Most auto suppliers are familiar with the Big Three’s loss of North American market share to the “New Domestic” producers—foreign-owned auto-makers with assembly facilities in North America. Since 1999, the New Domestics have gained 10% in market share—an average of 2% per year. Between imports and North American production, they now control over 50% of the passenger car market and close to 25% of the light truck market. (Over three quarters of these sales are represented by Toyota, Honda and Nissan.)
Too many suppliers have been slow to respond, and continue to have the majority of their business with the Big Three, and often most of it with only one. They should work toward having their distribution of business between the Big Three and the New Domestics reflect the market share balance in North America.
Here are some of the factors that suppliers will need to grapple with in developing a strategy to increase their sales with the New Domestics.
It requires a long-term commitment.
Getting the first sale can often take four or five years. When a supplier is faced with the choice of looking for new sales from existing Big Three customers (with whom they have established sales contacts; good engineering relationships; and access to design staff) versus targeting new customers such as Toyota, Honda and Nissan (with whom they have no sales contacts, and where they will need to work hard to establish engineering and design relationships), it is very easy to take the path of least resistance and stick to growing sales with its current customer base. Because of the inherently higher initial cost, companies need to be convinced that diversification with the New Domestics is a strategic imperative, not an option. Otherwise, it will be difficult—if not impossible—to get the organization to commit the up-front resources necessary to make it happen.
Facing new demands.
Suppliers have to be prepared to work hard to get business. Suppliers that have worked through this process have recognized the following factors:
- New Domestics demand high levels of technical and engineering support. These requirements often exceed those of the Big Three. The companies are typically very demanding about meeting technical specifications, including testing.
- Engineering contacts and relationships are often required in Japan and the U.S. While more of the engineering control is being transferred to North American technical centers, often key decisions are still made in Japan. A company with serious aspirations for New Domestic sales needs to be ready to make a commitment to a Japanese presence, even if it is through contract relationships. At a minimum, suppliers hoping to get business need to be prepared for frequent travel to Japan.
- The New Domestics are very detail oriented, and often want extreme amounts of information on your costs. One frustrated supplier said it simply: Get ready to document everything.
- They and their suppliers care more about process control and “lean” systems than the Big Three. Plant audits are very tough. One of the benefits of this process is that many suppliers find they learn an immense amount about their processes and opportunities for improvement from the audit process.
While the sales process is lengthy and demanding at the front end, business volume ramp-up for those suppliers that have “made the cut” tends to be rapid. Once a supplier becomes a “member of the supplier family,” the New Domestics will typically want to make it successful. (This loyalty, of course, is why it is so hard to get business in the first place.)
The New Domestics focus on reducing costs, not margins. IRN conducts a biennial survey of OEM pricing strategies with suppliers. The New Domestics have consistently been at the lower end of price reductions asked of suppliers. More importantly, their style of interaction with suppliers is different: their approach is to collaborate with suppliers to drive out cost, as opposed to leaving it up to the supplier to find a way to absorb the reduction. They will often do this by providing high quality technical expertise.
Still, doing business with the New Domestics is by no means an automatic route to better profitability. Toyota, in particular, has a reputation for being very hard on supplier margins. It may allow its suppliers to make money consistently, but not much of it. In part because of a more intense engineering focus, and demands for high levels of cost information, there are often less opportunities for “windfall” margins on jobs. Following the adage that “the best customer is a customer that knows less about the product than you do,” many suppliers have found that by using creative applications engineering and part design/redesign skills they can squeeze more margins out of their Big Three customer base than their New Domestic customer base. This is one area where the “hollowing out” of the engineering function at the OEMs can work to the supplier’s advantage.
While they share some similar character-istics, the New Domestics have very different supplier strategies. For example, while Toyota resists sourcing modules, Nissan is openly pursuing modular sourcing on many components.
North American suppliers can’t afford not to have a strategy to expand their presence with the New Domestics. Without these relationships, suppliers will be cut out of most of the growth in volume in the North American market. There is never an easy time to start. Our advice: Start now and avoid the regret later on.