German auto suppliers
facing pressure of tier system
By Hans-Andreas Fein, Stuttgart, Germany
It is still an open question whether or not the DaimlerChrysler deal will change the world. It already has
changed the world for Daimler suppliers in Germany, especially the small and medium size suppliers.
No tiers but fears
‘Tier what?’ asked the president of a German injection molding firm when he was asked about the role
of his company in the automotive supply chain. He was not familiar with this term. The German word
‘tier’ means ‘animal’ and he could not see what that had to do with the auto industry. And the lack in
communication was not just a question of the language.
German auto suppliers had good times in the ‘70s and ‘80s when they seemed to have their position
granted forever. There was nothing as prestigious as being a direct supplier to Daimler (MercedesBenz), BMW or to VW. While the U.S. restructured its auto industry into a tier system at the beginning
of the ‘90s, the German system defended its order. Mercedes-Benz, BMW, Audi & Co still had up to
3,000 direct suppliers, ranging from Bosch, Thyssen, and Mannesmann to injection molders,
stampers, and small turning shops. Although they felt the need to reduce the number of suppliers and
disclosed step-by-step plans to do so, the actual changes were few.
First alarm
During the mid-’90s, things changed. When Lopez came to VW he mixed up the army of VW suppliers
and shocked the German industry with his extreme and rude price reductions of up to 30 percent. And
not by accident his new purchasing policy led to a crash. The 500-employee Mittelmann-Gub foundry
in Viersen, one of the traditional VW suppliers, could not fulfill Lopez’ claims and went out of business.
It was a signal that impacted all industrial companies in Germany. Suppliers to Mercedes-Benz and
BMW watched these activities carefully, but found themselves treated much friendlier and maybe
more professionally.
Changes continued soft and slow. The take-over of Rover shifted the purchasing strategy of the
Bavarian auto manufacturer to more European sourcing for the whole BMW group. Daimler-Benz’
corporate policy, conservative and steady for decades, began to shift to source more systems and
complete modules. With the new Smart, the swatch-styled two seater assembled in Lothringia,
France, the change became really noticeable. The automaker worked with only 20 so-called systems
and module suppliers, tier ones by American standards.
The big bang then came in 1998 with the mega-merger of Daimler and Chrysler. Explaining the
synergies of this deal, Daimler CEO Juergen Schrempp predicted more than $3 billion U.S. dollars in
cost savings, with a major part to be gained out of joint sourcing activities. It became clear that higher
purchasing volumes would now be sourced from fewer direct suppliers. Another big bang was heard in
Munich. The poor results of Rover led to the resignation of BMW’s CEO Pietschesrieder and sounded
the alarm for a new cost reduction program for the whole BMW-Rover group.
Big Bang continues
Those events are no doubt the beginning of an upheaval among the German supplier base. The
sourcing of modules, systems and assemblies as well as price comparisons between German and
American quotations on contracts is now the name of the game. Daimler suppliers will be forced into
competition with Chrysler suppliers. Major suppliers such as Bosch, Siemens, Mannesmann, JCI and
Delphi will certainly see a further increase in their business. But those ‘biggies’ just count for 30 to 50
of the total 3,000 suppliers in Germany. What about the rest?
The medium-to-large suppliers should benefit as well from the higher integration and more ‘valueadded’ being put into auto components & companies like Behr Automotive (air condition systems),
Continental (tires and brake systems), Webasto (roofing and body parts), Eberspaecher (heating
systems) and Allgaier (body parts) just to name a few. Most of these companies, employing over
2,000 people, are still family-owned and quality-minded.
The over 2,500 remaining small and medium size suppliers and engineering firms throughout
Germany, are facing an uncertain future. With every model change and more contracts going to tier
one vendors, they have only three options left:
First, to become a second tier or third tier with a link to some of the major suppliers. Secondly, they
might form joint ventures with other small size suppliers in order to build a system or module out of
complementary parts. This was done through the initiative ‘VIA’ in 1996, when eight suppliers from
Nordrhein-Westfalia cooperated to supply a complete front-end module.
The third option for those suppliers is to change their focus completely and supply more parts to nonautomotive industries. If they take none of these alternatives, they will most likely go out of business.
Unfortunately, many of the firms are not aware of this. They still think they can continue as before,
counting on long-term personal relationships with a purchaser or an engineer at Mercedes or BMW.
But Daimler decision-makers now will be questioned by Chrysler managers and BMW’s management
will be changing positions and responsibilities as well, so traditional personal relationships will not
mean much any more.
West Michigan can teach the new role
What does all this mean to West Michigan suppliers? German suppliers have excellent technologies in
place and their work force is traditionally quality-minded. But most of the firms lack the knowledge for
lean management and continuous improvement. They do not know how to think and act as a second
tier or third tier supplier. This opens doors for Michigan firms to take the German companies by the
hand and lead them into the new way of doing business. Teach them that being a tier suppler and not
a ‘pet’ supplier, is their best chance, and that joint efforts can pay big dividends.
Based in Stuttgart, Germany, Andreas Fein specializes in helping U.S. firms in the automotive and
machine building industry enter the German/EU market. For more than 20 years already his consulting
firm has worked with a number of West Michigan companies.
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