DETROIT — The cost of doing business in the North American auto industry is going up.
>From automakers demanding across-the-board cuts to a rapidly increasing number of Tier 1 and even Tier 2 molders seeking rebates and givebacks, their suppliers are facing more financial demands in 2001 than they have in the past, analysts and business operators say.
Even for a business built around continual demands to reduce prices from year to year, the fiscal pressure can be staggering.
"The interesting thing is how fast it all came about," said Jeff Mengel, a partner with Plante & Moran LLP, a management consulting company with offices in Auburn Hills, Mich. "It's a feeding frenzy."
The National Tooling & Machining Association led a fight against retroactive rebates in the auto industry two years ago. Now nearly all of its members are being asked for some kind of a retroactive payment, said Matthew Coffey, president of the Fort Washington, Md.-based group.
"There are some very creative people out there trying to do anything to stall payments or cut payments," agreed one mold maker, who requested his name not be used.
The renewed push began with DaimlerChrysler AG's demand for a 5 percent price cut by the start of 2001, with another 10 percent by the end of 2002. That triggered other companies to try to spread that cost reduction through their supply base.
"What's happening clearly is that it's all being pushed down the supply chain," Mengel said. "Everyone is in the game, or at least attempting to do this, some kind of a giveback, a rebate.
"Not everyone is successful at it, but they're trying."
Automotive electronics supplier FCI USA Inc. sent its suppliers a letter March 15 seeking a 20 percent drop in costs starting April 1.
The company, part of Framatome Connectors International of Paris, listed itself as the fourth-largest global manufacturer of automotive electronic connectors in 1999, and the second-largest in Europe.
The company would not discuss its current situation, but the letter, signed by Donald W. Poorman, director of procurement for FCI USA of Etters, Pa., states: "Many of our key customers are experiencing a drastic decrease in business in the electronics marketplace and are requesting that FCI must reduce its prices immediately.
"We need a price reduction of 20 percent for your product and services in order to remain competitive in the marketplace. We expect your cooperation."
The company warned that suppliers' ability to meet the request will be weighed against competitors' efforts. "Current, as well as future sourcing decisions will be affected by your response," the letter states.
Even multibillion-dollar plastics processors are feeling the pressure to hit price targets and in turn are relying on their own supply base to help them succeed.
"Clearly we are under an obligation from our customers to perform and reduce costs to their expectations," said Textron Automotive Co. Inc. spokesman Tim Weir. "As we've stepped up to accomplish that, we've asked our supplier partners to be right there with us."
Troy, Mich.-based Textron — which introduced an engineering and cost-sharing agreement for its suppliers last year — has "stepped up" its emphasis on prior commitments to meet cost-reduction requirements, Weir said.
"The only difference this year: We are being more firm than we might have been in the past regarding our suppliers' required performance on all measures, including price," he said. "Industry conditions demand it."
For smaller companies, including mold makers, the problem is not in previously negotiated reductions, Coffey said, but in demands for retroactive cuts.
"How can you find a way to take 5, 10, 20 percent out of a product that's already in production?" he asked.
In addition, mold makers are waiting weeks and months for promised payments as molders struggle to meet demands from their customers.
"We're talking four and five and six months behind schedule," he said. "The little guy is out there financing these big guys."
Even the promises to shuttle future business their way in exchange for price cuts are no guarantee, he said.
"It's a shell game," he said. Toolmakers that have complied with past requests have not seen any increased business shipped their way, he said.
"My advice is still to just say no. We've seen that one before. The threats are not carried out in 90 percent of the cases, and the promises are not fulfilled in any case.
"The promise to be on a supplier's preferred list is worthless."
Even DaimlerChrysler backed off a bit from its across-the-board 5 percent demand. The company, faced with overwhelming reluctance from its suppliers, went back on its initial refusal to negotiate.
In the end, DaimlerChrysler claims it has reached some kind of a price-reduction agreement with about 90 percent of its suppliers.
"Negotiations were all we wanted all along and what they were refusing to do," said Neil De Koker, managing director of the Original Equipment Suppliers Association of Troy.
Demands for cutbacks and rebates were tough on suppliers during the past few years, and now that the car market is slowing it's worse, Mengel said.
"So many of them are short in volume that people are doing some crazy things," he said. Some are bidding on jobs knowing they will lose money in the long term but hoping the boost in production will pay the short-term bills.
Both Mengel and Coffey maintain the best thing to do is pursue business beyond an automotive base.
"My basic advice is, go find some good customers and get rid of the bad customers," Coffey said. "Bad customers are the ones who ask for rebates."
Saying no to rebates can be expensive, though, Mengel said. Every business owner has bills to pay and employees to put to work. Refusing to accept a reduced rate on a contract could mean losing the job.
"They have to make a decision: Do I want to play this game, and if I do want to play in this game, can I afford to?" he said.
"It will eventually stabilize, but do you have the willpower and cash flow to persevere?"
Akron, Ohio-based Plastics News senior reporter Joseph Pryweller contributed to this story.