New message

Automakers ought to be doing is trying to avoid the very same problems that have snared their suppliers

Quality is Job 1. That was the message delivered by Ford Motor Co. back in the 1980s. It was a clear statement at a time when the automaker and its North American cohort badly needed to cut through a lot of complicated information about their industry and project the news that they had learned the lesson. Brilliantly, it linked Ford’s purpose and methods to its products.

It would be good for everyone if today’s confused and somewhat aimless auto industry could deliver an effective message. The trouble is, they send lots of message but none seems to be the right one.

Here’s what I mean: Ford, General Motors, and DaimlerChrysler have problems; they can’t sell vehicles fast enough or profitably enough to cover their costs. Now, "quality" may still be Job 1 at Ford, but there’s so many other ideas coming from Detroit I wonder if they are seeing the same problems the rest of us see. We know the Big Three are trying to expand into new consumer markets, and lately they’re showing concern about new low-cost cars entering the domestic market. We know, particularly, that Ford wants to be appreciated for its environmental goodness, as demonstrated recently with the promise to produce 250,000 hybrid vehicles annually by 2010 (up from about 24,000 per year now.)

The latest buzz from Dearborn is Ford’s determination to scale down its roster of suppliers so that it can build tighter bonds with those it keeps. According to a September announcement, Ford will place larger, longer-term contracts and require a more integrated design process with its preferred suppliers. Their list includes Autoliv, Delphi, Magna Intl., Johnson Controls, Lear, Visteon, and Yazaki, though more will be named.

Tony Brown, Ford’s senior v.p. for global purchasing, told the Associated Press the automaker is spending $90 billion per year on purchases, $70 billion for parts and materials that end up in finished products. He said the new strategy will be to involve suppliers at the beginning of a vehicle’s design process and pay them in advance for engineering and development. With longer contracts, suppliers will be able to invest more in these programs, but they’ll have to commit to remain competitive and will give Ford access to their technologies.

Have no doubt that if this strategy works, or more important, if investors like the idea, GM and Chrysler will mimic it.

On its merits, this is not a bad idea. Automakers and their suppliers should improve and coordinate their R&D, and it’s possible this will work well for Ford and its suppliers, but it’s not an entirely reasonable strategy.

First, long-term commitments look good in advance, but cannot possibly anticipate every future development. They frequent works with friends and family; they never work when money is involved. When you’re planning a budget you want to forecast costs but you can’t guarantee revenue, which is why so many budgets get revised midyear. At some point, Ford and its suppliers will want to break these commitments.

Also, it’s axiomatic that in a free market buyers want variety, not limitation. Ford will want to source products that are not on the official list; suppliers will want opportunities to sell elsewhere. Most important, the most serious problem automakers face is not with their suppliers.

They must recognize that there is a cost-structure crisis moving through the manufacturing supply chain that is about to spring on them. Three years ago steelmakers were strapped for revenue, and automakers benefited. For the past year auto-parts suppliers (including metalcasters) have been diving for creditor protection Ford is leading a charge to cut a long-term deal with them when they’re most vulnerable.

What automakers ought to be doing is trying to avoid the very same problems that have snared their suppliers. Pension and benefit obligations estimated in the tens of billions are waiting for them, too. Maybe they haven’t got the message yet.

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