Small Business

Dark Days for Detroit's Suppliers


DaimlerChrysler's demand that auto-parts suppliers accept a 5% cut has prompted a wave of fear and anger among small component manufacturers, many of whom see the Jan. 1 edict as the final, fatal squeeze in a process they say has been wringing the profits out of their industry for the best part of a decade.

While some suppliers say they're resisting the mandate, "the smaller ones are pretty much having to cave," says Jim Gillette, auto analyst at IRN in Grand Rapids, a consultant to auto-components manufacturers. "They've tried to negotiate, but it has been pretty tough going."

DAUNTING MATH. While industry insiders say suppliers who refuse to accept the 5% reduction won't be cut off immediately, they also predict that any outfits refusing to go along will fail to win future contracts. Particularly at risk, they say, are businesses producing low-tech, easily replicated parts, things like stampings, fasteners, and injection-molded plastics.

"How can I knock off 5%? Last year, my aftertax profits were 2%," says the owner of a Michigan company that makes automotive stampings, explaining why he refused to accept the cut. Although the price cuts "will drive a lot of people out of business," the owner, who asked not to be identified for fear of repercussions, hopes to survive by diversifying into the electronics and appliance industries. For now, 85% of his business is automotive.

During the last two years, as auto makers sold a record number of cars, the components industry had "an inordinate number of bankruptcies," Gillette says. "My view is that 2001 is going to be the worst year yet. The financial situation of a lot of these smaller firms is just untenable." More than 95% of the roughly 2,000 auto-component companies are privately held, he estimates.

INDUSTRY EXODUS? About 25% of U.S. machine-tooling companies will be out of business within two years, predicts Kenneth Rieth, owner of Riviera Tool in Grand Rapids. A manufacturer of sheet-metal stamping dies used to shape body panels for cars and light trucks, Rieth supplies such companies as Magna International in Ontario, Canada, which makes doors, instrument panels, and other parts for DaimlerChrysler and other manufacturers. Since Rieth develops bodies for new vehicles, he is unaffected by the 5% mandate because his contracts are not year-to-year. All the same, he knows plenty of tooling companies that are. Auto makers "are driving their tooling suppliers right out of the industry," he says, adding: "Can this country live without a tooling industry?"

He's not the only one predicting the industry's demise. In January, the National Tooling & Machining Assn.'s survey of business conditions showed that 56% of its members expect business to stagnate or worsen over the next six months. After filling out the association's survey, an executive at a 72-employee Midwest company remarked: "The mold-making industry is going the way of the machine tool industry...offshore. Put up the For Sale signs."

Extracting price cuts from suppliers is nothing new in the auto industry. In the past, carmakers and suppliers have collaborated to develop more efficient production and design methods for components, with an eye toward negotiated, incremental price reductions.

BLINDSIDED. The man who initiated the culture of price cuts and cutthroat competition among suppliers was former General Motors executive Ignacio Lopez, who became notorious after jumping to Volkswagen and taking GM trade secrets with him.

In 1992, Lopez demanded rollbacks from GM suppliers and tore up some existing contracts. That was the beginning of the what Gillette calls the "brutalization" of the industry. "If you ask the suppliers about it, they'll put a few expletives in front of that word, too," he says, adding that DaimlerChrysler's demand for a 5% cut was both sudden and unilateral, which gave suppliers no time to develop cost-saving strategies.

"The supplier community was incensed with this approach by a new management team," said Neil DeKoker, managing director of the Original Equipment Supplier Assn. "Daimler got into trouble and they just assumed they could take 5% out of their suppliers. They forget we have shared some of our best ideas with them, helped them become profitable." Adds the owner of an automobile-stampings plant: "Everyone resented the way it came down: arbitrary, and retroactive to the first of the year."

DEEP IN THE HOLE. Yes, this price cut was handled differently, concedes Chrysler spokeswoman Mary Beth Halprin, who adds by way of explanation, "Have you seen our earnings?"

On Feb. 26, DaimlerChrysler CEO Jurgen E. Schrempp announced that Chrysler's U.S. car and truck business would lose about $2 billion this year. He also said parent company DaimlerChrysler will report a first-quarter operating loss of $4 billion. The price cuts -- 5% as of Jan. 1, to be followed by an additional reduction of 10% over the next two years -- are part of DaimlerChrysler's plan for clawing its way to profitability, a strategy that will also see the auto maker shed 26,000 workers from its payroll.

"They are taking their inefficiencies out on the suppliers," says the stamping-plant owner, who wants to see DaimlerChrysler become "as lean as they want the suppliers to operate."

Most suppliers would not discuss their reaction to DaimlerChrysler's demand. "Negotiations with Chrysler are going on right now," says DeKoker. "Discussing it with someone in the media is about the dumbest thing they could do." At Chrysler, adds Halprin: "There's a longstanding policy of not talking about supplier issues in the media."

RUMORS AND WHISPERS. Although most small suppliers will have no choice but to accept the lower component prices, some of the largest have more negotiating room. Reports of which suppliers are holding out have been contradictory, says Gillette, who notes that stories of one supplier's refusal to accept the cuts was denied by a company insider with whom he spoke.

Although there are still plenty of questions about the exact number of suppliers refusing to knuckle under, auto-industry watchers agree that quite a few suppliers face the prospect of being squeezed beyond survival. Some are said to be showing their financial records to Chrysler executives and pleading, "Show me where I can get 5%."

"The Big Three [carmakers] are carefully watching the financial condition of their suppliers because they do realize they are pushing on the edge of the envelope," says Gillette. For the foreseeable future, however, suppliers hold little hope that they will see the pressure ease. By Theresa Forsman in New York


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