Failure of the Automotive Industry – The Primary Reason

The US automotive industry suffered a fatal blow. Yet anyone who claims that the industry’s demise can be linked to a single root-cause of failure is sadly mistaken. I spent the greater portion of 10 years within that industry many of which in an executive or managerial role.

Unfortunately, there’s no silver bullet that caused the fall. I say unfortunately because a single cause of failure could be prevented in the future. In this case, the blame can be put only on the system as a whole making it difficult to protect against a repeat occurrence.

What the automotive industry suffered was a catastrophic failure caused by multiple points of failure. We’re talking systemic failure in its truest form. As an insider in the industry, I can personally attest to some of the actions (or lack thereof) that pushed the industry to a collapse.

One of the biggest gremlins that undermined the industry was a myopic focus on piece price (cost). Over the years the automobile manufacturers became totally engulfed in driving (no pun intended) suppliers to lower sell prices in an attempt to reduce the production cost of a car or truck and therefore increase the bottom line.

This shortsighted focus on lower piece cost was so strong that supplier relationships were sacrificed. In fact, one of the Big 3 automotive companies believed that if one supplier went under that another would always step up. How is that for arrogant?

The pressure for lower piece cost was so extreme that suppliers were forced to seek low-cost countries for the procurement of parts and for their own manufacturing processes. On the surface this approach may seem logical. However, what was lacking was a holistic view of the situation to see that lower piece price demands were leading to other systemic issues:

Reduced quality and increased life-cycle costs due to overseas outsourcing
Suboptimal designs because of shortcuts to reduce costs
Jobs being pushed out of the US
Collapse of solid, reputable suppliers
Tarnished relationships with the legacy supply base

The situation went as far as the automotive manufacturers demanding payments from suppliers to maintain current business or to be awarded new business. These payments were commonly known in industry as “givebacks”. These givebacks started as checks that were written for absurd amounts of money and then changed into piece price concessions over the length of a given contract (the SEC wouldn’t necessary like the check approach, i.e. buying business).

Business is about more than just the bottom line. The way in which you go about producing profit makes a difference. Our friends in the automotive industry learned the hard way that relying upon myopic, dictatorial and selfishly driven profits at the expense of your suppliers and customers is not sustainable.