For better or worse, the powertrain field is going to be drawing a high degree of attention for the foreseeable future. Although virtually every aspect of a vehicle has an influence on its fuel economy and emissions performance, the powertrain is the territory of the 'biggest-bang-for-the-buck', so it is likely to be the area of most significant change. Companies that consider themselves to be in the engine/powertrain category produce everything from springs and bearings to cooling systems and transmissions. Their prospects might vary depending on the direction that technology takes, so in order to be valued partners, it is critical for them to stay in the loop with their customers, and monitor developments even if they are not specifically involved in what is coming down the pike.
What are the implications of this attention for the commercial relationships of companies that are in this field? Do they enjoy a favored position in light of the critical nature of the powertrain in today's market? IRN recently conducted a study on the dynamics of supplier-customer power [see AD&P, January/February 2010 issue] that asked suppliers about price reduction requests and other topics surrounding their financial health and performance.
There is no question that the industry downturn in 2009 strained the vast majority of suppliers, but the companies who characterized their primary product area as Powertrain were more likely to describe their current financial position as "significantly weaker" than two years ago, when compared to the overall survey respondents (38% compared to 32% overall). In the overall survey population, a larger group selected the answer "moderately weaker," so it appears that powertrain suppliers have not been as successful in minimizing the effects of the industry downturn. In a related issue, the IRN survey asked suppliers how much they had reduced their cost structures. The improvements reported by the powertrain suppliers tended to be more at the modest end of the spectrum: 7.1% had reduced their cost structure by less than 10%, and only 16.7% of the powertrain players achieved a cost structure reduction of more than 30%. The corresponding figures for the survey population at large were 4.4% at the low end and 21.5% at the high end of savings.
The results took an interesting turn in the question of whether survey participants felt their power relative to customers had increased, decreased or stayed the same. Sixty-nine percent of the powertrain suppliers expressed the sense that their power had increased, compared to 57% of the overall survey population who felt that way. This shift of the power equation could also explain the dynamics of price reduction requests that were reported by the powertrain participants:
- The average annual request for those suppliers who were asked for a price reduction on existing business was 3.1% for the powertrain respondents, a lower average request than the 3.7% reported by the overall survey population.
- The average annual price reduction granted was 1.52%, also lower than the overall 1.9% that was the average concession from suppliers in the study.
- In fact, 30% of the powertrain suppliers in the survey just said "No" to the price reduction request and declined to consider any concession at all, given the circumstances of lower volumes, rising raw material prices, etc.
There are various ways to interpret these results. Did powertrain suppliers report smaller improvements to their cost structure because they were not as creative during the recent downturn or because they had previously achieved more rigorous gains than the norm? Is the sense of powertrain supplier strength justified? The overall survey results show that the stronger suppliers are gradually improving their profitability in a number of ways, including gaining price relief from their customers for increases in material input costs, and successfully resisting the demands for continuous pricedowns that have been a dominant factor in the automotive supplier industry over the last 20 years. It is IRN's belief that the supplier industry is accelerating its transition into two groups: big winners and everybody else. The top-performing suppliers are having trouble keeping up with current new program demand, as OEMs and Tier Ones look to align themselves with companies that can support their needs.
There is no question that many suppliers have fundamentally changed their fixed-cost structure so that as the industry returns to more normal levels of production they will see rapidly improving profitability. Unfortunately, this improved performance will not be experienced by all companies. There is still excess capacity in certain segments and many suppliers will continue to have to compete primarily on price. Within the powertrain supply base, the evolving needs of the industry may create a higher level of opportunity, but we are likely to see a greater range of outcomes experienced by individual companies. At least for the stronger suppliers, a new era of profitability is likely to occur.