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Auto Focus

By Melissa Anderson
Vice President, IRN Inc.
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You hear a lot about West Michigan’s roots in furniture, but the automotive industry has a long history here as well.

Our skilled manufacturing base and relative proximity to Detroit made it a natural fit that continues to this day, even though the industry has changed dramatically around us. Successful suppliers here have not only adapted but have figured out how to position themselves most advantageously for the new dynamics. One way they have done this is by diversifying their mix of customers to fit a desired profile.

Our experience has shown that:

a) that is a prudent move

b) there is no one-size-fits-all answer

c) and even if you think you’ve got it all figured out for good, you don’t.

The historical approach to selling automotive components was typically an opportunistic, first-come-first-served kind of operation. When IRN began automotive consulting in the early 1980s, our clients had a pretty straightforward task: sell to GM, Ford, and Chrysler.

Not only were those the only automakers of any volume in the U.S., they also bought a large number of parts directly and assembled them in-house. The mission began to change in 1985 when Japanese-owned car companies started establishing assembly facilities in North America and gaining market share at the expense of the Big Three, and, consequently, their suppliers.

Many of our consulting engagements over the years have involved working with companies on how they approach the market and who they sell to. Not only has the identity of the automotive players evolved, but global competition has made it harder to make money, so suppliers have had to figure out how to work smarter to maximize their results.

The critical need for many companies has been to diversify their customer base. Diversification is a form of insurance, spreading the risk so that your fate is not overly dependent on the circumstances of one customer.

It takes some work in planning and execution, but the alternative can be costly.

• Diversification is prudent. A horror story from a small second-tier stamping company in Grand Rapids some years ago illustrates an extreme example of the risk of overdependence on one customer. The company came within a hair’s breadth of losing 35 percent of its revenues all at once, not because of anything to do with its performance but because its main customer received a poor rating from the end customer, one of the automakers.

For more companies, the need for diversification was driven by the gradual evolution of the U.S. industry and the concept of aligning with market winners.

Gentex, as a successful, public company in our region, provides the data for a specific example. In 2000, according to a recent investor presentation, 59 percent of revenues went to the Detroit Big Three, 27 percent to European carmakers, 5 percent to the North American transplants, and 9 percent went to other customers in Asia-Pacific and elsewhere.

By 2010, the Detroit Three share had fallen from 59 percent to 22 percent. Its European customers rose from 27 percent to 44 percent, North American transplants were 15 percent as opposed to 5 percent, and other Asian customers reached 19 percent.

This supplier of advanced mirrors and electronics transformed itself over 10 years from a traditional Big Three supplier to a company with global breadth and a rebalanced customer portfolio.

• The ideal customer mix varies by company. There is no one-size-fits-all answer. Gentex’s early emphasis on the Detroit Big Three can still be seen in the fact that GM is its largest customer with 15 percent of sales. Its Toyota sales are tied at 15 percent, though, in keeping with the growth of the Japanese presence.

Because of its value-added, leading-edge mirror products, the European luxury car makers are key targets for Gentex, and that can be seen in its next three top customers: Volkswagen/Audi (13 percent), Daimler AG (12 percent) and BMW (10 percent).

Other companies may have different ideas about who should be their best two or three customers, or they may spread their sales fairly evenly across a large number of companies. The important thing is to make the customer base the result of conscious choices and not completely opportunistic ones.

• You are never done calibrating the mix. One of Gentex’s newer customers is Hyundai/Kia, with 10 percent of its sales. The Korean automaker is doing well with its U.S. market entry, so many suppliers that already diversified to accommodate the rise of the Japanese companies are considering or actively integrating Hyundai into their sales efforts.

Even among the existing customer possibilities, the situation can change. Not many people would have anticipated the hand that Toyota and Honda have been dealt with recall problems (Toyota’s alleged unintended acceleration), lackluster design (the new Honda Civic) and natural disasters hammering production.

Succeeding in the auto industry requires more active management of the customer base than ever before if you want to grow with the strong and avoid the weak.

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