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Automotive Industry

Three point landing: customers are leveraging skyrocketing steel prices into a leaner supply chain

Automotive Industries, May, 2004 by Craig Fitzgerald

Preliminary results from a steel surcharge survey suggests the Big 3 and many of their Tier 1s (i.e., systems integrators) are developing responses to steel price pass through request from suppliers that will accelerate their supply base consolidation efforts while simultaneously contributing to the achievement of their annual cost savings goals. Let's start with a description of the survey, identify key survey results then transition to its impact on supply chain reduction objectives.

Survey description and respondent profile

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This survey was performed in conjunction with OESA and was conducted by Plante & Moran, PLLC during March-April 2004. The overall survey objective was to provide useful, timely and relevant information to suppliers regarding pricing discussions with steel suppliers, strategy development for recovery negotiations with customers, and to improve communications regarding cost and profit implications for discussions with bankers, employees and shareholders.

Preliminary results described below are based on the initial phase of 21 face to-face and telephone surveys conducted with Tier 1-3 heavy steel users including stampers, forgers and machining suppliers, seventy-five percent of the survey respondents were under $500 million in annual sales, with survey mean revenue of $367 million and median of $68 million. Customers most frequently cited by the survey respondents were GM, DCX, Ford, and "other Tier 1." Toyota, Honda, Nissan, Delphi, Lear, JCI, and Magma were in a cluster mentioned somewhat less frequently, sixty percent of the steel purchased by survey respondents was procured directly by the supplier thereby exposing them to market pricing fluctuations, while 40 percent enjoyed the protection of a customer steel resale program.

40 percent average price increase

Steel price increases were measured from a one year ago base (i.e., March 2003) for four different steel types (hot rolled, cold rolled, coated and stainless). Hot rolled representing 45 percent of total steel purchases increased an average 45 percent (base and surcharge). Cold roiled increased 39.7 percent in the last year, and represented 30 percent of total steel purchases. Coated steel represented 17 percent of purchases and increased 32 percent, while stainless represented 4 percent of purchases and increased 11.3 percent. Total average cost per pound in March 2004 for hot rolled, cold rolled, coated and stain less were approximately 29, 33, 40 and 75 cents respectively.

Timid overall recovery strategies

Suppliers executed three distinctly different general price recovery strategies with customers, including:

* Wait-and-see (let competitors go first) and use a strong balance sheet and operating margins to capture new programs and resourced business from competitors who responded with an aggressive approach

* Timid recovery attempt by suppliers with moderate financial strength, often dealing with strategically important or critical mass customers

* Very aggressive recovery for suppliers on the ragged financial edge, and those with strategically unimportant customers they are willing to lose

The survey found 40 percent of suppliers pursued full reimbursement of surcharges and base price increases. Yet only 20 percent of survey respondents have firm agreement for full or partial recovery. Sixty percent of suppliers have attempted to negotiate some recovery width their customers, while others used different approaches including presenting the business case, insisting on payment or resourcing, or simply billing higher material costs.

Suppliers were noticeably more aggressive negotiating with Tier 1 customers than with OEMs. OEMs were typically more inclined to attempt to trade off future program awards or offset contractual price reduction targets (i.e., givebacks) than approve surcharge pass throughs. Suppliers" expecting "no recovery" varies from 45 percent with OEM customers, 25 percent for those serving tiered suppliers with sales greater than $1 billion, to 5 percent for those serving tiered suppliers with less than $l billion annually.

Linkage to supply base reduction?

So what do steel surcharges have to do with supplier consolidation? A lot! The logic goes this way. Purchasing departments have become a major "value capture" method for each of the Big 3 and for many if not most of the systems integrators. To give you a sense for its importance, Bo's boys at GM delivered in excess of $3 billion in savings in 2003, a meaningful portion of the company's total net income of $3.8 billion. So for GM to make their numbers committed to Wall Street in 2004, purchasing must achieve their purchased part cost reduction targets. Therefore, meeting profit plan at GM, for example, means holding the line on material costs pass throughs. Hence, the very aggressive and public communication in the press, courts, and hundreds of one-on-one supplier meetings of their total and complete objection to any and all requests for material cost adjustments.

Automotive Industry

Three point landing: customers are leveraging skyrocketing steel prices into a leaner supply chain

Automotive Industries, May, 2004 by Craig Fitzgerald

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