Introduction

The recent strike by the UAW against the Detroit 3 has exacerbated an already challenging financial situation for suppliers. Industry experts suggest that the automakers themselves may share some of the blame for this predicament.

Financial Pressure on Suppliers

The suppliers have been facing financial pressure since the UAW strike against General Motors in 2019. Factors contributing to their difficulties include uneven automaker production schedules, high materials costs, a tight labor market, and shortages of key components like microchips.

Tier 1 suppliers have been requesting concessions from their automaker customers to account for increased costs. However, they have often faced limited success in obtaining these concessions.

The inability of Tier 1 suppliers to provide relief to their Tier 2 suppliers has exacerbated the financial strain on the entire supply chain. Despite the automakers’ high profits, the strike has put the entire supply chain on edge.

The Perspective of Customers and Suppliers

According to Dan Rustmann, co-chair of Detroit law firm Butzel’s global automotive group, the customers may believe that suppliers are not managing their business properly or controlling their costs. However, the suppliers argue that they have been grappling with increased costs and fixed-price contracts. Obtaining any relief from their customers has been a challenging task for them.

Although some suppliers have received much-needed assistance from automakers or Tier 1 customers, this aid has only gone so far. As a result, Tier 2 and Tier 3 companies, which generally have lower profit margins and less customer diversity compared to larger Tier 1 firms, find themselves in a fragile financial position.

The Role of Inflation and Pricing

Inflation and the inability to obtain appropriate pricing from customers have further compounded the challenges faced by suppliers. Michael Robinet, executive director of Automotive Advisory Services at S&P Global Mobility, highlights the suppliers’ struggle to make up for the issues they have faced in recent years.

As the UAW strike continues, larger Tier 1 suppliers are closely monitoring the financial health of their subsuppliers. Companies like Mahle are actively assisting their Tier 2 suppliers during production disruptions or tool breakages. However, these assistance measures have led to cost increases, impacting suppliers’ margins.

Concerns After the Strike Ends

The financial resilience of the supply chain is expected to be tested once the strike concludes, and automakers aim for a swift return to production. If the strike persists for weeks or expands to encompass a significant portion of the Detroit automakers’ U.S. plants, the ability to resume production at short notice becomes a major concern. Suppliers may deplete their limited inventory and face challenges recalling or rehiring workers.

Laura You, a member of Michigan law firm Warner Norcross + Judd’s automotive and supply chain industry groups, emphasizes the time required to ramp up production in this industry. She advises suppliers to communicate with automakers about the need for a reasonable ramp-up timeframe. This is important because contracts typically allow automakers to impose financial penalties on suppliers if production does not accelerate at the expected pace.

Despite efforts to improve contracts, suppliers have encountered difficulties in obtaining concessions from their customers.