When Communication Leads to Collusion Rather Than Collaboration by Kelly Barner

Posted on October 15, 2013


Editor’s Note: Kelly has done it again . . . stoked the proverbial flames of controversy with another great piece.

While there is nothing that can justify the collusion on the part of auto industry suppliers that as Kelly reports added “$5B to 25 million new vehicles” as the result of “overpriced parts,” no one should be surprised that this happened.  In fact it was a long time coming – especially when you take into account the acrimonious venting from 200 plus supply-side senior executives during a keynote I gave back in 2005.  Can you say pitch forks and torches!

All this being said, the only question I have is this; I wonder if Walmart is paying attention?

The “drive on price reduction, low cost country (LCC) sourcing, and extension of terms” has led to the “collapse of the domestic automotive supply chain."

According to one industry expert, the “drive on price reduction, low cost country (LCC) sourcing, and extension of terms” had led to the “collapse of the domestic automotive supply chain.”  No wonder suppliers were/are angry!

In today’s networked economy, we are all conditioned to expect cooperation between organizations in the supply chain. When buyers and suppliers work together, and information flows in both directions, the end result is often better and less expensive than what would have been possible under other conditions.

Unfortunately, not all individuals and organizations have good intentions. In the largest criminal antitrust investigation ever pursued by the U.S. Department of Justice, companies and executives are being prosecuted for “collusive agreements to rig bids, fix prices, and allocate the supply of auto parts sold to U.S. companies” according to U.S. Attorney General Eric Holder (USA Today).

The collusive agreements affected most U.S. automakers, although not equally. Ultimately, the overpriced parts added $5B to 25 million new vehicles, adding an average of $200 to the sale price of each car. The repercussions have been equally large, with $1.6B in fines and 17 executives in prison or awaiting sentencing. According to the Attorney General, the illegal interactions between suppliers may have been an effort to stop years of aggressive downward pressure on parts prices.

It is easy to condemn these unethical and illegal supply practices, but there is another side to every story. It would seem that there are several approaches that could have prevented this, or at least contained the scope of it. Such a responsibility would not fall to Fair Trade Commissions or Departments of Justice, but to the buying teams at the auto manufacturers. Karl Brauer of Kelly Blue Book (kbb.com) described years of almost brutal demands for lower prices from parts suppliers.

People with malicious intentions will take opportunities to defraud business partners if they stand to gain. But if manufacturers had been simultaneously digging for better cost visibility, they would have realized that something was wrong. According to a New York Times article from September 26th, “Chrysler, Ford and General Motors, as well as the American subsidiaries of Honda, Mazda, Mitsubishi, Nissan, Subaru and Toyota” were all affected. While the suppliers reportedly used code names and met in secret to make sure their agreements were being adhered to, they also managed to carry on their collusive agreements for years before being detected.

Beyond not worrying about the operational realities of the cost reductions they were looking for, manufacturers are also guilty of negotiation by demand. Increasing the level of collaboration between buyers and suppliers is a popular tactic. Rather than throwing around one’s buying leverage to reduce costs regardless of the impact on suppliers, companies are work together to lower prices by increasing efficiency or working together on product design. The prices may not have been much better, but at least no one would be going to prison.

For many of the executives at the colluding companies, their careers have come to an end as they face lost credibility, fines or incarceration. But the buyers on the losing end of this price fixing scam – buyers who lost irreplaceable billions of their customers’ money – have found themselves limited as well, by their own ability manage costs and get visibility into the operations of their suppliers.

For more on this case, read the following:

Jaclyn Trop, “Companies Admit They Fixed Prices of Car Parts” NY Times, 26 September 2013.

James B. Treece and Hans Greimel, “Japan gets tough on auto industry collusion” Plastics News, 6 February 2012.

Kevin Johnson, “Japan-based firms will plead guilty to price-fixing” USA Today, 26 September, 2013.


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