Auto suppliers resisting demands to cut prices

David Sedgwick

Published: December 11, 2012 6:00 am ET

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Topics Automotive
Companies & Associations

DETROIT (Dec. 11, 12:10 p.m. ET) — As North America’s vehicle production increases, suppliers are resisting automakers’ demands for price cuts.

A newly released survey of 130 suppliers by IRN Inc. found that automakers requested price cuts averaging 3.0 percent this year on existing contracts.

That total includes annual productivity price reductions as well as any subsequent demands for price cuts.

But suppliers reduced their prices only 1.2 percent, according to survey respondents.

That’s less than the average annual price reduction of 1.5 percent last year, and the smallest average price cut since the Grand Rapids, Mich., consulting firm launched its survey in 2001.

The transplant automakers as a group received more substantial price reductions on existing business than the Detroit 3 automakers.

General Motors and Chrysler Group each received an annual price cut of 1.3 percent, while Ford Motor Co. received a 0.9 percent reduction. Meanwhile, the transplants as a group got average price cuts of 1.5 percent.

Suppliers are gaining pricing power at a time when capacity is starting to tighten, said Kim Korth, an IRN principal and the survey’s author.

Demands for price reductions in addition to annual productivity price cuts “are very rare right now, because of the limited capacity that suppliers have,” Korth said.

Automakers and suppliers are more likely to negotiate annual productivity reductions during the original contract negotiation, and then stick to the deal.

“These conversations are taking place when the business is awarded, rather than midstream,” she said.

North American production will rise 3.9 percent next year to 15.7 million light vehicles, IRN predicts. According to the IRN survey, nearly 29 percent of suppliers said they lack sufficient capacity if North American production were to rise to 16 million units.

Tighter capacity industrywide is generating bigger profits for suppliers.

In the survey, 37 percent of suppliers said they expected future contracts to be more profitable than their current business. That’s a big jump from last year, when only 18 percent expected their future contracts would be more profitable.

“Everybody who survived the recession has done quite well,” Korth said. “Now, all levels of the auto industry are profitable, and we haven’t seen that in 30 years.”

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


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Auto suppliers resisting demands to cut prices

David Sedgwick

Published: December 11, 2012 6:00 am ET

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