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COMMENT: Strength through desperation: Suppliers threaten to halt automakers' production

COMMENT
Franz W. Rother is Editor-in-Chief of Automobilwoche

The situation regarding steel prices and raw materials is more serious than ever.

The raw materials committee of the VDA has set up a task force to find a way out of the crisis.

Buyers from steelworks and foundries are in a desperate, global search for scrap iron, coke and other raw materials.

The automakers' marketing strategists are already debating when they can pass on the increased cost of manufacturing and parts to the car buyer -- and how much they can pass on.

Finance executives at mid-sized supplier companies see bankruptcy looming before their eyes and are sweating with fear. Five companies have already thrown in the towel and declared insolvency.

The last raw-materials crisis happened in the early 1970s when the OPEC embargo on oil exports caused an energy crisis.

This time the demand for cars in China is one of the main causes of the crisis. The booming Chinese market is devouring much of the world's resources and causing the price of coke and steel to rise sharply.

Arcelor, the world's biggest steel company, will increase its prices for the third time in the summer. ThyssenKrupp, another steel giant, is also considering a price hike.

Extra pressure is coming from the USA where steel companies are hoarding raw materials out of fear of shortages -- causing pain for European and Asian firms.

The auto industry is getting ready for more price increases and shortages. And the VDA is already preparing for the worst-case scenario: production stoppages this summer.

If that happens the companies that are affected cannot complain. They are themselves responsible for the shortages.

Automakers have massively expanded production in China in the past three years, so much so that even the Chinese government is warning of overcapacity.

Now they are reaping the bitter reward of their strategy. Overcapacity will further heat up competition in the Chinese market. This will cause car prices to drop in China to maintain consumer demand. But it will also worsen the raw materials problem and cause car prices to rise in other markets. Car buyers are used to discounts and will not accept any price hikes.

The consequence will be that people will keep their cars longer and new-car sales will plummet.

The solution is automakers and suppliers working together in a cooperative atmosphere. But that's unlikely at the moment.

Some automakers show zero understanding of the suppliers' plight and refuse to cover their share of the rising costs of raw materials.

Quite the opposite -- some are pressuring their "partners" into further price reductions and efficiency measures.

But they should be careful -- they might be hit from behind. The suppliers' association has already threatened to bring production to a standstill at automakers that don't cooperate by sharing the burden of price rises.

Some suppliers even have a priority list to determine which customers will receive deliveries when materials run short.

The balance of power could change from the automaker to the supplier very quickly.

Actually suppliers were always strong. It seems as though some have decided to use their strength -- out of desperation.

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