A “once in a lifetime” supply chain problem in China is forcing German automotive lighting maker Hella KGA Hueck & Co. to take a significant hit to earnings, with Hella saying that one of its Chinese injection molding suppliers abruptly stopped shipping parts.
Hella declined to name the Chinese supplier. Company officials said in a conference call with stock analysts that the Chinese firm stopped all deliveries of some molded components in late August as the result of an apparent financial dispute, forcing the German firm to make emergency adjustments to its supply chain to keep parts flowing to its customer.
“The problem in China is now caused due to very strange behavior of one of our suppliers, who, as I said, stopped deliveries,” said CEO Rolf Breidenbach, in a conference call with stock analysts. “This is a really, I would say, once in a lifetime event. We have never saw a supplier behaving like that.”
Hella, based in Lippstadt, Germany, said the problem would likely cause its earnings to drop about 30 million euros ($33.4 million) in the first quarter of its 2015-2016 financial year, to 69 million euros ($76.9 million).
It predicted that the failure of the Chinese supplier would result in 50 million euros ($55.7 million) in extra costs and charges for the entire fiscal year.
Hella officials issued a profit warning Sept. 17 and held a conference call to brief analysts a day later, ahead of its regularly scheduled Sept. 25 first-quarter earnings report.
The extraordinary charges resulted partly from Hella having to fly in the same parts from its other factories in Europe and the Americas to meet demand from its customer, which it also declined to identify.
Extra costs will also be incurred from resuming production at another Chinese supplier within six months, including possibly having to purchase duplicate tooling, the company said.
Breidenbach said the impact on Hella's customer was not significant and Hella estimated it could resume production of the parts at issue in China within six months.
It said the problem developed in its lighting business, and mainly affects head lamps, tail lamps, and single-function lamps.
Hella executives repeatedly declined to speculate about the motives of the unnamed Chinese supplier but Breidenbach at one point said the dispute with the Chinese company was over money.
“It wasn't a quality-related issue. It was a — how should I call it, financial — unusual financial expectations from the supplier,” he said.
Hella executives said they saw the problems as limited to this particular supplier, and not indicative of bigger difficulties in China's auto supply chain.
“There are more and more very good-performing local suppliers in China and our supplier base is in increasing and competition is increasing,” Breidenbach said. “Therefore, we see the supplier base getting more competitive compared to the last years.”
Apart from the Chinese part problems, Hella said it expects its first quarter sales to increase 14 percent to 1.5 billion euros ($1.67 billion), with about 4 percent of that due to exchange rates. It credited new product launches and strong overall demand in the Americas, Europe and China for the increase.