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Global platform shift: Suppliers must deploy key strategies to reduce risk

November 24, 2015 Article 6 min read
Daron Gifford
Over the next five to 10 years, regional automotive suppliers may become an endangered species. To achieve economies of scale, automakers are introducing global platforms that will allow them to design vehicle families that share the same powertrain and underpinnings. Virtually every major automaker has adopted this common architecture strategy, and by 2020, global platforms will account for two-thirds of worldwide vehicle production, predicts IHS Automotive. The bottom line: Global platforms are the future of the auto industry.

Among the most aggressive practitioners of this strategy are Volkswagen AG and Renault-Nissan. By 2020, Volkswagen will derive 80 percent of its production volume from four platforms, while Renault-Nissan will do so with just three. IHS Automotive expects Volkswagen’s MQB platform will be the world’s most-produced platform in 2020. That platform, which will underpin the Golf, Jetta and Passat, will generate nearly 5.5 million units of production.

Global platforms allow automakers to create different body styles—perhaps a sedan, coupe, wagon, and crossover—by using “top hats” built on common underpinnings. With this approach, 72 percent of a new model’s variable cost can be shared with other models and platforms, according to an estimate from Fiat-Chrysler Automobiles.

Common components might include the floorpan, seat frames, suspension, brakes, HVAC and steering systems, among others. But contracts to produce these parts won’t necessarily be winner-take-all. Automakers often line up at least two suppliers to ensure that a backup is available in case the primary vendor has problems.

Ford Motor Co.’s F-150 pickup demonstrated the perils of sole sourcing when the supplier of the truck’s frame encountered difficulties in meeting Ford’s accelerated production schedules. This year, Ford asked an additional supplier, Tower International, to be a second source for the frames. However, common platforms generally mean fewer—and bigger—contracts to fight over, so suppliers must take steps to mitigate their financial risks. Here are a few ideas.

Embed yourself as the automaker’s strategic partner.

Suppliers that gain recognition as strategic partners will get an early look at their customers’ product planning. That, in turn, will give them a clearer shot at long-term, no-bid contracts.

To compete, a supplier will need to establish their engineering division—with strong technology and software expertise—to interact as “equals” with the automaker’s design team. Suppliers that prefer to “build to spec” in the future will confront difficulties.

A strategic partner also will have to trust their customers enough to show them their best ideas and technology—even before they get the contracts.

Develop detailed profit-and-loss plans for each component covered by your contracts. 

Suppliers are generally able to forecast each component’s “hard” costs such as raw materials, tooling, equipment, manufacturing, and shipping. But it’s just as important to forecast “soft” costs at a part level, such as engineering and program management. Since many automakers struggle to understand and account properly for soft costs, suppliers must be prepared to explain the facts behind their soft costs to the customer, without being defensive.

Aim to be the No. 1 or No. 2 provider of your targeted product technology.

Those who are No. 3, 4, or 5 will need to invest heavily to move up, or even keep up. Suppliers unwilling to invest need to evaluate whether they want to stay in the segment.

A common approach to move up has been to make an acquisition. Visteon, for example, decided to focus on cockpit electronics when it acquired Johnson Controls’ electronics operation. Then Visteon sold its profitable HVAC unit, as if to underscore its all-or-nothing bet. But suppliers can also pursue potentially less costly approaches, such as forming joint ventures, licensing key technologies, or building the expertise in house.

Make contingency plans in case the customer falls short on production.

This is especially important if the supplier is expanding production into a new geographic region. For an automaker, any new model launch is risky. If a customer introduces a modern-day Aztek or Edsel, riding out the production shortfall may be challenging.

Suppliers can hedge their bets by lining up multiple customers in that geography, or by forming a joint venture to share the risk. And if a supplier continues forward with only one customer, then an alternative strategy would be to line up additional contracts for other vehicle platforms being produced in that country.

Seek long-term contracts to amortize tooling and R&D.

Ideally, a supplier would negotiate customer contracts extending for the life of the vehicle (5+ years), as well as the next generation of the same vehicle platform. This is considered standard procedure among Japanese and Korean suppliers who are members of a customer’s keiretsu (or chaebol). This idea is still uncharted territory for the Detroit 3 automakers, but there are signs of change.

Last spring, for example, General Motors Purchasing Chief Steve Kiefer confirmed that GM had offered component contracts for two vehicle generations—lasting a decade or so—to 30 key suppliers of components for pickups and SUVs.

Negotiate long-term agreements.

More than ever, the supplier’s leverage to obtaining long-term relationships is technology—especially if it impacts fuel economy. Nexteer Automotive, for example, has gained global contracts for its fuel-efficient electric power steering systems. Last year, the company boosted sales by 25 percent to $2.98 billion, and in the first six months of 2015, revenues have risen 15 percent.

Company President Laurent Bresson says Nexteer does business with nine of the top 10 global automakers. Nexteer, a former in-house owned supplier for General Motors, produces electric steering systems for GM’s Gamma II family of small cars such as the Opel Corsa and Mokka and the Chevrolet Sonic.

To supply these global products, Nexteer has factories in China, Mexico, and Poland. “Since we’re not a just-in-time supplier, we don’t have to be right next to our customer,” Bresson said. “But it is absolutely key to be in the region.”

In part, that’s because automakers want to keep their supply lines short. It also ensures that the supplier and automaker are protected from currency fluctuations, Bresson said.

Nexteer has managed to line up some contracts for the life of the vehicle—typically five or six years—and it’s holding discussions with some automakers about contracts that would cover two product cycles.

But that can be a tough stretch for both supplier and customer. “It’s very challenging because technology is evolving very fast,” Bresson said. “It’s very hard to be 100 percent sure that you’ll have the exact same technology in five years.”

Benchmark to provide early input.

As automakers select their teams of strategic suppliers, those companies are naturally winning the lion’s share of new contracts. For example, Ford Motor Co. earmarks 65 percent of its purchasing budget for 100-plus direct and indirect suppliers that are members of its Aligned Business Framework, or ABF.

Last year, the automaker confirmed that it had invited its ABF suppliers to benchmark key components from rival vehicles before Ford froze the new designs for the next-generation Focus and Fiesta. Ford said early input from suppliers helped it design lighter, cheaper, and more reliable components.

For the next-generation Fiesta—due in 2017—Ford evaluated HVAC systems from three competing models. Suppliers that participate in Ford’s benchmarking programs have an inside track on future contracts.

There is, of course, a catch. Ford and other automakers prefer to include global suppliers in their benchmarking activities. But what about regional suppliers that don’t have the capital or technology to grow globally with their customers?

Most experts in the automotive industry expect that regional companies will struggle for a shrinking share of the available market, leading to a shakeout in the industry. 

To be sure, some suppliers may find themselves relegated to a lower status, but others will encounter opportunities to expand. The automakers desperately need cutting-edge technology, and they need it now. Suppliers that have that technology—and can deliver it anywhere—will profit accordingly.

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