(Oct. 13, 2003) — It's hard to believe that any company in the plastics industry would pursue the tactic of asking suppliers for rebates, especially after seeing the reaction that the idea generates in the automotive industry.
Plastics processors generally describe what automakers and Tier 1 suppliers politely call “requests for rebates” with less genteel language: shakedowns or extortion.
Here's how rebates typically work: Company A asks its key suppliers for a payment based on a percentage of revenues that Company A has generated for those suppliers during the past year or two. There's no legal obligation to pay the rebate, so Company A says the decision is voluntary. The catch, though, is that Company A claims that any future contracts may depend on suppliers' willingness to pay.
In other words, if you don't pay, don't be surprised if your customer finds a new supplier next year.
Editorially, we've been consistently against rebates for some time. It's been clear to us, as it has been to most processors, that the best way to deal with suppliers is by working together. When two companies negotiate a contract, it's obviously unfair for one party to come back a year or two later and ask for a refund.
Well, SMS Plastics Technology apparently was not paying attention, although in its case the target is component suppliers, not processors. The Meinerzhagen, Germany-based company — which supplies Battenfeld injection presses, Battenfeld Gloucester film equipment and American Maplan and Cincinnati-brand extruders — recently sent form letters to its suppliers of parts, products and services asking for a 7 percent rebate on goods that SMS has purchased since mid-2002.
As in the auto industry, you can chalk the decision up to the intense competitive pressure in the plastics machinery market. SMS was upfront about that in the letter to its suppliers: “The economic situation continues to be under pressure and the market for our products seems to be recovering slowly,” it said. “Additionally, according to our sales forecast, there will be a moderate market recovery with only slight increases in sales volumes for 2004 and 2005.”
Certainly desperate times call for desperate measures, although no one is saying that SMS is in extreme danger. In fact, one of the unusual things about the plastics machinery market is that, despite the deep drop in sales during the past three years, at least in the United States, no significant player has gone out of business.
Companies that ask for rebates are sending the market a message: We're exploring all possible avenues for saving money and generating revenue, even options that might produce a very negative response. The move also puts suppliers on the defensive. They know the chances of boosting their prices this year is nil; in fact, they'd better find some room for discounts fast.
Our advice for companies that are getting rebate letters: Say no. If the customer wants to open a dialogue about future cost savings, by all means you should cooperate. But if the firm's just looking for cash and an opportunity to beat it out of its suppliers, then walk away.
To companies considering asking for rebates, you should consider first whether you've done all you can to work with your suppliers to improve productivity.
The right path is clear, although it's not always the easiest.