General Motors woes seen causing supply chain cull

Filed in archive Market Overview on January 11, 2006

According to Reuters, Struggling carmaker General Motors is putting fresh pressure on its vast network of suppliers, which was trimmed by 500 firms in 2005, prompting fears of further U.S., European auto supplier bankruptcies.

The price squeeze could benefit East Asian firms as the world's biggest carmaker said one way its suppliers of auto parts could cut costs was to source from low-cost countries.

Without a turnaround in fortunes, GM may itself have to file for bankruptcy, ratings agency Standard & Poor's said last month. GM denies this but even without such a worst-case scenario its suppliers face a continuing price squeeze.

The carmaker wants to trim its $85 billion annual materials spend, and in so doing will likely add to a recent chain of multi-billion-dollar auto part maker collapses. In 2005 Delphi Corp., Collins & Aikman Corp. and Tower Automotive Inc. collapsed.



The supply base has to take a close look at their business and whether they're being efficient. Material cost is a significant part of the vehicle cost," said Tom Wickham, a GM spokesman in the United States.

GM cut its supplier base from 3,700 to 3,200 companies, or by 14 percent, in the past 12 months, Wickham said, as it seeks a turnaround that includes a cut of 25,000 jobs and the closure of 12 North American facilities through 2008.

The company suffers from high labor costs compared to Asian counterparts.

"What's happened over the last 12 months is we've increased our dialogue with the supply base."

That dialogue has centered on how GM's remaining suppliers can cut costs, including sourcing parts from countries with cheaper labor.

"(Can they) make cheaper, to source from a low-cost country?" said Wickham, adding a "footprint in low-cost countries" could enable GM suppliers to become more efficient and profitable.