top of page

Cooperations with Trust to Propel the US Auto Industry Forward

Image Credit: scusi/Alamy Stock Vector


What we got?

The current uncertainties in the US automotive industry stem from the unstable economy including murkier macro-led demand, unsettled inflations, and geopolitical conflicts (Business Insider, 2023). The material and skilled labor shortages (Corporate, 2023; McKinsey & Company, 2023) rippled from the previous COVID-19 still hang over daily production among the assembly lines. The road to electrification and autonomous driving with connectivity certainly adds uncertainty to OEMs and suppliers on their R&D projects and transitions of product mixes (Business Insider, 2023). Amid the uncertainties and insecurities, many corporations tighten their grip on the other agents in the supply chain to protect and preserve their corporate synergy. However, cooperation with trust among players is the dominant strategy most beneficial to everybody in the US auto industry.


What to do?

Hebisch et al. (2022) stated that the automotive supply chain relationships are non-zero-sum games as the buyers can increase their power without decreasing the supplier’s power and reverse. Cooperation / win-win has been proven to be the dominant strategy for accomplishing the best economic payoffs for all players. Many research papers (Creutzmann, 2021; Mudambi & Helper, 1997; Swinney & Netessine, 2009; Wolters & Schuller, 1997) pointed out that cooperative games and trust could lead to a win-win situation. The business relationship between car manufacturers and their suppliers must be a true cooperative partnership to achieve a win-win situation, and such partnerships will reduce production costs, advance R&D performance, lower transaction costs, and provide the supplier with longer contracts and higher volumes. The cooperative bargaining process initiated by Nash (1950) is indeed relevant. This process is often referred to as the Nash Bargaining Solution (NB), and it provides a framework for modeling negotiations among players in a way that satisfies certain axioms of fairness. The cooperative Bargaining Process or Nash Bargaining Solution (NB) is used to model and analyze negotiations in various contexts under the cooperative environment where parties seek to distribute resources fairly and efficiently. However, it can only be accomplished with mutual trust, the key to implementing long-term contracts, which are extremely crucial in the U.S. automotive industry.


If not, so what?

Operating in non-cooperative environments will always cost more and take longer than in cooperative environments. Let us take an academic approach by examining the payoffs between Nash Equilibrium and Nash Bargain: Nash Equilibrium is about individual players making the best decision they can, given the decisions of others, in a non-cooperative context (Wolters & Schuller, 1997). Nash Bargaining involves players working together to find a mutually beneficial outcome in a cooperative context (Heese, 2015). In Nash Equilibrium, each player acts independently, trying to maximize their payoff without cooperation. This can lead to outcomes where the overall payoff is not maximized. A classic example is the Prisoner's Dilemma, where individual rationality leads to a worse outcome for both parties compared to what they could achieve through cooperation. Nash Bargaining, in contrast, is about finding a mutually beneficial agreement. By cooperating, the players can often achieve a better outcome than they would by acting independently. This is particularly true when the players' interests are not strictly opposed, and there is room for negotiation and compromise. In a cooperative setting, both the suppliers and OEMs can work together to maximize their collective benefit. This approach aligns with the principles of Nash Bargaining, where the focus is on finding a mutually beneficial agreement that improves the outcome for all involved parties compared to what they could achieve independently. In contrast, a non-cooperative approach (akin to Nash Equilibrium scenarios) might lead to outcomes where each party is primarily concerned with maximizing their individual benefit without collaboration. This results in missed opportunities for greater overall gains that could be achieved through cooperation. The difference could be many millions of dollars in terms of short-term and long-term profits driven by cost reduction via increased scale of the economy, innovative collaborations, and strategic investments.


Let’s do it!

It is imperative for the US auto industry to actively embrace cooperative strategies underpinned by trust. This shift towards cooperative bargaining, in line with Nash's principles, offers a beacon of hope amidst the fog of current uncertainties. By doing so, companies can unlock many benefits, including cost reductions, innovative breakthroughs, and stronger, more resilient supply chains. To initiate this transformative journey, key industry players must foster environments conducive to trust and collaboration. This involves rethinking traditional competitive dynamics, investing in transparent communication channels, and building long-term partnerships rather than short-term transactional relationships. Moreover, embracing cooperative strategies is not just about enhancing economic payoffs. It is about creating a sustainable and forward-thinking industry that can better navigate future challenges, whether they be economic, technological, or environmental. As we stand at this crossroads, the choice is clear: By committing to cooperative principles and trust, the US auto industry can surmount its current challenges and pave the way for a more prosperous and resilient future. The time to act is now - let's do it!


References:

Business Insider. (2023, December 14). S&P Global Mobility forecasts 88.3M auto sales in 2024. Business Insider. https://markets.businessinsider.com/news/stocks/s-p-global-mobility-forecasts-88-3m-auto-sales-in-2024-1032901222

Corporate, C. (2023, December 12). Year in review: Three auto industry trends that defined 2023. CCC Intelligent Solutions. https://cccis.com/news-and-insights/insights/year-in-review-three-auto-industry-trends-that-defined-2023/

Creutzmann, J. B. (2021). Strategic relevance and application of the mechanism design theory at the example of selected European private procurement auctions in a B2B-context (Bachelor's thesis, University of Twente).

Hailes, D. (2023, June 7). As inventory concerns begin to fade, economic uncertainty and high interest rates take center stage for U.S. Automobile Dealers. Cox Automotive Inc. https://www.coxautoinc.com/news/q2-2023-cadsi/

Hebisch, B., Wild, A., & Herbst, U. (2022). The power of alternative suppliers in the automotive industry—A matter of innovation? Industrial Marketing Management, 102, 1–11. https://doi-org.ezproxy.umgc.edu/10.1016/j.indmarman.2021.12.017

Heese, H. S. (2015). Single versus multiple sourcing and the evolution of bargaining positions. Omega, 54, 125–133. https://doi-org.ezproxy.umgc.edu/10.1016/j.omega.2015.01.016

McKinsey & Company. (2023, December 8). 2023: The year in charts. McKinsey & Company. https://www.mckinsey.com/featured-insights/2023-year-in-review/2023-the-year-in-charts

Mudambi, R., & Helper, S. (1998). The ‘close but adversarial’ model of supplier relations in the US auto industry. Strategic management journal, 19(8), 775-792.

Swinney, R., & Netessine, S. (2009). Long-Term Contracts Under the Threat of Supplier Default. Manufacturing & Service Operations Management, 11(1), 109–127. https://doi-org.ezproxy.umgc.edu/10.1287/msom.1070.0199

Wolters, H., & Schuller, F. (1997). Explaining supplier-buyer partnerships: A dynamic game theory approach. European Journal of Purchasing & Supply Management, 3(3), 155–164. https://doi.org/10.1016/s0969-7012(97)00011-7

 

17 views3 comments

3 Comments


Dr. Bob Schaller
Dr. Bob Schaller
Dec 17, 2023

Well done, Peter!

Like
Dr. Bob Schaller
Dr. Bob Schaller
Dec 20, 2023
Replying to

I really like your headings, e.g., what we got? and what to do? The best one is Let's do it!

Like
bottom of page