Suppliers to the automotive industry (OEM suppliers) have witnessed strong and steady growth over the past few years. Owing largely to the recovery in the global automotive market coupled with high-capacity utilization at their production facilities, OEM suppliers have performed better as compared with their OEM customers, especially in terms of profitability. However, the golden period is expected to expire in the coming year. With automobile sales not rising at a similar pace as before (especially in developed markets), and growing pressure on OEMs’ margins, OEMs have been undertaking massive cost cutting programs. This in turn is putting pressure on OEM suppliers to reduce prices. Additionally, OEM suppliers are facing rising expectations from OEMs to be located close to the OEMs’ facilities, especially in emerging markets.
As the automotive industry is seeing a shaving off of sales and profits, it is increasingly exerting pressure on its suppliers. OEM suppliers are facing increased pressure from OEMs to have an increased global presence (closer to the OEMs’ own assembly lines). While this means expanding operations and investments, OEM suppliers also need to keep costs low to be competitive and meet OEMs cost reduction programs. Thus, OEM suppliers need to balance both these approaches to remain competitive.
EOS Perspective
While the strategy for cutting costs and location proximity largely remain mutually exclusive, suppliers that best manage to meet their clients’ expectations have a chance to shine. They can look at innovative strategies such as locating themselves in a third region (that offers proximity to the clients site as well as offers low costs) to best balance client demands. But most importantly, suppliers need to device an optimal manufacturing network keeping in mind all aspects and overall cost/location benefits. Suppliers that manage to come up with innovative solutions to handle complex client requirements, are well likely to come out as industry winners during time when the industry maybe entering a crunch phase again.