DEARBORN, MI – Frank Macher allowed the unthinkable to happen.
As president and CEO of bankrupt supplier Collins & Aikman Corp., he was in the loop in mid-October when his company stopped shipment of interior parts toMotor Co.’s Hermosillo, Mexico, plant in a dispute over component prices.
The Hermosillo facility, which producesFusion, Lincoln MKZ and Mercury Milan sedans, shut down temporarily as a result.
Pricing disputes are common as domestic auto makers and suppliers struggle for survival in a tumultuous North American market, but stopping shipment of components remains a rare occurrence that comes only as a last resort.
As a 30-year veteran of Ford who led the auto maker’s components business before it was spun off asCorp. in 2000, Macher understands as well as anyone the gravity of Collins & Aikman’s actions.
So much so that less than a week after the shutdown, Macher took to the stage here at an industry conference hosted by the Center for Automotive Research to call for some sanity in the deteriorating relationship between suppliers and OEMs.
He kept his promise not to discuss the details of the dispute with Ford, but he closed his speech with a story about a plant he visited in Czech Republic while at Ford in the 1990s. Lights would turn on and employees would do their jobs only when Macher and his entourage walked by. He asked the managing director why.
“He said, ‘Well, they pretend to pay us, and we pretend to work,’” Macher recalls. “I don’t think that’s the appropriate relationship for us and our customer. I don’t like it when they pretend to pay me, and I don’t like to shut anybody down.”
Still, Macher is hardly conciliatory in his speech, in which he proposes a “Bill of Rights” to govern OEM-supplier relations.
Using terms such as “immoral,” “shenanigans,” “sin” and “horrible,” Macher lays bare the dynamic that has driven many suppliers into bankruptcy or entirely out of the industry.
He refers to supplier-funded tooling as a key cause for supplier failures. Often, suppliers are required to pay for tooling to produce vehicle components, with the understanding they will be reimbursed by their OEM customer when the tools are approved for production.
“For a number of reasons, there are cases where it’s almost impossible to get tools (approved),” Macher tells the crowd. “And as a result, production is started with unapproved tooling, and it may run one or two years without the supplier receiving reimbursement for tooling.”
In addition, suppliers now are shouldering a disproportionate share of engineering and product-development cost, with little hope for compensation. These responsibilities are spelled out today in “global terms and conditions” as written by OEMs, Macher says.
“We’re not in an evolutionary environment any longer where the terms and conditions were modified and adjusted over a period of time,” Macher says. “Where we are today is in a radical sea of change, a tsunami of unprecedented proportions: untold supplier bankruptcies, closures, sell-offs and, with a few exceptions, an ever weakening of a supply base. It becomes more and more obvious every day that major disruptions are on the horizon because of insolvency and liquidations.”
Another source of supplier trouble is vehicle programs that fall far short of the OEM’s projected volumes. Suppliers with a heavy reliance on Detroit auto makers also have excess capacity as those OEMs lose market share.
As Detroit loses share, Japanese auto makers are gaining it. Yet, U.S. suppliers have struggled to win business with the Japanese, particularly in the area of plastics.
Macher says Japanese auto makers typically produce internally such Collins & Aikman components as instrument panels and bumpers, or outsource them to fellow Japanese keiretsu suppliers.
“So whenever we see a Japanese car sold instead of a U.S. car, in many cases you’re seeing a loss of business for the entire plastics industry,” Macher says.
Other pressure points are volatile raw material prices (particularly for resin and steel) and unrelenting pressure from OEMs to slash component prices. Macher says OEMs are strong-arming plastics suppliers that make money on other components.
“Wherever there’s excess capacity as there is in plastics, the lever can be played to the benefit of an OE and to the hurt of the supplier,” Macher says. “’You make money on electronics? Fine, give us a price reduction on plastics. You make money on seats, give us a price reduction on plastics,’” he quotes OEMs as saying.
“As a result, the entire plastics industry is in disarray,” Macher says.Corp., for instance, has said it is exiting the plastics industry and instead is focusing on its more profitable products – namely seats and electronics.
Corp., which also is in bankruptcy, is exiting automotive plastics, and Corp. gave its plastics plants back to Ford last year. Ford is attempting to sell them as part of the Automotive Components Holdings LLC unit.
“We will all be smaller in number,” Macher says of automotive plastics suppliers, which he expects to drop in number from 14 to five. “But I think we will be healthier.”
To fix the business model, Macher proposes a Bill of Rights stating clearly what auto makers and suppliers should expect from each other.
OEMs deserve top-quality products built to specification every time; on-time delivery; first-rate technology and service; competitive component prices; and collaboration to achieve affordable cost targets.
From OEMs, suppliers deserve realistic product volume projections. “If you miss on a volume, you pay us those fixed costs that were attributed to that volume miss,” Macher says.
Suppliers also are entitled to a “pay as you go commitment” for product development; timely tooling reimbursement; protection of proprietary technology; an end to OEM market testing of a supplier’s technology; a framework for resolving commercial disputes; and an indexing mechanism for the OEM and supplier to shoulder high costs for raw materials.
In addition, Macher insists auto makers refuse to award contracts they know are unprofitable. He says auto makers have “very capable financial analysis departments” to determine if a supplier makes money on a particular contract.
“And they can also determine who is buying the business (taking a contract at a loss),” he says. “To allow that to happen, to allow people to bid on business three years down the road that they know is under water to start, is immoral.”
At issue is the ability of the supply chain to post profits in the U.S. auto industry. “It is not a sin to make money. It’s good,” Macher says. “And it assures the shareholders will stay with you, that your employees are taken care of, that you have a viable business.
“Healthy suppliers make for healthy customers because they can provide better technology and better feature content for that customer.”
Macher refers to fellow conference speaker Thomas Stallkamp, industrial partner at Ripplewood Holdings LLC, a private equity fund seeking potential acquisitions in the supply base.
Stallkamp, former president of DaimlerChrysler Corp., says Detroit auto makers are under the impression that if they lose money, their suppliers should, too.
“Boy, does that make a lot of sense,” Macher tells the crowd. “So I’ll tell you this: If I ever go bankrupt, I’m going to expect every one of you guys in here to go bankrupt, too. That’s the way it should work, right?”
Macher says he would like to present his proposed Bill of Rights at a meeting of the Original Equipment Suppliers Assn., and that he hopes to draw support from other suppliers.
“It really is a question as to whether or not this supply industry is truly willing to band together on certain principles and conditions that they would like to achieve,” Macher says.
Asked by moderator David Cole if now is the time for suppliers to push back against OEM price pressures, Macher says: “Each supplier has to make their own decision as to whether or not they can weather the storm. Whether or not to take more aggressive action, that’s their decision.”
Later, he declines to tell journalists what specifically prompted Collins & Aikman to stop shipment. “All I can say is, it was a logical step, and a rational businessman would unfortunately have to make that decision,” Macher says.
He also declines to speculate as to whether the supplier is prepared to stop shipment again. “Let’s see how everything plays out,” he says. “Now, I think we’re on terms that should assure continued deliveries.”