From Reuters News Wire

FRANKFURT, GERMANY — Caught between a rock and a hard place, automotive suppliers say they are determined to pass on steep rises in raw material costs to their customers even as carmakers step up pressure for lower manufacturing costs.

“There is no reason why we should subsidize the carmakers for higher raw material prices,” Thierry Morin, the chief executive of Europe’s largest listed car parts maker Valeo, said yesterday at the Frankfurt motor show.

His comments echo those of other suppliers, large and small, who are willing to continually reduce their production costs but are refusing to act as a cost shock absorber for manufacturers.

With carmakers, especially in the United States, suffering from debt downgrades or a negative debt outlook, purchasing bosses are trying to wring out even more cost reductions.

“It has always been like that and it will not go away,” Morin said about the pressure exerted by carmakers, saying the answer was a constant effort to raise efficiency and improve products to justify profit margins.

John Gardner, a vice president at aluminum producer Novelis said his company quotes its customers a price for manufacturing on top of the price of raw materials.

“We charge for our work. The client can either hedge for the raw materials itself or we can do it at their request, and for a fee,” he said.

France’s Michelin continues to raise tire prices to reflect the higher costs of rubber and steel. Its rival, Continental is also passing on price hikes but is at the same time putting pressure on its steel suppliers to cut costs, threatening to look for cheaper sources, like China.

“We are currently broadly reviewing the market so that we have alternatives in place,” Continental Chief Executive Manfred Wennemer told Reuters yesterday.

The world’s largest auto parts supplier, Robert Bosch GmbH, has fully hedged against rising steel prices and Chief Executive Franz Fehrenbach told reporters that he expected no impact on operating profits this year.

But smaller German supplier ZF Friedrichshafen was less optimistic. Chief Executive Siegfried Goll told Reuters the firm was “helplessly held hostage to higher steel prices.”

Still, while carmakers can use their buying clout to pummel the suppliers, they need to keep them alive or their own production would be in danger.

“For the very short term, that (price) is the subject of negotiation between us, our clients and our suppliers and we’ll see what comes of it. With carmakers whose financial health is not at its best, that is not easy to negotiate,” Faurecia Chief Executive Pierre Levy told Reuters last week.

“But in the longer term, when the wave of raw material price rises has gone over us, our clients need us and we need them. We have to make clear that we need to have a normal profitability on the products we make,” he said.

This was a feeling shared at the other side of the table.

Gilles Michel, head of purchasing at PSA Peugeot Citroen — which has a 71.39 percent stake in Faurecia — told Reuters that putting price pressure on suppliers was one way for the group to reduce costs, next to its own efficiency programs.

But the effectiveness of squeezing suppliers depended on the quality of the relationship — the better the ties the easier it was to agree long-term cost reductions and performance improvements.

2005 Reuters. All Rights Reserved.

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