Blog: Dave LeggettWho's going to be left holding the baby?

Dave Leggett | 30 June 2008

You probably don’t need reminding that some automakers and suppliers are being squeezed right now by stalling demand and surging cost pressures (and some also have unfavourable exchange rates to add in to this toxic mix).

Market geography matters a great deal because some markets are depressed or in decline while others are growing. But there are lots of question marks concerning market prospects in the medium-term pretty much wherever you look. Even in China fuel prices have now spiked.

The automotive demand outlook is a little problematic to say the least.

And then there are the pressures on the manufacturing cost base being wrought by much higher energy and materials costs. That’s becoming plain ugly due to the scale of the adjustment coming through. It’s not just steel now; it’s materials across the board. Vehicle manufacture is a highly energy intensive business with plenty of stuff being moved around so this industry will feel the cost pain of dearer energy more than most.

Everyone wants to contain or reduce manufacturing costs wherever possible to help counter increased input costs. But what about passing some of the ‘exceptional’ cost rise on to your customer (either the OEM or the final consumer)? 

Contract clauses may allow some suppliers to get short-term relief on materials, but contracts eventually have to be renegotiated. Passing on costs is going to be tough to do further out.

Just where will costs end up being absorbed or passed on along the value chain? If the OEMs can’t pass it on to the final consumer due to adverse market conditions, then the pressures they apply on their suppliers will likely be greater. There could be some friction ahead as participants up and down the value chain try to minimise their own hit as the sometimes brutal interplay of customer-supplier relations and market power are played out.

And here’s a thought. Will the cost dynamics that have underpinned the trend to international outsourcing eventually be reversed somewhat by higher shipping costs? Increased transportation charges might make the more ‘local’ manufacturing option more attractive in some instances.


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