Written by / Zhu Lin
Edited / Meng for
Design / Shi Yuchao
Source: Autonews, Crain's Detroit Business, by KURT NAGL
For auto suppliers, 2021 will be brutal but bring unexpected benefits.
From soaring commodity costs to supply chain issues, a variety of issues are hitting their businesses, but they're also gaining new power at the negotiating table with automaker customers.
In the past, automakers have maximized surges in demand by converting lower car inventories into record prices and strong profits, while suppliers have suffered financial losses. But the supply chain crisis has exposed the interdependence of every layer, from top to bottom, and highlighted the importance of large and small players.
Experts say the bargaining power of suppliers and automakers has arguably never been stronger. Now, they are using that influence to change the way they do business with automakers. According to industry executives and observers, automakers are feeling pressure to acquiesce if they want to continue to get auto parts.
Thomas Walters, a commercial litigator at law firm Dinsmore & Shohl LLP, said: "Historically, automakers have had enormous influence and exerted influence on the supply base. I think that in this case, the automaker has no choice but to share the pain with other manufacturers in the same situation. ”
Share the pain
Automakers have been reluctant to absorb the increase in component costs, but over the past few months, suppliers have been calling for cost reductions. Companies, including Cooper Standard Motors, have been asking customers to renegotiate contracts to cover losses. Downstream in the supply chain, as the supply crisis continues and SMEs struggle to survive, these demands have become demand.
According to the Supply Management Association's Semi-Annual Economic Forecast released in December, raw material prices for the wider manufacturing sector have risen 14.5 percent since the end of 2020. Prices are expected to rise by 8.1% in 2022.
The industry association's survey of about 900 industry members shows that businesses have had some success in passing on price increases to customers. About 64 percent of manufacturing executives say they are able to pass on the impact of rising prices. Less than half said they expected the business environment to improve in 2022.
Most contracts between automakers and suppliers are for the production life of a part, from a few years to 10 years or more. Many deals were signed long before the COVID-19 pandemic began and the ensuing supply crisis. The general rule is to supply customers at all costs – unless the cost is an economic collapse.
"At one end of the supply chain, you see these crazy, exorbitant cost increases. At the other end of the supply chain, automakers charge higher prices, and it's all the suppliers caught in the middle to combat risk. Dan Sharkey, co-founder and member of the law firm Brooks Wilkins Sharkey & Turco PLLC, said. He has always specialized in supply chain litigation.
From Ford Motor Company's F-150 and Explorer to Stellantis' Jeep Cherokee, a series of unexpected production suspensions have severely impacted suppliers' revenues.
Capacity utilization of light vehicles in North America has been steadily declining, but has been stalled since the covid-19 pandemic led to plant shutdowns and reopening after the COVID-19 pandemic in the second half of 2020. According to the Federal Reserve Bank of St. Louis, capacity utilization was slightly above 60 percent in the third quarter of 2021, compared to nearly 80 percent in the same period in 2020.
"Smaller companies tend to be more flexible and aggressive because they lose less, right," he said. These small businesses will say, 'Hey, I just lost money last month, and if the price doesn't go up next month, I won't ship parts.' ’”
This is similar to the wording in dozens of letters recently sent to AlphaUSA. AlphaUSA supplies fastener components and stampings to major automakers and is outspoken about the unprecedented rise in steel prices.
David Lawrence, AlphaUSA's executive vice president and chief administrative officer, said nearly all of the company's suppliers had issued an ultimatum to the company: either raise the price or stop receiving materials.
Lawrence said AlphaUSA's only option is to pay the markup.
"It's their way of surviving," he said of smaller suppliers, "and they're going to have to ask for prices to make up for the cost." They have no other way of surviving. ”
AlphaUSA, in turn, is looking to shift these costs to the supply chain to mitigate its losses. At first, customers reacted with "bad luck," but now their tone has begun to change.
"Our customers started talking to us reluctantly," Lawrence said, "and at this point, we don't have customers who stick to their positions, but we haven't yet customers come up with solutions." ”
New areas
Supply chain friction keeps Sharkey, Walters, and others like them busy. As it happens, the supply chain litigation business has never been so good.
Shachi, who has worked in the field for nearly 30 years, says he has never handled so many commercial disputes at the same time, even during the 2008-09 financial crisis. Walters said he doesn't think the situation will improve anytime soon.
"I would say that this is definitely a new area," Walters said, "and it's safe to say that many suppliers are under financial pressure to survive the pandemic and the global supply chain disaster." ”
One of them is Stewart Industries LLC, a 20-year-old minority company in Butter Creek, Michigan, that supplies assembly to the automotive industry, including major customer Denso Corporation. Just before Thanksgiving, Stewart Industries sent an email to customers informing them that the company would be closed and that parts would stop shipping.
Crain's Detroit Business received the letter, signed by CEO Joseph Stewart and President Erick Stewart, which reads: "Today, we write to you with great emotion that Stewart Industries LLC is suffering from a historic financial crisis and will cease our business. ”
More suppliers are likely to be in financial trouble, as industry analysts expect supply chain disruption and microchip shortages to continue at least into the first half of 2022. Under normal circumstances, the unexpected loss of suppliers is a headache for the purchasing department, and in a supply crisis, this can be a major blow.
Walters said: "We can learn from the situation in 2008-09 and the resulting collapse of the supply base, and I think automakers are looking at this particular situation in a different way." ”
Together
Both Walters and Schach said they had never seen automakers so willing to renegotiate a deal that worked against them. The negotiations included a number of potential concessions that had never been heard of before, including retrospective price increases, accelerated payment terms, long-term contracts, raw material price indices and a general sharing of fluctuations related to production costs.
Often, the only adjustment is for automakers to pressure suppliers to cut costs.
"It's amazing," Scharky said, "and there are automakers whose perceptions are surprisingly generous, and they've actually been raising prices." Now, there's no Santa Claus or the Easter Bunny, but I'm really surprised that some automakers actually raise prices because it's hard for everyone to get supplies right now, so they want to be the supplier's favorite customer. ”
Some automakers are more willing to renegotiate than others, just as some suppliers have different tipping points before asking customers to make concessions. Scharky and Walters declined to name customers.
Automakers' sourcing strategies are confidential, but whether they decide to help suppliers absorb costs, and how they help suppliers digest costs, can have an impact on their profits, and they have to respond to investors.
"Obviously, I'm not going to dwell on any of the conversations we have across the supply base, but I would say that the only focus is to make sure we have consistency and to reduce some of the volatility that we see in the supply chain, whether it's due to logistics or semiconductors, among other things." Paul Jacobson, GM's chief financial officer, said on a conference call with investors in October.
In a November conference call with investors, Toyota executives briefly discussed price negotiations with suppliers and stressed the need to juggle both sides.
"Regarding the relationship with our suppliers, we want to coexist with our suppliers so that together we can reduce costs and improve our competitiveness." Kenta Kon, Toyota's operations officer, said by phone, "We want to improve the competitiveness of our suppliers, and we want to reap the results fairly together." ”
Several large suppliers echoed this "concerted effort" sentiment. Robert Lee, president of Continental North American Automotive Technologies, said in a recent interview with Crain's that the company is engaged in "constructive dialogue" with customers about new supply agreements.
"It's not a situation where people aren't interested in having any such discussions. It's not like that at all," Lee said, "and we're having these discussions, and what I'm trying to say is that we as an industry have to recognize that everybody needs to create value and make sure that the value from the industry is equitably distributed." ”
Being able to pass on price increases upstream in the supply chain is a win for suppliers. But for consumers, the situation is less optimistic, and the industry is counting on consumers to absorb the final cost.
"The most likely scenario is that automakers will at least share those costs, and then [the costs] will have to be passed on elsewhere," Lawrence said. ”