The UAW’s strike against the Detroit 3 has made an already precarious financial situation for suppliers even more fraught — and the automakers themselves might be in part to blame, industry experts said.
Dating back to the union’s 2019 strike against General Motors, suppliers have been under intense financial pressure stemming from uneven automaker production schedules, high materials costs, a tight labor market and shortages of key components such as microchips.
During that time, Tier 1 suppliers have been going to their automaker customers seeking concessions on pricing to account for those increased costs, often with limited success.
In turn, Tier 1 suppliers have been often been unable to provide appropriate levels of relief to their Tier 2 suppliers, whose finances have been hit even harder in recent years, creating a situation where the entire supply chain is on edge because of the strike despite sky-high automaker profits, experts said.
“From the customer’s position, they might say it’s because a supplier isn’t managing their business properly or controlling their costs, but that only goes so far,” said Dan Rustmann, co-chair of Detroit law firm Butzel Long’s global automotive group. “Across the supply base, suppliers have been suffering from increased costs and fixed-price contracts and really having to fight and argue to get any relief.
“And if it comes, it comes very grudgingly.”
To be sure, many suppliers have received much-needed relief from automakers or their Tier 1 customers in recent years. And despite the significant pressure suppliers have found themselves under after an unprecedented number of challenges in recent years, a wave of supplier bankruptcies that some have feared has not come to pass.
But that aid has only gone so far, leaving suppliers, particularly Tier 2 and Tier 3 companies that generally don’t have the same level of profit margins or customer diversity as larger Tier 1 companies, in a fragile financial position.
“The cherry on top of the cake for suppliers has been inflation and not getting pricing from their customers to stay whole from a profitability perspective,” said Michael Robinet, executive director of Automotive Advisory Services at S&P Global Mobility. “Suppliers have not been able to stretch their legs and make money to make up for all of their issues over the last four years.”
Larger Tier 1 suppliers are closely monitoring the health of their sub-suppliers as the UAW strike progresses, and particularly if the union expands the strike beyond the initial three plants it has targeted. Mahle CEO Arnd Franz told Automotive News at the Detroit auto show last week that the German parts supplier has been forced to do “a lot of firefighting” to help keep its Tier 2 suppliers afloat in recent months by assisting them when production disruptions occur or tools break.
“We’re performing to protect our customers and their production,” he said. “This is a big part of the cost increases that we have incurred, and in many cases were deteriorating our margins.”
The financial wherewithal of the supply chain could be most tested after the strike ends and automakers look for production to come back online quickly. That’s especially true if the strike persists for weeks or months, or if it expands to include a large portion of any of the Detroit automakers’ U.S. plants.
“The biggest concern I’ve universally heard from my supplier clients is the ability to come back online on short notice,” Rustmann said. “It’s going to be very difficult, especially the longer it goes on, and everyone is worried OEM customers are going to demand an overnight return to full production. It’s not realistic.”
Suppliers are likely to quickly burn through what little inventory they do have, and if they are forced to lay off or furlough workers during the strike, might find that they might not have enough workers ready to come back at a moment’s notice — or that their Tier 2 suppliers could be having the same issue.
“This is not a type of industry where you can go from zero to 100 overnight,” said Laura You, a member of Michigan law firm Warner Norcross + Judd’s automotive and supply chain industry groups. “If your customer orders have been stopped altogether for a period of several weeks, it will take time to ramp back up.”
You and Rustmann have said suppliers should work with automakers to make it clear that they will need time to ramp up. Doing so is important, Rustmann said, because contracts between suppliers and their customers would typically allow automakers to levy financial penalties on suppliers if production doesn’t ramp up at the speed they expect.
He added: “I counseled my clients on all types of ways to try to improve their contracts, but the reality is they’re having great difficulty in obtaining any kind of concessions from their customers.”
