The French automobile supply industry is in serious trouble, and efforts to speed up payments to small suppliers will only slow down the exodus of jobs. A recent study of 18 Tier 2 suppliers by Deloitte Finance in Paris found that the average operating profit last year was -0.8%. Indeed, six of them were “in a catastrophic situation”, averaging -8.9% operating profit, according to Dominique Evrard, an associate at Deloitte Finance.
The problem for suppliers is linked to the declining fortunes of Renault and PSA. The two French companies had been increasing production in France for a decade until 2005, when their growth cycles both came to a halt. With declining sales, the OEMs saw their margins drop from the 4-5% range to 1.4% for Renault last year, and 0.6% for PSA. Part of the cost-cutting in response has been to source more parts from low cost countries.
In 2006, 124,000 people worked at automotive suppliers in France, said Jacques Monnet, executive director of the French supplier organisation FIEV, and by 2010 that is estimated to drop to 110,000.
The big Tier 1 suppliers seem to be in less difficulty, responding to the pressure by moving their footprints. Valeo and Faurecia have each dropped about 10,000 employees in Western Europe in the last five years, for example, while growing in other markets. “They have accompanied Renault and PSA to foreign markets, and they have enlarged their customer base,” said Evrard. In 2001 the French OEMs accounted for 42% of their combined sales, and in 2006 that had dropped to 36%..
The French OEMs had combined operational profit of â‚¬3.1bn in 2004 and â‚¬838m in 2006. According to Evrard’s calculations, the decline at Renault and PSA came from â‚¬1.5bn in raw material price increases, â‚¬1.2bn in lost volume, â‚¬1.3bn from a less-rich mix as the product line aged, plus increases in R&D costs and preparing Euro IV engines. If it had not been for â‚¬2.7bn in reduced costs from purchasing and production, the Renault-PSA combined operating loss would have been â‚¬1.1bn. Of course, the OEMs’ purchasing gain is lost revenue for the supply base.
The problem for suppliers is linked to the declining fortunes of Renault and PSA Peugeot Citroen
This problem didn’t arrive suddenly, but it is increasing. Evrard found that the number of Tier 2 and lower suppliers going out of business in France has increased from 124 in 2000 to 200 in 2006. Cash flow is just one problem they face, but the supply industry was able to do something about that. Under pressure from the minister of industry last year, the OEMs, suppliers and the tool industry agreed to speed up payments in the supply chain. As of 1 September 2007, the OEMs now pay their suppliers within 90 days. For more than a decade, they have been paying 90 days from the end of the month when they get the bill, for an average of 105 days.
Better news is that the OEMs and suppliers have agreed to pay a percentage of tooling costs up front, instead of insisting that all of it come back on the piece cost as production proceeds. And companies with a turnover bigger than â‚¬500m agreed to pay companies smaller than â‚¬300m in 60 days. The OEMs also agreed to share more strategic goals with the French supply base, and the new faster-pay agreement will be reviewed in spring 2009, after a full year of experience.
The number of Tier 2 and lower suppliers going out of business in France has increased from 124 in 2000 to 200 in 2006
At a presentation to an industry audience sponsored by the French magazine L’Usine Nouvelle, Christophe DeVille, senior purchasing manager at Toyota, explained that Toyota strategy is to have half its supply base in Europe being European suppliers. However, he said, the 140 buyers in his department have to work hard to get European suppliers qualified. “If it were left to occur naturally,” he said, “Japanese suppliers would dominate because of the quality. The Japanese are generally ten times better than the Europeans for quality.
Toyota wants supplies with a quality rate better than 15 defective parts per million. Until July 2003, Valeo was “terrible”, said vice president Kazuo Kawashima, who was hired to do something about the problem. “The PPM rate in 2003 was 871 parts per million.”
Valeo chairman Thierry Moran told his executives that Valeo had to do everything it takes to become a Toyota supplier, because if it can satisfy Toyota, it can satisfy anyone. Under pressure from Moran and guidance from Kawashima, Valeo improved its PPM rate to 13 last year.
Faurecia has just begun the same path. It’s PPM rate was 135 in 2005 and 95 last year, but a new programme, including a new Japanese quality manager hired from Renault, Ken Sato, has a goal of achieving 15 ppm in 2008.
The real trick for suppliers to survive is to never be satisfied, said Kawashima, because that leads to kaizen, or constant improvement. “We are not good enough,” he said, despite being good enough for Toyota. He said he had a goal of getting PPM down to single digits, and using the Japanese word for waste, or non-value added cost, he said, “we still have muda”.