Most Automotive Suppliers Unable to Profit When They Innovate, Study Finds
Washington, DC – 72% of part suppliers claim superior capabilities to low-price competition, but most match lowest bid 56% of the time, according to research recently conducted by Kotler Marketing Group, in conjunction with several automotive supplier associations. The vast majority of study participants perceive themselves as having an advantage over their competitors in terms of either technology or service-and-support capabilities, but they struggle to get rewarded for the value they create.
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This study shows that a major roadblock to a sustainable and innovative automotive industry is the negotiations and purchasing strategy employed by the OEMs. The study documents how the current purchasing regime in the industry focuses on low price to the detriment of innovation. “The pressure on suppliers to discount is destroying the industry. It leaves no money for suppliers and saps their desire to invest and innovate” said Steve Rose, Practice Lead at Kotler Marketing Group.
OEMs and purchasing organizations at Tier I and Tier II manufacturers, for their part, consistently negotiate down premium-value suppliers to rock-bottom prices. The rate of discounting is especially alarming considering that most survey respondents have their operations based in high-wage countries in North America and Europe. It is precisely these suppliers, who increasingly compete with low-cost suppliers from China and India, that can least afford to discount.
- 70% of respondents say that the size of the discounts they have been offering is either similar to, or greater than, what they have offered in the past.
- 32% of respondents pass on less than 50% of their higher raw materials costs to customers
- 21% of respondents are only able to recover up to 24% of their raw materials cost
Interviews with purchasing executives and suppliers confirmed that while this represents a short-term, visible savings for buyers, they often incur larger, less-visible costs:
- In the short-term, sourcing from low-cost suppliers, with potentially inferior products and/or service, leads to extra costs during development and production.
- Post-production risks include higher warranty claims and lower customer satisfaction.
- But perhaps most damaging is the long-run disincentive for suppliers to invest in R&D. We argue in this report that as long as this dynamic continues, it systematically starves the industry of “bottom-up” innovation.
In spite of difficult environment, the study did reveal that a significant minority of suppliers are able to resist the demands for lower prices:
- 30% of respondents claim they are discounting less than in the past.
- 29% of respondents say they win price premiums on the majority of programs where they are sourced.
By defending the value of their premium products and services, these best-practice suppliers point the way towards a more competitive, innovative, and sustainable industry.
The just-released study, “Sales Best Practices in the Global Automotive Supplier Industry“ details the best-practices these companies follow in terms of sales strategy, sales organization, pricing policies and sales training and collateral development.
“Suppliers that wean themselves off their reliance on discounting will be in a much better position to ride out this downturn, regardless of what happens to Ford or GM.” said Rose.
Kotler Marketing Group (http://www.kotlermarketing.com/) conducted the study between August and October, 2008. Senior executives and sales professionals provided input on more than 30 different business metrics and sales practices. Over 100 Tier I suppliers were surveyed and nearly 75 Tier I and Tier II/III suppliers. Raw materials suppliers were also surveyed..
For more information on the study, visit our online store.
About Kotler Marketing Group
Kotler’s Value-based Services Practice has built a track record of success at helping companies in the automotive and heavy duty industries implement value-based sales and marketing strategies. Our consultants and training programs help clients to document and demonstrate the value of innovative products & services. We have advised dozens of clients on how to implement a value-based strategy.
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