In a bow to inflationary pressures, automakers are working out new ways to increase prices paid to <link _top>suppliers pounded by the soaring cost of <link _top>raw materials.
General Motors and others are using world price indexes to grant automatic price increases to <link _top>suppliers whose commodities are becoming more expensive.
The trend to pass-throughs is far from universal, and <link _top>suppliers say it’s developing in patchwork fashion. But even limited acceptance of <link _top>raw-material price escalators adds to pressures on carmakers to raise prices.
<link _top>Suppliers say automakers are increasingly willing to index the price of <link _top>raw materials such as <link _top>aluminum, <link _top>copper, <link _top>precious metals and, in some cases, materials made from <link _top>petroleum or <link _top>natural gas and used to make tires and rubber components.
“The fragility of the supply base is forcing the auto companies to agree to more material pass-throughs,” consultant John Casesa, managing partner of Casesa Shapiro Group, said here last week at the Management Briefing Seminars.
Gary Convis, CEO of Dana Holding Corp., said in a speech at the conference that the company started the year paying $307 per ton for <link _top>steel for driveline components.
“We had set our budget for $410 per ton for the year,” Mr. Convis said, but “$525 flew by us in May. It is slowly resting today at $850.”
Each of the Detroit 3 has its own policy on helping <link _top>suppliers with <link _top>raw material prices.
Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. executives could not be reached for comment. But Japanese automakers generally are more willing to grant pass-throughs, <link _top>suppliers say.
“But they’re not going to give you 100 percent,” cautioned one executive for a European <link _top>supplier. “Everyone wants to understand what you are doing to offset those price increases.”
Bo Andersson, GM’s group vice president of global purchasing, told Automotive News that GM allows <link _top>suppliers to index <link _top>copper, <link _top>aluminum and <link _top>precious metals to an international market standard.
GM relies on prices posted on the London Metal Exchange, a futures exchange. GM adjusts <link _top>raw material figures monthly or quarterly, Andersson told. Other companies use internal indexes based on statistics generated by global commodities markets.
Most of GM’s metal-bending <link _top>suppliers are insulated from volatility because they buy <link _top>steel from GM’s <link _top>steel resale program. Andersson says 90% of GM's <link _top>suppliers of <link _top>steel components participate. Several automakers get discounts on <link _top>steel by purchasing bulk quantities, then resell it to their <link _top>suppliers at cost.
But GM is still struggling to develop a price policy for <link _top>suppliers that produce castings made from recycled <link _top>steel scrap. The price of <link _top>steel scrap has soared as world demand rises.
General Motors sells about 300,000 tons of scrap each year to <link _top>steelmaker Nucor, which then sells new <link _top>steel to GM. By next year, Andersson says he hopes to work out a deal with some GM <link _top>suppliers, such as <link _top>foundries, which could recycle GM's <link _top>scrap steel themselves.
Andersson appears reluctant to index oil and <link _top>natural gas, which are used to make plastic and rubber components. GM negotiates these prices with <link _top>suppliers case-by-case, he says.
Ford Motor Co. appears more willing to consider pass-throughs for these components. Two <link _top>suppliers have told Automotive News that the company has agreed to index the price of <link _top>raw materials used for tires and rubber components. Ford declined to comment.
Last week, Chrysler LLC purchasing chief John Campi said at the conference here that <link _top>raw-material price escalators are critical to the long-term health of <link _top>suppliers. But he said Chrysler first needs to know <link _top>suppliers’ true costs.
That will require <link _top>suppliers to share information and work with Chrysler to reduce materials usage or find alternatives before they can expect Chrysler to provide higher prices.
At Johnson Controls Inc., about 50% to 60% of all new orders peg reimbursement for <link _top>raw materials to outside indexes that track price fluctuations, said Beda Bolzenius, chief of Johnson Controls’ global automotive business.
“Awareness of the issues has increased, and so has the willingness to resolve them,” Mr. Bolzenius said.
He said the use of indexes grew in popularity after steep <link _top>raw-material price increases in 2004 and 2005.
Johnson Controls, one the world’s largest makers of auto seats and interiors, began negotiating the indexes then. But those changes were put in place only after Johnson Controls improved productivity, he said.
But the use of indexing is not universal.
At Lear Corp., Lou Salvatore, president of Lear global seating, says automakers still are pushing traditional contracts requiring annual price decreases for productivity gains.
Salvatore said a <link _top>supplier that relies on indexed contracts risks losing out to a competitor willing to work without one.
If Lear or other Tier 1 <link _top>suppliers can’t get index provisions from automakers, they can’t give relief on <link _top>raw materials to their own <link _top>suppliers, Salvatore said.
“We can’t be in the middle of the sandwich,” he said. “We’re not a bank. We’re not looking to make money on the economic increases, but we can’t lose it, either.”
Dana’s Convis said he plans to deal with soaring <link _top>raw material costs, “just like everyone else. We are going to our customer, getting on our knees and pleading.”
