An unprecedented forum featuring many of North America's largest automotive toolmakers has produced a call for a new trade group that can develop contract standards that better protect their interests.
Alarmed by payment problems with customers, a group representing a dozen mold-making companies from the United States and Canada met Feb. 20 at the Auburn Hills office of consulting firm Plante & Moran PLLC.
Participants openly discussed cash-flow difficulties plaguing many automotive tool shops due to late or negligible payments from customers. While toolmakers asked that they not be quoted by name, they shared some common problems.
The situation is more complex than merely attempting to get paid for work sooner, said one executive with a large toolmaker.
``Even more importantly, how do we get cash upfront without destroying relationships and ties to customers?'' the executive said. ``And how do we do this without doing something illegal or inappropriate? What is the model?''
Several industry studies from Southfield, Mich.-based Plante & Moran seem to bear out those concerns. On average in 2002, large mold-making shops that specialize in the transportation market did not collect payment for 163 days, or close to half a year, after tools were built, said Jeffrey Mengel, head of Plante & Moran's plastics consulting group.
In standard industry practice, suppliers pay tool shops after production parts are approved by carmakers, in a process commonly called PPAP, production part approval process. However, the PPAP period can be delayed for several months or even years, depending on the program, Mengel said.
``As it is, 163 days is a lot of time for a [toolmaker] to wait,'' Mengel said. ``Payment is not always based upon what a contract says. There are delays in invoices and delays in PPAP that can affect payment.''
On top of that, large mold makers have slim profit margins - on average, about 7.3 percent of sales in 2002, he said.
Representatives of two banking firms and an outside law firm who attended the two-hour forum offered some remedies. Those included a recent mold-lien law in the state of Michigan that allows a company to join secured creditors asking for remuneration if a customer has financial problems. The law stemmed from a lobbying effort from Michigan chapters of the American Mold Builders Association of Roselle, Ill.
Another remedy, after a tool is shipped, is for the mold shop to file a civil suit, said Daniel Weiner of law firm Schafer and Weiner PLLC of Bloomfield Hills, Mich. The toolmaker can claim that a customer did not provide adequate assurance of financial performance. ``It might be easy for a customer to bully you,'' Weiner said. ``But you don't have to buy into that.''
However, neither solution is used often. Getting hostile with a customer may not be a good solution to staying in business, said the president of another large shop. ``[The mold-lien law] is a great law, but you don't want to use it, or you won't have a lot of customers left once you do.''
One tooling executive recounted an anecdote in which a company got tough with a customer when payment did not arrive. When the customer came to ask about the tool, the mold maker drew a picture of the Detroit River. The customer asked what that was, and the toolmaker said that for a dollar, he'd tell the customer where his tool would be found.
That might have been an exaggerated story, but some toolmakers are thinking some nasty thoughts these days.
Banks, especially those in Canada, also can work with toolmakers to make certain they are covered adequately for late payments, said D. Craig Wiggins, senior vice president of Detroit-based Fort Street Capital. Some banks loan money to tool shops based on work in process. Others will ask customers for progress payments while the tool is being built, he said.
Mold makers at the forum also participated in a survey asking which customers are the best and worst when it comes to collecting cash. Among automotive suppliers, those toolmakers most preferred included Delphi Corp., ABC Group Inc. and Intier Automotive Inc. The least popular were Lear Corp., Visteon Corp. and Decoma International Inc.
Among carmakers, foreign-based companies including DaimlerChrysler Corp. and Nissan Motor Co. Ltd. were said to provide payment closest to PPAP. Honda Motor Co. Inc. and Toyota Motor Corp. were among the worst offenders.
Toolmakers also said that, in many cases, they had to pay banks a 4-6 percent financing charge when payment was not received until PPAP.
That discussion culminated in a call for an organized group to develop standard terms and conditions for toolmaking contracts. In the automotive industry, the Original Equipment Suppliers Association of Troy, Mich., has created similar standards for parts suppliers.
Automotive toolmakers need to emulate that model, said one attendee.
The need for a strong automotive toolmaking group might effect more permanent change, the executive said. While other mold associations can be effective, they represent a broader base that does not meet the specific needs of those in the transportation industry, another participant said.
The group unanimously decided to move forward on the idea for a new association. A meeting tentatively is scheduled in March at Plante & Moran's office to iron out details.
``If we stay together and come up with standard terms and conditions for a purchase order, that's the best solution,'' said one executive who pushed for the idea of an automotive tooling group. ``All the rest is just talk.''