Suppliers' contracts increasingly allow steel cost pass-throughs

David Sedgwick ERJ staff (AN)

Detroit, Michigan -- To protect themselves against sharp fluctuations in steel prices, parts suppliers are demanding contracts that allow them to pass raw-material cost increases along to automakers.

Two-thirds of 166 automotive suppliers that use steel told IRN Inc., a Grand Rapids, Michigan, automotive consulting firm, in a recent survey that their contracts allow component prices to fluctuate with the cost of their raw materials.

It's not just users of steel that are looking for contractual pass-throughs. The IRN survey found that 59 of 100 respondents that use aluminum also had some sort of cost-recovery mechanism built into their contracts. Out of 47 respondents that use natural rubber, a quarter had some form of cost-recovery mechanism in their contracts.

The natural-rubber contracts were particularly significant, says IRN's Korth: "That's not a material people have negotiated in the past."

That's up from virtually none in 2008, when prices started to gyrate, the survey reports.

IRN asked 202 suppliers to describe their price-hedging strategies for a variety of raw materials, including steel, aluminum, plastics, rubber and other materials.

Suppliers told IRN that automakers are starting to accept price indexing to avoid time-consuming one-on-one negotiations with hundreds of suppliers.

"The carmakers have embraced the concept," said IRN CEO Kim Korth, "because they don't need to renegotiate the cost of every part with every supplier."

Toyota Motor Corp. and Ford Motor Co. have proved most willing to index the cost of all raw materials, the IRN survey found. Sixty-four percent of Toyota suppliers and 60 percent of Ford suppliers said the automakers were "somewhat likely" or "more likely" to grant satisfactory price increases.

By comparison, 40 percent of Chrysler Group's suppliers and 43 percent of General Motors Co.'s suppliers said those automakers are willing to do so. Spokesmen for GM, Ford and Chrysler declined to comment.

Toyota "reviews pricing annually, including the price of our raw materials as well as other cost components," said Gene Tabor, Toyota's North American general manager of purchasing, in an e-mailed statement.

From Automotive News (A Crain publication)

Website of IRN