Want to supply injection molded parts to Visteon Corp.? It has some new rules.
The Dearborn, Mich.-based automotive supplier wants its Tier 2 suppliers to pay upfront to win new contracts. According to a request for quotations document recently sent to molders, Visteon expects molders to cut their prices at least 6 percent annually, and to prepay the first year's cut as a condition of winning the contract.
In return, Visteon promises more work. The company is slashing its supplier base, and notes that in the future it will partner with only two or three firms per business segment, with current and future business given only to those selected companies.
``We are going to consolidate our supply base, and we want to make sure we're all on the same page,'' said Visteon spokeswoman Liane Smyth-Bilicki. ``This is one of the tools we're using to look at who is out there.
``We feel our supplier partners are a part of Visteon, and we're not going to just arbitrarily cut.''
In early 2002, Visteon officials said the company would cut its supply base from 1,800 companies down to 500 within five years. Those selected stand to see their volumes increase substantially - enough for an injection molder now with less than $50 million in annual sales, for example, to climb to more than $100 million.
It also conceivably could achieve tight, long-term supplier relationships like those among Asian automakers and their suppliers. But one analyst noted the prepayment demands do not follow the same rules.
``It seems like almost a whorish attempt to take advantage of the supply base,'' said Jeff Mengel, a partner with consulting group Plante & Moran LLP of Auburn Hills, Mich.
Visteon is not the first to consider an advance payment. There are increasing attempts at several companies to use the system, with some suppliers reportedly paying millions of dollars to guarantee new business. General Motors Corp. considered a prepayment in the past, only to withdraw the concept because of a negative backlash.
``We have meetings and talk about the impossible requirements Visteon is placing on suppliers, and this is the biggest,'' said one supplier who requested anonymity. ``They want a low price off the bat, then 10 percent over the contract. There's only so much you can take out of the product. We have to manufacture the product for no profit, or go in with a quote considering the 10 percent and probably not get the business.''
Another supplier, who also requested his name be withheld, said he is hearing from more customers seeking prepayment.
``They're saying, `Here's more business; now what are you going to do for me?' It's part of the block bidding, where they award 15 or 20 parts to one supplier, instead of one or two.
``If you're dependent on Visteon and that demand comes with a lot more work, it could be beneficial. I think you're going to see new kinds of creative ways of negotiating with block bidding.''
Suppliers now considering the injection molding request have until Feb. 28 to submit a response. Negotiations are set for March with contracts to be signed by mid-March and detailed discussions through March and April.
The upfront payment noted in the documents would consist of prepayment of the first year's reduction, plus some reduction for years two through five that would be ``created by gaining a significant amount of business for five years,'' it states.
That also should equal a minimum of 10 percent of the booked business.
In addition, Visteon wants suppliers with capabilities in the design, development and launch of new programs, an ability to locate or relocate plants when necessary and an ability to participate in new business efforts.
Visteon also wants information on how well participants manage their tooling supply base, their interest in backing a united resin purchasing program, any plans to move manufacturing and tooling to low-cost locations like Mexico, China, Asia and Eastern Europe and comments on their financial stability.
For its part, Visteon promises the ``business relationship between Visteon and its supplier will be collaborative in nature,'' and would provide a five-year contract, with the ability to extend that contract.
``This is a big book of business with higher utilization rates,'' Mengel said. ``This is not going to be for everybody. There are very few companies that would have any interest in this.''
Those few firms, however, potentially could take over the molding now divided among dozens of their competitors.
Any molder that would be interested must weigh very carefully not only the financial costs, but also Visteon's reputation. The company does not have a strong history of cooperative work with its suppliers, Mengel said.
Jim Gillette, vice president of IRN Inc., a Grand Rapids, Mich.-based consulting group, said he has spoken to a supplier who put all of the paperwork in a drawer.
``Visteon still owes him money,'' Gillette said. ``He's not going to be interested until that's settled.''
It is likely other companies will try the same tactic if Visteon succeeds, Gillette noted. Competition is fierce, and with an expected drop-off in auto production this year, companies will be on the lookout for any financial edge they can get.
Terry Kosdrosky is a staff reporter for Crain's Detroit Business, a sister publication to Plastics News. Automotive News reporter Julie Cantwell also contributed to this story.