Nov 2002
  The newsletter for buyers and suppliers of castings and forgings
     
  SUBCONTRACTING UNDER THE DICTATORSHIP OF PRICE
 
     
 

by Daniel Coué for MIDEST


For quite a few years now there has been a very marked trend towards limiting or indeed reducing subcontracting prices in all the countries of the European Union. This trend seems to have strengthened in recent times. The graphs printed below demonstrate this. Obviously, they are based on differing economic situations despite the increasing inter-connection of the economies. However, a glance shows that in all cases there is a significant difference between the level of prices for the whole of manufacturing industry and the level in subcontracting, to the disadvantage of the latter.

This trend is clearly very harmful to the profitability of subcontracting companies. It constitutes a direct threat to employment in these activities and to investment. Ultimately, it is the competitiveness of European subcontracting that is at stake, and, through a knock on effect, that of European industry as a whole.

The statistics reveal a real deterioration in the terms of trade, and the under development of the subcontracting sectors, the majority of which are made up of dynamic and innovative small and medium sized manufacturers. In the end, the entire industrial fabric of Europe could suffer and an immense technological potential that is vital to the economic success of Europe risks being lost.
Classically, this erosion is explained by a balance of power that is chronically unfavourable to subcontractors. Such an analysis is not false but it does not provide a full explanation of why the deterioration in prices is accelerating.

Two further cases now need to be taken into account.

1/ GLOBALIZATION OF MARKETS

The liberalization of trade on a world scale is clearly not a negative development. It opens up new opportunities to European industry but at the same time it also increases competitive pressures. This fact also gives customers a new weapon in their negotiations with suppliers.
The pressure on prices is all the greater given the increased ease with which orders can be shifted to countries with low wages. Today, it is no longer just the less highly technological sectors that are threatened by this trend. The digitization of procedures and the development of new techniques for the exchange of computerized information mean that activities can be moved to different geographical regions, and this applies to the fields with the highest technological content as well. Examples include the making of top of the range clothing, the assembly of electronic cards, precision engineering, the production of moulds for plastics or press tools…

Industrial culture, the knowledge and the experience of people play a less and less important role. This is because expertise and intelligence are increasingly vested in the electronic systems controlling the machines.

Note: Certain customers have not hesitated to take advantage of this new situation. They place an initial order for a part or a pre-production part from a European supplier and they insist that the latter hands over the manufacturing programs to them. Then, they pass these programs to an "exotic" subcontractor. This behaviour, which is becoming increasingly widespread, is out and out theft of expertise. It strips European subcontractors of the only advantages they retain, very often, in the face of international competition. There is a need for abusive clauses and practices to be reported and penalized to a greater degree.

2/ THE SYSTEM OF OBJECTIVE PRICES

The need to reinforce their competitiveness in tougher and tougher world markets has driven some manufacturers to develop new more rigorous and pro-active purchasing techniques.
Previously, they were almost always based on the system of invitations to tender or "semi invitations to tender" directed towards finding and selecting the lowest quote or the best quote on the basis of a certain number of pre-determined criteria. This principle, even if it was not perfect, in general made it possible to establish a "fair price" for the services required.

Quite naturally, the initiative over price was with the vendor, that is the subcontractor. The customer would then normally make its choice on the basis of these responses.

In principle this is how a market economy works. Clearly, this does not exclude some negotiation or even bargaining in defining the details of the transaction. The important point is that price effectively acts as the regulator between supply and demand.

The "objective price" technique first appeared in Japan (in particular in the electronics, optics and automobile industries). Since then it has been gradually adopted by the major international groups. Sometimes rechristened Global Sourcing, it really hit the limelight under the direction of Ignacio Lopez, first at GM and then Volkswagen. Now it has spread to all fields of activity and even to "small customers".

This method is economically harmful and dangerous. It consists of setting the maximum purchase price for each part or sub-assembly by breaking down the sale price of the final product as set by marketing studies.


It has two results
1/ First of all, it is an authoritarian type of system, and consequently it inevitably leads to downward pressure on prices..

2/ / It results in a situation where the vendor is deprived of all initiative. It is the buyer who sets the price, who pre-determines the value of services. One is now in a sort of "virtual command economy" where the free setting of prices no longer exists. There is a substantial risk of a hardening of the economic arteries that might be harmful to the proper operation of the subcontracting markets and, as a consequence, to the vitality of European industry.

It is a further factor in the flight of business, jobs and technologies to regions where business can find more advantageous operating cost conditions

.

The following graphs have been produced on the basis of figures published by Eurostat. These are a series of price indices (1995 = 100). The green line is manufacturing industry and the red one subcontracting (average of metal, plastics and rubber processing). The figures for Ireland and Austria are not available.

 

Daniel Coué
80 rue La Condamine. - F 75017 PARIS.
Tel. / Fax : 33 (0)1 42 94 80 32
E-mail : danielcoue@club-internet.fr


Sponsor
MIDEST - International industrial subcontracting exhibition
www.midest.com

 

 
     
     
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