For automotive suppliers, the nightmare has come true: DaimlerChrysler's demand for an across-the-board price cut has triggered a wave of price cutting throughout the industry.
Unwilling or unable to absorb the automaker's demand, large Tier 1 suppliers have begun passing on DaimlerChrysler's price cuts to hundreds of smaller companies.
Interior supplier Magna International Inc. moved quickly to offset the effects of Chrysler's pricing demand by reaching out to its suppliers. In a Dec. 21, 2000 letter, a procurement officer for Magna's interiors group ordered his suppliers to cough up a 5 percent price reduction effective Jan 1 - matching the DaimlerChrysler demand.
Even other automakers are feeling market stress. Honda of America Manufacturing Inc. sent a letter to suppliers in early January for more aggressive price cuts than last year. Honda, which is calling for price cuts ranging from 2 percent to 3 percent, is 'experiencing increasing competitive pressures based on the weakening market conditions,' the letter stated.
Larry Jutte, Honda of America's senior vice president for purchasing, called on his suppliers to support another year of cost cutting to strengthen Honda's market position and assure 'continued demand for your parts.'
Suppliers in a bind
Suppliers have sustained years of automakers' pricing demands. But DaimlerChrysler's sudden demand for the 5 percent price cut upset suppliers' balance sheets because of its size and timing.
Craig Fitzgerald, a partner with consulting firm Plante & Moran LLP of Southfield, Mich., said suppliers are in a bind. 'Margins for suppliers are too thin, debt levels too high, and lower vehicle production volumes will cause many suppliers to go from miniscule profits to losses.'
The winners in such a pricing strategy, he said, are 'poor quality, low innovation, low-cost suppliers, bankruptcy attorneys and turnaround firms.'
But DaimlerChrysler is counting on its 2,000 suppliers to meet this year's price cut to lessen its $40 billion parts-and-materials tab by $2 billion.
For suppliers who quickly agree to pony up their share, the automaker's procurement executives are promising rewards. But those who refuse could be in line for punishment, according to supplier executives familiar with the automaker's tactics.
'Those who pay up will be rewarded,' said one supplier CEO who has agreed to pay. DaimlerChrysler will not 'shop' your product to competitors and will limit your price cut to 5 percent this year. The automaker also will help a supplier recover the 5 percent cut from his Tier 2 and Tier 3 suppliers.
For those who refuse, he said, DaimlerChrysler is prepared to set an example this month. The automaker plans to terminate business with a few suppliers whose products are easily replaceable, such as commodity parts.
DaimlerChrysler has not closed the door on negotiations. Chrysler Vice President Peter Rosenfeld was open to various cost-cutting schemes, not just grabbing supplier profits, according to a senior officer with one of the automaker's largest suppliers.
But suppliers fear than any capitulation to DaimlerChrysler's demand will lead to similar demands from General Motors and Ford Motor Co. 'Every time a GM or Ford procurement officer calls, they always ask `what are you doing with Chrysler?' ' a general manager for a large Tier 1 company said.
Demands trickle down
The upheaval created by DaimlerChrysler appears to have prompted the Automotive Systems Group of Johnson Controls Inc., to ask for comparable savings from its Tier 2 and Tier 3 suppliers. Fully 50 percent of the material costs for the Plymouth, Mich., interiors supplier are in the products it buys.
'It is impossible for JCI to meet the additional requests for cost reductions without your direct involvement,' said Larry Alles, the company's vice president and general manger for worldwide purchasing, in a letter to suppliers dated Jan. 4.
Visteon Corp. has minuscule DaimlerChrysler business, but it is seeking greater cost savings from its suppliers as part of its efforts to win new business. The company's Interiors/Exteriors division recently asked its suppliers for a 10 percent price cut this year - a much higher percentage than the company seeks this year, said Susan Skerker, a Visteon senior vice president.
Visteon, which last year cut $590 million in costs from suppliers, manufacturing waste, material procurement and other efforts, told analysts recently that its new target is $700 million.