Motor Vehicle Parts and Accessories

SIC 3714

NAICS 336399

The automotive parts industry manufactures motor vehicle parts and accessories, rather than motor vehicles or passenger car bodies, which are discussed under Motor Vehicles. In addition, automotive tire production is covered separately in the article entitled Tires and Inner Tubes.

INDUSTRY SNAPSHOT

The global motor vehicle parts and accessories industry, valued at US$900 billion in 2004, is a relative newcomer to the global marketplace. The industry became international in scope as major car manufacturers turned away from direct manufacture of auto parts in favor of heavy reliance on auto parts suppliers to develop major car components. This happened for the simple reason that many auto parts could be made more cheaply off-site by suppliers than by the large automakers themselves. In 1988, literally no global automotive parts suppliers existed, but within a decade some 50 very large integrators manufactured or assembled various automotive systems for sale to the world's major automotive manufacturers, and by the mid-2000s the industry was quite fragmented. Some analysts who observed the ongoing flux in the industry projected that the number of major systems suppliers would shrink to as few as 16 by 2008.

The performance of the automotive parts industry is tied directly to the performance of the automobile industry. This fact, in addition to rising materials prices and interest rates, combined to make the future of many suppliers uncertain in the mid-2000s. Auto parts suppliers were continually faced with demands by their largest customers, car makers, to lower prices and increase quality. As a result, even with favorable market conditions, auto parts manufacturers struggled to maintain consistent profit margins, despite increased demand. In 2004, while some companies were posting record profit increases, many others were posting the opposite. By 2004, major companies were turning to offshore outsourcing to remain viable and competitive.

ORGANIZATION AND STRUCTURE

At the turn of the twenty-first century, auto parts suppliers dealt in five commodity areas: power-train, chassis, body, interior, and electronic. Some companies specialized in subsets of these commodity areas (e.g., brakes and safety systems), but the major categories remained identifiable. The auto parts industry also had two primary sectors: the original equipment (OE) sector, which included parts for the car manufacturers; and the aftermarket parts sector, which included replacement parts for cars and trucks. The major players in the OE sector were distinguished by product and customer base. Tier One suppliers were those that produced parts sold directly to automakers, while Tier Two suppliers sold parts to Tier One companies, and Tier Three suppliers sold the raw materials used to manufacture parts to Tier Two and Tier One operations.

Sales of original equipment parts were dependent on many factors, such as the size, number, and complexity of any given car or truck market, and the number of parts and accessories that OE car manufacturers produced themselves. Parts were distributed through new car dealers, oil companies, major parts distributors, and smaller jobbers. Common products included wheels, bodies, frames, axles, transmissions, transaxles, bearings, valves, springs, bumpers, brakes, fuel injectors, seats, seat belts, airbags, and cushioning and safety padding materials. In the early 1980s, OE suppliers often signed annual contracts with auto manufacturers covering only the current model year. By the 1990s, multi-year contracts were being written—sometimes for the life of the vehicle. The late 1990s consolidation of the supplier industry was reinforced by the actions of the automakers themselves, who dealt with fewer but more technologically advanced OE suppliers worldwide. Sometimes this limitation of supplier numbers became extreme. In the early 1990s, Chrysler made the decision to reduce its 2,500 suppliers to no more than 750 primary suppliers over the next several years. By 1997, Chrysler had reduced its supplier count to 1,200, and was aiming for an ultimate target of just 150 major suppliers.

The aftermarket parts segment of the auto parts market tended to be more stable and subject to fewer fluctuations than the OE segment, though some OE suppliers also sold to the aftermarket. Aftermarket parts consisted primarily of items that could be described as consumable, subject to the daily wear and tear of vehicle operation (e.g., spark plugs, piston rings, brake pads, rotors, batteries, oil and gas filters, shock absorbers, struts, springs, exhaust systems, wiper blades, and air filters). During periods of economic recession OEM demand usually dropped, but sales in the aftermarket remained level and frequently strengthened during economic downturns—largely because financially-strapped car owners tended to fix and repair cars rather than buy new. The major threat to the aftermarket parts industry was the increasingly high level of quality in original parts. Obviously, if original equipment lasted longer, it had a negative effect on demand for replacement parts. Aftermarket parts traditionally were sold through service stations, general and specialized repair shops, tire stores, department stores, dealers, auto parts stores, and discount stores, but in 1998 electronic home shopping loomed as a plausible alternative. Analysts expected the aftermarket business to maintain moderate long-term growth, but eventual consolidation echoing the consolidation of OE suppliers was likely, especially in the United States.

The OE and aftermarket parts manufacturers shared an ability to make specialized parts that required a high level of technical skill. Because they could spread the costs of research and design, as well as tool and die costs, over many different contracts, "outside" auto parts manufacturers held an important cost advantage over the parts divisions of the automakers—an advantage that frequently was supplemented by the lower cost of non-union labor. These cost factors gave outside firms significant influence in the design and engineering of new parts for upcoming car models, as car manufacturers depended on suppliers to help keep costs low and technological advancements high.

BACKGROUND AND DEVELOPMENT

The early development of the auto parts industry was closely linked to the growth of the automobile early in the twentieth century. As the production of automobiles increased, so did the need for automotive parts. For many decades, the automotive parts industry served a limited number of models, which allowed parts makers to concentrate their efforts on producing mass quantities of a small assortment of components. In the 1970s, however, as Japan began exporting vehicles to the United States, the variety of models began to expand. The following decade, the popularity of small trucks began to surge. As a result, parts makers found themselves having to increase the number of parts they offered, while reducing the quantities of each part manufactured. Although this broadening of the automotive parts market did increase sales for many auto parts makers, it also undercut earnings growth due to the costs associated with manufacturing a more diverse group of parts. The industry growth also prompted many new players to enter the market, increasing competition.

The auto parts industry began to grow in earnest during the late 1980s and early 1990s, when many major car manufacturers began to rely more heavily on auto parts suppliers to develop major car components, mainly because many auto parts could be made more cheaply off-site by suppliers than by the large automakers themselves. These suppliers were often forced by their largest customers, the car manufacturers, to endure price freezes or reductions. The parts makers responded by cutting the costs of their own business operations. In the mid-1990s parts suppliers found that their efforts eliminated many of their extraneous costs, but further cost reductions were needed that could not be accomplished through traditional approaches and strategies. Chrysler and General Motors (GM) helped their parts suppliers with two innovative and cost-effective methods to meet the competitive cost challenges for the latter part of the 1990s.

Chrysler Corporation gave many of its parts suppliers responsibility for complete component system building. These suppliers were asked to build the systems within a target price that was set by Chrysler, while still maintaining high levels of quality and features. If the suppliers reduced costs below target levels, then enhancements had to be added to their systems. If parts supplier costs exceeded target levels set by Chrysler, then savings had to be found elsewhere in the system without cutting back on enhancements or quality. This guaranteed substantial cost savings to Chrysler—savings they shared with the parts suppliers in the form of incentives to pursue additional operational goals that ultimately benefited Chrysler. Although the pressure on parts suppliers was tremendous, the resulting synergistic relationship between parts supplier and auto company worked to enhance the competitive strength of all involved.

Following Chrysler's innovative action, General Motors devised a plan dispatching teams of engineers, designers, and purchasing cost accountants to meet with teams of employees at the parts manufacturers' plants. Under the direction of GM worldwide purchasing director, Dr. J...

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