OEMs Willing to Swallow Raw-Material Price Increases
By Tom Murphy WardsAuto.com, Feb 2, 2011 3:36 PM

DETROIT -- With dozens of auto suppliers having endured bankruptcy and hundreds of others fighting for survival in recent years, a top supplier executive says auto makers finally are accepting responsibility to cover price increases for raw materials necessary to produce components.

The issue of raw-material prices has been a political powder keg and has been responsible for years of losses piling up on supplier balance sheets. Hard-nosed OEM purchasing agents, especially those representing Detroit auto makers, generally have insisted suppliers swallow wildly fluctuating price increases for materials such as steel and plastic resin.

But the tide is turning, and auto makers understand that business model cannot sustain a viable supply chain, says Bill Kozyra, chairman, CEO and president of TI Automotive, a $2.5 billion supplier of fluid-carrying systems, powertrain components and blow-molded plastic fuel tanks.

“I was in a meeting with an OEM yesterday, and the attitude is different,” Kozyra says this week in a speech to the Automotive Press Assn. here.

“OEMs recognize that the suppliers cannot absorb raw-material costs that are coming in because they won’t survive if the suppliers foot the entire bill,” he says. “The OEMs have to pay most of the cost increases associated with raw materials. Many OEMs recognize this is a serious industry issue.”

But Kozyra understands the onus cannot rest squarely on the shoulders of auto makers. “We as suppliers have the responsibility to find as many offsets as we can in terms of cost reductions and process changes and design changes and logistical improvements that need to be made.”

In November, Kozyra began a 1-year term as chairman of the board for the Original Equipment Suppliers Assn., which has been trying for years to establish a more equitable model for coping with dramatic swings in raw-material price increases.

“I can tell you the dialogue that’s taking place between (OEM) vice presidents of purchasing and supplier executives is just now starting to head into a positive direction,” he tells Ward’s.

“I’m not talking about all 12 (auto makers), but you can sure differentiate which ones get it and understand we can’t ever return to the past vs. which ones aren’t quite there yet,” Kozyra says.

Skeptical suppliers might think OEMs are saying one thing but ultimately will do another, by finding other ways to ensure suppliers continue paying those costs.

“No, we won’t end up paying for it because we now have the ability to put our foot down and say, ”Hey, we’re not going to make the mistakes of the past,” Kozyra says. “We can point to the recent past of us being on the verge of bankruptcy or having gone through bankruptcy and say we’re not going to do that again.”

He says OEMs “drove a cost business model and a relationship that was too one-sided in terms of absorbing cost increases. It has to be more balanced. I’m not saying they (OEMs) will pay 100% (of cost increases). But I’m saying they at least have to pay three-quarters of raw-material cost increases, and suppliers will be on the hook to find some offsets around the other 25%.”

Achieving that 25% should not be difficult for innovative suppliers, Kozyra says.

“Every week, I learn about some idea that our engineers came up with that could take $1 out of every car. Those kinds of savings can be exploited. Perhaps we could eliminate a part due to further system integration. The OEMs need to break through the barriers of getting those design changes implemented quicker through their engineering teams.”

Kozyra says U.K.-based TI survived the past two difficult years by making significant cuts: closing facilities, slashing travel expenses in half, cutting pay and eliminating bonuses. The white-collar workforce in North America was cut 55%.

In December 2009, TI completed its restructuring under the British process known as the scheme of arrangement, which is a sort of consensual restructuring of the balance sheet but not the same as U.S. bankruptcy.

Today, TI has near zero debt and is expanding with new operations in Mexico, Turkey, China, India, Hungary and Russia.

“Most of us are starting to make money again,” Kozyra says of automotive suppliers. “Volumes are on the rise here in North America, but we’re also experiencing very good volume growth in Asia/Pacific and it looks as though Europe is slowly expanding.”

As vehicle production picks up, some suppliers, particularly of microchips and steel stampings, are struggling to keep pace, having downsized during the recent downturn.

Today, Chrysler Group LLC canceled production shifts at several plants in eight locations due to a shortage of parts.

The affected plants largely are concentrated in Michigan and include Jefferson North in Detroit, where the Jeep Grand Cherokee and Dodge Durango are built, and the Sterling Heights, MI, plant that makes the Chrysler 200 and Dodge Avenger.

Kozyra sees the shortages being caused by a small number of Tier 2 and Tier 3 suppliers, not Tier 1 suppliers such as TI.

“The industry is still suffering, and it will take some time before capacity levels and supplier levels are back on track,” he says. “I can tell you a year ago at this time, on the heels of 2009, we had no idea what to expect from 2010 in terms of production builds.”

In the meantime, suppliers are paying premium freight costs to airlift parts around the world and paying workers overtime to fill the pipeline as best they can, Kozyra says.

“I think the short supply situation will be over in a few months,” he says.

He also expects further consolidation among auto suppliers.

“I think the OEMs clearly understand the need to have fewer suppliers. I think you’ll see OEMs building around two or three suppliers in each product area on the car. Maybe they’ll have two or three fuel-tank suppliers, but not six or eight, like they’ve had in the past.”