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The Wall Street Journal
October 19, 2004
Auto Sector Woes Squeeze Suppliers;
Prices for Raw Materials Are Rising, But Car Makers
Won't Pay More for Parts
By Paul Glader and Neal E. Boudette
Just as the economy is supposed to be picking up steam, the auto sector is facing a new round of
weak earnings and job cuts in part because of a new twist on an old demon: inflation.
Prices of steel and petroleum-based plastics have soared, squeezing suppliers unable to pass along
the cost increases to auto makers, which are in the midst of their own price war. The result is a
crisis among the auto suppliers employing tens of thousands of people across the Midwest.
Yesterday, Delphi Corp., once part of General Motors Corp., reported a third-quarter net loss of
$114 million. Visteon Corp., which was previously part of Ford Motor Co., is expected to report a
substantial loss on Thursday. More bad financial news is due next week from Tower Automotive
Inc. and Dura Automotive Systems Inc. Some smaller suppliers are shutting down, moving
abroad or seeking bankruptcy protection, a route Citation Corp. and Intermet Corp. took last
month.
For the past few years, U.S. auto suppliers have had to contend with fierce competition from lowcost
Chinese competitors and constant demands for price cuts from auto makers. This year,
suppliers are being whacked by a spike in raw-material costs, with spot-market steel prices for
hot-rolled coil, a benchmark product, more than doubling in the past 12 months to about $750 a
ton in September, before falling back to about $675 a ton in recent weeks. Commodity prices
have declined in the past week on a variety of materials, including copper, nickel and lead, partly
because of worries of a slowdown in China. Still, many small and midsize auto-parts makers said
the relief isn't significant enough to reverse their fortunes.
"You can't absorb all the raw-material costs and continue to provide the huge price reductions"
required by the auto makers, John Barth, chief executive at Johnson Controls Inc., said this month
in a conference call. Johnson Controls' automotive unit, which makes seats and interiors, is
profitable and faring much better than many suppliers, but nevertheless announced last week that
it was cutting 350 jobs at several Michigan locations to keep its costs down.
GM confirmed that some of its suppliers have asked the company to help shoulder the rise in steel
prices. It has begun selling scrap metal to some suppliers at below-market prices, but so far hasn't
been willing to consider paying more for parts. "We want our suppliers to honor the contracts we
have with them," a spokesman said.
For some U.S. parts makers, the rise in material costs is biting particularly hard now because GM
and Ford are loaded with unsold cars in their dealer networks and are scaling back production.
That means there probably are more lean months ahead.
"Clearly, there's an inventory bubble, and the production cuts won't be complete by the end of the
quarter," Delphi Chief Financial Officer Alan Dawes said. "Our plans for next year are going to
have to take that into account." Delphi plans to close three plants in the fourth quarter.
The hardest hit of all are companies that make simple metal assemblies, for whom steel can
account for half of their costs, said William Gaskin , president of the Precision Metalforming
Association, based in Independence, Ohio. "If you are not getting relief from your customers, you
get stuck."
At AMI Reichert Stamping Co. in Toledo, Ohio, workers are producing the last runs of auto parts
such as window channels, brackets and shift gates for larger auto suppliers like Delphi and
Visteon.
Reichert is selling off its stamping presses, giving back its tool-and-die equipment and closing its
doors Oct. 29, leaving about 65 workers without jobs and a 225,000-square-foot plant vacant in a
town already hard hit by manufacturing layoffs.
During boom times, the plant employed about 250 workers and brought in about $30 million
annually.
"We have been working to turn it around and were starting to. But the main difficulty was getting
our customers to accept material surcharges," said Dennis "Pete" Peterson, president of the
company. "That's the reason we are shutting it down."
Foreign companies accepted the 50% surcharge, he said. But some U.S. customers threatened to
sue the small metal-stamping company if it tried to pass along surcharges on parts, as steel prices
jumped 100% to 200% on some key products this year.
The plant closing is another blow to the Toledo area. Alcoa Inc.'s nine-year-old plant in
Northwood, Ohio, which employed 140 people to make electrical components of automobiles, is
closing by the end of the year. Production has shifted to Mexico. And the 73-year-old Gerity-
Schultz Inc. plant that makes carburetor bodies closed Thursday, putting 34 people out of work.
"We had a good run at it," said President James Murtagh, 80.
Mr. Peterson of AMI's Reichert Stamping said that after 38 years in the auto business, with GM
first and later as a manager of auto-manufacturing plants, he wants to find work in a different
industry.
"Times have changed now. The trust level between customers and suppliers is just not there
anymore," he said. "They preach there is a team concept. There really isn't. There is a lack of trust
between customers and suppliers in this country right now."
Write to Paul Glader at Paul.Glader@wsj.com and Neal E. Boudette at Neal.Boudette@wsj.com
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