Until the rude awakening of the 1973 oil embargo, the U.S. auto industry – vehicles and parts together – was a domestically focused business producing strictly for the home market with little in the way of foreign competition with which to contend. Ford and GM had extensive operations around the world, Chrysler had some small operations in Europe, American Motors had none. Their foreign holdings were run mostly at arms length, producing vehicles having little or nothing in common with those assembled in the United States. The industry imported very little, just $5.7 billion for all vehicles, engines and parts in 1970. It exported even less, a total of $3.9 billion.
The Auto Industry’s Traditional Supply Chain
Into the 1970's the vehicle manufacturers (Original Equipment Manufacturers or OEM’s) relied heavily upon their captive, in-house parts manufacturing operations for as much as 70% of their requirements, but were beginning to buy increasing quantities of products from outside suppliers. Even so, virtually all engineering and product design work, and all vehicle assembly was undertaken by the OEMs.
OEM engineers designed most of the bought-in components, developing all product parameters in the process. The OEMs would provide detailed blueprints to potential suppliers and invite them to bid against each other for a contract, employing an auction market model in which the two lowest price bidders usually won a “build to print” contract for an agreed fixed price, for an agreed quantity, supplied over a finite time period of generally not more than one year. OEMs frequently would pay for and retain legal ownership of any unique molds, tool sets, or stamping dies used to manufacture the products they engineered.
Suppliers were expected to do little more than to determine how to actually manufacture the item for the lowest cost and a reasonable profit. Any cost reductions they managed to accomplish during the contract accrued for their own benefit. A third supplier frequently was selected for each item, held in reserve in case one of the primes fell out of favor. Price was the dominant factor in contract awards. Other key criteria included the prospective suppliers’ manufacturing capability, capacity, reputation, and reliability. Product quality was another metric employed, but high rates of failure were tolerated, often with very little repercussion for the supplier other than to replace the rejected components at its own expense. This could be onerous, however, as the OEM’s typically built large inventories of purchased parts, and could reject the entire stock, if the error rates were subsequently found to be too high.
Structurally, the OEM’s supply chain was divided into three distinct, but sometimes overlapping layers. Those firms that sold finished components (such as a starter or generator) directly to the vehicle manufacturers were ‘Tier 1’ suppliers. Those that sold directly to the Tier 1s (copper wire or carbon brushes) were ‘Tier 2.’ Those that supplied raw materials to any of the above were usually characterized as ‘Tier 3.’ As the universe of domestic vehicle producers imploded, falling from more than 100 in the 1920's to just four in 1970,1 competition among the parts suppliers to serve the survivors got stiffer, although the orders they won grew larger. Even so, the parts industry found that it could meet most requirements utilizing a limited number of facilities.
The Census Bureau reports that in 1985, firms identified to be primarily in automotive parts industry SIC categories (i.e., all Tier 1s, some Tier 2s, and probably few, if any, Tier 3s) generated shipments estimated to have a value of $111 billion, nearly 5% of all factory shipments by all U.S. manufacturers that year. Employment in the sector averaged 796,700 for the year, 4% of the nation’s total manufacturing employment. 1985 exports of U.S. automotive parts totaled approximately $14.3 billion, compared with imports of $15 billion, yielding a $700 million deficit2. Shipments to Canada and Mexico accounted for 81% of all exports, while imports from those countries amounted to 65% of that total. The United States had a $2.2 billion surplus with Canada, a $300 million deficit with Mexico. Trade with China yielded a $17.8 million surplus on exports of $18.6 million and imports of $805,000. Shipments to Japan totaled just $217 million, while imports reached $2.8 billion, generating a bilateral deficit of $2.6 billion.3
All Rights Reserved. Do not reproduce, copy and use the editorial content without permission. Contact us: firstname.lastname@example.org.