Automotive suppliers demand better terms

By Lawrence Speer Automotive News Europe

Brussels -- CLEPA, the European suppliers association, wants a fundamental change in the way its members do business with automakers.

" Contract terms have become a very major problem for suppliers," CLEPA CEO Lars Holmqvist told Automotive News Europe. " Contract negotiations are very unbalanced and extremely difficult."

Later this year CLEPA will release recommendations for contract terms and conditions.

At issue are the risks CLEPA members believe they are taking when entering into agreements.

Among those risks:

• Carmaker demands for the right to terminate or alter contracts at will
• Warranty and recall obligations
• Costs linked to rising raw material costs.

" This becomes gambling, not business," Magneti Marelli CEO Eugenio Razelli told ANE. He said Magneti Marelli " prefers to lose some business rather than sign an unfair contract."

Razelli said the proposed CLEPA guidelines " could be a good starting point, because, so far, there are no standard contracts."

CLEPA hopes the proposed recommendations will provide suppliers and car manufacturers with a new basis for contracts when they renegotiate.

A CLEPA group is currently analysing a number of automaker-supplier contracts, seeking to identify unfair terms and conditions and establish a list of best practices. The group has yet to release a formal list of terms and conditions it considers unfair. Suppliers regularly complain about carmaker demands for the right to terminate or alter contracts at will.

They are also unhappy about assuming the financial risks linked to rising raw material prices and currency fluctuation, as well as the cost of investing in emerging markets.

In 2004, the US-based Original Equipment Suppliers Association, released a draft document with its model terms and conditions.

Margaret Baxter, OESA's vice president of policy, said Aisin World Corp. of America is the only supplier to adopt the draft, although she added that the document is being widely used by suppliers to supplement the language in their in-house terms and conditions.

Aisin World Corp. of America is part of Japan-based Aisin Group.

Willing to walk

Valeo CEO Thierry Morin said his company has walked away from deals over unacceptable contract terms.

" We have refused some business, because we are a company that eventually has to answer to its shareholders," Morin told ANE.

Morin said car manufacturers often tell suppliers to ignore harsh contract clauses, promising that there will be no enforcement.

" They say, 'Don't worry, we won't act on that,' " Morin said. " By the second or third time it becomes a habit, and then it becomes enforceable. So I do not believe anyone should ever sign a contract under the condition that it is not going to happen. That's unfair."

Automakers maintain they work closely with suppliers to ensure viability. Some carmakers, such as Renault, have established risk committees to monitor suppliers' financial health.

But " suppliers are responsible for making the management decisions to solve their problems," said Renault purchasing boss Odile Desforges.

Mercedes-Benz purchasing head Frank Deiss said that Mercedes' analysis of suppliers shows that over-aggressive acquisition strategies, unbalanced customer portfolios and bad management lead to financial problems.

" None of the financially distressed suppliers I have seen got into the situation because of OEMs slashing prices," Deiss said. " It has mainly been due to mistakes of the supplier's management."

Said Birgit Behrendt, Ford of Europe vice president of purchasing: " The early involvement of suppliers in the development process is key."

From Automotive News Europe (A Crain publication)