Before the pandemic, Laval Tool and Mould bought steel from Canada and the United States. Two years and a global-supply-chain crisis later, prices have doubled and the company sources steel from six countries on three continents.
“Nobody has captured that type of increase, and nobody’s going to pay it, either,” Laval President Jonathon Azzopardi told Automotive News Canada.
Steel is just one of many key materials whose price has ballooned since the start of 2020, he said.
The Windsor-area toolmaker and auto-parts supplier is far from alone in facing a supply chain more expensive at every stage. Coupled with automakers building fewer cars because of the global microchip shortage, dramatically higher material costs have squeezedorturnedprofitmargins negative at many parts companies.
Suppliers warn that they could be forced to close if automakers do not make concessions.
Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA), would not name the good or bad actors but said some automakers are showing concern and sharing rising costs, while automakers are “punishing” their suppliers.
“They’re not reopening contracts,” Volpe said. “They’re refusing to renegotiate the sharing of some of those costs and are being less than thoughtful in how they handle release of orders.”
CHIPS JUST THE TIP OF ICEBERG
Volpe pointed to the microchip shortage as the root cause, but the problems have rippled outward from there, he said.
“When that volume disappears, it gets felt all the way through the supply chain; because if they’re not making cars today, you’re not making seats,” he said. “And if you’re not making seats, you’re not buying foam. And if you’re not making foam, then you’re not buying petrochemicals.”
From APMA members, Volpe said, he has repeatedly heard of orders packed on trucks ready to ship, only to have customers call and cancel, adding fresh warehousing and logistics costs. In many other instances, low-volume orders have created inefficiencies at parts suppliers set up for certain levels of production.
With demand for vehicles continuing to outstrip supply, automakers have been able to pass some of their rising costs on to consumers, Azzopardi said. Parts suppliers do not have that luxury, he said, adding that the automakers he works with have all “turned a blind eye.”
“They’re basically saying, ‘You’re signed in for a price, and that price is not negotiable until the contract comes up again, and you have to live with that price, absorb it and make your own changes to be able to manage those increases.’ ”
SIZE DOESN’T MATTER
Big Canadian parts companies such as Magna International have seen their margins tighten as well. In the third quarter, for instance, Magna posted an earnings before interest and taxes (EBIT) margin of 2.9 per cent 2021, compared with 8.5 per cent the year before.
The chip shortage has lowered volumes and led to unpredictable production schedules, cumulatively thinning margins, said Magna CEO Swamy Kotagiri.
“On top of these factors, we have experienced inflationary cost increases in production inputs, including freight, commodities and, to a lesser degree, labour and energy costs,” Kotagiri said on the company's most recent earnings call in November.
All suppliers are seeing the effects, but Volpe and Azzopardi said the squeeze is felt most at Tier 3 — the level furthest from the automaker, where raw materials are processed before they become auto parts.
“As you get further away from the [automaker], it gets harder and harder for us to move those costs to the consumer,” Azzopardi said. Laval Tool works as a Tier 1, 2 and 3, depending on what component it is building.
Azzopardi’s company has cut costs where possible but with tight margins even before the crisis, it has slipped into the red.
“We’re losing money,” he said. “There’s no ifs, ands or buts about it.”
Automakers are also subject to cost pressures.
General Motors, for one, saw its adjusted EBIT margin for North America squeezed to 10.3 per cent in the third quarter, down from 15 per cent for the same period in 2020.
As the company works through its supply problems, it’s also trying to ensure that it keeps its partners “in business for the long haul,” said GM Canada President Scott Bell. “We certainly have our fair share of challenges to face, but you gotta do it together, or else somebody’s going to get left out.”
The two other Detroit automakers have suffered less impact on margins.
In its third-quarter earnings report, Ford Motor Co. posted an adjusted EBIT margin for North America of 10.1 per cent, down from 12.5 per cent in the same quarter in 2020.
Stellantis, which reports its financials semiannually following the merger of PSA Group and Fiat Chrysler Automobiles, said its margin for North America reached a record 16.1 per cent in the first half of 2021. With the merger only closing a year ago, no previous period is directly comparable.
In past crises such as the 2008 recession, Volpe said, automakers were more willing to work with suppliers. Now, some automakers are putting profit ahead of industry welfare, he said.
“If we’re all going to come out of this in a healthy sense,” Volpe said, “being competitive and being able to actually run at full capacity when we get semiconductors at the volumes that are required, the [automakers] have to do better.”