Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry

Business History Review

Volumn 65, Issue 4, 1991, Pages 781-824

  Helper, Susan ^a  

^a CASE WESTERN RESERVE UNIVERSITY   (United States)

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EID: 84972298480     PISSN: 00076805     EISSN: 2044768X     Source Type: Journal    
DOI: 10.2307/3117265     Document Type: Article

References (91)

1. Throughout this article, I use the term “supplier” to encompass both financially independent downstream firms and vertically integrated divisions.
2. Oliver E. Williamson, Markets and Hierarchies: A Study in the Economics of Internal Organization (New York, 1975); Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York, 1985); James D. Thompson, Organizations in Action (New York, 1967); quote from Economic Institutions of Capitalism, 76.
3. By “structure” I refer to the nature of relationships among firms (as defined in the next section) as well as traditional industrial organization variables such as concentration ratio, barriers to entry, and rate of technical change.
4. Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline of Firms, Organizations, and States (Cambridge, Mass., 1970).
5. I use the term “technical progress” very broadly; I mean it to encompass invention, innovation, and diffusion by both supplying and buying firms. I specifically wish to include organizational innovations such as just-in-time inventory techniques and quality assurance methods such as statistical process control.
6. See, for example, Williamson, Markets and Hierarchies, and the articles cited in David L. Kaserman, “Theories of Vertical Integration: Implications for Antitrust Policy,” Antitrust Bulletin 25 (Fall 1978): 105–28.
7. M. Therese Flaherty, “Prices vs. Quantities and Vertical Integration,” Bell Journal of Economics 12 (Autumn 1981): 507–25.
8. See Susan Helper, “Supplier Relations and Technical Change: Theory and Application to the US Auto Industry” (Ph.D. diss., Harvard University, 1987), and Helper, “An Exit-Voice Analysis of Supplier Relations,” in Morality, Rationality, and Efficiency: New Perspectives on Socio-economics, ed. Richard M. Coughlin (New York, 1991), for more detail.
9. Stanford Business School Case, “Signetics (A),” 15, and “Signetics (B),” 8, Stanford, Calif., 1982.
10. For an alternative conception of incentive systems in supplier relationships, see M. O'Hare, Robert Leone, and M. Zegans, “Privatization of Prisons: A Managerial Perspective” in Private Prisons and the Public Interest, ed. Douglas C. McDonald (New Brunswick, N.J., 1988).
11. For formal analysis of this proposition, see Helper, “Supplier Relations and Technical Change,” chap. 6, and Helper and David I. Levine, “Long-Term Supplier Relations and Product-Market Structure,” Journal of Law, Economics, and Organization 8 (Oct. 1992): 561–81.
12. See Helper, “An Exit-Voice Analysis,” and Helper, “Supplier Relations and Technical Change,” for details.
13. Of course, some technical changes (for example, the invention of the personal computer) require neither very much capital nor very much buyer-specific information exchange. However, these types of technical changes are less likely to be practical in a mature industry such as automobiles, in which huge investments in physical and organizational capital specific to a particular way of doing things have been built up over time. See William J. Abernathy, The Productivity Dilemma: Roadblock to Innovation in the Automobile Industry (Baltimore, Md., 1978); William J. Abernathy and Kenneth Wayne, “The Limits of the Learning Curve,” Harvard Business Review 52 (Sept.-Oct. 1974): 109–19; Abernathy and Kim Clark, “Mapping the Winds of Creative Destruction,” Research Policy 14 (Feb. 1985): 3–22; and Kim Clark, “Managing Technology in International Competition: The Case of Product Development in Response to Foreign Entry,” Harvard Business School Working Paper (Boston, Mass., 1985).
14. For more on the ability of dominant firms to alter the cost curves they face, see William Lazonick, Business Organization and the Myth of the Market Economy (New York, 1991).
15. On U.S. managers’ short time horizon, see, for example, Robert Hayes and William Abernathy, “Managing Our Way to Economic Decline,” Harvard Business Review 58 (July-Aug. 1980): 67–77. In contrast, supplier relations in the Japanese auto industry seem better characterized as a case of continuous voice, as Susan Helper, “Comparative Supplier Relations in the US and Japanese Auto Industries,” Business and Economic History, 2d ser. (1990): 153–62, shows.
16. Lawrence H. Seltzer, A Financial History of the American Automobile Industry (Boston, Mass., 1928), 19–20.
17. “nniversary Issue,” Automotive Trade Journal (1924), 15; Alfred P. Sloan, Jr., Adventures of a White-Collar Man, ed. Boyden Sparkes (New York, 1941), 9, 60.
18. Allan Nevins and Frank Hill, Ford: The Times, The Man, The Company (New York, 1954), 232; Nevins and Hill, Ford: Expansion and Challenge (New York, 1957), 22–23, 88ff., 173–74; Nathan Rosenberg, Perspectives on Technology (New York, 1976); Richard Langlois and Paul Robertson, “Innovation and Vertical Integration in the American Automobile Industry, 1900–1940,” Working Paper, Department of Economics and Management, University College, University of New South Wales, Canberra, Australia, 13.
19. Sloan, Adventures of a White-Collar Man, 37–39; see also Nevins and Hill, Ford: The Times, The Man, The Company, 212.
20. Seltzer, A Financial History, 89–90, 100.
21. Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, Mass., 1962), 118; Sloan, Adventures of a White-Collar Man, 29; G. Thompson, “Intercompany Technical Standardization in the Early American Automobile Industry, ”Journal of Economic History 14 (Winter 1954): 1–20.
22. Sloan, Adventures of a White-Collar Man, 92–93.
23. Dodge v. Ford Motor Company, 1070 Mich Sup. Ct. Briefs and Records, cited in Seltzer, A Financial History, 101.
24. Sloan, Adventures of a White-Collar Man.
25. Nevins and Hill, Ford: The Times, The Man, The Company, 460.
26. Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, “Vertical Integration, Appropriable Quasi-Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21 (1978): 297; Alfred D. Chandler, Jr., and Stephen Salsbury, Pierre S. du Pont and the Making of the Modern Corporation (New York, 1971).
27. Richard Langlois and Paul Robertson, “Explaining Vertical Integration: Lessons from the American Automobile Industry,” Journal of Economic History 49 (June 1989): 361–75.
28. Nevins and Hill, Ford: The Times, The Man, The Company, 461.
29. P. Heldt, “Parts Makers’ Role Gets Bigger as Automotive History Unfolds,” Automotive Industries, 6 May 1933, 546–48, 554, argues that in the 1920s, independent suppliers made significant improvements in parts including brakes, crankshafts, pistons, valves, springs, carburetors, radiators, clutches, steering gears, and axles.
30. Langlois and Robertson, “Innovation and Vertical Integration,” 22–24; Langlois and Robertson, “Explaining Vertical Integration,” 374–75.
31. Margaret B. W. Graham and Bettye Pruitt, RirD for Industry: A Century of Technical Innovation at ALCOA (New York, 1990), 148; quote from Nevins and Hill, Ford: Expansion and Challenge, 447.
32. In the days of single sourcing, an important union goal in the case of a strike was to prevent the transfer of automaker-owned tooling to another plant, leading to “games of ’hide-and-seek’ along Detroit side streets, with union members in pursuit of the transfer trucks.” Kenneth Alexander, “Market Practices and Collective Bargaining in Automotive Parts, “ Journal of Political Economy 69 (Feb. 1961): 17. Strikes were a frequent occurrence in the early postwar period; for example, GM reported that in mid-May 1946, 142 of its suppliers were affected by strikes. Harold Katz, The Decline of Competition in the Automobile Industry, 1920–1940 (New York, 1977), 263.
33. Stephen Herzenberg, “Towards a Cooperative Commonwealth: Labor and Restructuring in the U.S. and Canadian Auto Industries” (Ph.D. diss., Massachusetts Institute of Technology, 1991), 225.
34. This estimate is very crude. It is based on 1) the finding in R. Kamath and C. Wilson, “Characteristics of the U.S. Automotive Supplier Industry,” Joint U.S.-Japan Auto Study, no. 10 (Ann Arbor, Mich., 1983) that in 1980, the top forty auto suppliers (.8 percent of the total) made about 31 percent of the total volume of $34 billion in sales of “parts, components, and raw materials” to U.S. automakers whose producers the authors were able to identify; and 2) the observation that in general, it was only the largest suppliers who had much interaction with the automakers. Therefore, the bottom 99.2 percent of suppliers were in the simple exit mode.
35. Written, legally binding contracts lasting longer than one year were extremely rare, however. See Michael E. Porter, Cases in Competitive Strategy (New York, 1983), and University of Michigan Transportation Research Institute, “The International Automotive Challenge: Strategy Beyond Cost and Quality,” UMTRI Research Review 17 (Sept.-Dec. 1986): 18.
36. Interview, October 1984.
37. Supplier interviews, October 1984. When asked to comment on this incident, a Ford executive freely admitted that in the past, “we cut the legs out from more than one supplier” (August 1985).
38. Interview with Ford purchasing staff executive, August 1985; see also Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization, and Management in the World Auto Industry (Boston, Mass., 1991).
39. J. Patrick Wright, On a Clear Day You Can See General Motors (New York, 1979), 49.
40. Maryann Keller, Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors (New York, 1989), 104.
41. Interview with GM manager at a former Fisher plant, 4 December 1990; interview with James Meehan, professor of economics, Colby College, April 1986. This example illustrates that the ability of a vertically integrated firm to “effect internal adaptations by fiat” (Williamson, Economic Institutions of Capitalism, 75) is not automatic; incentive systems must be carefully established and maintained. Similarly, the example illustrates that the costs of haggling and the danger of a “hold-up” may be greater with a powerful internal supplier than with an outside firm.
42. E. Raymond Corey, “General Motors (A): Organization of the Procurement Function,” Harvard Business School Case 9–576–251 (1977), 15; interview with manager at ex-Fisher plant, 4 December 1990. In 1971, the Chevrolet Vega was unable to meet emissions standards. GM's Rochester Products Division refused to help with the problem, so Chevrolet had to add an air pump to help exhaust gases burn more effectively. Holley Carburetor was willing to work with Chevrolet on the problem and designed a carburetor that eliminated the need for the pump and saved Chevy $3 million per year. GM management then awarded the contract to produce the Holley-designed carburetor to Rochester Products. Only after strenuous protests by DeLorean was Holley “allowed to keep a little piece of the business.” Wright, On a Char Day, 78–79.
43. Chrysler, “blind ambition” drove its Dayton plant to claim that it could make radiators, even though it had no relevant experience and the equipment it was proposing to buy was obsolete. Chrysler eventually rejected the plan, but only at the highest possible level; other disputes were not resolved so satisfactorily; interview with Chrysler engineer, August 1985.
44. A. Knight, “Automotive Report,” Smith, Barney, Harris, Upham and Co., New York, 10 Feb. 1983.
45. Chandler, Strategy and Structure; Alfred D. Chandler, Jr., Giant Enterprise: Ford, General Motors, and the Automobile Industry (New York, 1964).
46. Robert Crandall, “Vertical Integration in the United States Automobile Industry” (Ph.D. diss., Northwestern University, 1968).
47. Knight, “Automotive Report. “ In contrast, the automakers have not been nearly so successful at protecting their rents from their suppliers of labor. For most of the period since 1913, when Henry Ford's $5 day was double the prevailing manufacturing wage, the automakers have paid their workers wages above the manufacturing average. Between 1948 and 1980, the ratio of auto assembler wages to the average production worker's wages ranged from 1.17 to 1.55. See Harry Katz, Shifting Gears: Changing Labor Relations in the U.S. Automobile Industry (Cambridge, Mass., 1985), Table 2.1.
48. At Chrysler in the 1970s, the cost of expected midstream changes accounted for 20–30 percent of automotive program budgets. Wall Street Journal, 23 Feb. 1988, 24.
49. Barriers to entry into some industries could be quite low. In the late 1960s, for example, “a simple [metal] finishing operation could be started in rented quarters for under $10,000.” H. Arnett and D. Smith, The Metal Finishing Industry, Michigan Business Reports, n.s. no. 10 (Ann Arbor, Mich., 1977), 3.
50. Interview, October 1984; written comments by a Ford executive on a 1986 draft of this manuscript.
51. Porter, Cases in Competitive Strategy; interview with executives at Fleck Manufacturing, a small ($5 million sales) Canadian wiring-harness maker, May 1987.
52. David Teece, “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy,” Research Policy 15 (Dec. 1986): 285–305.
53. Chandler, Giant Enterprise.
54. Lawrence J. White, The Automobile Industry since 1945 (Cambridge, Mass., 1971); Michael Moritz and Barrett Seaman, Going for Broke—The Chrysler Story (New York, 1981).
55. H. Arnett and D. Smith, The Tool and Die Industry, Michigan Business Reports, n.s. no. 1 (Ann Arbor, Mich., 1974), 28 and 39. Arnett and Smith report that the “vast majority” of shop owners they surveyed considered historical costs only in preparing bids.
56. Arnett and Smith, The Metal Finishing Industry, 27.
57. Porter, Cases in Competitive Strategy.
58. Abernathy, Productivity Dilemma.
59. Alfred P. Sloan, Jr., My Years with General Motors (Garden City, N.Y., 1963), 69, cited in Abernathy, Productivity Dilemma, 34. See also Stuart W. Leslie, Boss Kettering (New York, 1983), 123–47, and Chandler, Strategy and Structure, 154.
60. Abernathy, Productivity Dilemma, 35. It may seem unlikely that an incident that occurred nearly seventy years ago would have much influence on corporate behavior today. But this example was cited as late as 1987 by GM engineers as a reason to avoid technological risks. (Conversation with Robert Kazanjian, University of Michigan, reporting on a class he had taught at the GM Tech Center, Feb. 1987.)
61. William J. Abernathy, Kim B. Clark, and Alan M. Kantrow, Industrial Renaissance: Producing a Competitive Future for America (New York, 1983); Robert E. Cole and Tazio Yakushiji, eds., The American and Japanese Auto Industries in Transition (Ann Arbor, Mich., 1984).
62. Interview, August 1985.
63. Interview with Chrysler purchasing executive, August 1985.
64. Interview, May 1988.
65. General Motors president F. James McDonald in University of Michigan Transportation Research Institute, “The International Automotive Challenge,” 12.
66. Wall Street Journal, 31 July 1984, 1; Ford interviews, August 1985.
67. Auto industry executives’ use of this concept seemed very similar to that now in vogue among game theorists; see, for example, David Kreps and A. Michael Spence, “Modelling the Role of History in Industrial Organization,” Harvard University Discussion Paper 992 (July 1983). For example, I interviewed in October 1984 a supplier who had GM-owned tooling at his plant that would take nine months and cost $4–5 million to move to another supplier. When asked why he did not try to raise his price at contract renegotiation time, he said, “Because our reputation would be shot to hell. We might get away with it once, but nobody in the business would ever deal with us again; they'd say, ’You're nothing but a bunch of dishonest crooks.’ “
68. Signetics (B), 5, 7–8.
69. Ward's Auto World, June 1987 and Nov. 1988, 59; Mary Connelly, “Acustar stronger since Chrysler plan to sell it fell apart, “ Automotive News, 6 March 1989, 20.
70. Michigan Business, April 1987, 71; Michelle Krebs, “GM ready to merge 5 parts units into 2,” Automotive News, 6 March 1989, 3, 6.
71. Modern Michigan, Winter 1989, 13.
72. Robert M. Sinclair, vice-president, engineering, at Chrysler, in University of Michigan Transportation Research Institute, “The International Automotive Challenge,” 22. In the automotive industry as a whole, half of all engineering was done by engineering service firms, according to Ralph Miller, president, Modern Engineering Service Company (31). Cash-rich CM bucked this trend with its purchases of Electronic Data Systems (for $2.5 billion in 1984) and Hughes Aircraft Company (for $5 billion in 1985), acquisitions that significantly increased its computer and electronics capabilities. (Fortune, 8 July 1985, 22).
73. Wall Street Journal, 23 Feb. 1988, 24.
74. Frank Gillett, “The Integrating Supplier” (MA Thesis, Massachusetts Institute of Technology, 1992).
75. Interview with Daniel L. Luria, senior researcher, Industrial Technology Institute, Ann Arbor, Mich., February 1987.
76. Susan Helper, “Supplier Relations and Investment in Automation: Results of Survey Research,” Center for Regional Economic Issues, Case Western Reserve University, Helper, “Have Things Really Changed between Automakers and Their Suppliers?” Sloan Management Review 32 (Summer 1991): 15–28.
77. Chemical Week, 11 Nov. 1987, 10; Wall Street Journal, 23 Feb. 1988, 22. Similar figures could be cited for General Motors and Chrysler.
78. Knight, “Automotive Report,” 17.
79. Chrysler interviews, August 1985.
80. As Langlois and Robertson, “Explaining Vertical Integration,” point out, product innovation often has these features, whereas (many types of) process innovation are characterized by the need to work out details centrally.
81. For a game-theoretic analysis of how a change in the buyer's threat point due to a change in final-product market structure can lead to a change in supplier relations strategies from exit to voice, see Helper and Levine, “Long-Term Supplier Relations.”
82. General Motors, “Report on Conference Held at Jackson Community College, Jackson, Michigan” (1984), photocopy.
83. Dana Milbank, “Air-Bag Woes Knock Wind Out of TRW,” Wall Street Journal, 12 March 1991, A4.
84. Supplier interview, November 1984.
85. See Helper, “Supplier Relations and Technical Change,” chap. 5, for more detailed discussion.
86. Chrysler interviews, August 1985.
87. See Roy D. Shapiro, “Toward Effective Vendor Management: International Comparisons,” Harvard Business School Working Paper (1985).
88. By early 1989, there were 232 Japanese-owned or joint-venture plants in the United States in operation or in final planning stages. Of these, 85 had contracts with at least one of Ford, GM, or Chrysler. Joseph M. Callahan, “232 Japanese Supplier Plants Gunning for Your Business, “ Automotive Industries, Feb. 1989, 89–112.
89. David Andrea, R. Hervey, and Dan Luria, “The Capacity Explosion: Implications for Michigan Suppliers,” AIM Newsletter 1 (March 1986): 6–8; interview with Daniel D. Luria, senior researcher, Industrial Technology Institute, Ann Arbor, Mich., August 1987.
90. Harley Shaiken and Stephen Herzenberg, Automation and Global Production: Automobile Engine Production in Mexico, the United States, and Canada (La Jolla, Calif., 1987), show that cost is significantly less, and quality and machine uptime levels approach U.S. levels at a U.S. automaker's engine plant in Mexico compared with one in the United States making exactly the same (fully de-bugged) product. On the difficulties of coordinating production between the United States and Mexico, see Roy D. Shapiro, “Rio Bravo Electricos,” Harvard Business School Case (1982).
91. Akin to what Michael Piore and Charles Sabel, The Second Industrial Divide: Possibilities for Prosperity (New York, 1984), would call an “industrial district.”