Auto OEM and Tier-1 Dynamics

Shall we start by looking at the relationship between OEMs and Tier 1s?

That's the beginning of all of it. The three first principles: quality, price and delivery. These are a given that are not debated about. Either you can fulfil the quality requirement, either you can fulfil the price range and you can make sure that you can deliver in time, as expected, or else you're out of the business. So this is not a differentiation factor.

Quality is a given. In the end, you have to consider that when we're talking about, for instance, the seat frame structure and the mechanisms, we're talking about a security part. We're also talking about ppm [parts-per-million] rates in the range of 10 to a maximum of 15 ppm. So either you're in this ballpark or you're not considered.

And with regards to the price, of course the OEMs try to push the suppliers as much as possible to get to the "right price." Most of the time, there's a certain bandwidth. If you are in the range of 5-8% plus/minus then you're still considered. If you're shooting too high, then you're out again.

And delivery, here we're talking about two elements. If you're a complete seat suppliers, we're talking about the just-in-time supply, which consequently means the JIT (just-in-time) factory has to be relatively close to the customer, I would say within a radius of 50-80 miles of the customer site. Otherwise logistics costs and delivery on time become just about impossible. Or you have to have an interim warehouse, which is not beneficial because in order to build the variations as late as possible a warehouse doesn't make sense.

Let's compare Adient to Faurecia, let's assume that they both have the same quality, does is just come down to operational ability in terms of manufacturing at slightly better cost?

No, actually the difference between Adient and Faurecia when it comes to seats is that they have the rework stations included in the just-in-time lines, while Faurecia has taken it out. So, if there's rework to be done on a seat, it's done outside the regular production line. Outside of this, Faurecia is following rigidly and strictly the Toyota manufacturing principle, which in Faurecia has called the Faurecia excellence system. I see it as a beefed up Toyota manufacturing system, which they have continued to improve over a period of time. In order to make the Faurecia excellence system happen all over the globe in each of the Faurecia plants, they have recruited a couple of Japanese manufacturing experts to teach, and also monitor and audit the excellence system to ensure it's being utilised to the maximum.

So Faurecia don't have the rework lines?

They have rework stations, but they have excluded it from the regular production line, while Lear and Adient have it as part of the production line. If you look at the standard seat manufacturing line, Faurecia is using between 15-18 employees per shift, while Lear and Adient are using approximately 2 more.

And that's down to the the rework part of the line?

Yes. The philosophy of Faurecia is rework is not part of the standard operation process. It happens, yes, but if it happens it has to be separate from all the other operation systems and processes.

What's the difference typically in the cost and duties of these extra two people?

Actually, from a pure cost standpoint, Faurecia is a bit lower than Adient for a typical seating line, which is mainly due to the fact that rework is part of the standard operating process. In Faurecia, if there's rework to be done, they hide it under the SG&A costs. It's divided through all the different processes so in the end it doesn't have too much of an impact on the cost price per seat.

It does show up in the bottom line though right?

Yes, it does. But, if you can spread it over all the different operational processes, it's a micropercentage that you have to add.

Why would the EBIT margin for Faurecia be higher than Adient, for example?

There are a couple of elements to it. They were the first company to fully standardise; first of all, they standardised the seat mechanisms, but then they also standardised the production of seat mechanisms. Consequently, if they are quoting for a new seat, they can just duplicate the designs of the existing mechanism lines, so they don't have the R&D costs again and again. They have standardised the seat frames as well, which is also a cost benefit. Furthermore, Faurecia is strongly focused on using the Toyota production system to create permanently continuous improvement. And, if they quote a tool for the price of x, they also have ideas in mind to bring the cost price down x minus 5 or x minus 6 or whatever.

Don't Lear and Adient also have this standardisation?

Lear and Adient are lagging behind. They have started to go in the direction of standards, but they are not as advanced as Faurecia is for the time being. Aa a matter of fact, Lear is partially buying seat mechanisms from Faurecia, and Magna is also partially buying mechanisms from Faurecia. So when it comes to economy of skills, Faurecia is certainly seeing a big benefit through this standardisation.

Is the seat mechanism the core structure of the seat?