Reports this week that GM is looking to sign contracts with suppliers that run for two vehicle generations or as long as a decade is another sign of the change that is occurring in purchasing departments. The move is being made as a means of cutting costs and gaining access to advanced technologies. The terms appeared in a Wall Street Journal (WSJ) article, reporting Steve Keifer saying that by locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the automaker can expect suppliers to share more innovations and better processes that help save money. “We want them to double down on us,” Kiefer said at the meeting at GM’s Warren Technical Center in Michigan (United States).
The US automaker has already started signing long-term supply contracts with some of its suppliers. According to WSJ, Keifer recently asked about 30 of its major suppliers to help revive supply bottlenecks so the automaker can ramp up production of pick-up trucks and sport-utility vehicles (SUVs). In some cases, GM is believed to have promised to help some supplier cover addition costs to get the needed part. The demand for pick-up and SUVs is expected to grow in North America, mainly on declining price of gasoline. This is driving automakers in the US to increase production of such vehicles.
The move is a sign of how GM is working to improve relationships with suppliers. The automaker believes that a good relationship with suppliers can go a long way in reducing costs and driving innovation. The OEM is attempting to undo decades of damage caused by poor relationships with suppliers. Keifer informed that an internal procurement team is looking for new automotive technologies in places like Silicon Valley (United States) or in Israel. He is also open to do business with new companies that have traditionally not suppliers to automotive industry.
Power shifts to suppliers, but not entirely
The move is part of a strategy change across the industry to increasingly negotiate on contract terms rather than price. Last year, it was reported that Toyota was less aggressive with parts suppliers during price negotiations, focusing instead on maintaining its component supply cluster in Japan. Both OEMs and suppliers are currently investing on new technologies, focused on the rising integration of consumer electronics, active safety systems and, in the long-term, autonomous driving.
Last year, General Motors sent a letter to several suppliers offering to help identify waste, forecast costs, reduce raw-material costs and look for other ways to reduce costs. Carmakers are facing a fight on two fronts; stiff emissions regulations and increasing complexity in the technology both inside the car and in the powertrain. The onus is increasingly on suppliers to do the necessary research and development for these technologies. For suppliers with a competitive edge in a specialised market, they have now far more power to negotiate on unfavourable contracts. And the number of diversified automotive suppliers with only a few competitors is only going to grow.
A key reason for this change in leverage is that most major suppliers have come through the last few years with much-reduced dependence on low-margin commodity products, instead making advanced technology, which requires the electronics and sensors that suppliers are better able than carmakers to produce at scale. In addition, strong demand and limited capacity also play a role in the power shift, as does the push among automakers to reduce the size of their supply bases.
However, the price of locking in for a decade will still be a big question for suppliers. The balance of power could quickly shift back to OEMs, as suppliers begin investing in new lines and plants to meet demand, and thus have to consider the need to operate those new facilities close to full capacity as possible. Also, handing over technologies exclusively to one automaker will mean that their long-term future could potentially be heavily wedded to one OEM, or even one model’s success or failure.
