CHAPTER 5

Outside Market Forces

The most important outside market force for carmakers is the prominent role played by the manufacturers of the roughly 15,000 parts that go into the assembly of vehicles. Also of importance are suppliers of commodities and raw materials. Relations between carmakers and their suppliers have changed considerably in recent years because suppliers have more responsibility in the design and manufacture of vehicles than they had in the past.

Suppliers of Parts

A company making parts primarily destined for installation in new vehicles is called an original equipment manufacturer (OEM). A company making parts sold primarily as replacements in older vehicles is known as an aftermarket supplier. OEMs are responsible for more than 70% of the value added of a motor vehicle, totaling more than $1 trillion in annual sales worldwide.1

Original equipment can be classified into parts, components, systems, and modules. Terminology is not standardized, but the four types of equipment are commonly distinguished this way:

• A part is a small, individual piece, either a standardized generic item such as a bolt or a piece of metal, rubber, or plastic that is stamped, cut, or molded into a distinctive shape.

• A component consists of several parts put together into a recognized feature such as a seat cover or piston.

• A system combines several components to make a functional element of a vehicle such as an instrument panel or a transaxle.

• A module integrates several systems into one of a handful of major units of a vehicle such as a passenger compartment or engine.

OEMs are organized into a hierarchy called tiers. OEMs that sell directly to carmakers are called tier one suppliers. Tier two suppliers sell primarily to tier one suppliers, and tier threes to tier two suppliers. Carmakers have drastically decreased the number of their tier one suppliers from several thousands to a couple of hundreds. Traditionally, carmakers assembled vehicles from thousands of individual parts supplied by thousands of individual companies. For example, knobs, wires, tamped metals, and gauges were sent by different suppliers to the final assembly plants for fashioning into instrument panels. Now, a single supplier provides an instrument panel ready for installation in the vehicle. Suppliers of knobs and gauges have become tier two suppliers. A tier one supplier typically provides a system or module, and in turn obtains parts and components from tier one suppliers.

Types of Parts

Parts, components, systems, and modules can be allocated to five principal types or vehicle functions: powertrain, chassis, exterior, interior, and electronics.

Powertrain is the term that the motor vehicle industry employs to encompass the systems responsible for propelling the vehicle. The two principal powertrain systems are the engine and drivetrain. The heart of the engine is a block with several cylinders, most commonly four or six. Inside each cylinder is a piston that moves back and forth in four cycles or strokes as intake and exhaust valves open and close. The heart of the drivetrain is the transmission, which contains gears that are connected to the engine by means of an input shaft and to the axles by means of an output shaft. The purpose of the transmission is to adjust the input shaft to turn faster or slower than the output shaft, depending on conditions. Also part of the powertrain is the thermal system, which cools the engine and heats and cools the passenger compartment, and the exhaust system, including pipes and mufflers, to expel the spent gases.

The chassis makes a vehicle safe to drive and provides passengers with a comfortable ride. Principal chassis systems include fuel handling, driveline, steering, wheels, tires, brakes, and suspension. The fuel handling system includes a fuel tank, a fuel line to carry the fuel from the tank to the engine, a pump to push the fuel from the tank, and injectors to insert the fuel into the cylinders. The principal driveline components are the drive shaft and the axles. The drive shaft connects the transmission output shaft with the axles. The axles hold the wheels in place and drive them forward or backward. The steering system is the principal interface between the driver and chassis. The steering linkage makes the inside wheel turn more than the outside wheel. The wheels, which are mounted on the axles, are connected to the powertrain by the driveline and to the operator of the vehicle by the steering. A tire is attached to each wheel to make the movement of the vehicle smoother. Brakes, which are attached to the wheels, are controlled by a computer that is activated when the driver steps on the brake pedal. The suspension system, which includes springs, bars, and shock absorbers, stabilizes the vehicle, keeps tires on the road, and cushions passengers from uncomfortable bumps.

The exterior is the container that houses the other vehicle components and passengers. Principal exterior systems include the frame, body, bumpers, glass, and paint. The frame is constructed of steel members welded or riveted together, usually in the shape of a rectangle with crosspieces, sometimes in an X-shape. The body panels are stamped or pressed at stamping facilities from sheets of steel, aluminum, or plastic. Trim, such as door handles, grills, and mirrors, are attached to the body panels. The bumper typically includes a reinforcement bar sheathed in a plastic cover. Foam is packed between the bar and cover to cushion an impact.

The interior is the compartment that carries the passengers. Principal interior systems are the seats and interior trim. A seat includes a metal frame; foam padding; an external skin cut from fabric, leather, or vinyl and sewn to shape; and controls to adjust the seat. Interior trim consists of four principal modules: instrument panel, headliner, flooring, and doors. The instrument panel, housed in a soft-plastic dashboard, displays gauges that monitor and control the vehicle. Once made of woven fabric, the headliner and flooring are generally made of polyester fibers or composites that also include foam, cotton, and synthetics. Doors are sandwiches with an outer side stamped from metal and an inner side molded from plastic. Between the inner and outer panels are acoustical and restraint systems, locks, regulators, speakers, adjusters, wiring, and other electronic components.

The electronics control the performance of the vehicle and provide convenience to passengers. Electronics systems include engine management, entertainment, information, and safety. The growing role of electronics in motor vehicles is discussed in Chapter 7.

A count of several thousand individual manufacturing facilities operated by tier one suppliers in Europe and in North America was undertaken by a team including the author. The distribution by type of plant is similar in the two regions. Powertrain parts are produced at 34% of plants in Europe and 26% in North America. Exterior parts are produced at 18% of plants in North America and 10% in Europe. Chassis parts are produced at 19% of the plants and electronics parts at 16% of the plants in both regions and interior parts at 22% of the plants in Europe and 21% in North America. Thus, Europe has more powertrain plants and North America more exterior plants, whereas the share of plants making the other three types of parts is virtually the same in the two regions (Table 5.1).2

The share of suppliers in each of the five functions varies, depending on what is counted. Suppliers of exterior parts employ a relatively large number of people, whereas suppliers of powertrain parts have relatively high numbers of plants and value of shipments. In addition, some parts, classified as generic (such as bearings, brackets, and hinges), are found in more than one module and are not specific to motor vehicles.

Leading Parts-Making Companies

As a result of consolidation, the supplier industry is dominated by a relatively small number of very large OEMs. Seventeen suppliers had at least $10 billion in OEM parts sales worldwide in 2012, and five had at least $30 billion.
The 10 largest suppliers together accounted for around $250 billion in OEM sales in 2012, that is, 20% of the global market, and the 100 largest had around $700 billion in OEM sales, that is 70% of the global market.

Despite consolidation, regional differences persist. Only two of the ten largest global suppliers ranked among the ten largest suppliers in each of the three major car producing regions of Asia, Europe, and North America. Four of the ten largest global suppliers were among the ten largest in two of the three regions, and four were among the ten largest in only one of the three regions.

The 10 largest OEM suppliers worldwide in 2012. Here are the 10 largest suppliers worldwide in 2012, grouped according to the regions of the world where they ranked among the 10 largest.3

• Among the 10 largest in Asia, Europe, and North America:

∘Robert Bosch GmbH, founded in Germany in 1886, produces a wide range of engine components, as well as brakes, steering, and exhaust systems. The company is owned by a charitable foundation and the Bosch family.

∘Continental AG was founded in Hanover, Germany, in 1871, to produce tires for carriages and bicycles. It is the world’s fourth largest tire maker, behind Bridgestone, Goodyear, and Michelin, but it is a larger supplier than its tire rivals because it is also a major supplier of other parts such as brakes, suspension, and instrument panels.

• Among the 10 largest in Asia and North America but not in Europe:

∘Denso Corp., Japan’s largest supplier, originated as ­Toyota’s in-house electrical and radiator maker. It became an independent company in 1949, but Toyota still owns one-fourth of Denso and accounts for one-half of its sales.

• Among the 10 largest in Europe and North America but not in Asia:

∘Magna International Inc., based in Canada, is North America’s largest supplier. The predecessor company was founded in 1957 by Frank Stronach, an Austrian émigré, to produce body stampings.

∘Faurecia, Europe’s leading seat maker, was founded in 1914 by Bertrand Faure to make seats for Paris trams. It became one of the world’s largest suppliers in 1997 when it acquired parts making activities that had been spun off from PSA Peugeot Citroën.

∘Johnson Controls Inc. (JCI) was incorporated in 1885 to make and sell thermostats to regulate building heat. JCI did not become a major car parts supplier until 1985 when it bought seat maker Hoover Universal, Inc. Into the 21st century, JCI was one of two leading seat suppliers globally, along with Lear Corp., the world’s eleventh largest parts maker (see below).

• Among the 10 largest only in Europe:

∘ZF Friedrichshafen AG was founded in 1915 by Ferdinand von Zeppelin to produce gears for Zeppelin airships. As a car parts supplier, the company has specialized in transmissions, axles, and other chassis systems and modules.

• Among the 10 largest only in Asia:

∘Aisin Seiki Co., founded in 1949, is around one-fourth owned by Toyota. The supplier is closely tied into Toyota’s keiretsu network, primarily as a supplier of engines and transmissions, and two-thirds of Aisin’s sales are to Toyota.

∘Hyundai Mobis originated in 1977 as a manufacturer of containers. It became a major car parts supplier in the 1990s, including the principal supplier of complete chassis modules to Hyundai and Kia. Mobis is part of the Hyundai chaebol through interlocking ownership.

∘Yazaki Corp. was founded in 1929 by Sadami Yazaki to produce wiring for cars. The company, which is still family owned, is the inventor and leading supplier of wiring harnesses, which bundle together the large amount of otherwise chaotic wires that thread through vehicles.

Among the 10 largest suppliers in 2012 in one or two regions but not worldwide. These ten OEMs ranked among the ten largest in one or two of the three principal car-making regions but overall did not rank among the 10 largest globally.

• Among the 10 largest in Europe and North America but not in Asia:

∘Delphi Automotive Systems was GM’s parts-making division until spun off as an independent company in 2000. As an independent company, Delphi has exited from most sectors in order to focus attention on electronics.

∘TRW Automotive is the leading supplier of steering gears. The parts maker had been part of a major military and aviation supplier until spun off as a separate automotive supplier in 2003.

• Among the 10 largest only in North America:

∘Lear Corp. was founded by William Lear as an aviation company. For the auto industry, it produced seat frames and became a major parts supplier in the 1990s through acquisition of several seat companies.

∘Cummins Inc. was founded in 1919 in Columbus, Indiana, to produce diesel engines. Carmakers manufacture most of their own engines, but a notable exception is diesel engines for pickup trucks in North America.

• Among the 10 largest only in Europe:

∘BASF SE was founded by Friedrich Engelhorn in Germany in 1865 to supply dyes. It now is a major supplier of styrenes and polyurethanes for molding plastic parts, as well as coatings.

∘Valeo SA was founded in France in 1923 to make brake linings. It has become Europe’s leading producer of thermal systems, including heating and cooling.

• Among the 10 largest only in Asia:

∘Sumitomo Electric Industries was founded in Japan in 1897 to make copper wire. It started to supply wiring to the auto industry in 1961.

∘Toyota Boshoku Corp. was founded in 1918 in Japan to produce fabric and added car parts in 1972. The company has become the integrator of complete interior modules for Toyota, including seats.

∘JTEKT Corp. was founded in Japan in 2007 through the merger of two Toyota kereitsu firms. It specializes in supplying Toyota with steering and driveline components.

∘Hitachi Automotive Systems was founded in Japan in 1930 to produce electric parts. It now specializes in engine controls and management systems.

Suppliers of Commodities

The auto industry is a leading purchaser of a variety of commodities and minerals. Purchases are made by both parts makers and carmakers. The average vehicle produced in the United States in 2011 weighed approximately 1,800 kilograms. Vehicles have been getting heavier by 6% between 1995 and 2000 and by 4% between 2000 and 2011. So carmakers have to purchase ever more commodities.

Steel is by far the most important component at 1,100 kilograms or 60% of the total weight (Table 5.2). Plastics and aluminum are next in importance, each about 9% of a vehicle’s weight. Rubber and fluids account for 6% each of the weight of a vehicle and glass for 2%. Steel has been declining as a percentage of a vehicle’s weight, from 68% in 1995 to 66% in 2000 and 60% in 2011. Plastics, aluminum, and ­rubber have increased their shares substantially, measured by percentage and
by weight.4

Steel

The principal input in nearly all motor vehicles is steel. The amount of steel in an average vehicle increased through the 20th century, reaching an average of around 1,100 kilograms in 2000. Approximately one-fourth of steel produced in the United States is destined for motor vehicles.5 Steel is rolled into a thin product through either hot rolling or cold rolling. Motor vehicle producers rely primarily on hot rolled steel for chassis components such as brake drums, wheels, and suspensions; body components such as cross and side members, roof frames, pillars, and doors; and drivetrain components such as transmissions, differentials, gearboxes, and clutches. Cold rolled steel is commonly used to stamp the hood, roof, fender, and door panels, because of its appealing surface finish.

Steel was not used in large quantities until the 1920s, when open wooden carriages were replaced with enclosed bodies. In the early 1900s, bodies were made primarily of wood. White ash was the most preferred. Philadelphia furniture maker Hale & Kilburn, then the dominant producer of steel seats for trains, is credited with producing the first steel car body for the 1912 Hupmobile. Hale & Kilburn’s general manager Edward Budd set up his own firm in 1912 to produce steel car bodies and patented the all-steel car body. Budd’s first large order came in 1914 from Dodge Brothers, which was then in the process of converting from the largest U.S. parts supplier to a high-volume carmaker.6 Ford’s decision to purchase Budd steel bodies in 1917 was a critical step in speeding up Model T production. The principal constraint in increasing assembly speed had been the time needed to paint the body. Paint applied to a steel body at a high temperature dried in a few hours, whereas varnish on a wood body took two weeks to dry. Budd was also credited with developing unitized body construction during the 1930s, three decades before it was widely adopted. During the Great Depression, Budd cut back on its body building business and developed stainless steel passenger railroad cars instead. Budd was acquired in 1978 by German steel manufacturer Thyssen AG, which merged in 1999 with Krupp AG and sold its U.S. stamping operations in 2006 to a Canadian company Martinrea.

In the 21st century, the amount of steel in an average vehicle has been declining by around 5% during the first decade of the 21st century. The decline has been much more rapid for regular carbon steel, composed simply of iron and carbon, which accounts for 90% of steel production. The use of cast iron has also declined sharply. Nearly all engine blocks were once cast in iron, but increasingly, other materials are used to make the engine.

On the other hand, the amount of high- and medium-strength steel in an average vehicle increased by 50% during the first decade of the 21st century. High-strength steel—which is alloyed with other elements such as manganese, molybdenum, manganese, chromium, and nickel—is increasingly used by carmakers for body parts because it is stronger than regular steel. Because it is especially resistant to corrosion, stainless steel is used for a few components, such as the exhaust, for which resistance to corrosion is especially important.

Carmakers obtain around one-half of their steel from the integrated steel mills operated in the United States by four steelmakers: Arcelor Mittal, AK Steel, U.S. Steel, and Severstal. Arcelor Mittal, the world’s leading steel producer by a wide margin, became the leading supplier of steel to the U.S. auto industry through acquisitions of Inland Steel in 1998 and International Steel Group in 2004. Of the world’s six largest steel companies, only Arcelor Mittal owns mills in the United States. The other five—Nippon, Posco, JFE, Tata, and Shanghai Baosteel—are all based in Asia and have concentrated on the rapidly growing markets in Asia.

AK Steel sells a higher percentage of its output to the auto industry than do the other three leading firms. AK is the leading supplier of steel to the leading Japanese carmakers Toyota and Honda, although its largest customers are actually GM and Ford. Severstal is the fourth largest supplier of steel to the U.S. auto industry, holding 8% of the market.7 Severstal owns the steel mill that was once integrated into the Ford Motor Company’s massive River Rouge complex. In 2004, Severstal acquired the bankrupt Rouge Industries Inc., which Ford had set up as an independent company in 1989. Severstal’s only connection today to Ford is the ­proximity of its mill. U.S. Steel is less heavily invested than its competitors in the auto industry.

The one-half of the car industry’s steel purchases not made from the four integrated steel mills is divided about equally between imports and smaller steelmakers and minimills. Imported steel is shunned because of the high transportation costs of transoceanic shipping. Shortages in domestic production and currency exchange rate fluctuations can increase short-term reliance on imported sources. The principal channel by which foreign steel enters the U.S. motor vehicle industry is through service centers. Service centers purchase bulk quantities of steel from both domestic and foreign sources and perform finishing operations, such as cutting, shearing and grinding, that otherwise would have to be done by parts makers.

Carmakers are not major direct purchasers of steel from minimills in part because the steel products used in vehicles are stamped primarily from flat steel, which has not traditionally been a specialty of minimills. Steel produced from scrap at minimills has been regarded by the auto industry as insufficiently strong to stand up to the rigors of driving or at least to tests. Although it is not a major direct purchaser of steel from minimills, the auto industry gets some steel produced at minimills indirectly through service centers. The primary use of steel from minimills in the auto industry is for wiring.

Some automotive steel comes from intermediate processors, such as Shiloh Industries. Founded as a tool and die company in 1950, Shiloh sells $600 million worth of steel products to the auto industry. Shiloh manufactures blanks, which are two-dimensional shapes cut from flat-rolled steel. Shiloh cleans, coats, trims, and cuts steel into shapes that carmakers use to stamp into body panels such as doors and fenders. Blanks are also sent to other suppliers to stamp such parts as seat frames, bumpers, frames, and rails.

Although the motor vehicle and steel industries have been closely associated for a century, the relationship between them has often been uneasy. Carmakers once routinely sought bids for steel contracts from three companies; GM once negotiated with nine steelmakers. A savvy steelmaker would submit designs that, if adopted, placed it at a strategic advantage when manufacturing contracts were issued. The consolidation of the steel industry into a handful of larger firms has reduced competition. As the number of steelmakers willing to play the game declined, carmakers could no longer count on finding three bidders for contracts.8 Just four steel companies at the table is too small for carmakers’ comfort. The surviving steel companies have been independent and powerful enough to stand up to carmakers. For their part, carmakers have reduced steel content in favor of lighter-weight materials, notably plastic and aluminum, in order to increase fuel efficiency.

The fundamental divergence of interests between the two industries has been the price of steel. Essentially, low steel prices are good for carmakers and parts suppliers and bad for steelmakers, whereas high steel prices have the opposite effect. Policies such as tariffs and quotas on foreign imports designed to protect U.S.-based steel producers may limit the supply of steel and drive up prices, thereby harming U.S.-based car makers and parts suppliers. Conversely, open market policies may lower the cost of steel for the U.S. motor vehicle industry, but they expose the U.S. steel industry to foreign competition.

Other Commodities

Plastics and aluminum rank a distant second and third to iron and steel in automotive content, but the share of both is increasing rapidly. Rubber and glass round out the five most important commodities represented in motor vehicles.

The average plastic content of vehicles increased by one-third in the first decade of the 21st century, from 130 kilograms or 7% of vehicle weight in 2000 to 170 kilograms or 9% of vehicle weight in 2011. Plastics firms, such as BASF and Dow, supply the motor vehicle industry with commodities used to mold plastic parts. These include styrenes, polyurethanes, polypropylene, nylon, polymers, thermoplastic urethanes, and vinyls.

Plastics are durable, cheap to make, and lightweight. Plastic parts predominate in the interior systems, such as door panels, instrument panels, seat covers, headliners, and floor coverings. Smaller components are also plastic, including gauges, switches, vents, handles, floor mats, and seat belts. Plastic has replaced steel not only in exterior components, ­principally bumpers but also in some cases hood, trunk, and door panels. Some powertrain parts are also now plastic, such as the oil dipstick.

The amount of aluminum has increased from 41 kilograms in 1977 to 105 kilograms in 1995, 122 kilograms in 2000, and 161 kilograms in 2011, and the percentage has increased during that period from less than 1% to 9%. Aluminum is relatively expensive to cast, about $5.50 per kilogram compared with $0.90 per kilogram for iron in the early 21st century, so its increased use is adding several hundred dollars to the price of a vehicle. And it is not as durable as iron. Nonetheless, aluminum is being used more to cast engine blocks because it is an effective way to cut vehicle weight and thereby increase fuel efficiency.

In addition to engine blocks, the most common applications of aluminum are wheels and body panels, again because they reduce vehicle weight. Wheels were once made of steel, but aluminum wheels have captured the largest share of the wheel market because they are considered more stylish as well as lighter. The body panel most likely to be aluminum is the hood. The major supplier of primary aluminum and fabricated aluminum products to carmakers and suppliers is Alcoa, Inc.

Rubber is used primarily in tires. Also made from rubber are smaller parts such as wiper blades, engine mounts, seals, hoses, and belts. Around 75% of the world’s natural rubber production is used to make tires for vehicles. Charles Goodyear mixed raw rubber with sulfur to create an elastic substance resistant to heat and cold, a process later called vulcanization. Until then, rubber’s usefulness had been severely limited by its tendency to melt in summer heat and become brittle in winter cold. With the growth of motor vehicles in the 20th century, tires became the principal use for natural rubber. Synthetic rubber now accounts for 60% of the rubber content in tires.

Two-thirds of the world’s original equipment tires are supplied by four companies: Bridgestone/Firestone Inc., Continental AG, Goodyear Tire & Rubber Co., and Michelin Tire & Rubber Co. Goodyear is the sole survivor of a number of tire companies that clustered in Akron, Ohio, in the early 20th century. Bridgestone, based in Japan, became the world’s largest tire supplier when it acquired U.S.-based Firestone in 1988. U.S. Rubber and B.F. Goodrich merged in 1986 to form Uniroyal Goodrich, which was sold in 1990 to the French tire maker Michelin. General Tire was sold to German tire maker Continental in 1987.

Glass is used primarily on the front, side, and rear windows. The first glass windshield, introduced as an option in 1904, consisted of two horizontal panes of glass connected by hinges. The top half could be tipped open for an unobstructed view when the bottom half was completely splattered. The surface area of glass increased rapidly during the 1920s when the enclosed compartment replaced the open carriage. The introduction of laminated safety glass helped consumers overcome fear of the glass shattering. Glass is increasingly used in interior parts, such as navigation screens and back-up camera lenses.

The three leading glass suppliers worldwide are Asahi Glass Company, Saint-Gobain Group, and NSG/Pilkington. The three together have two-thirds of the world’s automotive glass market. NSG/Pilkington and Asahi were two of four leading glass suppliers in North America. The other two were Glass Products (until 2007, Ford Motor Company's glass works) and Platinum (until 2007, PPG).

Distribution of Parts Suppliers

Most parts are produced in the same regional clusters as the final assembly plants. The clustering occurs at both the international and intraregional scales.

At the international scale, the largest suppliers are divided about equally among the three principal car-producing regions. The seventeen suppliers with at least $10 billion in OEM sales in 2012 included six with headquarters in Asia (five in Japan and one in Korea), six with headquarters in Europe (four in Germany and two in France), and five with headquarters in North American (four in the United States and one in Canada). The one hundred largest suppliers worldwide included thirty-five with headquarters in Asia (twenty-nine in Japan, five in Korea, and one in China), thirty-four with headquarters in Europe (twenty-one in Germany, three each in France and Spain, two in Sweden, and one each in Belgium, Italy, the Netherlands, Switzerland, and the United Kingdom), and thirty with headquarters in North America (twenty-six in the United States, three in Canada, and one in Mexico). In addition, one of the one hundred largest had headquarters in Brazil.9

The distribution of the leading suppliers changed sharply during the first decade of the 21st century. In 2000, seven suppliers had OEM sales over $10 billion, and these included five U.S.-based companies and one each in Germany and Japan. Thus, the growth of very large suppliers during the early 21st century has been entirely among companies based outside the United States. Similarly, the distribution of the hundred largest suppliers changed. The number with headquarters in Asia increased from twenty to thirty-five, including from nineteen to twenty-nine in Japan, from one to five in Korea, and from none to one in China. The number of large suppliers with headquarters in North America declined from forty-four to thirty, with the entire decline in U.S.-based firms. The number in Europe declined by only two during the early 21st century, but the distribution within Europe changed. The number of headquarters increased from ­seventeen to twenty-one in Germany, from none to three in Spain, and from none to one each in Belgium and the Netherlands. On the other hand, the number decreased from nine to three in France, from four to one in the United Kingdom, from three to two in Sweden, and from two to one in Italy. The loss of U.S. and European companies from the ranks of top suppliers is attributable primarily to their acquisition by surviving competitors as well as to relatively rapid expansion by suppliers in Germany and Asia.

Within the car-producing regions, parts suppliers are highly clustered. In North America, one-fourth of supplier plants are located within 250 kilometers of Detroit (the historic center of the region’s auto industry), one-half are within 550 kilometers of Detroit, and three-fourths are within 1,000 kilometers of Detroit (Figure 5.1). The distribution of suppliers within Europe follows a similar pattern. One-fourth of supplier plants in Europe are located within 350 kilometers of Stuttgart, Germany (the center of that region’s auto production), one-half within 535 kilometers of Stuttgart, and three-fourths are within 1,000 kilometers of Stuttgart (Figure 5.2). The figure of 1,000 kilometers is roughly equivalent to a one-day driving distance for truck deliveries.10

The degree of clustering varies by the type of part being produced. The historic core area of North American auto production in Michigan and adjacent jurisdictions is home to around 60% of body parts plants, 50% of powertrain and interior parts plants, and around 40% of chassis parts plants (Table 5.3). However, the core area has only 25% of electronics plants. Nearly one-half of electronics plants are in Mexico, North America’s lowest wage area. Because of Mexico’s lower wage rates, it is worthwhile for suppliers to incur the higher costs of shipping raw materials to Mexico and shipping assembled electronics parts back to auto alley where most of the customers (the assembly plants) are clustered.

Europe has much less variation by type of part. The core area centered on Germany and France contains around one-half of all parts plants, with little variation by type (Table 5.4). Around 20% of electronics plants are located in peripheral areas of Europe, compared to 11% for all plants, a much less extreme variation than in North America. In other words, whereas the low-wage area of Mexico has attracted a large percentage of North America’s automotive electronics plants, the high-wage skilled labor area of Europe centered on Western Germany has retained a disproportionately large share of the region’s electronics plants.

Changing Producer-Supplier Relations

Purchasing most parts from independent suppliers represents a reversal of the practice that prevailed through most of the 20th century. Ford and GM emerged in the 1910s as the two dominant carmakers in the United States and in the world in large measure because they made most of their parts in-house, an approach known as vertical integration. Historically, the motor vehicle industry was one of the world’s most vertically integrated industrial sectors. Ford and GM were known for controlling all elements of the production process from raw materials through finished vehicles. Similarly in Europe, leading carmakers such as Fiat and Peugeot practiced vertical integration. As recently as the 1980s, GM produced more than 70% of its own parts and Ford 54%.11

After nearly a century of making most of their parts, U.S. and European carmakers turned most of their parts-making operations into independent businesses. Ford and GM exited within a year of each other, in 1999 and 2000, respectively. Vertical integration had become a liability rather than an asset because by then other carmakers were able to buy better quality parts from independent suppliers at lower prices. Though the level of vertical integration has declined sharply, yet it is still relatively high compared to most industrial sectors.

Manufacturers of key parts existed prior to the start of commercial production of motor vehicles in the 1890s. Carmakers relied on already established specialists for engines, transmissions, chassis, and bodies as well as for generic parts like nuts and bolts to put the other pieces together. Southeastern Michigan became the center of motor vehicle production in large measure because the leading manufacturers of key parts were already established there. Southeastern Michigan was especially important for early carmakers because it was the center of production for the most important part—the gasoline engine. Henry Ford and GM founder William Durant were both strong advocates of vertical integration. The two employed different strategies to achieve a high degree of vertical integration.

Ford sought direct control over all steps in the manufacturing process, from the mines and forests where raw materials were extracted to the rail lines that carried parts and vehicles to the dealers. Distrustful of others’ competence and reliability, and unwilling to delegate responsibility, Ford set up from scratch most parts-making functions and clustered their operations in a single place. At Ford’s complex along the River Rouge in the Detroit suburb of Dearborn, Ford famously unloaded at one end ships filled with iron ore from mines he owned, and at the other end loaded finished vehicles onto rail cars. In between, all but a handful of the parts were manufactured.

Prior to organizing GM in 1908, Durant had made Durant-Dort Carriage Co. the country’s largest carriage maker largely through vertical integration. Durant believed that making parts was the key to getting production costs below those of competitors who purchased most of their parts. Consequently, Durant-Dort made its own bodies, wheels, axles, upholstery, springs, varnish, and whip sockets. As he transitioned from making carriages to making cars, Durant acquired for GM numerous parts suppliers as well as carmakers. Some proved liabilities, but others formed the foundation of GM’s production and offerings. In some cases, entrepreneurs such as Albert Champion and Charles Stewart Mott were enticed to move to GM’s hometown of Flint to set up parts facilities. In other cases, acquired companies were permitted to continue operations elsewhere in the country.

Under vertical integration practiced for most of the 20th century by Ford and GM, and to a lesser extent by Chrysler, companies making parts were relegated to secondary status in the production process. Each year, suppliers competed with each other for contracts from the Detroit three carmakers to produce parts according to precise specifications. The company submitting the lowest bid received a contract to supply a particular part for one year. To keep suppliers on their toes, GM in particular often bought the same part from several companies and deliberately changed suppliers of particular parts from year to year. Manufacturers did not share information with suppliers about how parts fit together or their intentions for retaining or changing individual parts in the future.

The impetus for changing carmaker–supplier relations during the late 20th century was the diffusion to North America and Europe of lean production from Japan. Before World War II, Japan’s major parts suppliers were part of zaibatsu, which were large family-owned vertical monopolies, consisting of several industrial subsidiaries dominating specific sectors of a market, with a wholly owned banking subsidiary providing finance and a holding company providing top management.

During the U.S. occupation of Japan after World War II, the zaibatsu were replaced by keiretsu. The top management holding companies were eliminated, and the subsidiaries, including parts suppliers, became quasi-independent companies. However, under the keiretsu system, the quasi-independent companies are interrelated through cross-ownership. For example, Toyota holds equity stakes in engine supplier Denso, transmission supplier Aisin, seat supplier Toyoda Gosei, and interior trim supplier Koito, and the four parts suppliers hold equity stakes in each other.

Japanese carmakers adopted flexible production practices after World War II under the influence of W. Edwards Deming. One key element of flexible production is to give parts makers more responsibility in the production process. Key changes in carmaker–supplier relations have included:

1. Purchase of large systems and modules instead of individual parts: Systems, such as seats and suspension, are put together elsewhere and shipped as single deliveries by one supplier instead of hundreds of parts that would be put together at the final assembly plant.

2. Replacement of an annual contract with a multi year cooperative agreement covering the life of a particular model, typically 4 to 10 years: The supplier of one component could talk with the supplier of another component.

3. Selection of a supplier on the basis of its ability to meet quality standards instead of lowest cost: Suppliers submit to random audits and offer guarantees against defects and long-term warranties. Suppliers have to practice kaizen—continuous improvement in productivity, accident rates, inventory reduction, and other measures—to hit ever more ambitious quality and price targets. Instead of working to standardized blueprints, suppliers are given incentives to suggest improvements in carmakers’ designs.

4. Transfer from the carmaker to the supplier of product development information that had once been considered confidential: Suppliers are involved in the planning process several years earlier than in the past. Electronic communications, such as computer assisted design, foster flow of information between a supplier and a carmaker, as well as among various suppliers.

5. Expectation that the supplier establish research capabilities in order to take the lead in development of suitable components for future vehicles: Armed with the stability of long-term contracts, suppliers can invest more in design and engineering to improve the quality of parts and reduce production costs. For their part, carmakers have reduced their R&D capabilities in many aspects of components. Lower prices are achieved not by attacking suppliers’ overhead margins but by working with suppliers to reduce production costs.

6. Delivery of needed components on a just-in-time basis instead of placing them in long-term inventory. Japanese carmakers use the term kanban to mean just-in-delivery. Logistics firms coordinate the movement of parts from suppliers to the final assembly plant in a logical sequence, often within only a few minutes of being needed on the assembly line.

7. Organization of parts suppliers into tiers with a relatively small number of so-called tier one suppliers selling directly to carmakers, tier two suppliers selling to tier one suppliers, and so on down a hierarchy of tiers. The number of tier one suppliers shipping directly to carmakers has been reduced by one-half since the late 20th century. Lower tier suppliers typically fabricate specific parts and lack engineering and research capabilities.

8. Consolidation of parts suppliers into fewer larger companies with capabilities of delivering entire integrated systems and modules instead of merely individual parts and components.