Automotive News - August 11, 2008 - (Page 47) AUGUST 11, 2008 • 47 Steel futures market: A cure for high prices? David Barkholz and Robert Sherefkin dbarkholz@crain.com Carmakers, parts stampers and other metal-hungry suppliers see the market as a way for them to lock in future prices as a hedge against big spikes. creases, we welcome the various proposals that are being offered as ways to manage the cost of steel,” said General Motors spokeswoman Deborah Silverman. “The NYMEX proposal is one more option that we will review in determining the most appropriate overall strategy for us.” Chrysler LLC spokesman Kevin Frazier said the automaker also is evaluating the NYMEX plan. Steelmakers generally dislike the plan, preferring to meet customer demands through direct negotiations. The steelmakers also warn that speculators could drive up futures prices. In recent months, the negotiating edge has gone to the steelmakers in their talks with auto steel users. Since December, the price of steel Automakers and suppliers are inspecting a potential new weapon in the war on steel price volatility. This fall the New York Mercantile Exchange will launch a futures market for domestic hot-rolled coil steel. Carmakers, parts stampers and other metal-hungry suppliers see the market as a way to lock in future prices as a hedge against big spikes. They also hope the market will provide a public posting of steel prices, in contrast to today’s bazaarlike haggling. “In light of the recent steel price in- used in frames, bumpers and wheels has nearly doubled to $1,000 per ton. The domestic industry, riddled with bankruptcies earlier this decade, now enjoys massive profits as price increases more than offset the rising cost of steel-making raw materials. For example, U.S. Steel, of Pittsburgh, more than doubled net income in the second quarter to $668 million on a sales increase of 60 percent compared with the year-earlier quarter. Neil De Koker, president of the Original Equipment Suppliers Association, said parts makers could peg steel price pass-throughs — whereby suppliers pass a portion of higher costs through to customers — to futures contracts. That would prevent some of the tumult of having to constantly negotiate the size of passthroughs with the automakers — a tough and often ugly business. Michael Chupa, CEO of CRH North America Inc., of suburban Detroit, said the maker of steel seat adjusters is taking a wait-and-see approach to the new futures market. CRH and many other stampers have steel inventory because of the fast fall of North American vehicle production in recent weeks. CRH’s global revenue is about $750 million annually and $200 million in North America. c Suppliers salute Ford The Working Relations index measures automaker-supplier relations based on 284 suppliers’ responses to a survey. Points are awarded in several categories, and the maximum score is 500. Ford was the big gainer this year but still trails its Japanese rivals. 2008 2007 2006 2008/2007 % CHANGE CHRYSLER Needs products, not just cash flow continued from Page 1 Toyota Honda Nissan Industry mean Ford GM Chrysler 367 359 253 249 191 163 161 415 380 289 270 162 174 199 407 368 300 266 174 131 218 –11.6% –5.5% –12.5% –7.8% 17.9% –6.3% –19.1% Source: Planning Perspectives Inc. SUPPLIERS Survey bad news for most big automakers continued from Page 1 Henke sampled 284 Tier 1 suppliers between mid-April and mid-June. The suppliers awarded points to the six major North American automakers in such areas as help from the automaker, pressure to reduce prices and improve quality, profit opportunities and the ability to recover material cost increases. The study is important for automakers because good supplier relations can cut costs, boost efficiency and increase access to supplier innovations. they have significantly pulled back in the critical areas of sharing new technology and investing in new technology. Two years of worsening supplier relations have “resulted in suppliers treating Chrysler as Chrysler has been treating them,” he said. Last week, Dana Holding Corp. asked a bankruptcy court to allow it to end its business with Chrysler by the end of this year. (See story, Page 8.) ‘Culture change’ required Sig Huber, Chrysler’s director of supplier relations, who came from Toyota in May, declined to comment on the study because he has yet to see it. But in the past six months, he said, Chrysler has eliminated several processes that suppliers found to be wasteful, costly or unnecessary. Better supplier relations, Huber said, require “a culture change, and that will take time to take effect.” Suppliers to Honda and Toyota are investing more this year than last, but the pace has slowed, Henke said. The study turned up two surprises in the category of pressure on suppliers to reduce prices. Toyota, after years of reducing pressure on its vendors, turned up the heat. But Ford’s reputation for heavyhanded tactics to reduce prices was not borne out by the study. It found that Ford pressure had declined every year since 2004. Henke gave high marks to Alan Mulally for Ford’s improved survey results. The Ford CEO, he said, has acknowledged supplier-relations problems and has taken a hands-on approach to improving those relations. Henke also credited Ford’s decision to repair its tattered supplier ties by moving Paul Stokes, its popular head of European purchasing, to Ford’s Dearborn, Mich., headquarters late last year. c Overall, relations still bad Overall supplier relations suffered as Chrysler, Nissan and Toyota dropped to their lowest levels in five years. Chrysler has fallen 26.1 percent in just the past two years. And Ford, despite its 17.9 percent gain this year, is far behind its Japanese rivals. Even after Toyota’s dramatic decline in the 2008 Buyer-Supplier Working Relations study, both Toyota and Honda Motor Co. have a commanding lead in good relations with their suppliers and are by far the top choices to do business with, Henke said. Nissan consistently ranks third but “is just sitting there getting worse and worse,” Henke said. Every year since beginning the study in 2002, Henke has found that suppliers decreased investment in r&d spending and service and support for the Detroit 3. This year was no different for the Detroit 3. Suppliers also cut spending in those two areas for Nissan. Chrysler suppliers told Henke that company’s cash flow is strong? Actually, Press appears to be correct — in the short run. Chrysler has sold assets, trimmed truck and minivan output, closed plants and announced the elimination of 29,000 jobs since February 2007. The company also says it has $11.7 billion in cash and marketable securities — up slightly from $10.6 billion a year earlier. And for the first six months of the year, the automaker says it generated a positive cash flow of $1.1 billion. By the way, Chrysler measures cash flow as earnings before interest, taxes, depreciation and amortization. That’s the figure investors use to determine whether a company can pay its bills. So a positive cash flow is good news for such an embattled company. Because Chrysler is privately held, it is not obligated to publish financial information. But certain data — such as inventory, per-vehicle incentives and production capacity utilization — are publicly available. Here are some useful indicators: As of Aug. 1, unsold vehicle inventory totaled 409,300 units, down about 55,000 from the same date a year earlier. So Chrysler’s decision to slash output has kept inventories from ballooning. On the downside, its days’ supply of unsold vehicles is higher because sales are so poor. Incentives totaled $4,022 per vehicle in July, according to Edmunds.com. Jim Press’ claims about strong cash flow appear to be correct — in the short run. Since February 2007, Chrysler has sold assets, trimmed truck and minivan output, closed plants and announced the elimination of 29,000 jobs. While that remains well above the industry average of $2,652, it’s down about $300 from a year earlier. Production capacity utilization is only 79 percent, down from 95 percent a year earlier, according to the Oliver Wyman Group, a consulting firm. This hints at the price Chrysler pays for controlling its vehicle inventory. While Chrysler’s cash flow looks good now, it’s unclear whether the automaker has earmarked adequate capital for product development, says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich. “If you shut down all product development, you could show a profit for a short period of time before the public rejects you,” McAlinden says. For the record, Chrysler has forged a partnership with Nissan to produce a small car in North America. Last week, The Wall Street Journal reported that the two companies are talking about developing a mid-sized car, too. And Chrysler still hopes to develop a small car with Chinese automaker Chery Automobile Co. But Chrysler has been vague about its progress with Chery. Worried dealers Moreover, dealers complain that Chrysler is not spending enough cash to advertise its products and programs. Dick Greenfield, owner of Dick Greenfield Dodge in Lawrenceville, N.J., wishes Chrysler would spend more money on advertising to help him bring customers into his showroom. Greenfield says he closes many deals with customers who visit his store. “We talked to Chrysler. We said we’ve got to have something to drive traffic,” says Greenfield, who adds that his store suffered “a horrible July.” Until Chrysler resolves its product plans — and backs it up with adequate advertising — Moody’s and the rest of Wall Street will remain downbeat. c Ford exec to head CCS design department Craig Trudell ctrudell@crain.com DETROIT — A Ford Motor Co. chief designer will head the design department at the College for Creative Studies here. Larry Erickson, 51, most recently worked on advanced vehicle development in Ford’s strategic design group. In his nine years with Ford, Erickson also was chief designer on th http://Edmunds.com
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