Auto-Supplier Stocks Shed Oil Trading Patterns
Bennet, James, THE JOURNAL RECORD
DETROIT _ Picking stocks in auto suppliers used to be mostly a matter of timing: If you bought almost any supplier before a boom, you could enjoy fattening earnings and then, when the recovery ripened, reap a nice profit.
But during this recovery the changing relationships between the domestic automakers and their suppliers have added several wrinkles to the game.
To cut costs, the automakers are using their leverage as mammoth purchasers to push down the prices charged them by suppliers. And at the same time they are forcing suppliers to pick up more of the work and expense of designing and engineering components.
"You don't have this boom-bust pricing scenario anymore, where prices are going up as people scramble for product," said John A. Salvette, director of business planning for Hayes Wheels International, a supplier of wheels to 12 automakers worldwide, including Detroit's Big Three. "It doesn't work that way anymore."
In fact, he said, "we have several long-term contracts that have built-in price reductions." Other companies report the same situation. Johnson Controls, a big supplier of seats, batteries and other products, says its prices are lower now on average than they were in 1988.
As recent price increases by the Big Three demonstrate, the decline in component prices is not dragging down the sticker prices on vehicles, and some suppliers grumble that they are subsidizing the improved earnings of their clients.
But the automakers contend that thanks to supplier price cuts, their cars and trucks are cheaper than they would be otherwise in light of new government regulations on emissions and safety that add costs.
Besides pushing for lower prices, the automakers are trying to increase efficiency by whittling the number of suppliers they deal with directly and forcing these "first tier" suppliers either to diversify or to subcontract work to other suppliers.
The downward pressure on suppliers' prices can be substantial. The ITT Automotive unit of ITT Corp. sells its anti-lock braking systems to automakers for about $330 each, down from $700 in 1986, said Timothy D. …