Out With Suppliers! Vertical Integration Rises Again in Detroit ...
If you read between the lines of Tim's analysis and a news write-up in the Detroit Free Press, it becomes clear that there are a couple of reasons on the surface for such a move. The first, clearly, is to add and preserve union jobs. A new wage structure for union workers who are new to the job allows the Big 3 to pay roughly the same labor rates to employees in certain areas as their suppliers pay. The second reason which Tim and others opine is to reduce supply risk. After all, if you believe that somewhere close to 50% of the US automotive supply base is destined for insolvency -- as a handful of turnaround and analyst reports have pointed out -- then it does make sense to bring at least some production in-house as a hedge against supply disruptions.
But despite these benefits, I'd argue that in the long-run, vertical integration could in fact come back to bite Ford and its Detroit OEM brethren. Why? Because the Japanese know that much of the innovation in the automotive industry comes from outside -- in other words, it comes from your supply base. Do you really think that those parts suppliers providing components and piece parts to both the domestic and Japanese OEMs will be likely to share their ideas with their Detroit customers when they risk not only losing a potential platform contract to another supplier, but now their own customer as well? It's unlikely, especially considering the Japanese are more than willing to pay for innovation in the form of long-term, stable relationships and profitable relationships (for suppliers).
This is further proof in my book that Detroit is digging itself into a digger and deeper hole. And Spend Management -- or a misinterpretation of Spend Management practices -- is front and center in picking up the shovel.
- Jason Busch
You are absolutely right. Even the U.S. automakers -- from GM to Harley Davidson -- recognize the importance of capturing innovation from the supply base. Suppliers are experts in their products and services. They also have the investments in talent and infrastructure to deliver economies of scale that will be costly for the Big Three to reinvent.
Yet, over-bearing obligations to Big Labor and growing instability among the automotive supply base have Detroit's back up against the wall. (Look no further than the recent fallouts from strikes at American Axle and TRW for evidence of this dilemma.) These factors have limited the options for what the Big Three can do to unravel their disproportionately high costs.
The spoils will always go to those manufacturers than can quickly assemble (and disassemble) a network of suppliers and partners that can address current market needs and provide competitive advantage. Unfortunately, U.S. automakers are running a potato sack race against uninhibited sprinters. The odds are not in their favor.
Thanks for your thoughts. I think we're all in violent agreement here. The current wiggle room that Detroit OEMs have to pursue the types of relationships that they want to is limited by the union relationships that past generations created and nurtured. I particular like the potato sack analogy.
Full story <a href="http://creepingsharia.wordpress.com/2008/03/09/ara...%e2%80%99s-store-wal-mart-submits-to-sharia/">here</a>
Potato sack race Vs inhibited sprinters :) . I love that anology :)
Senthil.
Wal-Mart is a calculating competitor. I read the story and it was quite surprising that they would go to these extremes. But heck, anything to keep prices down -- even on those non-competitive products that won't put local stores out of business -- is good for Detroit. For blacks, whites, muslims, jews and hispanics alike -- not to mention everyone else who might have to take to its potholed streetes. This is one city that faces being wiped off the fiscal map unless they do something to shore up the sad state of their economy. And Wal-Mart is a positive -- not a negative -- in this regard. As to Sharia law, I'm no expert, but many of the "goy" stores in my neighborhood in Chicago -- which has a high jewish concentration -- carry judaica, kosher items, etc. That's simply meeting the local demands of what the neighborhood wants, correct?
But then again, not the point from a procurement perspective. They clearly made forward looking plans to not upset Muslims in the area by fixing prices and even foregoing profit in the process. How unlike Walmart. And how is that good for shareholders? Well, one might say it builds goodwill - but again they never needed goodwill to push other American merchants out of business.
Sharia law is very specific, and like the Qur'an dictates every aspect of Muslim life. It is quite clear that Wal-Mart has studied that to a certain extent - although they didn't do background checks on their diversity expert who has a history of anti-Semitic and pro-Hizbullah activity as well as committed election fraud. Ethics in procurement is not at the top of Wal-Mart's list apparently.
If what you say about your neighborhood is true, it's highly likely that those owners studied the market, took a risk, opened a business and survived in an open, free, capital market. Not a price fixing, protectionist market. Why didn't Wal-Mart open an Israeli Wal-Mart there? And why did they negotiate deals with all the Dearborn merchants first? And why do they need an Islamic advisory group? These are aspects of sharia law - do not offend Islam or you face jihad. Off topic but explanatory. Also, you can't charge interest under sharia law - search sharia banking for more info - an entire new field of insurance and banking products coming to market in the US.
Of all the ethnic neighborhoods in America, they chose the most anti-American, anti-capitalist. Wal-Mart negotiated with no one, until now.
It is a precedent they should be sure to keep going forward - but if they do that's more profit they will need to pass up.