How Boeing, Toyota, Caterpillar, and other OEMs can double their current net profit by using smart contracts to become unmanned “virtual companies”, with or without cryptocurrency: Part 7
How globalized are OEM-supplier relationships already and how massive is the market?
Very globalized and very massive are the correct answers. Let me quickly make my point by hitting the highlights:
“There are no purely American vehicles. These are global automakers who use global sources for all types of parts.”-Michelle Krebs, senior analyst at Autotrader
“The only automaker that builds all its American cars at a US plant is Tesla (TSLA). But even Tesla imports roughly half the parts it uses.”-Chris Isidore, CNN Money
The % of domestic components for all cars/trucks/SUVs sold in the USA is tracked by both the US government and the independent Made in America Index. In 2015, only 7 of 267 makes and models had over 75% of their parts produced domestically. In 2018, only the Honda Odyssey and Honda Ridgeline were at 75%. Texas alone imports $6 billion in car parts from Mexico each year (https://www.brookings.edu/blog/the-avenue/2017/03/30/how-u-s-states-rely-on-the-nafta-supply-chain/).
In 2014, Boeing announced it would double its (then $2 billion/yr) purchases of Chinese parts “in coming years” and Airbus announced it would double its (then $1 billion/yr) purchases of Chinese parts by 2020 (https://www.heraldnet.com/business/boeing-and-airbus-plan-to-spend-more-on-chinese-suppliers/).
The Boeing 787 is well-known to be sourced from parts all over the world: https://www.businessinsider.com/boeing-787-dreamliner-structure-suppliers-2013-10.
The Airbus website openly states a strategic desire to source 40% of components from outside Western Europe and the US by 2020 (https://www.airbus.com/be-an-airbus-supplier.html).
Defense aerospace is even more dependent on China than commercial aerospace. The Pentagon decided it was better to accept an F35 with Chinese components than an F35 that was a few years further delayed: https://www.ibtimes.co.uk/us-defence-department-allowed-china-made-components-f-35-fighter-jet-programme-1430973.
Finally, note that a domestic tier 1 supplier might have overseas production facilities (despite nominally being headquartered in the US) or rely on downstream tier 2s or tier 3s that are overseas. The above numbers, shocking though they are, probably don’t even reflect the full extent of globalization.
Now that we’ve established how globalized things are, let’s establish how tremendously big these markets are.
According to the June 25, 2018 “Top Suppliers” report from Automotive News, just the top 100 suppliers sold $823 billion in goods to auto OEMs around the world (copy it over to a spreadsheet and add it up for yourself):
• Asian auto OEMs=$284 billion (34.5%)
• European auto OEMs=$254 billion (30.9%)
• North American auto OEMs=$235 billion (28.6%)
• Other auto OEMs=$50 billion (6%)
That list is far from complete and a lot of big suppliers don’t even make the top 100! For instance:
- Nippon Sheet Glass (Pilkington) recorded a revenue of $5.4 billion USD and didn’t even make the list (https://asia.nikkei.com/Companies/Nippon-Sheet-Glass-Co.-Ltd). They’re huge, they’re everywhere! Even the glass on my Subaru is made by Pilkington (I’ve looked).
- Fuyao Glass recorded a revenue of $319 million for its North America division (https://www.daytondailynews.com/business/report-fuyao-now-profitable-sees-318m-revenue/v1kJFqBSrSsLnDJRLNK6wI/). Including their main operation in China, it’s over $2.1 billion USD per year in revenue.
Another fun fact (that I mentioned in an earlier part): Ford spends over $100 billion on suppliers each year (https://www.bloomberg.com/news/articles/2013-10-21/ford-wants-to-pare-number-of-suppliers-by-40-executive-says).
The aerospace supplier industry isn’t quite as large, but it’s not small either. Airbus spends nearly $60 billion each year on external sourcing from 12,000+ different suppliers (https://www.airbus.com/be-an-airbus-supplier.html).
Also consider the following numbers from pages 33 and 37 of a Deloitte report:
Removing the value-add from services and OEMs, what’s left is the $264.3 billion/yr in recurring B2B purchases from suppliers (39% of the whole industry). With industry CAGRs of 2.1% in 2017 and 4.1% in 2018, that number becomes $280.9 billion for 2018.
*Note that the $0.2 billion difference in the totals for each table are due to rounding.
According to McKinsey, suppliers are typically 70% of an OEMs cost of goods sold: https://www.mckinsey.com/industries/automotive-and-assembly/how-we-help-clients/automotive-suppliers. Argoturbo, which is more aerospace-oriented, says 65%-75% for a typical healthy supplier: http://www.argoturbo.com/blog/the-supply-chain-management-challenge-to-decrease-the-cogs. Boeing is on the low end at 65%: https://leehamnews.com/2016/07/07/boeing-pfs-2-0/. Airbus is on the higher end, with external procurement accounting for two-thirds of the company’s revenue (or ~75% of COGs).
With those numbers in mind, you can easily estimate how much any publicly traded OEM is spending on supplier ecosystems just by looking up their COGs and multiplying by ~70%:
- Innovative agriculture and lumber OEMs like John Deere (acquired Blue River Technologies) and CNH Industrial (has self-driving tractor through Case brand)
- Earth movers like Caterpillar, Komatsu, and Kubota
- Forklift and crane OEMs like Altec and Terex
- Scooter OEMs like Bajaj
- Motorcycles: Harley Davidson, Kawasaki, Yamaha, KTM, Suzuki, Triumph, Ducati
- Snowmobile OEMs like Bombardier and Polaris
- Boat builders like General Dynamics and Huntington-Ingalls
- and many hundred others
Given that Fiat-Chrysler and General Motors are almost as big as Ford, they’re probably spending $80-$90 billion per year on suppliers at the very least (if the same percentages hold up).
All told, supplier-OEM relationships represent a rich, multi-trillion-dollar B2B sphere that could be greatly modernized. We will discuss that in part 8.
