Continental Teves North America is among the latest large Tier 1 suppliers passing down price-cut expectations to Tier 2 parts makers.
Company President Bill Kozyra outlined expectations for annual materials cost reductions of 5 percent or more at a Wednesday, Nov. 14, gathering of more than 80 suppliers. The brake and chassis maker, a unit of German supplier Continental AG, also sought quality and delivery improvements.
"As our customers look to us for further price reductions and a variety of improvements, we are looking for our suppliers to do the same," Kozyra said.
The past year has been brutal for suppliers regarding price concessions. It started with DaimlerChrysler demanding an automatic 5 percent cut from every supplier. Other automakers have followed with varied demands.
Share the painTier 1s such as Visteon Corp., Valeo SA, Delphi Automotive Systems Corp. and Johnson Controls Inc. have passed along that pain.
Continental Teves' 5 percent-plus is not expected to come strictly out of supplier profits, said Dean McConnell, the company's director of actuation products. A supplier suggestion program offering shared savings to the Tier 2s is one avenue.
With lower volumes and pared-to-the-bone margins, Tier 1s say they have no other choice but to pass the cuts on to their supply bases. But for the smaller suppliers in the Tier 2 group, the pressure often has placed them in the position of making parts at a loss or losing a customer. Many are losing money this year, and some are on the verge of bankruptcy.
Parts makers say noThe situation has led more suppliers to say no, one industry source said. Parts makers are increasingly refusing price concessions to automakers and Tier 1 customers, according to study released last week by supplier consultant IRN Inc. of Grand Rapids, Mich.
Although almost half of all suppliers said they had compromised on price concessions, about one-quarter of nearly 100 surveyed companies said they had refused requests for price breaks in 2001. The remainder gave the full 100 percent requested. Customers demanded an average 5.4 percent price reduction in 2001, but the average supplier was willing to give only 3 percent.
The lack of profits already in many supply contracts and deteriorating market conditions have contributed to that resistance, IRN President Kim Korth said. Price cut pressures also are coming more frequently from the Tier 1 level, she said.
Continental's directive didn't surprise suppliers, even though one Tier 2 representative said his company can't afford to give 5 percent. The parties are still negotiating an outcome.