Losing innovation and talent: what can suppliers do to stem the tide?

Automotive Industries, Sept, 2004 by Jason C. Brewer

At the automotive conference in Traverse City last month, a steady stream of executives from the traditional domestic manufacturers stated innovation and talent are the life-blood to survival, yet many of their behaviors appear to discourage innovation and chase away talent Despite these discouraging behaviors, suppliers must work to protect their talent and innovation to survive.

"Why bother giving them innovations if there's no return for it!" one sales engineer at a supplier said to me. His story was one of several I've heard recently. His company began with the OEM's base design and reengineered it to reduce several dollars in cost and several kilograms in mass per vehicle. They subsequently did the analysis to convince the OEM engineers that their improved design would work. The purchasing organization then sourced the improved design to a competing supplier at a lower price, perhaps enabled by the lower-price supplier's lack of engineering staff. The sales engineer protested by presenting how much engineering effort went into saving the OEM cost and weight. Purchasing's alleged response: "You should have gotten ah engineering services contract upfront."

A manager in sales at another supplier told me a very similar story of saving an OEM cost and weight over the base design and subsequently losing the work to a lower bid. According to him, purchasing's response to his protest was: "I don't care. My job is to get the lowest price."

Historically, patents have protected suppliers' return on intellectual investments. However, suppliers tell me that they are discouraged by their customers from bringing patented designs of processes. Supplier-owned patents restrict the OEM's ability to move work from supplier to supplier as a lever on pricing. And without patent protection it is difficult to get compensated for innovations once they find their way onto a customer's print.

Innovation was viewed as one of the few remaining avenues to make money under today's climate of global pricing and give-backs, online auctions, participation in product development costs, and rising costs of materials and health care. But now with supplier innovations being shopped around to the lowest bidder, the automotive supplier business seems even tougher. Although, one supplier president summed it up for me this way: "This business has always been hard. But what's different today is I can't trust anyone." He went on to tell me about one colleague who came to that conclusion and left the industry, and another who is biding his time for an early buy-out.

Asking around about trust, one supplier engineer told me about his first day at his previous job at another supplier. He told me on his way in, another engineer was leaving his exit interview nearly crying. "Don't believe anything they say!" He didn't stay at that supplier long.

Another incident of a very sensitive nature was relayed to me by a supplier executive. Suffice to say the punch-line of the experience was, "And [OEM executive] said to me, 'Next time, you'll get it in writing.'"

The executives at the conference attributed the lack of fresh new technical talent entering manufacturing to the field's rust-belt image of dirty and old fashioned. I see it differently. Young people aren't stupid. They read the papers about plant closings and the loss of manufacturing jobs in the U.S. Plus our children and neighbors' children ask us about our industry and get the straight story. After listening to a COO of a tier-two supplier tell me about how his customer is pressuring him for another give-back, saying no to steel surcharge pass-throughs, and awarding his company's innovations to his competitors, I asked him why he stayed. He replied, 'I don't mind working hard--but if my kids go into automotive, I'll disown them!"

After recounting incidences of price-cutting, innovation going to other suppliers, or irrational sourcing decisions, some suppliers ask me, "You used to work for an OEM--don't they know what they are doing to us? Don't they know they are sucking us dry until we can't afford to invest of until they put us out of business?" This reminds me of the moral from an Aesop fable about a scorpion that gets a ride across a river on the back of a frog, but stings the frog to death before they get to the other side. They can't help it, it's in their nature. With their need to generate cash to invest in new products with the hope of gaining share and profits, they will continue to try to cut everywhere and especially the price of what they buy. The behaviors are unlikely to change until the OEMs are successful, or until the structure and economics of the industry don't allow them.

Suggestions for Suppliers

So if the OEM's can't change, what can the suppliers do? One choice is to jettison all costs associated with engineering products or processes and focus on manufacturing excellence as a low-cost supplier. This, however, is a very difficult model for success because there are many companies using this model, with most sectors having participants that are already excellent and improving daily. For some automotive component segments, it will be impossible to survive with this modal competing against China, Latin America and Eastern Europe. As Jerry Elson, vice president at General Motors said at the conference, "If we can't van by technology in this country, we will not win." Or, as stated by Dr. Venkatesh Prasad at Ford, "If we don't have innovation, we don't have a future."