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USA - Automakers allow more pass-throughs; sharing pain with suppliers

In a bow to inflationary pressures, automakers are working out new ways to increase prices paid to suppliers pounded by the soaring cost of raw materials.

General Motors and others are using world price indexes to grant automatic price increases to suppliers whose commodities are becoming more expensive.

The trend to pass-throughs is far from universal, and suppliers say it’s developing in patchwork fashion. But even limited acceptance of raw-material price escalators adds to pressures on carmakers to raise prices.

Suppliers say automakers are increasingly willing to index the price of raw materials such as aluminum, copper, precious metals and, in some cases, materials made from petroleum or 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 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 suppliers with 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, suppliers say.

“But they’re not going to give you 100 percent,” cautioned one executive for a European 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 suppliers to index copper, aluminum and precious metals to an international market standard.

GM relies on prices posted on the London Metal Exchange, a futures exchange. GM adjusts 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 suppliers are insulated from volatility because they buy steel from GM’s steel resale program. Andersson says 90% of GM's suppliers of steel components participate. Several automakers get discounts on steel by purchasing bulk quantities, then resell it to their suppliers at cost.

But GM is still struggling to develop a price policy for suppliers that produce castings made from recycled steel scrap. The price of steel scrap has soared as world demand rises.

General Motors sells about 300,000 tons of scrap each year to steelmaker Nucor, which then sells new steel to GM. By next year, Andersson says he hopes to work out a deal with some GM suppliers, such as foundries, which could recycle GM's scrap steel themselves.

Andersson appears reluctant to index oil and natural gas, which are used to make plastic and rubber components. GM negotiates these prices with suppliers case-by-case, he says.

Ford Motor Co. appears more willing to consider pass-throughs for these components. Two suppliers have told Automotive News that the company has agreed to index the price of 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 raw-material price escalators are critical to the long-term health of suppliers. But he said Chrysler first needs to know suppliers’ true costs.

That will require 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 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 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 supplier that relies on indexed contracts risks losing out to a competitor willing to work without one.

If Lear or other Tier 1 suppliers can’t get index provisions from automakers, they can’t give relief on raw materials to their own 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 raw material costs, “just like everyone else. We are going to our customer, getting on our knees and pleading.”

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