Search
One vehicle may contain up to 30,000 individual parts.
One vehicle may contain up to 30,000 individual parts.
( Source: ©Kovalenko I - stock.adobe.com)

AUTOMOTIVE SUPPLIERS The automotive supply chain: Tier suppliers explained

| Author / Editor: Seth Lambert / Nicole Kareta

How do OEMs and tier suppliers or tier companies fit into the automotive supply chain and what exactly do these terms mean? This overview article covers the basics of the automotive industry from tier 1 to tier 3 suppliers and provides answers to the questions asked.

Automotive basics - What is an OEM?

The automotive industry is not a small business; as a whole, it employs around 34 million workers worldwide, with approximately 25 % of those people working directly for automakers, which are also known as “Original Equipment Manufacturers” (OEMs). This term is used to distinguish companies that actually make cars in factories, versus those that simply stick a label or badge on an existing vehicle and engage in sales and marketing.

Unfortunately, the world is not as clear-cut as this, meaning that a good number of auto companies do both—they make some cars themselves in their own factories, but also purchase and/or import vehicles from other manufacturers (some located halfway around the world) and put their brand name on them. In this latter case, the actual producer of the vehicle is the “original” equipment manufacturer (OEM).

There are also cases where an automaker may buy a significant portion of a vehicle—say, an engine or a powertrain—and add their own components to finish it off. In these cases, who the “OEM” is becomes more of a gray area, unless one is referring to specific vehicle components.

There are also situations where an automaker simply wants to use the name of a better known or recognized car company, so in these cases, the lesser-known enterprise may license the better-recognized name from the other firm. This often happens with newer carmakers, which may surmise (often correctly) that certain globally familiar brand names carry more weight in their countries, or at least among specific demographic groups. In these cases, the carmaker firm is the OEM, but the vehicle in question may bear a brand name that’s licensed from the more famous company.

There are also situations where a carmaker may produce a vehicle in one country and then ship it in a “knocked-down” (disassembled) form to an overseas subsidiary. In some cases, this overseas division may modify or localize the vehicle to its own specifications, in addition to completing the assembly process. In these instances, the company division or group that manufactured the vehicle originally is the OEM.

And of course, there are endless permutations of all of the above processes, sometimes leading to confusion about which business entity originally produced what part of a vehicle, and where. (Not every automaker is eager to reveal its secrets of manufacturing and/or labeling of vehicles.)

What is an automotive supply chain?

Further complicating matters is the fact that automotive production has evolved greatly since the days when the first carmakers began turning out primitive autos that had only the most essential functions and appurtenances. In these cases, automaker OEMs made virtually every component one could find on their cars.

However, as with almost every other industry, this situation quickly transformed; within a few years of the first car manufacturers going into business, the era of the automotive supplier was born. The reason was simple; if a secondary company could specialize and produce certain components of a car faster and cheaper than the OEM itself, why shouldn’t the OEM buy (outsource) those components and integrate them into their vehicles?

Within several decades of the first cars appearing in national marketplaces, there were companies producing starter mechanisms, engine parts, brakes, body panels, bumpers, steering wheels, seats, tires, and more. While some automakers such as Ford found value in trying to keep much of their manufacturing in-house, other brands were more than happy to assemble their vehicles from components made by dozens or even hundreds of suppliers. This development created the automotive supply chain.

What are tier suppliers?

As cars began selling by the tens of thousands and the auto industry grew, many parts companies began to rapidly expand and establish large factories and venerable reputations unto themselves.

In some cases, companies that were unsuccessful at selling whole vehicles found fortunes specializing in niche component manufacturing. In other cases, some parts manufacturers, encouraged by their success, decided to go into the business of making entire automobiles. A number of carmakers merged and/or acquired smaller OEMs, so that General Motors, for instance, eventually became the owner of the Buick and Cadillac brands, and Ford became the owner of Lincoln (among many other acquisitions and divestments).

These kinds of relationships extended themselves to the auto parts business as well. In cases where a carmaker wanted to have total control over the manufacture of certain components of its vehicles, it might simply purchase the component maker outright (or buy up a percentage of shares in the company).

Tier 1 suppliers

In other cases, however, component manufacturers remained independent, although their relationships to their OEM customers were extraordinarily close. These “first-tier suppliers” (known as Tier 1 companies) may have had seller-buyer relationships with OEMs extending back decades, or they may even have been spun off at some point from the OEMs’ own manufacturing operations. The latter scenario is often the case when it became apparent that a Tier 1 supplier could make more profit if it supplied parts to more than one carmaker (although many Tier 1 suppliers have only one or two large customers).

The dominant Tier 1 auto suppliers in the world today typically have operations in scores of countries around the world and employ tens—if not hundreds—of thousands of employees. Often, they will supply powertrains, suspensions, chassis, and entire engines to OEMs—items that make up significant portions or frameworks of cars. In some cases, Tier 1 suppliers can manufacture up to 99 % of a whole vehicle, becoming OEMs themselves. Examples of Tier 1 suppliers today include Magna, Aptiv, Borg-Warner, Bosch, Continental, ZF, Knorr-Bremse, Marelli, Denso, Aisin, and Hitachi Automotive Systems. In a number of instances, many automaker OEMs are also Tier 1 suppliers themselves to other car manufacturers, either under their own name or through partially or wholly owned subsidiaries (for instance, automaker Isuzu supplies engines to both General Motors and Toyota).

Tier 2 suppliers

As in other industries, the success of front-line Tier 1 suppliers gave rise to a host of second-tier suppliers (known as Tier 2 companies), which produced smaller pieces of the components the Tier 1 suppliers were selling to the automaker OEMs. Examples of these pieces might be car window motors, door handle mechanisms, or heat exchangers. But many of these Tier 2 suppliers’ customers may also lie outside the auto industry; Tier 2 companies are typically not focused solely on auto parts.

In many cases, Tier 2 companies never deal directly with an OEM, only doing business with Tier 1 companies, which in turn talk to and negotiate exclusively with their OEM carmaker customers. An example of a Tier 2 company would be one that supplies a radar sensor to a Tier 1 business, which in turn sells an advanced driver assistance system (ADAS) to an automaker.

Some examples of Tier 2 auto suppliers today include firms such as Osram, SOME, ITR USCO, Minth Group, Stanadyne, and Zexel. As with carmaker OEMs, Tier 1 suppliers can also simultaneously be Tier 2 suppliers in some cases. An example of this would be Hitachi, which supplies both complete car engines to automaker OEMs and engine pistons to Tier 1 suppliers.

Tier 3 suppliers

Because literally tens of thousands of components can be needed to make a single automobile today (some sources say the average car has around 30,000 discrete parts), there are not just first- and second-tier suppliers of auto parts, but third-tier suppliers (Tier 3 companies) as well. These firms typically provide the most basic components needed to make cars—for instance, specific parts (say, individual switches, or cables) or a piece of engineered material, like a large section of glass or steel. Tier 3 companies supply firms at all levels of the industry, so their customers include Tier 1 and Tier 2 companies, as well as carmaker OEMs. Some examples of Tier 3 auto suppliers today would be U.S. Steel, Kobelco, Fuyao Glass, or Fengfan.

To add even more complexity, some companies are engaged at all of the above levels of the industry, however, very often they have partially or wholly owned subsidiaries that operate at the different tiers, to reduce confusion.

(ID:46893018)