Driven to the wall by rising input costs and pressure from automakers to cut costs, component suppliers are pushing to insert an important clause in their supply contracts: Price flexibility.
Vendors told FE that owing to the volatile nature of raw material prices, it has become literally impossible for them to absorb all the costs, since their profit margins were coming under severe strain. They are rooting for a clause to renegotiate contracts if prices of key raw materials like steel, zinc, copper or rubber rise beyond 10-12%.
Typically, once a supply contract is signed between a manufacturer and a component-maker, it stands for the entire duration of the contract. For instance, Maruti Suzuki signs agreements with vendors for 12 months, which are signed between April and December every year. Similarly, Hyundai Motor India signs contracts with auto ancillary makers every January for a period of 6-12 months.
?We are in talks with some original equipment manufacturers (OEMs) to take a certain burden of the rising raw material prices pinching us,? said Sudhir Jain, executive director and corporate business head of Minda Industries. The firm plans to renegotiate contracts if prices of key inputs rise more than 10%, he said.
The apex body of component makers supports this view. According to Srivats Ram, V-P of Automotive Components Manufacturers? Association, prices of flat and alloy steel have shot up 20% in the past five months. ?Component makers are re-negotiating contracts with OEMs because their margins are under severe pressure,? he said.
A Gurgaon-based vendor, who supplies auto majors like Maruti Suzuki and Tata Motors, said the firm had little option but to pass on the burden to its customers.
?In many cases, the auto makers are willing to re-visit the contract because even they realise that it is not possible for us to maintain margins,? he said. Among others, Tata?s ultra-low cost car Nano is also facing the price crunch of mounting input costs. According to reports, a key component supplier has voiced concerns with the auto major over surging raw material prices. However, there has been no official confirmation from the company yet.
A senior official with auto component maker Denso Haryana said that demands by carmakers to cut production costs were unreasonable. He said that if price hikes are not passed on to the customers, it could force another round of labour stir. ?Since the company was not in a position to increase wages due to margin pressures, some of our workers went on strike,? the Denso official said. In February, about 100 workers of Denso Haryana went on an indefinite strike that disrupted supplies to its biggest client Maruti Suzuki.
RC Bhargava, chairman, Maruti Suzuki is understood to have asked the company?s 200-plus component-makers to cut costs across board by 2-3%.
He was referring to how vendors should undertake every possible step to increase efficiency to counter rising raw material prices.
Jain of Minda Industries said that in the backdrop of volatile raw material costs, the company was looking to cut wastages by improving internal productivity. However, he said that this process alone cannot make up for the rising costs of inputs and the OEMs would have to share the brunt of it.