This industry includes establishments primarily engaged in manufacturing motor vehicle parts and accessories but not engaged in manufacturing complete motor vehicles or passenger car bodies. Establishments primarily engaged in manufacturing or assembling complete automobiles and trucks are classified in SIC 3711: Motor Vehicles and Passenger Car Bodies; those manufacturing tires and inner tubes are classified in SIC 3011: Tires and Inner Tubes; those manufacturing automobile stampings are classified in SIC 3465: Automotive Stampings; those manufacturing vehicular lighting equipment are classified in SIC 3647: Vehicular Lighting Equipment; those manufacturing ignition systems are classified in SIC 3694; those manufacturing storage batteries are classified in SIC 3691; and those manufacturing carburetors, pistons, piston rings, and engine intake and exhaust valves are classified in SIC 2592: Carburetors, Pistons, Piston Rings, and Valves.
336211 (Motor Vehicle Body Manufacturing)
336312 (Gasoline Engine and Engine Parts Manufacturing)
336322 (Other Motor Vehicle Electrical and Electronic Equipment Manufacturing)
336330 (Motor Vehicle Steering and Suspension Components (except Spring) Manufacturing)
336340 (Motor Vehicle Brake System Manufacturing)
336350 (Motor Vehicle Transmission and Power Train Part Manufacturing)
336399 (All Other Motor Vehicle Parts Manufacturing)
Following the terrorist attacks of September 11, 2001, the big three U.S. automakers (Ford, General Motors, and DaimlerChrysler) succeeded in jumpstarting a suddenly depressed auto market by offering generous financing offers and rebates, which drove strong new car sales through 2002 despite the recessive economy. Lightvehicle sales in the United States in 2002 totaled 16.8 million units, down 2 percent from 2001 (17.2 million units) and down 4 percent from 2000 (a record 17.4 million units).
In 2003 there was a consensus in the industry that sales would not be sustained at that level and would drop between 16 and 16.6 million. To remain competitive automakers are cutting margins very thin, and the result is extreme pressure on auto parts manufacturers to keep costs very low. With profits built solely on volume, warning bells were sounding in 2003 for many auto parts dealers who analysts feared would crumble in the face of a downturn in the auto industry. Widespread layoffs were predicted if auto sales dipped below the 15 million mark for the year.
The auto parts industry is divided into two principle segments: original equipment (OE) suppliers and after-market suppliers.
Original Equipment Suppliers. Original equipment suppliers sell parts and components directly to automobile manufacturers for the production of new vehicles. Consequently, sales in the OE market depend on the number, size, and complexity of new vehicles produced. Primary products include wheels, frames, axles, transmissions, transaxles, bearings, springs, bumpers, brake systems, fuel injectors, seats, seat belts, airbags, cushioning, and safety padding materials. For many large suppliers, OE parts provide the majority of sales, although most suppliers also produce parts for aftermarket sales. Companies that supply both OE and aftermarket parts can generally cover development and tooling costs on the OE sales volume and supply the aftermarket at higher volumes than pure aftermarket suppliers.
Furthermore, spreading research, development, and tool and die outlays over several contracts with different manufacturers provides OE suppliers a cost advantage over the in-house parts divisions of vehicle manufacturers. OE suppliers typically concentrate on a few components and systems requiring a high degree of technological skill and manufacturing efficiency. By supplying parts for new vehicles, OE manufacturers are generally on the leading edge of technology, and vehicle manufactures have started turning to suppliers for increased engineering and development responsibilities. Auto makers also look to leading suppliers for financing and services related to inventory management, logistics, and tooling.
Aftermarket Suppliers. Aftermarket parts suppliers manufacture and sell replacement products for used vehicles. Primary products include spark plugs, shock absorbers, struts, springs, brakes pads, rotors, filters, wiper blades, and exhaust systems. Aftermarket parts are distributed through a few major parts distributors and thousands of small jobbers and local firms; they are for sale by auto dealers, service stations, repair shops, auto parts stores, tire stores, department stores, discount stores, and home and do-it-yourself stores. Aftermarket sales tend to be more stable than OE sales, particularly during recessionary times. As owners put off the purchase of new autos, they tend to extend the life of their current vehicles through increased maintenance and parts replacement.
With industry restructuring and realignment, the auto industry's supplier and original equipment manufacturer (OEM) roles were expected to change dramatically. Automakers and suppliers were expected to forge long-term agreements that focused on quality rather than price. Three layers of suppliers were expected—the system integrator, the direct supplier, and the indirect supplier. The ratios of these types of suppliers were also expected to change with system integrators growing to include 35 percent of suppliers—a 13 percent increase—and the indirect suppliers decreasing from 70 percent to 40 percent.
The automotive parts industry began with the development of the automobile at the turn of the century, and the growth in the parts industry followed that of the automotive industry. By 1970, automobiles were manufactured in long production runs of few vehicle models. The vehicle population consisted of a fairly homogenous group of cars—known to be not particularly well made. Automobiles of the era were easy to repair, and, with nearly all of the 225,000 service stations in operation providing repair services, mechanics were abundant. Parts suppliers found it easy to predict the demand for a relatively narrow range of parts and profited from their manufacture.
Beginning in the 1970s, several trends in the U.S. automobile industry started to affect domestic parts producers. The number of vehicle models produced began to expand, buoyed mostly by the increased sales of Japanese automobiles in the U.S. market. The continued proliferation of models and the shortening of model lives increased the number of parts required for vehicle manufacture and repair while lowering the volume of individual part production. Lowered economies of scale began to dampen the profits of parts suppliers while growing product lines increased the number of niche suppliers.
During the 1980s, small trucks began to sell more rapidly than passenger cars—requiring an increased production of parts for the truck population. During this time, the increasing market share gained by foreign vehicle manufacturers—whose OE and replacement parts were principally supplied by foreign parts producers—resulted in a decrease in the overall market for domestic parts.
Responding to this global competition, U.S. vehicle manufacturers placed a stronger emphasis on quality and reliability. However, more reliable new cars led to fewer repairs, slowing growth in aftermarket parts sales. In addition, the increased technical complexity of newer vehicles made performing repairs more difficult. Of the roughly 130,000 service stations in existence in 1990, only about 50 percent still performed repair services; dealers and independent service facilities were gaining a share of repair services.
The increased cost of repairing more complex systems, the inability of do-it-yourselfers to perform their own repairs, and the decreased number of service stations performing routine checks led to an underperformance of maintenance and repair. To a limited extent, these effects were counteracted by the aging automobile population. While the number of cars under three years old remained relatively constant between 1970 and 1991, the number of cars greater than three years old increased significantly; thus, the aging vehicle population provided a growing market for vehicle repair and parts replacement.
In the late 1980s and early 1990s, parts manufacturers were forced to respond to major changes in technological advances, relationships with vehicle manufacturers, and the impact of Japanese auto makers.
Technology. Parts makers worked to meet the increased technological sophistication of new automobiles. Protective airbags were installed in 51 percent of 1992 model year cars compared to almost none in 1989. With regulations requiring the use of passive restraints, airbags were expected to be standard equipment on almost all cars and light trucks by 1998. Anti-lock braking systems were installed on 32 percent of new automobiles in the 1992 model year, and traction control systems and innovative suspensions gained popularity.
Additional developments were underway to increase the use of lighter-weight materials throughout new vehicles. While increasing research and development costs, the use of complex and expensive components and systems improved opportunities for revenue and profit increases for parts suppliers. Further opportunities were provided by new clean air regulations. More stringent regulations increased the complexity of engine control and emissions systems, and a required increase in inspection programs led to more repair and parts replacement opportunities for aftermarket suppliers.
Relationship with the Auto Makers. With an influx of auto makers, the United States evolved into the most competitive automotive market in the world. To meet the demands of increased competition, the Big Three U.S. auto makers—General Motors, Ford, and Chrysler—focused efforts on quality improvement, cost reduction, and strategic sourcing, thus reducing the number of primary suppliers while increasing their responsibilities. These efforts had tremendous impact on parts manufacturers. Although in the past OE parts were sold largely on annual contracts covering the model year, in a move to improve supplier relationships, vehicle manufacturers began to award contracts for the life of a vehicle model.
In addition, auto makers reduced the number of suppliers they dealt with directly, awarding primary suppliers more responsibility for the design and development of entire systems and sub-assemblies. Primary suppliers were expected to integrate and coordinate the purchase of parts from smaller secondary and tertiary suppliers, and suppliers of all levels were urged to raise their quality standards while reducing costs. In response, many parts suppliers reduced the number of vendors they dealt with. Large parts suppliers who were able to increase the services they offered to vehicle manufacturers benefited most from these trends.
Each of the Big Three auto makers initiated programs for supplier management. Between 1980 and 1991, Ford reduced its worldwide supplier base by 50 percent and, in 1991, it began a restructuring plan that included increased supplier reductions. The company also asked suppliers to cut costs by 1 percent annually until 1997 and opened up its bidding system so that outside suppliers competed evenly against Ford Automotive Components Group, which supplied about 50 percent of the company's parts in the early 1990s.
Chrysler implemented its Supplier Cost-Reduction Effort (SCORE) program, urging suppliers to come up with ideas for improvements and cost savings in manufacturing, scheduling, inventory, and shipping. Chrysler attempted to establish long-term relationships with suppliers by naming suppliers for specific commodities. The company had fewer than 2,500 suppliers in 1992—down from more than 3,000 in the late 1980s—and it had a goal of eventually reducing the number of suppliers to 750. The company's 1993 LH model used 170 suppliers, compared to 600 to 800 suppliers for cars of earlier model years.
General Motors initiated the industry's most controversial supplier management plan with its Purchased Input Concept Optimization with Suppliers (PICOS) program, which demanded significant price reductions from suppliers given long-term contracts. Under the program, GM sent teams of engineers, designers, and purchasing cost accountants to meet with parts suppliers at their plants to investigate production inefficiencies and propose solutions leading to cost reductions. The program also allowed GM to accept unsolicited bids from worldwide suppliers for contracts it had already negotiated for future models, and it stripped away advantages to GM's Automotive Components Group. In addition, the company offered suppliers the opportunity to lease factory space in GM plants and a supply of labor from idled workers.
In 1992, the Big Three announced plans to develop a standardized quality assessment program for suppliers. Such a move, which would reduce the time and paperwork required in undergoing several quality audits by different auto makers, was expected to eventually save suppliers $160 million annually. A first step toward a common standard was taken by eliminating a major source of redundancy in quality auditing.
Previously, first-tier suppliers were required to audit second- and third-tier suppliers from whom they purchased parts. However, because many companies acting as second- and third-tier suppliers also sold parts directly to one of the Big Three, they were already required to be audited under either the Ford Q101, Chrysler Supplier Quality Assessment, or GM Target for Excellence quality program. With the new arrangement, suppliers that were already qualified through one of the Big Three were no longer required to be audited by a primary supplier. The agreement was expected to save the supplier industry $500,000 a year.
The Impact of Japanese Auto Makers. Increased sales of Japanese automobiles affected the operations of both OE and aftermarket parts manufacturers. Because most Japanese aftermarket parts were furnished by Japanese OE suppliers, the volumes of replacement parts for domestic parts suppliers dropped as Japanese vehicles increased their market share in the United States. Domestic parts suppliers started increasing their offerings of replacement parts for Japanese vehicles but, at the same time, Japanese suppliers started seeking higher profit margins through the supply of aftermarket parts for U.S. vehicles.
While Japanese manufacturers increased their production of cars within the United States, the move had not significantly improved the opportunities for domestic parts manufacturers. Foreign vehicles manufactured in the United States had significantly fewer domestic suppliers than Big Three cars. Domestic OE suppliers argued that the Japanese plants in the United States continued to purchase parts from suppliers based in Japan and the growing number of Japanese suppliers operating in the United States. Furthermore, with the increased capacity of many American factories manufacturing Japanese cars, Japanese suppliers started competing for OE contracts with the Big Three. Some suppliers believed that their industry could be permanently suppressed by these developments.
Some domestic parts suppliers claimed they were hampered by the Japanese keiretsu system—the close relationship between auto makers and their suppliers—arguing that the system impinged on their ability to supply parts to Japanese vehicle manufacturers in North America and Japan. At the request of U.S. suppliers, the Federal Trade Commission (FTC) began an investigation of alleged antitrust violations by Japanese auto producers in the United States.
Japanese producers argued that they purchased from suppliers meeting their needs and, so far, the FTC had concluded that there was no clear evidence of collusion among Japanese companies. During President George H.W. Bush's 1992 trade mission to Japan, Japanese auto makers pledged to purchase $19 billion worth of U.S. auto parts annually by 1995. During 1992 and 1993, Japanese purchases of U.S. auto parts began to increase. The rising value of the yen relative to the dollar made shipments of parts from Japan more expensive, encouraging Japanese transplant manufacturers to purchase more U.S. parts.
The automobile industry continued to buy an increasing number of automotive parts from outside suppliers through the 1990s because it reduced costs, provided more flexibility, and allowed for a greater specialization of technology according to an article in Fortune magazine. During the mid-1990s, the U.S. automotive parts industry comprised some 5,000 firms—including about 500 Japanese, European, and Canadian manufacturers—that supplied either the original equipment (OE) market, the replacement parts market, or both. According to the U.S. Department of Commerce, industry production hit an all-time high in 1994, reaching $134 billion. The following year, output fell slightly to $131 billion, mirroring the slight decline in motor vehicle production. However, the motor vehicle parts industry represented a 25 percent growth since 1992.
The U.S. industry was dominated by 50 large manufacturers that accounted for the majority of sales. From 1992 to 1995, North American sales by these top 50 suppliers increased by almost 50 percent, growing from $68 billion to $101 billion according to U.S. Department of Commerce reports. The United States was home to the world's sales leader, Delphi Automotive Systems, with 1995 global sales of over $26 billion, $10 billion more than its nearest foreign competitor.
In the mid-1990s, the fight was on among automotive parts manufacturers to dominate the growing Smart Car parts market. With the establishment of the Partnership for a New Generation of Vehicles (PNGV) by President Clinton in 1993, auto manufacturers were competing to produce new generation concept cars. The ripple effect of this affected the automotive parts industry. High-tech console gadgetry was being produced by most large auto manufacturers.
"Competition for space on your dashboard is looming, as TRW, Texas Instruments, and Eaton, among others, race to recast their battlefield products for the U.S. car market," reported a Fortune article. Competition for this market was global. Smart car products already available and in the works included satellite navigation and mayday systems, radar intelligent cruise control, and night vision.
With the restructuring of the automotive parts industry, the U.S. automotive industry was expected to be challenged by foreign competition and customer demands for continued cost cuts and quality improvements. The global automotive parts market was expected to total about $519 billion by the year 2000. According to the U.S. Global Trade Outlook, growth in major markets was expected to average less than 2 percent annually; hence, the biggest opportunities for U.S. exporters were expected to be in the fast growing Asian and Latin American markets.
In the late 1990s, automakers put great pressure on their parts suppliers to reduce costs. Suppliers initiated programs to increase productivity and improve efficiency. As the manufacturers tried to streamline assembly plants, they looked to the parts suppliers to provide the systems that would reduce the number of parts assembled at the plant. Acquiring a company meant adding parts to the systems and modules.
Consolidations and mergers were taking place in the industry, enabling suppliers to continue offering savings to automobile manufacturers. Mergers and acquisitions were the means used to provide more modules and systems to automakers.
General Motors Corporation and Ford Motor Company made announcements in 1999 that they were moving all of their annual purchases of materials and components onto the Internet. Suppliers were virtually forced into e-business. The automakers looked to the Internet to simplify supplier links and eliminate costly paperwork related to bids, billings, orders, and shipments.
OEM Suppliers. According to Automotive News, the top 150 OEM suppliers increased annual revenues during 2002 by $15.8 billion, with the group reporting total North American sales of $182.1 billion, up from $166.4 billion in 2001. The top 10 industry leaders accounted for $78.5 billion, or 43.1 percent, of the industry's sales.
Whereas the big names in the OEM business, including Delphi and Visteon, should weather any downturns in the North American auto industry based on their diversified interests and substantial overseas investments, many auto parts manufacturers are facing a slowdown with trepidation. Stephen D'Arcy of PricewaterhouseCoopers L.L.C. told Crain's Detroit Business in January 2003, "A 6 percent decline in volume in North America would produce not a 6 percent increase in business failures but maybe a 200 percent increase in business failures." D'Arcy is not the only one forecasting the demise of many in the parts industry. Crain's Detroit Business also quoted Jay Alix of Alix Partners L.L.C., who said, "If the industry loses 1 million units of production this year, hundreds of parts makers will fail."
North American automakers have focused on costcutting to align with their low auto prices. Because approximately one-half of a car's cost is attributed to parts suppliers, the automakers have put increasing pressure on OEM suppliers to reduce prices. With the cost of rare materials on the rise, OEM suppliers are under tremendous pressure. Analysts expect increased acquisitions and mergers as some smaller suppliers are forced to sell or close shop.
Aftermarket Suppliers. In the aftermarket parts sector, big box discounters, such as AutoZone, continue to exert price pressure on the industry. Discounters, who use volume buying to put costs and prices down, are expected to continue to draw business away from department stores, hardware stores, service stations, and other small-volume dealers.
The complexion of the aftermarket industry is changing as vehicles become more heavily dependent on complex systems and electrical components, out of the comfort zone for the do-it-yourselfers (DIYers). The do-it-for-me segment holds 76 percent of all auto maintenance and repair. The aftermarket parts industry has attempted to entice DIYers by loaning out necessary tools for free and offering free oil recycling services.
Delphi Corporation, spun off from General Motors in 1999, was the number one OEM parts supplier to North America in 2002. North American parts sales totaled $27.4 billion that year, resulting in a net income of $343 million. Products for sale were steering, chassis, electrical, energy and engine management, thermal management, and interiors.
Visteon Corporation, spun off from Ford in 2002, was the number two supplier with parts sales of $18.4 billion in 2002, resulting in a net loss of $352 million. Visteon products included chassis, climate control, electronic, exterior and interior systems, and power train controls.
Other industry leaders included Johnson Controls, Inc., with 2002 revenues of $20.1 billion; Lear Corporation, with 2002 revenues of $14.4 billion; and Dana Corporation, with 2002 revenues of $9.6 billion.
Vehicle manufacturers generally have higher labor costs than parts suppliers, who are able to employ more non-union workers. In 2001, the Bureau of Labor Statistics estimated that 923,570 people were employed in the U.S. motor vehicle and motor vehicle parts industry.
Problems arose between General Motors and the United Auto Workers (UAW) over outsourcing. In June 1998 the union workers went on strike at GM parts facilities over cost cutting issues. GM pushed for higher production and claimed that union rules prohibited efficiency. The UAW stand was that workers were endangered when production was sped up to increase productivity. Problems also surfaced in 1996 at GM's Delphi brake plant with a 17-day strike over outsourcing. Negotiations led to a contract that guaranteed that the automakers would maintain a 95 percent workforce while the manufacturers kept the right to outsource.
U.S. parts manufacturers have been forced to match the growth in global operations of domestic auto makers to maintain their primary supply relationships. Additionally, international growth has been spurred by the desire to gain supply contracts with overseas vehicle manufacturers. Most leading domestic producers have established manufacturing facilities in the principle auto producing regions of the world—including Canada, Europe, and Mexico. In Europe alone, seven leading U.S. parts manufacturers have combined annual sales exceeding $1 billion. The global integration of the auto industry has led many suppliers to develop joint ventures with foreign parts producers. As the industry continues to globalize, increased U.S. supplier investments are expected in Mexico, Asia, and Europe.
The United States has posted a trade deficit in automotive parts since 1983, primarily due to a large deficit with Japan. Between 1989 and 1992, the parts trade deficit with Japan remained between $9 billion and $10 billion, accounting for one-fifth of the overall trade deficit with Japan. Canada is the only major nation with which the United States has maintained a trade surplus, and Canada remains the leading trading partner of U.S. firms. Between 1985 and 1991, Canada received more than 60 percent of total U.S. parts exports and supplied one-third of total imports.
The number of foreign firms producing parts in the United States increased dramatically throughout the 1980s and early 1990s. In the early 1990s, approximately 350 wholly-owned foreign part plants and more than 120 joint ventures operated in the United States. Japanese suppliers owned 167 U.S. parts plants and were part of 123 joint ventures. European firms, led by German manufacturers, owned 168 plants in the United States, and Canadian firms owned 17, with one joint venture. While fairly well established in Europe and Canada, U.S. penetration of the Japanese domestic market remained weak. In 1992, one wholly owned U.S. parts plant—and a few joint ventures—were operating in Japan.
Continued consolidation and increasing global competition are forecast for the automotive parts industry. The future prospects for large domestic producers are likely to depend on their ability to obtain contracts with Japanese transplant manufacturers, as well as to retain contracts with the Big Three against competition from Japanese suppliers. For smaller second- and third-tier suppliers, the key is likely to be establishing strong relationships with primary suppliers.
U.S. Automotive Parts Exports. During the late 1980s and early 1990s, exports had become more vital to the U.S. automotive parts industry, growing from 15 percent of production in 1986 to 30 percent of output in 1995. The Clinton administration's trade policy efforts to open closed markets made the U.S. automotive parts industry one of the leading exporters. From 1992 to 1995, U.S. exports of automotive parts grew at an average annual rate of 12 percent, rising from $28 billion to $40 billion according to the Office of Automotive Affairs, U.S. Department of Commerce.
Expanded efforts by the industry, backed by the Clinton administration's work to increase U.S. access to the Japanese automotive parts market, resulted in a 58 percent increase in exports to Japan—growing from $1 billion in 1992 to $1.6 billion in 1995. Japanese car manufacturers purchased $19.9 billion worth of U.S. made automotive parts and materials in the 1994 fiscal year. Approximately 75 percent was spent to transplant Japanese manufacturing operations in the United States, while the remaining 25 percent was spent on exports to Japan. Exports to Mexico and Canada benefited from the passage of the North American Free Trade Agreement (NAFTA)—growing from $26 billion in 1993 to $29 billion in 1995.
In 1997, U.S. imports of automotive parts increased 4.8 percent over 1996 to $50.7 billion. Fifty-three percent of the imports were from NAFTA countries. Automotive parts imports from Japan accounted for 23 percent of the shipments.
In 1997, 73 percent of U.S. exports of automotive parts were to NAFTA countries. The European Union received 9 percent. U.S. penetrations increased in the Asian and Latin American markets but were stymied by the Asian currency crisis. U.S. exports of automotive parts totaled $47 billion in 1997.
Crain, Keith. "No Business in the Car Business." Automotive News, 14 October 2002, 12.
Guyette, James E. "DIFM, Discounters to Gain Marketshare, Says Study." Aftermarket Business, November 2002, 3.
Hoover's Company Profiles. Hoovers, Inc., 2003. Available from http://www.hoovers.com .
Kosdrosky, Terry. "Experts: Emotions Keep Faltering Suppliers Going." Crain's Detroit Business, 13 January 2003, 12.
Levy, Efraim. "AutoZone: Shifting to High Gear." Business Week Online, 18 March 2003.
Moran, Tim. "Automakers Cut the Old Connections to Suppliers." Automotive News, 13 September 1999.
Murphy, H. Lee. "Auto Suppliers Brace for Hit." Crain's Chicago Business, 20 January 2003, 4.
Sherefkin, Robert. "Suppliers: Price Cuts Aren't a Winning Long-Term Strategy." Crain's Detroit Business, 20 January 2003, 21.
——. "Top 150 Step Up." Automotive News, 24 March 2003, 1.
Shutovich, Christina A. "Cabin Air Filter Market to Grow." Aftermarket Business, June 2002, 10.
Standard & Poor's Industry Surveys. New York: Standard & Poor's, 1999.
"Supplier Pushed into E-business." Automotive News, 1 December 1999. Available from http://www.auto.com .
U.S. Department of Labor, Bureau of Labor Statistics. 2001 National Industry-Specific Occupational Employment and Wage Estimates. Available from http://www.bls.gov .
Wiescinski, Doug. "Getting to the Bottom Line of E-Business." Automotive Industries, September 2002, 34-45.
Wilson, Amy. "Blip in Auto Sales Could Spell Doom for Suppliers." Crain's Detroit Business, 20 January 2003, 1.
——. "Expert: 'Hundreds' of Vendors Stand at Brink of Failure." Automotive News, 20 January 2003, 29.