Value is not Price

The automotive parts industry has not exactly had an easy time over the last decade or so.  Many of those companies chased the alluring volume from what was previously known as "the Big Three" (which we now call "the Detroit Three), and suffered as Ford, GM, and Chrysler lost market share.  But they also suffered as a result of the supplier management tactics of those companies.  It's no coincidence that poor supplier management... or a lack of partnership... aligns with companies losing market share.

As Daniel Hertz Jr. of Seals Eastern said in an interview with Rubber & Plastics News,

"The idiocy out of Detroit just gets to you after awhile," he said.  "They want to buy by the pound.  The only think price, not quality.  They're overloaded with lard."

William Krames, CEO of Santa Fe Rubber Products Inc. has a similar perspective,

"We handled a lot of automotive business until two years ago," he said.  "We had one job from a second tier supplier, the sole supplier to a Big Three automaker.  We got the job, and a year later, the company spread the job to seven suppliers.  The Big Three will let a supplier sink into bankruptcy if you let them.  They don't care."

So what did both of those guys do?  They had the guts to take their companies in a different direction.  Take Hertz's Seals Eastern.

The seals, gaskets, and O-ring manufacturer dumped its automotive segment and along with it about $2 million in regular business.  That's not easy to do for a firm that has $12 million in annual revenues.  By focusing on new technology "we had an up-tick in the oil and gas and heavy-duty equipment industries."  So the company go that lost revenue back from industries it we more comfortable serving.

And Santa Fe Rubber Products,

When Santa Fe de-emphasized automotive, it put more focus on its liquid silicone business, where it's been very successful.  He [Krames] is considering becomign an automotive supplier again - focusing on the firm's patented radiator seals - for Japanese car companies.  "We're interested because of their mentality," he said.  "As long as you perform, you'll do well with them."

By bashing their suppliers into submission, the Detroit Three put price before quality, innovation, and leveraging the experience of their suppliers.  That tactic was one reason they rapidly lost market share, and is a double whammy as some of those same suppliers are now helping the competition, making it even harder to catch up.

Once again: value is not just price. 

Comments

[Mark Graban]

I was going to blog about the same idea after seeing another example in the WSJ journal today, but I'll just comment here.

http://online.wsj.com/article/SB118403146441961477.html?mod=todays_us_page_one

The company, Linear Technology, pulled itself out of the auto business:

"Linear learned that the hard way in the early 1990s, when Ford Motor Co. was its biggest customer. What started out as a lucrative contract selling transmission-system chips turned into a quagmire as Ford kept pressing for discounts. "We got out of that business, and for years afterward, we refused to do anything with automotive," Mr. Swanson says.

Linear would rather see its order book packed with small to midsize orders from companies too busy to bargain over prices. "Shaving the last penny or two off our price quote just isn't a priority for them," says Lothar Maier, Linear's chief executive."

When will Detroit learn??

[Mark Graban]

Link didn't work, add

ge_one

to the end of the WSJ link I posted above. Access to the WSJ is free today thanks to sponsorship from Dell.

[John Izzo]

I just drove 700 miles in a rented Chevy Malibu. I cannot tell you how happy I was to get out of that piece of junk. Crappy cheap cockpit area, poorly designed seats and an overall flimsy feel. The alignment was off by several degrees and pulled very hard tot he left.

I drive German with not many complaints.