Give you back what?!? The rebate phenomenonGive you back what?!? The rebate phenomenon

Push is rapidly turning to shove between Tier One automotive suppliers and moldmakers. Two major suppliers, Lear and Visteon, have both asked for give-backs of 3 to 5 percent on work already completed. That has rankled moldmakers throughout the upper Midwest whose primary customer base consists of automotive suppliers.

In a Dec. 2, 1999 letter to its suppliers, Visteon Automotive Systems (Dearborn, MI) gave notice that effective Dec. 15, 1999 the company was "requesting a 3 percent rebate on all purchase orders placed in 1999 and/or delivered in 1999." Suppliers to Visteon were requested to reply by Dec. 15 in writing, "confirming your commitment to this productivity rebate."

Suppliers were invited to contact their Visteon buyer if they felt they were unable or unwilling to proceed with this "productivity rebate" to discuss a "mutually agreeable plan."

Profits Gone
"They're asking us to give back our profits," exclaimed one outraged moldmaker who declined to be identified for fear of retaliation from his automotive customers.

"They're not giving us a choice to cut pricing on future work so we can say yea or nay to the RFQ," said another angry moldmaker. "They're asking us to give back money we've already made, paid taxes on, and spent."

For many moldmakers, the automotive industry is their sole customer base. Throughout the 1990s the pressure to reduce costs has pushed them to the edge of their profit margins. Some see this continued push for reduced costs as the death knell for many mold shops. If the moldmakers give the Tier One suppliers what is being asked, they won't realize any profits, which will threaten the life of their business. If they refuse to cooperate with the Tier One suppliers, they risk losing the work.

"We're dead either way you slice it," said another moldmaker. Though it declined to comment further, Visteon replied with a prepared statement for the press, which stated that as the company moves toward "a greater level of independence [from Ford]" it is looking at every supplier and "evaluating his/her products and services on the basis of costs, quality, delivery and innovation."

The statement notes that in late November/early December, Visteon was given responsibility for tooling suppliers. The company benchmarked this group against others in the market. After evaluating these tooling suppliers, Visteon determined that "some suppliers might not be as competitive as the overall market indicates they should be and have been requested to step up to the plate."

Visteon's statement doesn't explain just how having suppliers send the company a "productivity rebate" check for 3 percent of the total purchase orders makes Visteon or their mold suppliers more productive or competitive.

In the meantime, an article in the Jan. 10 issue of The Wall Street Journal reports that Tier One auto parts makers are set to record their best quarter ever. Strong volumes and bigger vehicles are helping to boost revenues to record highs in this group. The article specifically mentions Magna International Inc., Lear Corp., Arvin Industries, Delphi Automotive Systems Corp., and Meritor Automotive Inc.

The Tier Ones' biggest challenge, notes this article, "continues to be the absorption of acquisitions."

David Southworth of Michigan Consulting in Royal Oak, MI, confirms this. As the Tier Ones get bigger through acquisitions, their ability to maintain productivity and profitability will be challenged. He sees the automotive industry turning the corner sometime in late 2000 or early 2001 with the dismantling of the major Tier One suppliers as the Big Three demand more competitive pricing.

Consolidation brought what the automotive industry wanted, Southworth explains, including economies of scale among its suppliers that could supply entire, assembled units (door panels, fascias, and so forth), not just parts. That, however, has also created fewer suppliers and given them a bigger stick.

As major OEMs feel the competitive pressures to hold the line on consumer pricing by reducing costs to manufacture, most have turned to their suppliers for help. Whether it's percentage cost reductions on molded parts like one major automotive supplier's "6-6-6" program (6 percent/year price reductions for three years on molded components), or the retroactive give-backs on molds being pushed by Lear and Visteon, molders and moldmakers will continue to be squeezed.

Backlash
Industry trade organizations, specifically the National Tooling & Machining Assn. and the American Mold Builders Assn., were quite vocal in their objection to this questionable tactic. This is just the latest in a long series of issues that second tier suppliers deal with every day. Many moldmakers must wait a year or longer-until molding on that particular model begins-even to get paid for the molds they build for the automotive industry.

Many give away the time they spend on engineering or development assistance just to get the job. Serving the automotive industry means investing in new, high-tech, high-speed equipment to reduce the number of man hours in the mold. It means hiring engineering talent and program managers to handle the additional requirements placed on the backs of moldmakers. And none of that comes cheaply.

The Challenge
The challenge for molders and moldmakers is to increase efficiencies and productivity and reduce man hours (in moldmaking) and scrap (in molding). It will require implementation of "lean" manufacturing techniques, and maybe some tough decisions about which market niches can be served profitably.