The industry needs strong Tier 2's - Opinion & Analysis: Supplier Insight - Society of Automotive Engineers Congress - Brief Article

Automotive Industries, April, 2002 by Greg Janicki

You can say a lot about the obvious changes at the recent SAE Congress in Detroit's Cobo Hall. Yes, it is no longer the premier venue fox mega Tier 1 suppliers. These suppliers instead use private OEM events to preview hot new technology. Yes, the SAE show was replete with small second- and third-tier suppliers alongside a plethora of testing, instrumentation, and service firms. They all were vying for the attention of anyone who would stop long enough to pick up a breath mint or corporate-logo pen.

You can say that the event has turned into a sub-tier show. But you can also say...so goes the industry. Let's face it: The supply industry is not what it was 10 years ago. Tier-1 suppliers are taking on more responsibility, both in engineering and procurement. The latter is happening a little slower than most would like, but it is still happening. But with the growing Tier 1 responsibility comes more pressure on the Tier 2s to provide the technology that the big suppliers used to provide.

The annual SAE show is just reflective of an industry that now needs strong Tier-2 suppliers to provide value that the Tier is can no longer create, because they are focused on integration and systems rather than parts and pieces.

How much have times changed? Well, if you think about what components were Tier 2, the landscape has a different look today from yesterday. (Let's define Tier 2 as components that are procured by a supplier for assembly into a larger part that is shipped to the OEM). Ten years ago, Tier 2 components consisted of parts like bezels, knobs, fasteners, and coatings.

Eventually the Tier-2 environment changed when the seat suppliers accelerated their control of all things seating, which led to the migration to Tier-2 status for mechanisms, frames, foam, and covers.

This was a hint of things to come. Fast forward to today. The list of components that have or will soon become Tier 2 is staggering -- not just in the number of components, but also in overall value. Some examples include instrument clusters, audio units, headlamps, bumper beams (possibly bumper fascias), window regulators, control arms, mufflers, radiators, shock absorbers, intake manifolds, and more. In their place come front-end modules, cockpit modules, door modules, and suspension modules.

As an example of how the value has shifted, let's look at one area: suspension. Historically, a group of components sourced directly by the OEM, suspension components are quickly finding a path to OEMs through an integrator: the suspension module supplier.

And if you think life as a Tier 2 has no value, just think about this number: $7.3 billion. That's the piece-cost value for some of the components that make up the suspension module (see chart).

No one is claiming that being a Tier-2 supplier is all fun and no frustration. The big Tier is still need to learn to manage their supply base and the OEMs need to figure out how much purchasing authority to give to them.

Until then, life among the sub-tiers will be full of potential, as weli as peril.

GREG JANICKI

Vice President

CSM Worldwide Inc.

GiregJanicki@csmauto.com

www.CSMAuto.com

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