GRAND RAPIDS, MICH. (Aug. 14, 1 p.m. ET) — Toyota Motor Corp., Ford Motor Co. and Honda Motor Co. are the automakers most willing to compensate suppliers for rising raw material costs, according to a survey by IRN Inc.
The Grand Rapids-based consulting firm polled 92 suppliers in May and June about the raw material pricing policies of nine automakers that assemble vehicles in North America.
Sixty percent of respondents said Toyota was very likely to “satisfactorily offset [raw material price] increases.” Fifty-one percent said Ford was very likely to do so and 43 percent said Honda was very likely to offset the cost increases.
Chrysler Group showed the most dramatic year-to-year improvement. Thirty-seven percent of the suppliers said Chrysler was very likely to offset raw material price increases, up from 23 percent last year.
As a group, automakers and suppliers have adopted price indexing as the preferred type of compensation. Typically, the two parties agree on a public pricing benchmark, then adjust prices accordingly every month or quarter.
Automaker payments may rise or fall, depending on price fluctuations.
Fifty-five percent of the respondents said they planned to recover their raw material costs via price indexing, while only 24 percent said they would seek either a one-time price increase or a permanent price hike.
“Relations with automakers are on a more equal footing, now,” said IRN President Kim Korth, the author of the survey. “Before, suppliers were afraid that the automaker would get mad at them. Now, they say they have to deal with this.”
Indexing has become popular because it frees automakers and suppliers from having to renegotiate contracts every time the price of a key raw material fluctuates.
But indexing doesn't work for all suppliers. Automakers typically index the prices of copper, aluminum and steel, but not rubber or plastic resin.
That's because there are no good price benchmarks for rubber or plastic resin, Korth said.
Suppliers of rubber parts “have been pulling out their hair, looking for an independent source to track material [price] variations,” Korth said. “And there are so many different types of plastics that the ability to index has been problematic.”
This year, the auto industry got a break when raw material prices declined across the board, a result of the economic slowdowns in Europe and China.
According to a report by AlixPartners, a May price index of 16 key raw materials declined 21 percent from the year-ago period. The index tracked the cost of steel, aluminum, copper, rubber, magnesium and crude oil.
But Korth expects raw material prices to spike as the world economy recovers, so suppliers should press the automakers to adopt more indexing agreements.
“Material prices have nowhere to go but up,” Korth said. “It's better to negotiate a formula [with customers] when you can do it without pain.”