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-March 22, 2007


Manufacturing News: Auto Parts Suppliers now Refusing to Accept Money-Losing Prices

Navistar latest to stand tough; will it exacerbate Detroit's woes?

SCDigest Editorial Staff


After years of having ever-lower prices dictated to them by automotive OEMs, auto parts suppliers are saying they’ve had enough.

A story this week from the Wall Street Journal confirms a trend Supply Chain Digest has reported on previously: that a combination of weakened OEMs, new ownership and mindsets among parts suppliers, and economic fundamentals are changing the tables. (See Major Parts Supplier, Tired of Losses, Plays Hard Ball with Ford, Causes Brief Plant Shutdown.)

For more than a decade, major automotive manufacturers such as Ford and GM have relentlessly pressed auto parts suppliers for lower prices – to the point in which few if any could consistently enjoy reasonable profitability. With many suppliers and just a few huge buyers, the OEMs held all the cards – or so it was perceived.

As the fortunes of U.S. automakers declined, they pressed even harder, just as raw material costs (steel, energy, plastic resins) were rising. Many were caught in contracts with pricing they said guaranteed operating losses, and no ability to raise prices based on increased production costs.

But a variety of factors are changing the dynamics:

  1. A number of auto parts suppliers have been purchased in the past two years by private equity companies determined to change industry economics.
  2. Other parts suppliers, such as Delphi, have gone into bankruptcy, enabling them to get out of money losing contracts and also providing a platform for changing how parts are priced, sometimes with tough new management that refuses to take money-losing business.
  3. Other parts suppliers have simply gone out of business or been acquired, changing the balance of power a bit more in the parts suppliers’ favor.

 In February, engine supplier Navistar was the latest among several high profile cases in which a supplier at least temporarily stopped shipping components to one of the OEMs over a pricing dispute. Navistar cut off all engine shipments to Ford, whom it had supplier for decades.

The tougher stance by suppliers obviously comes at the worst time for Ford, GM and Chrysler, which are each facing numerous challenges, including high total manufacture costs versus Japanese rivals. Absorbing price increases will make it all the tougher for the OEMs to gain back market share and return to profitability.

Things could get really tough. Ford has recently said procurement chief Tony Brown is charged with driving another $6 billion out of parts and commodity costs. Originally, the goal was to chop that amount by 2010. Now, Ford says it may take a year or two longer.

How weird are this industry’s negotiations and economics? The Journal reports that the February Ford/Navistar dispute arose in part from a demand by Ford that Navistar sell it engines for pick-up trucks at a loss to “accommodate Ford’s desire for higher profits.”

The dispute was temporarily resolved, but Navistar CEO summed up the troubles that lie ahead: “auto makers must “accept a new reality,” Daniel Ustian said in a speech in Detroit in January. “The math must benefit all of us.”

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