Study: Suppliers add r&d, risk

By Ulrich Viehover

June 27, 2005

Stuttgart, Germany -- European automakers are forcing suppliers to take on more upfront development costs, putting parts makers at greater risk if a new model's sales are slow.

That is a key conclusion of a report by German consultant Hans-Andreas Fein and the research firm IRN Inc. of Grand Rapids, Michigan

According to the report, "Auto Manufacturer Concession Demands 2004," European automakers last year said they developed just 6 percent of all components on their own. That's down from 14 percent in 2002, when the first study was conducted.

The 2004 report, the second study of the topic, found that Ford of Europe, General Motors' Opel subsidiary and France's Renault develop almost all new components with help from suppliers.

"Only Porsche seems to still be master of its own engineering," Fein said.

BMW AG also has above-average involvement in development, according to the report.

On average, automakers still carry two-thirds of the investment costs. Suppliers spring for the rest, but their investment only starts to be recovered after production begins.

"So the suppliers are sharing in the manufacturers' sales risks," Fein said.

If a model flops - as did the Mercedes-Benz's Smart Roadster and Maybach luxury sedan - suppliers are stuck with costs they can't recover.

Pressure on suppliers to cut costs has grown since 2002, the report said.

Fein said automakers frequently reopen contracts and implement new cost-reduction programs.

New rounds of cost cutting are especially popular at DaimlerChrysler and Volkswagen/Audi. At VW, a supplier can expect more than five rounds of cost cutting a year, the report found.

But the report says automakers have been getting smaller price concessions on parts.

The average reduction in prices last year was 3.9 percent, compared with 4.1 percent in 2002.

From Automotive News