DETROIT — Amid unstable currency rates, political upheaval and economic strife, Brazil and other South American markets have become flashpoints between automakers and suppliers in recent years.
The turmoil has sapped demand and prompted automakers to slash production, causing ripple effects among suppliers that had geared up to meet higher volumes. The weak currencies have made it more expensive for suppliers with Brazilian operations to source parts from North America and Asia, eroding their profits.
For General Motors, the situation has led to “a lot of debates and arguments” with suppliers about who should shoulder the bulk of those costs, says GM global purchasing chief Steve Kiefer.
“For less than 10 percent of our business, you wouldn’t believe how much time I spend with suppliers arguing about South America,” Kiefer said in an interview last month. “That’s really a waste of all of our time.”
The problem emerged as a key issue on one of GM’s largest vehicle programs: a new global platform for emerging markets that eventually could underpin 2 million vehicles in Brazil, Mexico, China, India and elsewhere. The company is spending $5 billion on the project through 2019, a bid to improve its brands’ appeal with up-to-date products. About $1.9 billion of that will be spent in Brazil.
To help insulate against the exchange-rate problem, GM has been trying to coax global suppliers to set up operations in South America, which will account for around 40 percent of the volume of the emerging-market program. For suppliers and GM, having a bigger chunk of the cost base in the same market where they are buying parts and selling cars will mitigate negative currency moves. But the headaches that have been emanating from Brazil and other Latin American markets have many suppliers reticent to invest in the region, Kiefer said.
In response, GM is offering more-flexible contract terms to several hundred suppliers on the global emerging-market project. Called Collaborative Contract Management, GM may reassess contract terms annually in the face of economic turmoil or when exchange rates and commodity prices fluctuate sharply.