Carmakers seek price, innovation

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The automotive industry is one of North America's largest, with production of passenger cars and light trucks totaling approximately 16 million units in 2004 and with a purchase value of more than $500 billion. More than 60% of those vehicle costs are assumed by suppliers rather than the major carmakers, and that number will rise to more than 70% in 2010, according to the Original Equipment Suppliers Association.

These costs include design, development, engineering, testing, prototyping, packaging, logistics, tooling, capital, manufacturing and assembly. "More and more carmakers are outsourcing R&D and other processes to their suppliers," said Dave Andrea, OESA's VP-business development. "There are enormous opportunities for innovative companies, but the Catch 22 is that developing an original equipment supplier relationship with these major manufacturers isn't easy."

Carmakers demand top quality, a global footprint and dynamic R&D functions from their vendors, said Karen Armon, CEO of Alliance Resources, an executive leadership development consultancy. "If you want to do business with, say, the Big 3 manufacturers, you have to be QS9000 compliant, foster an extremely professional corporate culture that fits with their visions and expect to export some of your leaders to offshore manufacturing facilities. You're not just selling parts to them, you're building a long-term, complex collaboration."

Tier 1 vendors a select group

The major North American manufacturers include the aforementioned Big 3-Ford, General Motors and Daimler Chrysler-as well as Toyota and Honda. On the flip side of the relationship, there are thousands of suppliers, though only a few hundred are so-called Tier 1 vendors.

The largest among these are Delphi Automotive Systems, Visteon Automotive Systems and Robert Bosch Corp., each generating original equipment sales of many different components and systems near or exceeding $20 billion annually, according to OESA. Margins may be tight-as they are for virtually every part supplier-but economies of scale give them an unmistakable leg up on competitors. In fact, the largest Tier 1 suppliers play such a dominant, influential role in the industry, smaller suppliers-Tier 2s and 3s-market their products directly to them rather than to the carmakers.

Suppliers provide everything from raw steel to ignition systems to wheels and tires, said Peter Brown, VP-associate publisher for the Automotive News Group, which is owned by BtoB's parent company, Crain Communications. "These days, if it's on a car or light truck, it's a good bet that it came from an outside supplier rather than the automaker itself."

The Big 3 are more likely to change their vendors with a new generation of a given vehicle to reduce costs or improve quality than, say, the Japanese-based carmakers, Brown said. "Toyota and Honda, generally speaking, maintain longer-lasting, more loyal relationships with their suppliers," he said.

The three `P's' of marketing

However, car manufacturers want to hear from companies that have built a better or cheaper mousetrap, he said. "The three Ps of marketing in this industry are indeed price, price and price."

Marketing efforts by and large hinge on one-to-one or engineer-to-engineer sales, Brown said. "Trade shows used to be more important, especially the Society of Automotive Engineers annual congress, but a lot of demonstrations now tend to be done behind closed doors. New innovations and designs have grown increasingly more secret, and no one wants to display proprietary stuff right out in the open any longer."

One company to break into the original equipment market recently is Microheat Inc., which makes the HotShot windshield heated cleaning and de-icing system. Microheat first sold the HotShot system to the automotive aftermarket and quickly caught the attention of carmakers.

"The secret to success in original equipment marketing-besides having an innovative product-is to build a strong, global sales force and keep knocking on doors," said Paul Thomas, Microheat's director of OEM sales." 

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