DETROIT - Lear Corp. is forcing its toolmakers to pay a lump-sum rebate for projects already completed and in progress. It gives Lear millions in extra income.
Lear began demanding the rebate this last spring, according to sources.
Lear, a seat maker based in Southfield, Mich., also has targeted will demand rebates from custom molders and material suppliers, for rebates, sources said.
But toolmakers could be hardest hit. Sources say Lear seeks rebates of 3 to 5 percent on tooling payments, retroactive to 1998.
Lear might have had little choice but to ask for the rebates. Some of Lear's customers have sought similar price give-backs from Lear, said Edgar Faler, an analyst with Detroit-based Olde Discount Corp. in Detroit.
'They are under pressure from their own customers,' Faler said. 'Lear had to get more aggressive with suppliers, it seems, to try to respond.'
Lear's move also could be driven by the result of in-house debt problems. During the past year, the company purchased UT Automotive and the seating business of Delphi Automotive Systems.
Currently, Lear has long-term debt amounting to 65 percent of total capital. Some analysts say Lear is at the upper end of a debt burden that any company would want to carry.
Based on estimates by several sources familiar with Lear's tooling program, Lear pays $40 million to $80 million annually for tooling, which would equate to rebates of as much as $4 million annually.
THINNING THE RANKS
Lear officials said they recently completed a major consolidation of the company's supply base of mold makers and offered them long-term contracts.
As a result of various acquisitions, Lear had more than 100 toolmakers in its supply base, said spokeswoman Karen Stewart-Spica. Lear spent the past 12 months evaluating evaluated those suppliers during the past 12 months those suppliers, and now with the consolidation, works with fewer than 20 tool shops.
The consolidation and long-term contracts will benefit Lear, its suppliers and its customers, according to Stewart-Spica. Reducing the supply base allows enables Lear to cut time and costs, which it expects to translate into savings for customers. Long-term contracts will help toolmakers gain future business with Lear.
Lear officials declined to discuss details of the price give-backs. But 10 sources associated with Lear tool shops, Tier 2 molders and material suppliers confirmed that Lear is rolling out the rebate policy. None wanted to be identified for fear of jeopardizing future Lear business with Lear.
Lear has told toolmakers that the price rebates give Lear an incentive to give mold shops opportunities for new projects.
'If you want to play, you've got to pay,' said a toolmaker familiar with the program.
Others said such a move - especially if mimicked by other parts suppliers - could force a long-anticipated shakeout of tool shops.
'We buy equipment and price jobs with Lear based on profitability and affordability,' said a toolmaker. 'The books were closed on many of those jobs, and now they want more money. We can't run our business that way and expect to earn a living.'
25% GROSS PROFIT
In the auto industry, tool shops already operate with thin profit margins, said Jeffrey Mengel, an analyst with Plante & Moran LLP, a consulting firm in Southfield, Mich. Many of them are small businesses, with annual sales of $5 million to $50 million.
Toolmakers generally make a 25 percent gross profit margin in the auto industry, compared with 35 percent in other markets, fields, Mengel said.
'Toolmakers are typically involved upfront in the program management of any new product launch,' Mengel said. 'They make money based on decisions made in that time frame. Going back later compromises their ability to make money.'
Still, toolmakers should expect similar aggressive behavior from other parts suppliers, said Richard Hilgert, an automotive analyst with Detroit-based Fahnestock & Co. Inc. in Detroit.
'When you have (carmakers) beating up on Tier 1 suppliers and requiring them to do more to provide a complete package, those suppliers have to turn around and beat up on toolmakers,' Hilgert said.
Some larger tool shops could benefit from the industry's tough-love approach. The current climate favors better-financed tool shops that can take on parts design and prototyping, said Ron Beneteau, business development manager of toolmaker Reko International Group Inc. of Oldcastle, Ontario.
'Suppliers are making tool shops grow up a little bit and rise to the occasion,' Beneteau said. 'The cream of the crop will rise to the top, and the well-capitalized companies will best be able to stand up.'
Reko officials did not comment on Lear's new rebate policy.
LEAR EASED DEMANDS
Originally, Lear wanted even more from its toolmakers. When talks began this last spring, the supplier asked its mold makers to guarantee that tools would not break when running on Lear presses. If that happened, the toolmaker would be responsible to have to pay for damages and press downtime, sources said.
But, after numerous face-to-face talks with tool shop operators, Lear backed down from that demand, sources said.
Several companies have negotiated terms with Lear, whittling down the price percentage and demanding specific future contracts. However, Lear has budged only slightly, several sources said.Some industry experts said the retroactive nature of Lear's request is the most unusual aspect. Many large parts suppliers ask for price give-backs going forward, said John Groustra, a partner of Conway MacKenzie & Dunleavy, a turnaround firm basedin Birmingham, Mich.
But Groustra said he had not heard of a retroactive request.'It's very unusual because of the unexpected nature of that request,' Groustra said. 'All the things (a supplier) might do to mitigate its impact don't apply. With a retroactive request, you can't manage finances as you go along, or work on productivity improvements.'
Still, not many toolmakers can afford to turn down the agreement, Mengel said. Their business is driven by the need to keep machines running at capacity, he said.
'If Lear is going to give volume, many mold makers would be intrigued enough to pay the 3 to 5 percent,' Mengel said. 'However, I haven't seen any guarantee of loyalty from Lear.'
HIGHER REBATES SOUGHT
The company has gone after other suppliers for price give-backs. Several suppliers of plastic material said Lear asked them for at least a 3 percent 'instant rebate' in October 1998 in exchange for promises of future business.
And three molders doing work with Lear said the company recently has tried to get rebates of 10 to 15 percent from them, retroactive to Jan. 1. Several molders negotiated the give-back down to single digits.less than 10 percent.
'They also wanted us to take more responsibility for warranty issues,' said one supplier. 'We had no choice but to sign.'
The practice of seeking deep price cuts gained prominence in the early 1990s at General Motors under former purchasing czar J. Ignacio Lopez. In the mid-1990s, GM launched a program dubbed 'Current Savings' that required suppliers to offer rebates in return for future business.Suppliers also face pressure from Ford Motor Co. Recently, Ford began to require that suppliers own tools for certain parts and systems, said Ford spokesman Ron Iori. Ford also wants suppliers to make common tools that can be used by several carmakers, Iori said.
'We picked tools that we thought had the greatest opportunity to reduce total value-chain costs,' Iori said. 'We think suppliers will drive some efficiencies as they standardize and share capacity among automakers.'
The program now is starting on certain molds and dies built for 2003-model-year vehicles, Iori said. It includes parts for door locks, radios, driveshafts and window regulators, among others, he said.
The company could use the added funds to bring down the percentage, he said. But for toolmakers, the move could spell disaster, said one mold builder.
'Universally, we're feeling the crunch,' said the source said. 'Some suppliers think we're making a ton of dough. As a matter of fact, we're not. This move could be very dangerous to our industry.'