Robbing Peter to Pay Paul

Automotive Industries, July, 2001 by Michael Robinet

A note to the Big 3--if you think marketshare is slipping today, the recent bout of penny pinching could land you in a deeper abyss later this decade. This frugality extends much further than mere supplier costdowns or shaving staff -- delaying future product programs opens the door even further to the competition.

Unless you have been under a stone since last November, slowing volumes, an inventory correction and slipping marketshare at the Big 3, as well as heightened incentive levels, have plagued the North American vehicle market. In placing more pennies in the piggy bank, the Big 3 are delaying future product revisions in droves. Today's new recipe for buffeting intense competition seems to be ignoring the future instead of enhancing it.

This recent bout of "push the program" seems to be acute -- affecting each domestic OEM in many of their prized light truck offerings. Delays have been rampant in full-size pickup/SUV, compact pickup and SUV, and even the minivan segments. There are obvious near-term financial advantages to delaying expenditures, but there are also several negative impacts.

* Moving the metal. This is still a fixed cost business -- no matter how many ways the OEMs try to shift capital responsibility to the supply base. Labor is essentially a fixed cost as well. Ignoring high-volume, profitable segments may lead to lower overall output, placing considerable pressure on capacity utilization rates. Ever-present "no plant closure" agreements with the UAW and GAW restrict flexibility to deal with emerging situations. The labor unions will fight hard to retain this language when renegotiations occur over the next 24 months.

* Holding the door open to the European and Asian OEMs. Never mind leaving it ajar. Why not give non-Big3 OEMs a helping hand in this market? Thus far, more than three points of marketshare have slipped through the Big 3's fingers. Recent FPP (Future Product Program) delays are music to the ears of the Japanese and their current/upcoming entries in the light truck market.

* Competitors in each of the affected segments can reexamine their respective game plans moving forward. Knowing that an important foe has delayed its actions by six to 36 months can cause others to alter marketing plans, modify content/technology levels and even change pricing. Offenders delaying programs will find that greater incentive intervention is necessary - vehicle line profitability invariably suffers.

* Digging a deeper hole for suppliers. Moving the timelines adversely affects suppliers of all tiers (see story, pg. 15). Suppliers can be caught with open capacity, idle machinery or tools and non-utilization of new leading edge technologies or processes. In an environment of low margins and global competition, even short delays can become a major financial issue.

* Technology may find legs. Suppliers are constantly seeking entry points to integrate new features or processes that may offer both themselves and the OEM customer a competitive advantage. If a program is delayed, the supply base cannot delay implementation. New entry points at a competing OEM must be sought to enable suppliers to achieve a timely payback on their investment. Delaying or canceling an FPP enables competitors the advantage of assimilating new technologies first.

The impact of delaying or canceling one's future is much more than a short-term bottom-line booster. Long-term, the consequences for the guilty OEM could reach into volume constraints, vehicle line profitability and image, as well as allowing others a leg up in technology. In this case, robbing Peter to pay Paul may be foolhardy for the future.

Director of Forecast Services CSM Worldwide Inc.

Recent Big 3 Product
Program Delays in
NAFTA
                      Segment Affected
Ford Motor Co.        Full-size Pickup/SUV, Compact Pickup/SUT,
                      Small Car
General Motors Corp.  Full-size Pickup/SUV, Compact Van,
                      Mid-size Car, Small Car
DaimlerChrysler       Compact SUV, Hybrid Wagon