https://www.wsj.com/articles/it-was-a-pretty-good-year-in-the-car-businessexcept-for-suppliers-11638700201

Peter Anthony, the head of an auto supplier in the Chicago area, has been on the sidelines for most of this year in an industry that generates substantial profits for automakers and dealers.

Raw material prices and labor costs have soared for his company UGN Inc., which produces vehicle insulation products. He said recruitment has become so difficult that the company relaxed its drug screening policy and recruited former prisoners to fill vacancies in the factory. All along, due to the challenge of the shortage of computer chips, auto companies have continuously cancelled orders at the last minute, which has weakened revenue.

"We have been hit from all sides," Mr. Anthony said.

For many in the automotive industry, this year has been a pretty good year. But one area of ​​the industry is largely missed: component suppliers.

Some auto parts manufacturers say the outlook is almost as bleak as in 2008 and 2009, when sales collapsed due to the economic recession.

"How can suppliers offset these cost increases we have experienced without getting price concessions from [car companies]?" Mr. Anthony said. UGN is losing money and recently started discussing changes to the terms with his clients.

However, the biggest problem is that his company is losing the auto industry's bubble pricing, he added. Due to tight inventories, car buyers paid record amounts for new cars, which resulted in automakers and dealers achieving solid earnings this year, despite the outage caused by a shortage of computer chips.

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

Executives and industry lawyers say that suppliers usually conduct business with auto companies based on fixed contracts that set prices for the duration of the auto project — the project may last more than five years — and it is difficult to renegotiate. Auto parts manufacturers also rely on a stable work order flow and an efficient and timely supply chain to control costs.

However, executives and industry analysts said that due to chip shortages, delays in delivery and cancellation of orders, coupled with the soaring cost of the entire business, have put more pressure on the already meagre profit margins.

Tensions over who will bear the rising costs are increasing. Detroit area lawyer John Trentacosta, who represents suppliers, said that smaller and tighter suppliers are increasingly refusing to ship unless they raise prices.

"For many of them, it's time for desperadoes," he said.

Lawyers and executives said that recently, even large suppliers that ship directly to car companies are seeking better terms. Cooper Standard Automotive Inc., which makes brake fluid lines and other components, recently told analysts that it asked customers to raise prices totaling about $100 million.

Last Monday, French car interior manufacturer Faurecia SE was the latest of many large auto suppliers to lower their profit forecasts in recent weeks. It cited unstable production plans from customers, auto companies, and labor shortages that led to the inflation of costs associated with opening a factory in Michigan.

A recent survey by the trade organization Original Equipment Suppliers Association showed that executives’ views on next year’s prospects are at the second lowest level since the financial crisis, only better than the spring of 2020.

Representatives of several major auto companies stated that they have worked with suppliers to ease inflationary pressures, but the specific aspects of the contract terms are confidential.

General Motors President Mark Royce said that whether automakers are willing to renegotiate depends on the length of the contract and other factors, but tends to abide by the terms.

He said at the Barclays Virtual Investor Conference: "I would say that communicating things is not a way to create value for our customers."

Industry consultants and lawyers said that so far, the North American automotive supply base has largely avoided the large number of bankruptcies and poor sales that occurred during the economic downturn in 2008-2009.

Chuck Moore, the managing director of the restructuring company Alvarez & Marsal, said that with federal support and the cash buffer that was hurriedly established at the beginning of the pandemic, the balance sheets of many component suppliers are relatively strong, entering 2021. year.

Mr. Moore said that despite this, as commodity costs rise and supply chain pressure continues into next year, many suppliers are taking loans, obtaining credit lines, or trying to renegotiate terms with customers.

"Due to liquidity pressure, we have received more calls from suppliers," he said. "I expect this situation to continue."

As automakers invest funds in the development of electric vehicles and driverless cars, technological changes have forced suppliers to invest in new areas, and financial pressures on the basis of auto supply are forming.

Mary Buchzeiger, CEO of Lucerne International, a supplier of stamped metal parts in the Detroit area, said: "Electrification itself is changing the ears of the industry, and then you will pile up on traffic jams. "We had an easier time in 2008."

How do supply chain issues affect you or your business? Join the conversation below.

Brian Pelke, president of Kay Manufacturing Inc., which makes parts for engines and transmissions, said that automakers usually cancel a full week of production with little notice. This put his company in the Chicago area (with approximately 150 employees) into a dilemma of excess inventory and shortage of cash flow.

"The profit of the car company is at a record high," Mr. Perk said, "and the rest of us just want to make a living."

Write to Mike Colias at Mike.Colias@wsj.com

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Appearing on December 6, 2021, the printed version reads "The automotive industry is booming-except for suppliers".

Copyright © 2021 Dow Jones Corporation. all rights reserved