Detroit: The End of an Era

You didn’t have to look very hard last week to find evidence that times are changing in Detroit. Ford (F) lowered expectations for ‘09 and is (finally) moving towards a smaller, more fuel efficient lineup. And although it didn’t gain a great deal of national attention, the dissolving of Plastech signals a major shift in the way American automakers will need work with, rather than against, their suppliers. Plastech, a leading maker of plastic auto parts and assemblies, filed for Chapter 11 earlier this year. Unable to turn things around, they peddled their various divisions to former competitors and auctioned their remaining pieces this week.

There were several factors that brought Plastech down, such as their lack of a diversified customer base and soaring prices for raw materials. But like a lot of Detroit suppliers, Plastech’s true Achilles heel was their long term fixed pricing agreements with the Big 3. Detroit auto makers’ ability to squeeze their suppliers is legendary. But the days of long terms fixed pricing agreements are likely over for any input that relies on volatile commodities. Those agreements may have looked good on paper, but they are unrealistic in the days of $130 oil and double-digit inflation in metals and plastics raw materials markets.

So what’s next?

The structure will vary depending on the commodities involved, but you can expect to see many of the prices automakers pay to be tied to indexes. For example, plastic resin and component contract price movements might be pegged to one of the many industry indexes. These indexes aren’t without their problems, but that added degree of flexibility in the pricing model will help suppliers deal with fluctuations in the price of their materials.

And speaking of flexibility, there will be a LOT more leeway written into the contracts. Quarterly pricing reviews will have buyers and suppliers syncing up regularly to find common ground. And agreements will look at the full cost of producing AND delivery in order to compensate for fluctuating fuel and freight costs.

Obviously a shift from strong arming suppliers to partnering with them is only part of the equation. The bottom line is…Detroit needs to sell more cars.

 

Comments

[windinmyface2:]

Lets face it, the technology is there, and has been there, for all the big four to use, or have used long ago. How many stories have we heard about a carb that could get 40 to 60 mpg, and the patent was sold to one of the big auto companies, and buried. Why not dig out some of these invention, and dust them off, and use them. Why not install Hydro. boosters? Anyone can buy, or make these at home, and install them, and claim to get 20 to 60% better mpg's. This could have been used years ago, and kept us ahead of the competition. Just like the oil shortages in the 70's, everyone dumped their LTD'S, Caddie's, and big Old's 98's for Subaru's, Nissan's, and Toyota's, and now it is happening again. I guess they didn't learn then, and as then, they have waited until to late to do something about it, and now they are in a panic. Its there, you own it, its needed, use it.

2008 Jun 03 12:06 PM

[OU812:]

folklore, but well put .

2008 Jun 04 05:44 PM