Automotive Engineering - June 2022 - 4

SUPPLIER EYE
Inflation ignites another supplier squeeze
F
or more than 100 years, OEMs and suppliers
have partnered to build components,
engineer and integrate systems,
offer services such as logistics, software,
and marketing support, and even manufacture
complete vehicles. Some of these relationships
have lasted decades -transcending corporate
buyouts and mergers, new leadership and shifting
technology requirements. Others have been,
well, short-lived. In the end, OEMs can't build
today's vehicles without a vibrant and stable
supply base. And suppliers have a finite number
of OEM customers. It is an ongoing dance, refined
over time.
During the past couple of decades, while U.S.
inflation roughly averaged 2%, suppliers were integrating
economics into the bulk of their production
costs over the life of the program cycle when quoting
business. A cycle is approximately five years
for vehicles and a couple years longer for powertrains.
Additionally, many suppliers have enjoyed
the reduced risk of material resale programs (the
OEM or Tier 1 buys the material) or they are able to
adjust pricing on a quarterly cost index structure
- popular with plastics-resin buys. Whatever the
structure, suppliers still assume numerous risks
over the program cycle - everything from unpredictable
volume swings, logistics turmoil, labor
issues and infrastructure costs.
Until recently, such risks were viewed as 'controllable.'
But recent gyrations in manufacturing
economics are testing even the strongest of
these relationships.
As I write this in early May, U.S. inflation is the
highest since 1981, and the industry is reeling.
From January 2021 to March 2022, the S&P
Global U.S. Materials Price Index rose 92%. Coldrolled
steel skyrocketed by 56% and WTI (West
Texas Crude) petroleum jumped 108% over the
same period. While some readers will note that
commodities are inherently volatile, labor costs
also have escalated. Wage rates rarely ratchet
downward, especially in an economy with sub4%
unemployment.
Rising wages and fuel costs also lead to rising
logistics costs. In recent columns, I've articulated
how suppliers have been impacted by the inflation
driven by ILL - Inputs, Labor and Logistics.
Russia's war with Ukraine and its subsequent impact
on global supply chains for several key automotive
inputs have only extended this problem.
Suppliers are caught in the middle. RawMichael
Robinet
Executive Director,
Consulting,
S&P Global Mobility
SAE Foundation
Trustee
michael.robinet
@spglobal.com
The chief
concern is
the ability of
smaller Tier
2s without
deep pockets
to weather
sustained
inflationary
pressures.
material suppliers follow the hills and valleys of
market dynamics with variable pricing driven by
supply and demand. OEMs can adjust real pricing
through modifications in vehicle MSRPs, incentives
and adjusting content. But they need to
proceed carefully. Though inventory currently is
low in historical terms, competition will again
heat up as inventories start to rise - we can't
stay at 25 days' supply forever.
With all or a portion of supply contracts being
fixed over a cycle, component suppliers are
sandwiched in an increasingly difficult situation.
After close to three years of erratic production
volumes and inefficiencies driven by COVID, the
chip supply crisis and a host of other factors -
suppliers are seeking a stable environment.
Secular shifts such as the impact of vehicle electrification
ensure that more challenges are looming.
Many Tier 1s and larger Tier 2s have strong
balance sheets and are diversified across several
automotive sectors, or even have non-auto exposure.
The chief concern is the ability of the
smaller Tier 2s without deep pockets to weather
sustained inflationary pressures.
In the end, the industry must ensure a viable
supply base. The ability for suppliers to innovate
and invest in new technologies, take advantage
of new production structures and react
to emerging opportunities is critical for all industry
participants.
4 June 2022
AUTOMOTIVE ENGINEERING
Automotive Engineering - June 2022

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