In the analyst industry, we used have a saying that “when the mainstream press catches on to a trend, it is certainly almost over.” I’d like to think that is the case with the automotive supply chain dilemma, but I’m afraid I would be wrong.

While Supply Excellence has been tracking the ongoing instability and decline of the U.S. automotive supply chain for some time, an article in yesterday’s USA Today predicts that the worst is yet to come. In the piece, my own colleague, Pat Furey, head of Ariba’s automotive sector business, calls the recent rise in bankruptcy filings among automotive suppliers “just the tip of the iceberg. Unfortunately, more will come.”

All the other pundits quoted in the article agreed. In fact, one analyst went so far as to predict that more than half of small- to mid-size automotive suppliers will go out of business within the next five years, either closing their doors or selling to a larger conglomerate.
What’s the problem? Well, the article points to the following pressures as the main culprits for the auto supply chain’s decline:

• Declining vehicle sales. Automakers trying to curtail production, as evidenced by recent production cutbacks at Ford and Chrysler. However, labor contracts have kept automakers from cutting production to required levels. Union agreements also assure workers wages, which keeps automakers from realizing the full potential savings of such cutbacks.
• Price pressure. To make up the difference, automakers continue to demand price concessions from suppliers, many of which are already in financial dire straits.
• Global competition. North American auto suppliers must compete not only with each other but with suppliers in China and India, where labor costs are much lower. And, thanks to recent concessions from the United Autoworkers union (UAW) allowing automakers to bring some parts and assembly manufacturing back in house, auto suppliers must also compete with their customers.
• Commodities inflation. Raw material prices, from oil to metals to plastics, continue to skyrocket. Suppliers must hold down these costs while delivering lower prices to customers.
• Cash flow. As noted here in an earlier post, automotive suppliers are strapped for cash. And credit lines are drying up fast. Auto suppliers are literally dying of thirst for cash.

Fixing the automotive supply chain will take more than just government bankruptcy protection. It will require a complete overhaul of the industry, including ensuring that the entire supply chain — not just the OEMs and Tier One suppliers — engage in more effective strategic sourcing and supplier management strategies, including more effective commodities hedging and a better balance between in-sourcing and outsourcing and on- and offshoring. And, while the Big Three have their own problems to grapple with (the most prominent being non-competitive labor costs), they would be wise to rev up their efforts in supplier development, joint ventures, and co-sourcing or contract sharing arrangements, that allow lower-tier suppliers to purchase materials at the automakers’ preferred contract rates.

But, just in case, let’s hope the pundits are wrong.