Some see auto suppliers' group as subtle rebellion against Covisint

By Brian Milligan -- Purchasing, 7/13/2000

Eight automaker suppliers will deploy a research team to determine how the Internet can be used to make them more efficient. Some industry observers see this as a warning shot across the bow of Covisint, a powerful online trade exchange being formed by General Motors, Ford, DaimlerChrysler and other automakers. Some even suggest the research group could be the suppliers' first step in forming their own exchange, a move that would certainly be a slap in the face to Covisint.

But others are taking a broader look at the process. Scott Upham, president of the Michigan-based Providata Automotive, a supplier consulting agency, likens formation of the search group to a card game. The OEMs have played their hand, he says. Now it's up to suppliers to play theirs. "The automakers have forced them to do this," says Upham. "It's 'play in our playground or don't play at all.'"

The story of Covisint is still unfolding. The online exchange, in process of being formed, is de-signed to attract suppliers from different tiers. Now, the suppliers group is raising meaty questions about the possibility of complementary-but still contradictory-online trade exchanges in the auto OEM industry.

John Chalifoux, director of marketing and e-business development for Valeo S.A., says the research group venture is benign. He says the eight suppliers have simply formed a study group to explore B2B business initiatives. High-profile suppliers in the group include Dana, Delphi Automotive Systems, Eaton, Motorola, TRW and Valeo S.A.

Exploring e-issues

The group, according to Valeo's Chalifoux, will address expected e-business issues facing the automotive supply industry. The group says it is exploring supply chain management, collaborative product development, customer relationship management, and the independent aftermarket. Its members will address technology issues facing the industry and identify business-to-business technology solutions. They hope to find ways to do these things whole lowering costs, resulting in greater benefits for each participant and its customers.

Representatives from Dana, the company credited with spearheading the project, say it's all designed to work with automakers, not against them.

"The intent of this exploration is to support and complement the activities of each participating suppliers' automotive original equipment and aftermarket customers," says Dana President and CEO Joe Magliochetti. "We will coordinate with our customers to be sure that we are addressing cost savings and efficiency opportunities across the entire supply chain of the automotive manufacturing and independent aftermarket industries."

Richard Radecki, director of e-business for the Michigan-based Delphi Automotive Systems, says the suppliers have only formed a research group that will help them gain understanding of Web-based technologies. Radecki says the intent is not to create an exchange, but to study the e-business solutions that are now arising, and how supplier groups can collaborate. None of the suppliers are obligated to implement anything when the study is complete.

"We all had the intention of investing in certain supply chain management tools, looking at the independent aftermarket, and at some of the common needs," explains Radecki. "We are trying to gain an understanding of the business objectives of our major OEM customers. We never intended to form our own exchange."

Radecki says the suppliers have a healthy respect for the exchange model, suggesting it has a lot to offer. "The exchange is a combination of e-procurement tools that automate on a Web basis," Radecki says. "There is a price-down element there. But, by the same token, its supply chain management tools will allow for lower inventory levels, collaborative engineering tools, and faster design cycles."

A careful watch

But in the same breath, Radecki says the research group is carefully watching Covisint as it develops. He says the trade exchange must take the concerns of suppliers to heart as it forms its plan. He also says suppliers are eager to tell Covisint about their concerns.

"We believe that whatever services Covisint develops, it ought to be a good value proposition for all suppliers and manufacturers," Radecki says. "Covisint is seeking customer input as it develop its products and services, and we are really looking forward to participating in that."

Pricing is, of course, the most important among suppliers' concerns. Radecki and others have long said there could be drawbacks to joining the automakers' exchange. He says it cannot be denied that the exchange is designed to get suppliers to provide parts at cheapest-possible prices. He and other suppliers warn that during online bidding , prices will be played up over supplier history or quality. Suppliers who provide parts for the lowest prices will be favored, and all others will be squeezed and forced to reduce prices.

Upham of Providata Automotive says such pressures are still coming from the exchange.

"We're seeing another round of pressurization of the suppliers," Upham says. "They want to squeeze the supply base as much as possible. But there's not a lot of give there anymore."

Upham says suppliers' skepticism about the exchange is growing, not dissipating. He suggests that this kind of intensifying wariness is fueling the research project. "The ones I advise say [the exchange] is just another hoop they have to jump through; this is just another way to beat down suppliers and their costs. And, in some ways, they're right. Carmakers will reap benefits from this. The supply base must deal with the aftermath."

Creating efficiency

But David Barnas, a spokesman for General Motors, says this is not the intent of Covisint. He says the exchange is designed to use the Internet to create efficiency-and this should help suppliers, as well as automakers, he says. "Our intent is to create the auto industry's leading' B2B exchange for the benefit of all automotive suppliers and OEMs," says Barnas.

What's more, he says the automakers have no intention of using the ex-change to shake down suppliers. But convincing suppliers of this is a difficult task. "We've announced many times that we are not here to squeeze anybody," says Barnas. "How would unhealthy suppliers help the auto industry and the OEMs? It is counterproductive.

"We're trying to do something for the entire benefit of the supply chain," Barnas continues. "Healthy suppliers mean healthier OEMs. Especially when you talk quality, service, technology, price, and everything along those lines."

This assurance won't stop the research project from going forward. And Chalifoux paints an optimistic picture. He believes suppliers' efforts here can be applied in a positive way to what Covisint is doing. He says it's obvious that not all suppliers view Covisint as a threat. The exchange is gaining steam, as Magna, Meritor Automotive, and Johnson Controls have all announced publicly their intent to participate in the new exchange.

The Michigan-based Delphi Automotive Systems recently signed a letter of intent to join Covisint. Radecki says Delphi waited until now to join because it wanted to learn more about Covisint and its intentions. A prudent approach is important, he says, since both automakers and suppliers are heading into unfamiliar territory.

Today, Radecki says, Delphi understands what Covisint is trying to do. He says Delphi let down its guard when it saw that Covisint was willing to listen to its concerns. "We needed time to understand how they go about it," Radecki says. "The fact that they started to pick a more neutral position, and involve other tiers of the auto supply chain by seeking our input, and the shape of the products and services they develop, made it very agreeable to us. We agree with their vision."

Not a threat

Chalifoux says others in the supplier group agree too. And for this reason, he says Covisint should not view their research venture as a threat. Rather, he says Covisint should view their research project as a complement. "We believe the efforts of the S8 are complementary to the efforts of Covisint and other OEM customers," Chalifoux says.

He notes also that different members of the group are not trying to sway others as they decide whether or not to join Covisint. "Each of the S8 members will make independent decisions on the exchanges or marketplaces in which they will participate." Chalifoux suggests that it's only natural for suppliers to move in this direction. As the Internet continuously opens new worlds of commerce, he says suppliers would be fools if they didn't try to find ways to use it to their own advantage.

Chalifoux further says that by exploring these offerings, the auto suppliers are actually learning how to enhance their own online relationships with other companies-including OEMs.

"The Internet fosters cooperation among all players in the value network," Chalifoux says. "Each player must look at its relationships not only with its customers and suppliers, but also with its peers. Companies that share the same objectives can form these relationships."

Some representatives from companies that make up Covisint say the research group is not taking them completely by surprise. With the whirlwind of changes now facing the supplier community, they say it makes sense that these companies should proceed carefully. "Obviously they are taking a prudent approach in their mind and decided to research everything and investigate further," says Barnas.

Exchange possibilities

While Dana and its supplier partners aren't technically forming an exchange, there's gossip in the OEM supplier community that formation of this research group could lead to one. Such a venture begins when competitors come together to investigate the World Wide Web. It ends when they form an exchange of their own.

In fact, that's exactly what happened when Ford, General Motors and DaimlerChrysler came together.

Barnas says if the S8 group does decide to go their own route and start up their own exchange, it is not out of the question that an exchange comprising suppliers would complement the OEMs' exchange. Some suggest that linkages between such sites could work to the advantage of all parties.

"If Dana and the others formed a venture, it could work with Covisint," says Barnas. "There could be some links."

Fara Warner, a spokeswoman for Ford, also takes a laid back approach to the research group's efforts. Warner says Covisint is not worried about the possibility that suppliers may be forming their own exchange. "Certainly, there are concerns about wanting to make sure we are coming up with the right solution for suppliers," Warner says. "That is the reason we came together. We don't want to have to deal with more than one exchange."

But Upham says the suppliers he works with are getting a different message from the automakers. And the message can be interpreted as a veiled threat.

"The carmakers told them, 'Don't bother forming your own consortiums. You have to be part of our world or not be part of anything,'" Upham says. "So they are discouraging suppliers from setting up consortiums for each other.

"Suppliers are being told, 'This is no way to interact with us. Sign up, or you will be left out in the cold,'" he continues.

Dennis Virag, president of the Michigan-based Automotive Consulting Group, is the first to point out that if suppliers do form their own exchange, it would generate a number of uneasy questions. Not the least of these is how a massive online auto exchange could work side by side with an impressive exchange made up of key suppliers. How could the two work together? Who would control what is being purchased, and at what cost? What happens if the two sides disagree?

"The problem with the Dana venture is, where is the benefit?" Virag asks. "Where does it reside? Who would capture the benefit of this exchange? If it were just the partner companies, why would anyone else participate in it?" he continues.

The driving factor

For the time being, at least, these questions will remain unanswered. But many in the industry agree on this: In a way, Covisint is driving the auto suppliers to do something. Formation of the exchange has many suppliers worried that they'll be forced to participate in an online environment that puts emphasis on price reduction. That fear is not going away.

And many suppliers feel they are being forced to participate. Those who don't will simply be left out as automakers search for companies to supply their parts.

Some say that by forming their own research venture, suppliers are taking a David and Goliath approach. They're proving that they are capable of taking e-commerce reins into their own hands. It's up to Covisint to make the next move.

"Clearly, [suppliers] are still nervous about letting the automakers drive this whole thing," agrees John McElroy, a member of the Society of Automotive Analysts. "They [the suppliers] are getting some pretty big players in here, and they're proving that they have some clout of their own."

Upham says it's easy to see why suppliers would be alienated by the way the entire auto OEM trade exchange is evolving. "Suppliers have not been involved in this venture. They don't have equity positions in the company, and they're peeved about that," says Upham.

Showing unity

Don Alles, marketing services manager for truck component operations at the Michigan-based Eaton Corp., agrees. Alles says that with the way the whole Covisint saga is unfolding, suppliers have no choice but to show a little unity. And a little force. A research group can be interpreted to be something of a trump card, he says. And it will certainly help suppliers gain a little confidence.

"Could this be happening because of Covisint? Yes, everyone recognizes that as a possibility," says Alles. "If suppliers, particularly Tier Ones, are feeling pressure from their OEM customers as a result of various cooperative trade exchanges, they're going to try and band together to provide enough critical mass to feel that they're on an even footing."

This strategy would be all well and good, except for the delicate balance that governs OEM suppliers. They must, after all, still work with the automakers in the long run. Automakers buy their parts. If suppliers alienate them too much, they will gain nothing.

McElroy says this could be the one factor that forces the suppliers to proceed with caution.

"If suppliers go off on their own and don't aggregate under the Big Three venture, it will cause big time friction," McElroy says. "The automakers control their livelihoods."

And McElroy theorizes that, in the long run, Covisint might not care too much about suppliers that don't want to join its exchange. The member automakers would simply be tempted to favor the companies that freely join the exchange, and exclude those that create their own venture.

"If it comes down to the wire and you have two companies, one that actively competes on their [Covisint] Web site, and one that does not, the automaker will look more favorably to the supplier that it sees as being more cooperative," McElroy says.

Barnas hints that a situation like this could indeed lead to some friction. "Whether or not this is the most advantageous way to go is still to be decided," he says.

Confusion reigns

And this may not be the only disadvantage of a second auto-related exchange. Some warn also about the confusion factor. Ford's Warner says Covisint is not intimidated by the research group's study. But she admits that if suppliers go in the direction of forming an exchange, it would lead to some confusion. "If you look at this from the point of the consumer, it would seem there is a proliferation of sites," Warner says.

Alles agrees that too many ex-changes would lead to confusion, but he suggests that this is inevitable. Auto suppliers won't be the last companies to study e-commerce, or to consider the possibility of forming an exchange, he says.

"I think there will be confusion in this market for the next five years because of e-commerce," Alles says. "It's going to be a very confusing time for all of us, providing tremendous opportunities for suppliers and customers. But in the meantime, there will be lots of cuts and scrapes and abrasions on everyone's nose for the next two to three years."

Jeff Wincel, vice president and general manager of the Modular Systems Business Unit at Donnelly Corp., agrees that there is potential out there for too many exchanges. But he also believes that many exchanges will soon be removed through consolidation. "There will be a tremendous number of exchanges, but only a few big players," says Wincel.

Upham says it would only be natural for suppliers to try and work with Covisint in some way, shape or form. But he also admits that Covisint probably views the situation as a defiant move. It's almost certainly going to add a little spice to the relationship, he says.

In the end, Upham says, "It's not a good thing. You need to have a good, working relationship with e-suppliers. And with that, you need to have a certain level of trust there."

But Alles also agrees that suppliers should be taking some sort of steps to, if not protect themselves, at least get a better understanding of Covisint. The research group, he argues, is a good first step. "You'd be foolish not to be testing the water in some way," says Alles.

The same steps

As they conduct their research, Alles says auto suppliers are learning that they are, ironically, already doing some of the things that Covisint purports to revolutionize. The suppliers, for example, send each other CAD data over the Internet. They use the Internet to facilitate simultaneous engineering, and attract other tier suppliers. That's one reason that Eaton still has no plans to join Covisint.

"We absolutely are doing a lot of those things already," says Alles. He notes, for example, that Eaton is already in the final stages of its own e-procurement strategy. "We've got a comprehensive e-business strategic plan in its final, formative stages. It covers all issues from the supplier to the customer. There's no reason to change at this point in time."

But even as he says this, Alles throws in a caveat suggesting that Eaton does not wish to alienate Covisint. "We're not going to ignore any efficiencies of new models that come along," he says.

Donnelly's Wincel says something very productive can come out of the suppliers' efforts. It is a step into the world of e-commerce. Auto suppliers can only benefit from the knowledge they accumulate, he says. If they decide in the long run to team with Covisint, they will all be more knowledgeable about e-commerce processes. "I see this as a good extension of what they're doing," says Wincel. "The large tier ones can see how to capture single benefits through e-procurement."

Neil DeKoker, managing director for the Michigan-based Original Equipment Suppliers Association, applauds the auto suppliers' research effort. "Absolutely, this is a positive step," says DeKoker.

"It is a leadership step, one that says, 'A few of us can get together, share information, implement things more quickly, and send a signal to the technology companies that we are addressing our own issues.'"

But it's a leadership step that is undeniably leading to competition between the two sides. To that, Warner has an answer: "The best solution will win."

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