The Supplier Industry in Transition-The New Geography of Auto Production
Klier, Thomas H., Rubenstein, James M., Chicago Fed Letter
On April 18 and 19, 2006, the Chicago Fed held a conference at its Detroit Branch to examine the ongoing structural changes in the U.S. auto industry. As suppliers play an increasingly central role in auto production, it has become crucial for carmakers to have a strong relationship with their supply base.
Over the past few decades, evolving carmaker-supplier relations have resulted in regional and international shifts in the location of production. Conference participants discussed recent trends in the relations between carmakers and their supply base, as well as prospects for the industry's continued concentration in the Midwest. This Chicago Fed Letter summarizes the major themes of the conference presentations and discussion.
Setting the stage
In his opening address, Michael H. Moskow, president and CEO of the Federal Reserve Bank of Chicago, noted that the auto industry has been making front page news for some time as a confluence of structural and cyclical factors has created a "perfect storm" for many supplier companies in this industry. Such factors include the rising cost of inputs, the shrinking market share of the domestic auto manufacturers, and heightened import competition.
Auto supplier employment is about three and a half times as large as auto assembly employment, and much auto production and related parts production takes place in the industry's core states of Michigan, Indiana, and Ohio, as well as the Canadian province of Ontario. Hence, this industry is of particular importance to the Midwest economy.
Uncertainty about the auto industry's future is foremost on the minds of many in the Midwest. Michigan alone- the state by far most concentrated in this industry-has lost over 22% of its auto industry jobs since 2001. Not surprisingly, its unemployment rate has ranked among the highest in the country since then.
Moskow set out a number of questions for the conference to address. He asked if there were any indications of a turnaround for the Big Three assembly companies. While the Big Three and many suppliers are affected by legacy costs and global competitive pressures, the industry is notorious for quick reversals of fortune and changes in its firms' relative positions. How important are the Big Three market share losses with respect to the Midwest's auto parts industry? For example, can Midwest auto parts companies help the Big Three rebuild and recover? If not, can they adapt to new customers and markets, and if so, are they likely to move or stay in the Midwest? How are auto parts companies restructuring to improve their prospects? In recent years, Midwest industries, such as steel and machinery, have experienced significant restructurings. How might the automotive parts industry change, and what might it look like afterward? Finally, what role will management-labor relations and working conditions play in a reconfigured auto parts industry?
The conference was organized around two major topical areas: the importance of carmaker-supplier relationships and the industry's changing geography.
Carmaker-supplier relations and networks
Neil De Koker, president of the Original Equipment Suppliers Association, an organization with nearly 400 member companies, said that suppliers have been taking on more responsibility in terms of value added as well as innovation and research and development (R&D). Suppliers now provide two-thirds of the value added in the production of a car. De Koker presented an industry in transition. He suggested 35% of suppliers are candidates for restructuring and another 35% for consolidation. De Koker also pointed to the traditional cost-based focus in carmaker-supplier relationships as not being conducive to harnessing opportunities for both suppliers and carmakers. While the domestic carmakers continue to be under tremendous pressure to look for immediate cost savings, De Koker suggested they need to move to a relationship model that emphasizes trust. …