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Lead Firms in the Automotive Commodity Chain

The United States is the world’s largest consumer market for passenger cars and light trucks. The “Big Three” U.S. automakers – General Motors, Ford Motor Company, and Chrysler Corp. (now part of DaimlerChrysler following its merger with Daimler-Benz AG) – accounted for 68% of the passenger cars produced in the United States in 1997. The remaining 32% of U.S.-made cars came from Asian and European “transplant” firms. Along with these giant assemblers, the automotive commodity chain also includes parts manufacturers.

The auto parts industry is fragmented, consisting of thousands of suppliers ranging in size from small shops to large multinationals. The auto parts segment of the chain is divided between original equipment manufacturers (OEMs) and the replacement market. OEMs are companies that produce parts and components that automakers use in the assembly of new vehicles. Participants in the replacement market (also known as the aftermarket) make parts and components to substitute or supplement items that were included in the original assembly of the vehicles. Both OEMs and replacement parts suppliers and distributors may be independent firms or subsidiaries of larger companies.

The basic method of making automobiles changed very little between 1913 when Henry Ford first invented the moving assembly line, and the 1970s, when a radically new system of “lean production” began to emerge in Japan. Pioneered by the U.S. Big Three, the automobile industry was the mass-production industry par excellence. The Fordist method of production made a limited range of standardized cars for mass-market customers. Auto manufacturing was carried out in massive assembly plants using rigid methods in which each assembly worker performed a highly specialized and narrow task very quickly and with endless repetition.

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The big U.S. and European automakers developed a particular kind of relationship with their suppliers, based on short-term, cost-minimizing contracts. As the major producers scoured the world for low-cost components, the increased geographical distance between the assemblers and their suppliers made it necessary for assemblers to hold huge inventories of components at their assembly plants. In this “just-in-case” system, the possibility of the assembly line being disrupted by a temporary shortage of components (or by faulty batches) was reduced.

Since the early 1980s, the auto industry has been marked by intensifying competition and increased globalization, which has resulted in lower costs and also improved product quality. With the advent of lean production by the principal Japanese automakers, led initially by Toyota, “just-in-time” systems emphasized close assembler-supplier relations and flexible forms of production in which quality control (or total quality management) was viewed as an essential element at all stages of the production process (Womack et al., 1990; Dicken, 1998: CHS. 5 and 10). The U.S., as well as foreign motor vehicle assemblers, now employ supply chain management to diffuse lean production methods and high-performance work organization practices into the broader automotive industry.

U.S. Big Three (General Motors, Ford Motor, Chrysler). Supply chain management is central to the efforts of the U.S. automakers to restructure, rationalize, and integrate the automotive supplier industry across Canada, the United States, and Mexico. In particular, the Big Three have initiated three key changes in the 1990s that have redefined their relationship with suppliers (Kumar and Holmes, 1997). First, automakers have shifted more of the responsibility for product design and inventory programs to their suppliers.

This has allowed the assemblers to focus their resources on their “core capabilities,” which include overall system design, drive trains, final assembly, and the marketing of the completed vehicle. Second, the size and complexity of those items of the vehicle that are sourced from suppliers have grown from individual parts and components to entire subassemblies, such as acceleration, braking, steering, handling, and seating systems, or even larger modules such as integral automobile interiors that include carpets, headliners, and dashboards.

The out-sourcing of complete systems and modules offers important cost savings to the assembler through reductions in the size of the plant and workforce needed to assemble vehicles. Third, automotive assemblers are reducing the number of their direct suppliers and offering them longer contracts, which lowers the overhead costs of managing and coordinating the entire system.

Chrysler was the car company that initially broke ranks with its U.S. brethren and launched many of these new relationships with its suppliers. In the 1980s Chrysler was cash poor and struggling to survive. As the smallest of the Big Three automakers, Chrysler typically stood third in line with suppliers, behind the much stronger Ford and General Motors. Instead of dictating to suppliers and trying to pit them against each other, Chrysler borrowed from Japanese companies and established mutually beneficial partnerships with its suppliers whereby they developed entire subsystems in return for long-term supply and cost-sharing agreements.

Chrysler went from the brink of bankruptcy to having the lowest cost structure of the Big Three and the highest average profit per vehicle. Furthermore, Chrysler’s strategy gave its suppliers the impetus to develop whole automotive subsystems, which has pushed the automotive industry from a predominantly vertical structure to a more horizontal one (Dyer, 1996; Fine, 1998: 61-62).

Foreign Transplants. Currency fluctuations have encouraged the production of foreign models of cars in North America and reduced the flow of imports. In particular, the long-term appreciation of the Japanese yen versus the dollar (which seems to have reversed itself since a mid-1995 peak), together with the earlier imposition of U.S. “voluntary export restraints” against Japanese car imports, made many Japanese automakers step up their North American transplant manufacturing capacity in order to maintain competitive prices on their core products.

European automakers are also expanding their U.S. and Mexican production operations. Mercedes Benz and BMW joined Honda in assembling cars in Mexico for the first time in 1996, and both German companies are also constructing new U.S. production facilities. The main impact of the foreign automotive transplants is that they offer alternative kinds of supply chains to which North American parts firms can affiliate, and they also are important partners for the growing number of strategic alliances, mergers, and acquisitions among the large U.S. and foreign assemblers.

Tier 1 suppliers (“systems integrators”). The automotive supply chain has always been organized hierarchically into “tiers,” but in recent years the tiered structure has become much more pronounced. There has been a drop in the number of suppliers at all levels of the supply chain, with each assembler relying on a core group of highly competent Tier 1 suppliers. To meet the automakers’ ever-increasing demands for cost reductions, enhanced productivity, and quicker delivery times, automotive parts suppliers have continued to consolidate. This has resulted in the emergence of a relatively small number of “systems integrators” among the ranks of Tier 1 suppliers that are capable of designing, manufacturing, and delivering complete modules to motor vehicle assembly plants (Kumar and Holmes, 1997).

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Sophisticated parts firms like Delphi, Bosch, Denso, Johnson Controls, Lear, Federal-Mogul, and Dana Corp. are consolidating across subsystems, which is leading to a significant degree of vertical integration in what had been a relatively fragmented industry. Systems integrators are beginning to assume the prime responsibility for selecting lower-tier suppliers and for coordinating key segments of the automotive supply chain at a global level. Thus, these top Tier 1 suppliers are challenging the assemblers for control over the key high-value activities in automotive production.

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Lead Firms in the Automotive Commodity Chain. (2021, Feb 04). Retrieved September 22, 2021, from https://essayscollector.com/essays/lead-firms-in-the-automotive-commodity-chain/

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