GENERAL PROBLEMS OF SMES IN THE AUTOMOTIVE COMPONENT
INDUSTRY - THE PRESENT SITUATION
As the market pressure towards vehicle manufacturers augments, they tend to pass on
the pressure on their suppliers in terms of price, quality, and services. Nonetheless,
there are additional changes in the supply system and structure, which affect the
component suppliers. The number of parts, components and systems, which are
outsourced by the vehicle manufacturers, is increasing continuously. Generally, this
tendency leads to a growing prominence of suppliers in the automotive industry,
which will change the relationship between OEMs and suppliers as well as among
suppliers themselves. However, not all suppliers will be in the position to take
advantage of these opportunities.
Within this scenario, there are three main tendencies, which are the most significant
for the future viability of the South Eastern European automotive component
suppliers, regardless of their size and location:
(a)
(b)
(c)
The continuously increasing demand for high quality,
The ability to integrate parts and components into comprehensive systems,
The growing strength of large 1st tier suppliers.
(a) High Quality
Nowadays, with larger shares of each vehicle coming from single companies outside
the vehicle manufacturer, the risk of poor quality is substantially increasing.
Therefore, vehicle manufacturers are looking for original product quality, which
would reduce the time-consuming and costly quality checks and rework processes. As
a consequence, automotive component suppliers, which work closely with vehicle
manufactures, will be assessed continuously and most thoroughly for the quality of
their work. Vehicle manufacturers are looking for defects per million parts, which on
average must not exceed 150. Furthermore, there is a strong trend towards error free
deliveries at all times. In the South Eastern European context, where the average
defect rate is often significantly higher, the challenge is not only to reach this target,
but also to achieve it in the shortest time possible, given the current developments in
the global automotive industry.
At the same time, vehicle manufactures do not allow increases in price as
compensation for these efforts. On the contrary, many demand yearly price cuts up to
10%. The smaller the supplying company, the more difficult this exercise becomes.
Yet, highest quality standards remain the most important prerequisite.
(b) Ability to Deliver Integrated Systems
Vehicle manufacturers are demanding that their suppliers deliver more complete
systems, rather than just parts or components. This trend is based on vehicle
manufacturers’ strategies trying to reduce the number of suppliers. The benefits are to
be found in the more efficient work and lower costs. However, there are benefits for
the suppliers as well, if they would not only deliver or, in some cases, assemble parts
and components, but would have the possibility to design, develop and test systems,
which would eventually allow them to retain a larger share of the added value to the
final product.
In order to best fulfil these tasks within an integrated system, the supply industry
needs to be structured in such a way that companies can jointly perform the system
integration. Ideally, this comprehensive system is based on three distinct roles:
- First tier suppliers (system integrators): The first tier of component
manufacturers comprises companies, which are capable of supplying
integrated systems to the vehicle manufacturer rather than individual
components, e.g. dashboards. These suppliers will need to offer not only a
broad range of technologies and materials but require also strong research
capabilities in order to work closely with the vehicle manufacturers to develop
better systems. Tier 1 suppliers are involved in the design, development and
testing process of the products/systems they are responsible for. They also
need to be financially strong in order to invest continuously into new
technologies and manufacturing capacities. The tier 1 suppliers would involve
companies that are financially strong, technology-oriented, large players who
operate on a global basis, e.g. Delphi Automotive System, Bosch, Visteon, and
Magneti Marelli.
- Second tier suppliers (direct suppliers): The second tier suppliers include those
companies, which supply the first tier manufacturer with finished components.
The profile of a second tier auto component company is generally that of a
substantially large manufacturer, who, yet, does not have either the financial,
or technological recourses or extensive geographical (global) reach in order to
supply integrated systems to vehicle manufacturers.
- Third tier suppliers (indirect suppliers): Third tier companies include those
firms, which supply raw materials and basic parts and components to the
second tier automotive component manufacturers. They do not dispose of
substantial recourses to develop integrated systems or, at least, completely
finished, complex components.
Suppliers seek to position themselves as high up as possible in this hierarchy, as a
high position allows retaining a higher percentage of the value added within the
supply chain. At the same time, a well-maintained position decreases substantially the
vulnerability of a company.
Within this structure, two areas of concern are important to companies in Southeast
Europe:
Firstly, the supply chain concept, as described above, is only just beginning to
emerge. A number of large international Tier 1 companies are now supplying
complete systems and modules to OEMs. Most of the Southeast European component
manufacturers would fall under the Tier 2 and 3 categories. As many SME will lose
their current direct business with OEMs, a solution for these domestic SMEs is to link
up with Tier 1 or large Tier 2 companies (in the case of the smaller tier 3 firms) and to
become part of their global supply chains. In order to do so, these SMEs will have to
successfully compete among themselves and with international competitors who
might be already part of these supply chains. This can only be done if the domestic
companies can become internationally competitive.
Secondly, in the South Eastern European scenario, over many years, vehicle
manufacturers had supported a host of SME component manufacturers in a parentancillary relationship, supported by very strict localization norms. The vehicle
manufacturers did most of the “systems development” in-house and the component
industry was supplying mainly smaller, individual components and parts. Hence, the
component industry in Southeast Europe never got the opportunity of developing true
system capabilities. Furthermore, due to the preponderance of SMEs, viable scales
were never developed. This led to a fragmentation of capacities and, eventually, lack
of domestic, and even more, international competitiveness. Although these conditions
have been changing in the last years, the time available to the automotive component
industry in Southeast Europe to transform into a globally competitive industry seems
very short, as the described systems of suppliers are developing very rapidly
throughout all markets and production locations. Unless they become able to change
and improve, many SMEs would face the prospect of losing business and, eventually,
having to close down.
(c) Growing Strength of 1st Tier Suppliers
Within this scenario of a consolidated and further structured vehicle and component
industry, tier 1 suppliers are gaining more and more strength, as a shrinking supply
base, in principle, implies less competition. Further, tier 1 suppliers will be more and
more the ultimate know-how partners for designing and developing of components
and systems. Therefore, these suppliers will gain a strong position not only vis-à-vis
the vehicle manufacturers but, of course, also vis-à-vis the direct and indirect
suppliers (tier 2 and 3). Already in many cases, it is not any longer the OEM, which is
the important buyer from the small and medium-sized company, but also the tier 1
system supplier.
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