What to make of supplier consolidation

    Louis Green

    There has been a lot of recent consolidation among auto suppliers here in Detroit, and a lot of speculation as to what it all means. The big fish are acquiring a lot of little fish — or in some cases, buying other big fish.

    Recently, the Detroit News had a nice summary of the merger mania.

    A new report says auto supplier mergers will hit an all-time high this year, surpassing the previous high set in 2007.

    Auto suppliers face rising development costs and cost pressure from automakers, which places more pressure on them to consolidate. Rising auto sales also have given some auto suppliers enough cash to make big deals.

    Understandably, some folks are worried by this news. Are small suppliers disappearing from the automotive supply chain? Are small suppliers too small to compete with the big players? Are we headed towards a supplier monopoly?

    From my vantage point, I see this auto supplier consolidation trend as part of the natural ebb and flow of supplier relations, and also reflective of the suppliers’ cash flow realities.

    For some suppliers, extended payment terms, tight margins, and mandated discounts have made their survival difficult. Supplier consolidation offers relief in the form of greater shared resources, talent, cash reserves, and more bargaining power with their customers.

    I have a particular concern about the small, women, and minority owned suppliers, who tend to have strengths and challenges that differ from larger suppliers. Many OEMs have been slow to adopt strong supply chain finance (SCF) programs that offer early payment and cash flow relief to these suppliers, who stand to benefit most from increased working capital. There are signs that this trend may change in the near future. SCF programs that deliver mutual benefits to the OEM and supplier communities will be great for the auto industry at large. It should be noted that small and diverse suppliers also have the possibility of growing through consolidation and acquisition, given the right tools and support.

    On an additional positive note, the consolidation trend also highlights the strength of the auto supply chain.

    First, as the article points out, the auto industry is finally growing past pre-recession levels, and the big players have more money to spend on acquisitions.

    Second, I would highlight the subtext of what’s happening here: innovation in the auto industry is coming from small suppliers, not big ones. Small suppliers solve individual problems and implement new technologies faster than big suppliers — and big suppliers want to keep pace. Consolidation is an easy and appealing way for large suppliers to innovate, without doing it in-house. Innovation can be bought, for a price. There are certain sectors of the auto supply chain where innovation is taking place at a breakneck pace, small suppliers are leading the way, and that is most definitely a good thing.

    Lastly, I would note that these trends work in cycles. While there has been a slew of large acquisitions recently, there are signs that forfeitures will also occur. Johnson Controls, Inc., one of the largest auto suppliers, is spinning off its entire auto business. Sometimes being big does not pay off. I predict that we’ll see big suppliers break up and re-form as smaller suppliers in the coming years as well. All of these trends are indicative of a largely healthy and normal supply chain.

    In case you missed it, here’s a quick rundown of recent supplier mergers and consolidation:


    Louis Green is the founder and CEO of Supplier Success, LLC. He is a nationally known expert in the fields of procurement, supply chain management, and supplier diversity.

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