Automakers allow suppliers to raise prices

By Robert Sherefkin and David Barkholz, Automotive News

Traverse City, Michigan - In a bow to inflationary pressures, automakers are working out new ways to increase prices paid to suppliers hit 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 aluminium, copper, precious metals and, in some cases, materials made from petroleum or natural gas and used to make tyres 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.

Although Bo Andersson, GM's group vice president of global purchasing, told Automotive News that GM allows suppliers to index copper, aluminium and precious metals, 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 more willing

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 tyres 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 percent 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," 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 andinteriors, 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, companies such as Lear are still pushing towards traditional contracts requiring annual price decreases for productivity gains.

Lou Salvatore, president of Lear global seating said, “we're not a bank. We're not looking to make money on the economic increases, but we can't lose it either.”

From Automotive News (A Crain publication)