In 2002, when automotive supplier Delphi began shipping the ignition switches to General Motors that are now being blamed for at least 13 fatal crashes, relations between the automaker and its former parts subsidiary were among the worst in the history of the automobile industry.
Three years earlier, GM had spun off Delphi in a bid to capitalize on the then-lucrative initial public offering market, but Delphi remained heavily dependent on GM’s business and was having trouble attracting new customers.
At the same time, GM was looking for ways to cut costs to cover an ever-widening cost gap with its foreign competitors. Squeezing suppliers for pricing concessions was a lot easier than addressing its own inefficiencies and uncompetitive business model.
“They had Delphi over a barrel and they knew it. GM just went after them and put on all sorts of pressure to reduce costs,” said John Henke, president of Planning Perspectives Inc., which tracks relations between automakers and their suppliers. “The two companies hated each other. If you were a Delphi engineer and you worked with GM, you didn’t want to get out of bed in the morning.”
Henke and other analysts believe the caustic relationship between General Motors and Delphi led to substandard parts being shipped by the supplier. And they say the dysfunctional state of Detroit’s automobile industry in the years leading up to its near-death experience in 2008 and 2009 helps explain why GM would have accepted them and installed them on its vehicles.
Delphi was not the only supplier howling under the yoke of what is now referred to as the “Old GM.”
Henke has been asking suppliers to rate their relations with automakers since 1992. From 2002 to 2007, GM was consistently rated the worst company to do business with in his annual survey.
“Relations with GM were definitely the most contentious,” he said. “They were so cost-oriented; price took precedence over quality. Suppliers were threatened with loss of business if they didn’t reduce the cost of their components. They had to be incredibly creative to meet GM targets.”
And those targets were set at their lowest for entry-level vehicles such as the Chevrolet Cobalt and Saturn Ion that are the focus of the current recall scandal.
The stress was becoming too much for Delphi to bear, says David Cole, then chairman of the Center for Automotive Research.
“At that time, it was clear that they were in businesses they couldn’t afford to be in,” Cole said. “They had a similar cost structure to what they’d had as part of GM, but GM was not willing to continue to pay them as much for parts. They had to compete with other suppliers for business. There was a lot of tension.”
Competing with other suppliers for business was often a brutal process at GM, according to Henke, who says the automaker routinely summoned parts manufacturers to its headquarters, put the representatives of each company in a different room and then asked them to name their lowest price for a given component. The GM purchasing reps would then take the lowest figure and challenge the other companies to beat it. And they would keep doing that until none of the suppliers was willing to go any lower.
That sometimes resulted in suppliers bidding so low that they had to cut corners to meet the promised price. And that, says Henke, is one reason why GM ended up receiving parts that did not meet its own specifications, as the company now says happened with the ignition switches from Delphi. And he said GM was willing to accept those parts because the alternative — delaying production — was too costly.
That is because GM’s contract with the United Auto Workers required the company to keep paying workers even if the factories they worked at were idled. This was the era of the now-infamous jobs banks, during which GM, Ford and Chrysler were forced by their union contracts to pay thousands of UAW members not to work.
“There were unquestionably times when parts were accepted that did not meet GM’s specifications. But you had to keep the production lines running at all costs,” Henke said. “It was probably the lowest point in supplier relations General Motors has ever had.”
The jobs banks system was dismantled in subsequent contract negotiations, starting in 2007. And both Henke and Cole said other vestiges of these bad old days died along with the “Old GM” after it filed for bankruptcy in 2009.
“The supplier relations, in general, are considerably better now,” Cole said. “Before, engineering wanted to buy on function, purchasing wanted to buy on price. Today, purchasing and engineering work much more closely together.”
Delphi, which went bankrupt in 2005, would not comment on its relationship with GM. But the company said in an email that it is “working closely with GM on the replacement parts” for the Chevy Cobalt and Saturn Ion.
General Motors also would not comment on past relationships with suppliers, but the company says it has recently rolled out new initiatives designed to strengthen its relationships with parts manufacturers.
“GM is dedicated to creating long-term strategic relationships with our suppliers,” said company spokesman Greg Martin. “One important step we’ve taken this year is the introduction of ‘Strategic Supplier Engagement.’ It is an initiative that lines up our priorities with those of our largest suppliers with one goal in mind — to bring the best innovation, quality and value to our customers.”