By on December 6, 2021

When the pandemic convinced practically every industry to press pause in 2020, supply chains became so crippled that just getting sectors of commerce rebooted became a challenge in itself. It was the business equivalent of a twenty-car pileup, with the automotive industry being hit particularly hard due to the complexity of its own supply lines. While the following year represented an improvement, production failed to stabilize to pre-pandemic levels.

The solution for automakers and dealerships was to begin demanding more money for cars. With vehicles in short supply, the value of new and used models blew through the roof. This move kept automakers largely in the black for 2021, despite a general inability (or unwillingness) to manufacture products at the normal pace. However, it didn’t help suppliers, who are haven’t been able to tack on the same premiums to individual components while still having to cope with rising economic hurdles.

As carmakers started cutting production targets, suppliers found themselves having to cut their own output and contend with irregular orders from their many clients. This allowed bottlenecks to persist before new economic pressures manifested. Equipment manufacturers now find themselves in a situation where order consistency is nonexistent, material costs and shipping rates have risen, and labor shortages have become the norm.

The Wall Street Journal featured several auto part suppliers in a recent article, focusing on the ways they’ve attempted to navigate the current economic situation. Many companies have lowered the bar for prospective employees, with more than a few filling out their ranks with former criminals despite previously having barred them. But there are been other businesses taking heat for doing the same with current inmates, with some being accused of engaging in forced labor (not that those accusations are anything new for this industry). Meanwhile, those who are playing by established rules are often finding themselves just scraping by.

From WSJ:

Some auto-parts makers say the outlook is almost as gloomy as it was in 2008 and 2009, when sales collapsed due to the recession.

“How are suppliers going to offset these cost increases we’ve experienced without getting price relief from [the car companies]?” [Peter] Anthony said. [The Chicago-based insulation supplier] UGN is losing money and recently began discussions with his customers about revising terms.

The biggest rub, however, is his company is losing out on the auto industry’s frothy pricing, he added. With tight inventories, car buyers are paying record sums for new vehicles, and that has led both auto makers and dealerships to post healthy earnings this year, despite disruptions caused by the computer-chip shortage.

Mr. Anthony’s firm is one link in a global supply chain that is buckling under the pressure of labor shortages, rising freight and commodity costs, and manufacturing disruptions.

Suppliers typically do business with the car companies under fixed contracts that set prices for the length of a vehicle program — which can run longer than five years — and are difficult to renegotiate, executives and industry attorneys say. Auto-parts makers also rely on a steady flow of work orders and efficient, just-in-time supply chains to contain costs.

But delivery delays and canceled orders resulting from the chip shortage, combined with soaring costs across their businesses, are putting even more pressure on already-thin profit margins, executives and industry analysts say.

Suppliers are getting sick of taking the hit for automakers who are broadening their profit margins by making vehicles cost more. Many are beginning to demand contract renegotiations with formal guarantees purchasing promises will be kept. Others are simply raising their own prices to account for the general hardship of the time. For example,  the Michigan-based Cooper Standard Automotive has opted to ask customers for price increases totaling roughly $100 million. But other businesses don’t know if they’ll get sufficient business to negotiate higher prices, leaving many suppliers to simply cut projections through 2022.

Electrification has played an additional role in stoking the current industry mayhem. With automakers pivoting toward electric cars, certain suppliers are finding themselves losing relevance while others are becoming essential. Assembly plants are already canceling orders on short notice, often resulting in weeks of downtime. For suppliers specializing in parts necessary for combustion vehicles, that trend may last forever as more EVs populate the roadways.

“Electrification itself is turning the industry on its ear, and then you pile on top of that this traffic jam of issues,” said Mary Buchzeiger, chief executive officer of Lucerne International, a Detroit-area supplier of stamped metal parts. “We had an easier time in 2008.”

It’s probably in automakers’ best interest to help suppliers where they can, as there’s a limit to how much consumers will endure. Marques cannot continue scaling back production indefinitely until every new vehicle retails for cool million. And suppliers likewise cannot be expected to fly by the seat of their pants forever when the whole industry was dependent upon reliable delivery schedules less than two years ago. But automakers don’t appear to be in any rush to rejigger any existing agreements. While we’re inclined to believe that’s because suppliers are getting the shorter end of the stick, with profit reports seemingly backing that up, nobody can say for sure due to the clandestine nature of most business contracts.

General Motors President Mark Reuss said the company’s overall willingness to renegotiate depends on the contract length among other factors, but that the general preference is to stick to prior agreements.

“I would say passing things through is not the way to create value for our customers,” he stated during the Barclays virtual investor conference.

But customers have already been paying more for less. Intentional or not, automakers have already passed on expenses to their customers while leaving equipment manufacturers on the hook for deals they’re no longer adhering to. The bottom line is that suppliers have become well aware that the big dogs are turning juicy profits despite cutting output and they’re incapable of doing the same without similarly upping their own rates. Unfortunately, that scenario would undoubtedly encourage the car companies to continue raising their own prices until the public decides automotive pricing has become untenable and stops buying — opening the door to an entirely new subset of problems.

[Image: Chamil/Shutterstock]

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18 Comments on “Despite Automaker Profits, It Was Another Rough Year for Suppliers...”

  • avatar
    SCE to AUX

    “until the public decides automotive pricing has become untenable and stops buying — opening the door to an entirely new subset of problems.”

    That’s already happened, but it’s not just the mfr’s fault.

    When the customer *must* have AWD, 400 HP, 20 speakers, heated and cooled everything, etc, then the price goes up. Yet, today’s cars represent far greater value than ever before.

    Also, the same customer is willing to go for 84-month financing with 0 down. I’m not sympathetic.

    • 0 avatar

      It has but that’s when the magic of games like leasing comes into play, in which probably 70-80% of all new product seems to be built to spec.

      I agree the proles demand AWD (which always adds a couple points cost) and heated/cooled etc (which are cheap in the grand scheme) but I don’t think bhp and 20 speakers rates high on the wants/needs. I might say connectivity to their electronic collar, err “phone”, but that seems to be more or less standard now. Inflation is the monster here, and has been for quite some time.

      • 0 avatar
        SCE to AUX

        Yes, leasing becomes very attractive with high MSRPs, assuring the customer of eternal payments and the dealer of clean 3-year-old cars.

        Leasing is also an attractive feature of EVs – especially non-Teslas – due to the pace of tech change in them. But, given the current market wackiness, I just bought out my EV lease since it was cheaper than the other options.

        • 0 avatar

          “Leasing is also an attractive feature of EVs – especially non-Teslas – due to the pace of tech change in them.”

          I have a general comment on this phenomenon since it is not limited to the automotive space. My thought is, if you can’t come out with a reasonable defined lifespan for your product or technology I call shenanigans and see zero point in purchasing the product. The “phones” are the greatest example which come to mind, people are nuts to keep following these things like lemmings. They have not made any *real* changes in years now, why do you keep buying this sh!t? Because they break? Because you care about minor point releases and cannot easily upgrade the O/S? Just stop, please just stop.

          Lesson: anything which can be purchased directly by credit will invariably rise in cost because of the fraudulent nature of the fractional reserve system. Though computers came down in cost despite loans/layway everything else has risen over time, some less than others. But the “phones” are a prime example, given technological deflation seen in computing they should all be decreasing in cost but the reverse is true. Why? Because of payment plans of course, they get you on it and by the time its paid down its broken or “obsolete” and you restart the cycle. I suspect this will play out with EV as well, since its defined lifetime will likely be no longer than most phones. Just look at all of the boot in face tyranny happening now if you doubt this hypothesis.

          • 0 avatar
            Margarets Dad

            “Boot in face tyranny”? My, we’re being a little dramatic, aren’t we.

            I doubt 99% of people have thought about this hypothesis, and would love for you to tell us about the people being locked away and silenced for believing in it.

          • 0 avatar
            SCE to AUX

            Allow me to clarify – when I say leasing is attractive, I meant to the masses.

            Leasing isn’t a great plan for your money, unless you want to live with payments forever. Somehow people are resigned to this for vehicles, WiFi routers, cell phones, and even furniture.

  • avatar

    That was a bit of a fever dream unload. All over the map.

    “Many companies have lowered the bar for prospective employees, with more than a few filling out their ranks with former criminals. But there are been other businesses taking heat for doing the same with current inmates, with some being accused of engaging in forced labor (not that those accusations are anything new for this industry).”

    1. “former criminals” – since when is that supposed to be an issue? Pay your debt to society and get on with life.

    2. “current inmates” – seriously? That’s legal? Do tell…who’s doing that? That’s a news story all on its own.

    3. “forced labor” Is that related to #2? or illegal immigrants?, China? WW2 flashbacks?

    • 0 avatar
      Greg Hamilton

      I seldom agree with you but…

      I do think hiring people with a criminal record who have paid their debt to society is a good thing, and I believe Charles Dickens would agree.

      With regard to current inmates, I don’t know if the author is referring to the prison labor complex in the U.S. which I believe by numbers is the largest in the world (which is not something to be proud of).

      As for number three, the author references his article on Uyghur workers.

      Unfortunately the article paints GM upper management as tone deaf and out of touch which although the author has an usual way of putting, on this he is in my opinion completely correct, and if DeadWeight were still with us he would agree enthusiastically.

    • 0 avatar
      SCE to AUX

      @Lou_BC: You put my thoughts into words.

      As usual, this article contains an assortment of random agenda items, conjoined to produce a 1000-word entry.

    • 0 avatar
      Matt Posky

      1. I agree. The more that are gainfully employed the fewer are likely to fall back into crime. The relevance of this is that companies are changing established hiring protocols, not that hiring ex-cons is a bad thing.

      2. Forced labor is legal where and when governments allow it. Though even companies based where it would be illegal seem to be finding roundabout ways to take advantage of slave labor. We’ve been covering it since 2020:

      3. Yes, yes, and yes. But no to the WW2 aspect unless you want to count familiar faces like VW.

  • avatar
    el scotto

    So lemme see, four-square Larry and his coke-addled GM are reveling in ADM and even more profits? There are some people who always have to the 1st of the newest of anything. Making hooking fish motions with my fingers and mouth. Then there are the few people who absolutely have to get a new car; accident, major and expensive mechanical failure.

    While Larry and Cokey dream of covering the floor of an unused sales cubicle with cash and rolling around in it; on rainy days they’re hitting e-bay to find white shoes and matching belts. Perhaps some loud sport coats too, polyester barely wrinkles.

    These two don’t realize that too many people recognize ADM, for what it is; unabashed greed. Calling Ruggles BTW. The same people who recognize the greed will stay away from their dealership until prices become sensible.

    el-Scotto can still remember Honda dealers in the mid to late 80s. Give us a huge, huge (intrest-free) cash deposit; wait six months, and we’ll give you what comes off the truck. I called shenanigans on the whole thing and went to my VW dealer. I bought a red Scirroco that made Lucas quality seem as good as NASA’s. But Oh Lordy on a sunny day and she was running right.

    • 0 avatar

      “The same people who recognize the greed will stay away”

      Agreed. I’d like to buy a new vehicle. Under current circumstances it would take a sudden catastrophic event or looming major component failure to force me to buy now.

  • avatar

    Small world, I used to work for UGN and have met Peter Anthony.

    Let me just say, from the bottom of my heart, I wish them nothing but continued misery. Worst run company I’ve encountered in my career. It’s no surprise they need to hire drug addicts and ex-cons given the wages they offer line employees.

  • avatar

    New car sales have been in decline years before covid 19 and with more automakers coming on line all the time, they’re losing market share too. In other news, the auto aftermarket has been growing exponentially in the same frame time. Extended easy financing is supposed to fight this.

    Parts suppliers can just change teams, supply the aftermarket, reproduction/resto parts, etc. Or play both sides if they’re not already doing it.

  • avatar
    Jeff S

    DenverMike I thought the same as people are keeping their vehicles longer the aftermarket for parts is growing. I cannot see the aftermarket declining anytime soon and if anything continued growth for the near future.

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