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
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.
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