New GM Cost-Cutting Scheme Worries Suppliers

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Sept. 29, 2005--Amid strained buyer-supplier relations, small and mid-sized auto parts manufacturers are remaining guarded about a new $85-billion cost-cutting plan unveiled by General Motors last week that appears to favor larger global outlets, industry analysts said.

The plan, announced by GM purchasing chief Bo Andersson last Thursday at a meeting of several hundred top suppliers in Milford, Mich., will set a variety of tailor-made, cost-cutting targets on a per-parts basis, rather than one overall reduction target across all suppliers, as the company has done in the past.

The targets, Andersson told suppliers, will be based on market data and commodities prices. With this new approach, GM hopes to shift cost reduction efforts away from overall supplier performance and onto individual parts and equipment, Andersson said, encouraging them to cut back on steel, aluminum, platinum, and other costly materials.

GM has blamed rising commodities prices, such as steel and plastic, for $2.5 billion in losses posted in the first half of the year. Of about 2,500 of its suppliers, fewer than 30 are large-scale global manufacturers with more than $1 billion in sales.

John Henke, head of Planning Persepectives, an industry consulting firm that conducts an annual survey of supplier attitudes toward major automakers, said the general reaction among the bulk of GM's smaller suppliers was "here we go again."

"There's a tremendous lack of trust out there that will cause suppliers to be very, very skeptical of anything GM does right now," said Henke, who is also a marketing professor at the University of Oakland in Rochester, Mich.

Since early 2003, General Motors has sought to reduce total purchasing costs? by 30% across the board, irking some suppliers who claim the cuts have forced them to sell parts at a loss or move operations offshore to cheaper labor markets.

GM spokesman Tom Wickham has said smaller suppliers aren't being asked to relocate to more cost-effective regions, but that "if a supplier chooses to go to a low-cost country, that's their prerogative."

A study conducted last May put suppliers' attitudes towards GM at a 15-year low. The automaker, the study reported, was "five times more focused on cost than quality." A full 85% of those surveyed described their relationship with GM as "poor." Just over half said they would "prefer not to do business" with the company.

Under current cost-cutting pressures, more and more suppliers are shifting capital, research and development, services, and support from GM and the other so-called U.S. Big Three, to Japanese automakers like Nissan, Honda and Toyota, according to the Planning Perspectives report. Worse, those that stay with U.S. automakers are more likely to simply maintain current quality levels, rather than striving to improve quality, the study showed.

Both Honda and Toyota have had similar, per-parts cost reduction schemes in place for years, said Henke.

He called the move a rational approach that hinged on whether GM buyers were being trained in the proper "behavior metrics" to deal with suppliers on an individual basis.

"If it works, it will be good for everyone -- GM, its suppliers, and the auto market," Henke said.

Whatever the plan's impact, Henke said, "it will take years" for the company to rebuild any goodwill with its smaller suppliers.