Automakers shove, suppliers push back

By Lindsay Chappell and Robert Sherefkin

It would have been unthinkable once for a lowly supplier to threaten to halt parts shipments to an automaker over money issues.

But a new power play is emerging in the North American auto industry.

Badgered to reduce parts costs by their customers, suppliers are resorting to brinksmanship with their customers.

Over the past year, Goodyear, Amcast, Lear Corp. and Yorozu Corp. each engaged their customers in public pricing disputes.

In several cases, those disputes threatened to disrupt vehicle production, once considered an unforgivable offense among automakers.

Now some industry observers are warning that the situation could escalate.

"Some of the bigger suppliers are exiting businesses," observes Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Michigan.

"That leaves less competition.

"The surviving suppliers can say to Ford or General Motors (GM), 'We don't want to play your games any more. Here's our price - take it or leave it'."

The problem largely affects the three Detroit automakers, which have testier relationships with suppliers than import automakers.

In July, Goodyear Tire & Rubber Co. demanded a price increase from GM for tyres on the automaker's full-sized sports utility vehicles (SUVs), crossovers and commercial trucks.

Fearing production disruptions, GM filed suit on 31 July to force Goodyear to continue shipping tyres.

A last-minute fix between the two manufacturers kept assembly plants open for the time being.

But the issue is still not fully settled for GM, a company that suppliers often identify as a bare-knuckled price negotiator.

Earlier this year, Japanese metal stamper Yorozu balked at an attempt by GM to reduce the prices of several parts mid-contract.

Yorozu filed a suit in Tennessee to void its GM relationship, saying that GM's actions represented a breach of its contract.

Yorozu is not seeking merely a relief from GM's price cuts but also a court-ordered end to its business dealings with the automaker.

Last December, wheel maker Amcast Industrial Corp. nearly shut down GM plants when price negotiations broke down with the automaker.

In the same month, interiors supplier Lear threatened to stop shipping parts to several Chrysler group assembly plants unless Chrysler raised prices to offset a spike in costs from Lear's Tier 2 suppliers.

A Detroit-area court temporarily ordered Lear to continue its shipments.

As a result of the threat, Lear lost a bid this year for a $400 million (€314.1 million) Dodge Ram interiors contract.

Sometimes you have to walk away, said a US supplier executive, who asked not to be identified for fear of retaliation from GM's purchasing department.

The supplier says he recently found himself in a similar situation to Goodyear.

He came to GM asking for an adjustment on a parts contract that had not seen a price increase since the mid-1990s.

According to the executive, the GM purchasing manager not only refused to grant a price update but threatened to strip him of the contract.

The purchaser told him that a price increase would require the approval of GM's worldwide purchasing czar, Bo Andersson.

Another option was for the purchasing manager to simply award the contract to a rival supplier without bothering to ask anyone.

Faced with that threat, the supplier and the GM manager sat silently looking at each other.

"In that case," the supplier finally said, "why don't you go ahead and do that."

"Let somebody else have this contract."

The supplier departed and the GM purchaser awarded the contract to a Chinese supplier.

Andersson acknowledged that suppliers have halted shipments to GM over contract disputes.

In an interview last week with Automotive News, Andersson said suppliers sometimes bluffed GM to get more money.

And if a supplier was stuck with an unprofitable contract, that was often the supplier's fault.

"We've never forced a supplier to take a contract," Andersson said.

Suppliers may be eager to fill their factories, but they may not have understood their costs when they bid for the work, Andersson added.

And if a supplier wants out, GM will help.

GM was not well-served having suppliers with unprofitable contracts, he said.

"But it is wrong if they put a gun to our head," Andersson concluded.

Indeed, some suppliers have acknowledged that they were often to blame for accepting unprofitable business.

"In the past, the boundaries in the industry were a little more nebulous," says Michael Sanders, global business director for a new business unit at DuPont Automotive, Energy Storage Solutions.

"You did anything and everything the automaker asked you.

"But today, what you're seeing is that a lot of suppliers aren't making any money. Suppliers [must] learn to define themselves a lot more clearly.

"They're saying, 'maybe we did this in the past, but we're not going to do it in the future'.

"This work was unprofitable.

"It's something I won't do anymore."

Lyle Otremba, a vice president at Cooper-Standard Automotive, says his company is learning to say no to business that does not meet specific guidelines.

To do that, he says, Cooper-Standard has "walked away from some bids."

From Automotive News (A Crain publication)