Whitepaper Wednesday will return next week. I wanted to jump on the automotive industry bailout news in a timely fashion.
Many eyes across the business world are on Capitol Hill where the leaders of GM, Ford, and Chrysler will be pleading for taxpayer dollars to save their companies and – as a result, they claim – the entire economy of the free world.
Personally, I’ve pondered whether letting the weakest of the automakers fail would be the right decision. Theoretically, it would allow the stronger two to have an opportunity to snatch up some market share and return to profitability, however thin those profits may be.
And, philosophically, it would help bring supply in line with demand. After all, if auto demand is down 37%, I’m not sure that we should be investing taxpayer dollars to sustain historical supply levels.
So one would think that the stronger two automakers would love to see the weakest one fail. Companies generally love to see their competitors die.
But there’s one reason – one big reason – for counterintuitive thinking to prevail here.
What’s that reason?
Supply chain risk.
Consider that, in today’s Pittsburgh Post-Gazette, GM said that it needs government financial support because “Absent such assistance, the company will default in the near term, very likely precipitating a total collapse of the domestic industry and its extensive supply chain.”
The article later stated that “GM said its collapse would cause ‘catastrophic damage to the U.S. economy, with failures rippling through suppliers to other automakers, dealers and financial firms.’”
So in other words, if GM goes out of business, so will many of its suppliers. Many of these suppliers are also used – nay, depended upon – by Ford and Chrysler. The collapse of these suppliers would so inhibit Ford and Chrysler from producing vehicles that they, too, would collapse.
I’m sure (well, hopeful) that each of these automakers understand who their common suppliers are, the prospective solvency of those suppliers given a failure by one or more of their competitors, and contingency plans in the event of a competitor’s collapse.
If one or more of the automakers does fail, there will be game-changing procurement lessons to be had. Make or buy procurement decisions – which, in recent years have always favored the “buy” outcome – may face a pendulum-like swing towards the preference of making in order to reduce such systemic supply risk.
We’ll just have to wait and see what happens.
Hold onto your hats…it’s gonna be a wild “ride.”
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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