Automotive Cost Reduction

Automotive OEMs face a difficult balancing act when dealing with their suppliers. To ensure product differentiation remains the lifeblood of the automotive industry, OEMs must demand innovation from their suppliers. At the same time, OEMs expect their suppliers to keep costs within reasonable limits. In fact, over the past ten years, OEMs have put their Tier 1 suppliers under intense and relentless cost pressure, forcing annual cost cuts that averaged about 3 percent. As a result, suppliers have seen their financial performance erode, which has forced some to consolidate and others into bankruptcy. But, clearly a diminished supplier community is not a happy prospect for OEMs. After all, suppliers have become the primary source of breakthrough innovation in the automotive industry.

Nevertheless, OEMs continue to instruct their suppliers to reduce costs. To remain competitive suppliers have turned to mergers, acquisitions, joint ventures and low cost sourcing in an effort to grow top-line revenue, maintain market share, more effectively utilise assets and increase leverage with the OEMs. Unfortunately, the expected benefits associated with those objectives often fail to materialise, resulting in additional margin and performance pressure. Achieving continuous cost reduction and performance improvement will continue to be a challenge and a key focus for both the Automotive OEMs and their suppliers. Suppliers will not have the luxury of focusing on one operational area only to ‘stem the tide’. To be successful in this environment, progress will need to be made across the board.