More Auto Suppliers Are Refusing Price Concessions To OEMs

Autoparts Report, Nov 18, 2001

After a decade of facing price cut demands by automakers, many suppliers are refusing to accept further cuts, according to a recent survey by IRN, Inc., an automotive forecasting and consulting firm located in Grand Rapids, Mich.

The survey showed that most suppliers were less concerned that their refusals would lead to reduced or lost contracts. In fact, the proportion of suppliers reporting that they had refused requests for price breaks has risen in each of the three years that IRN has conducted its biennial pricing survey. Still, nearly half of all suppliers surveyed said that they compromised when it came to price concessions.

"While automakers have been demanding price reductions with increasing frequency, suppliers appear to be rejecting the idea that there is more to give," said Kim Korth, president and founder of IRN. "Our 2001 survey suggests that suppliers might have reached the turning point of their willingness -- or ability -- to accommodate price concessions."

IRN, which polled nearly 100 automotive component suppliers for its third pricing survey, found that: OEMs and their Tier One suppliers demanded an average 5.4 percent price reduction from their Tier One, Two and Three suppliers in 2001 -- an increase of 13 percent over the 1999 survey.

In 2001, suppliers were less generous than in 1999, with the average supplier willing to give up only 3 percent inprice breaks. Tier One suppliers edged out General Motors Corp. for the dubious honor of "Most Demanding Customer," seeking average price reductions of 6.1 percent.

The survey found that, for the first time, GM was more likely to work with its supplier base to find ways to eliminate costs. Transplant OEMs continued to focus on cost reduction as opposed to price reduction, and they are given credit for working with their suppliers to drive cost out of the system.

Most of the suppliers surveyed said their customers emphasized giving back dollars rather than accepting "soft" benefits, such as redesigns that prevent the need for price increases. "The major change in the survey from previous years is that these continuous demands for price reductions are now taking place in a deteriorating market environment," Korth said. "As a result, suppliers are less tempted to agree to an immediate price reduction given this ongoing uncertainty."

IRN also recommended several steps to improve the contentious interaction between OEMs and their suppliers, including: Recognizing that the idea of improved competitiveness is an industry- wide issue and not simply a negotiating stance. It is imperative that profitability is possible at all levels of the supply chain. Shifting away from annual price reductions as a one-dimensional solution to the issue of increasing competitiveness and begin focusing on systemic cost reductions. Eliminating incentives that reward purchasing departments for short-term price reductions without consideration of long-term consequences.

"If the auto industry is to thrive, we must shift the nature of the dialogue between OEMs and their suppliers," Korth said. "As automakers turn over increased responsibility for engineering, design and production to their supply base, they must recognize that the health of these suppliers will have a direct impact on their own long-term health.

"We believe placing the need for systemic cost reduction on a more equal footing with the equal need to improve quality and innovation would go a long way to improving the current customer-supplier relationship."