When the pandemic convinced virtually every industry to press a hiatus in 2020, supply chains became so crippled that simply restarting commerce sectors became a challenge in itself. It was the business equivalent of a twenty-car pile-up, with the auto industry particularly hard hit due to the complexity of its own supply lines. While the following year represented an improvement, production failed to stabilize at pre-pandemic levels.
The solution for automakers and dealerships was to start charging more money for cars. With a shortage of vehicles, the value of new and used models has exploded. The move left automakers largely in the dark for 2021, despite a general inability (or reluctance) to manufacture products at the normal rate. However, this did not help suppliers, who have not been able to apply the same premiums to individual components while facing growing economic hurdles.
As automakers have started to cut production targets, suppliers have had to cut back on their own production and deal with irregular orders from their many customers. This allowed bottlenecks to persist before new economic pressures arose. Equipment manufacturers now find themselves in a situation where order consistency is non-existent, material costs and shipping rates have increased, and labor shortages have become the norm.
The Wall Street Journal featured several auto parts suppliers in a recent article, focusing on the ways they have tried to navigate the current economic situation. Many companies have lowered the bar for potential employees, several of them supplemented their ranks with former criminals when they had previously excluded them. But there have been other companies that have flamed for doing the same with current detainees, with some accused of engaging in forced labor (not that these accusations are anything new to the industry). Meanwhile, those who play by set rules often find themselves struggling.
From the WSJ:
Some auto parts makers say the outlook is almost as bleak as it was in 2008 and 2009, when sales slumped due to the recession.
“How are suppliers going to compensate for these cost increases that we have suffered without obtaining price relief of [the car companies]? ” [Peter] said Antoine. [The Chicago-based insulation supplier] UGN is losing money and has recently started discussions with its clients on revised conditions.
The biggest problem, however, is that his company is losing to the auto industry’s sparkling prices, he added. With stocks tight, car buyers are paying record highs for new vehicles, leading automakers and dealers to post healthy profits this year, despite the disruption caused by the computer chip shortage.
Mr. Anthony’s business is one link in a collapsing global supply chain under the pressure of labor shortages, rising transportation and commodity costs, and disruption of the making.
Suppliers typically do business with automakers on fixed contracts that set prices for the duration of a vehicle program – which can last more than five years – and are difficult to renegotiate, according to executives and lawyers at the. sector. Auto parts manufacturers also rely on a constant flow of work orders and efficient, just-in-time supply chains to contain costs.
But delivery delays and canceled orders resulting from chip shortages, combined with soaring costs in their businesses, are putting even more pressure on already slim profit margins, according to industry executives and analysts.
Suppliers are tired of taking the hit for automakers who are widening their profit margins by making vehicles cost more. Many are starting to demand renegotiations of contracts with formal guarantees that promises to purchase will be kept. Others simply increase their own prices to reflect the general difficulties of the time. For example, Michigan-based Cooper Standard Automotive chose to ask customers for price increases totaling around $ 100 million. But other companies aren’t sure if they’ll get enough business to negotiate higher prices, leaving many vendors to simply lower their projections until 2022.
Electrification has played an additional role in fueling the current chaos in the industry. As automakers move towards electric cars, some suppliers are losing relevance while others are becoming essential. Assembly plants are already canceling orders on short notice, often resulting in weeks of downtime. For suppliers specializing in the parts needed for combustion vehicles, this trend can go on forever as more and more electric vehicles populate the roads.
“Electrification itself is turning the industry upside down, and you add to that this traffic jam of problems,” said Mary Buchzeiger, CEO of Lucerne International, a stamped metal parts supplier in the Detroit area. “We had an easier time in 2008.”
It is probably in the best interests of automakers to help suppliers where they can, as there is a limit to what consumers will put up with. Marques cannot keep cutting production indefinitely until each new vehicle sells for a million dollars. And suppliers also can’t expect them to fly by the seat of their pants indefinitely when the entire industry depended on reliable delivery schedules less than two years ago. But automakers don’t seem in a rush to change existing agreements. While we’re inclined to believe it’s because vendors get the shorter end of the stick, with earnings reports seemingly confirming this, no one can say for sure due to the clandestine nature of most commercial contracts.
General Motors chairman Mark Reuss said the company’s overall willingness to renegotiate depends on the length of the contract, among other factors, but the general preference is to stick to prior agreements.
“I would say getting it right is not the way to create value for our clients,” he said at the Barclays virtual investor conference.
But customers have already paid more for less. Whether intentionally or not, automakers have already passed the expenses on to their customers while leaving equipment manufacturers in charge of agreements they no longer adhere to. The bottom line is that the suppliers are well aware that large dogs are making juicy profits despite the reduction in production, and that they are unable to do the same without similarly raising their own prices. Unfortunately, this scenario would undoubtedly encourage automakers to keep raising their own prices until the public decides that auto prices have become untenable and stop buying, opening the door to a whole new subset. of problems.[Image:Â Chamil/Shutterstock]
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