Pricing power shifts to some auto suppliers

David Sedgwick

Published: November 14, 2012 6:00 am ET

Related to this story

Topics Automotive

DETROIT (Nov. 14, 11:20 a.m. ET) — With North American vehicle production headed toward 15 million-plus units next year, automakers are encountering a new breed of supplier: the one that says “no.”

To automakers’ chagrin, some suppliers — mainly those in capital-intensive industries like iron castings — can pick and choose their customers. With capacity short and production schedules rising, suppliers can afford to accept the contracts and customers they want, and reject those they don’t want, whether because of prices or the broader terms of doing business with certain customers.

In short, the balance of pricing power has shifted to the supplier.

“For many commodities, we had a dramatic reduction of capacity and now we’re facing some barriers,” said Scott Kunselman, Chrysler Group’s purchasing chief. “One of our biggest problems is getting capacity for certain components.”

To ease production bottlenecks, Chrysler and other automakers are offering vendors better terms. Suppliers are:

• Securing contract guarantees that they will be paid if raw material prices rise.

• Winning more no-bid contracts from automakers.

• Getting quicker compensation for tooling.

Spot shortages

In an Oct. 24 interview, Kunselman told Automotive News that Chrysler has experienced some spot shortages of tires, brake rotors and iron castings.

Tire shortages should abate over the next couple of years, now that tire makers are building factories. But shortages of iron castings may persist.

Other product sectors are experiencing similar shortages, said Kim Korth, principal of IRN Inc., a Grand Rapids, Mich., consulting firm. During the recession, suppliers eliminated 20 to 30 percent of their production capacity, and they haven’t added it back, she said. That is translating to richer contracts.

“Suppliers are putting on third shifts, trying to figure out how to get more production,” Korth said. “They can’t support the demand that they have now, so why should they settle for a 2 or 3 percent gross margin?”

Newly emboldened suppliers are demanding, and getting, better terms from their customers. According to an IRN survey published in July, half of the suppliers polled said they had negotiated price pass-throughs — whereby suppliers pass a portion of higher costs through to customers — for raw materials, up from virtually zero three years ago.

Because the auto industry is short of capacity, automakers are closely watching suppliers for signs of trouble.

Chrysler, for instance, is monitoring suppliers that are running their plants around the clock to meet demand. At any given time, Chrysler’s list of maxed-out suppliers fluctuates from a dozen to 20 companies, Kunselman said.

“We work with those suppliers to make sure they don’t skip key quality steps or even preventive maintenance,” Kunselman said. “You have to look extra hard to make sure they keep a tight rein on quality.”

Chrysler’s problems are not unique. In January, Toyota confirmed that it was monitoring 10 to 20 suppliers that were struggling to produce enough parts, and urging some to add more capacity rather than to continue to rely on extended overtime.

A complete version of this story is available at www.autonews.com.


Comments

Pricing power shifts to some auto suppliers

David Sedgwick

Published: November 14, 2012 6:00 am ET

Post Your Comments


Back to story


More stories

Image

Canada's Papp Plastics is eyeing big opportunities with JV in Mexico

November 24, 2014 4:11 pm ET

Canadian injection molder and turnkey solution provider Papp Plastics & Distributing Ltd. will open an $11 million to $12 million joint venture...    More

Image

Indiana injection molder PRD expands

November 24, 2014 1:56 pm ET

Automotive supplier PRD Inc. is expanding its manufacturing facility in Springville, Ind.    More

Image

Can plastics return to the driver's seat?

November 24, 2014 6:00 am ET

When the June 1989 issue of Popular Science introduced three cutting-edge automotive technologies, including the latest Corvette and a powerful...    More

Image

New GM purchasing chief faces big hurdles to improve supplier relations

November 24, 2014 11:11 am ET

Steve Kiefer is moving into the eternal hot seat that is head of GM global purchasing and supply chain.    More

Image

Wilbur Ross steps down from IAC board

November 24, 2014 11:38 am ET

Financier Wilbur Ross Jr. has resigned from the boards of International Automotive Components Group SA and its subsidiaries due to new regulatory rest...    More

Market Reports

Plastics in Brazil - State of the Industry Report

This in-depth report examines the Brazilian plastics industry from a historical and geographical context. Our analysts provide insight on economic trends and forecasts, growing manufacturing sectors that utilize plastics, private investment opportunities, market environment challenges, and innovations in R&D.

Data tables and charts on producer prices, trade, plastics production and end market indicators is also included.

Learn more

Plastics Recycling Trends in North America

This report is a review and analysis of the North American Plastics Recycling Industry, including key trends and statistics based on 2013 performance. We examine market environment factors, regulatory issues, industry challenges, key drivers and emerging trends in post-consumer and post-industrial recycling.

Learn more

Injection Molders Market Report & Ranking 2014

This special package contains our 132-page 2014 Market Report on the Injection Molding segment and our exclusive 2014 RANKINGS database of 500+ Injection Molders for a discounted package price.

Learn more

Upcoming Plastics News Events

January 14, 2015 - January 14, 2015Plastics in Automotive

February 4, 2015 - February 6, 2015Plastics News Executive Forum 2015

June 2, 2015 - June 3, 2015Plastics Financial Summit - Chicago 2015

September 16, 2015 - September 18, 2015Plastics Caps & Closures - September 2015

October 27, 2015 - October 29, 2015Plastics Financial Summit - New York - 2015

More Events