GM recently reported record 2021 profits on lower volumes. It has focused production on the most profitable vehicles in its lineup in the face of semiconductor chip shortages and other supply chain disruptions. The company advertised higher costs for commodities, logistics and materials, but was able to partially offset them with high prices on full-size pickup trucks and SUVs. Ford Motor also announced an annual net profit of $17.9 billion, also due to the concentration of production on more profitable models. Since they are well established, it may be a good time for these OEMs to look to some of their other suppliers, especially the middle and smaller ones where they may have less visibility. Most of them face the same cost pressures and disruptions. If OEMs want these suppliers to survive and be an integral part of their North American supply chains, now may be the time to review some of their practices.

Suppliers to the automotive industry have always had to work hard. It’s a highly competitive space, and Detroit automakers are constantly pitting suppliers against each other in search of the lowest price. One supplier told me that the standard playbook used against him was constant threats to move his work elsewhere, or a promise of “no future work” as a way to take advantage of lower prices. They include punitive clauses in their supply contracts, with penalties of several thousand dollars per minute in the event of non-delivery of materials on time and stoppage of a production line. Yet when they reduce demand as they did at the start of the pandemic, sometimes with as little as a day’s notice, they offer little or no compensation. This leaves suppliers to absorb the fixed costs of their operations spread over reduced volumes. A CEO I spoke with on condition of anonymity said he was forced to temporarily cut wages by up to 30% and carry out a series of painful layoffs.

Almost all manufacturers face inflationary pressures on the cost of materials, labor and logistics. Another supplier who did not want to be identified told me that the price of the petrochemical resins they use to make plastic parts has doubled over the past year. Since resins are 40-50% of the cost of their product, they have to pass on those costs. Anther spoke of cost increases of 70-80% in base chemicals and other material cost increases ranging from 9-35%. These companies typically only earn single-digit margins, so they don’t have the ability to absorb cost increases without some relief.

In addition to cost increases, one company described the slowness with which large customers were paying their receivables, putting smaller businesses under intense cash pressure. “You’re so underwater, you don’t stand a chance,” another company told me. “When we go in to talk to them about it, they end the discussion.” Another said: “They even refuse to meet with us and just say they have a fixed price contract. Unlike GM, which could charge higher prices, if these suppliers cannot get relief, they will go bankrupt.

Adding insult to injury, Stellantis recently announced that the new purchase agreements state that “all future events are deemed foreseeable” by suppliers, who should now bear the costs of any future disruptions. This means that pandemics, severe weather, earthquakes or acts of God are predictable and suppliers should have enough inventory to weather them. It’s ridiculous because it says commercial impossibility due to unforeseeable circumstances, the meaning behind force majeure clauses in contracts, no longer applies. The question that comes to mind is who to want sell to Stellantis under these conditions?

A longer-term problem is that these suppliers are struggling to attract and retain workers. “There is no good news in much of the auto parts supplier industry,” the CEO of a midsize supplier told me. “Would I want my children to work as I should, at the mercy of an equipment supplier who could put me out of business at any time? Most people in my position would just say no! This does not paint the picture of a healthy supply chain.

It might be instructive to examine the semiconductor chip supply shortages that have plagued the auto industry. Car manufacturers mainly use advanced technologies because the performance of chips made with them is usually sufficient and they are inexpensive. When automotive production volumes fell in the spring of 2020, OEMs reduced their orders. By the way, chipmakers hate this because their products take a long time to manufacture and balancing supply with demand in the face of unreliable forecasts is always a challenge. Automakers only account for a small proportion of overall chip demand, so pandemic-driven shifts in demand that led to big increases in work-from-home sectors meant many other customers were happy to make up for this sudden manufacturing overcapacity. These segments are not very big profit generators for semiconductor manufacturers, so they like to run their factories at maximum capacity to maintain cost absorption and overall costs. Chipmakers have likely underinvested in these older nodes in recent years, which has contributed to the capacity shortage as they are less profitable.

As I have pointed out elsewhere, Japanese OEMs like Toyota and Honda take a more strategic than transactional view of their suppliers. Toyota makes sure they understand their suppliers’ costs, but appreciate their capabilities. “I don’t earn that much per unit on a contract with Toyota,” commented one company I spoke with, “but the business I do with them is very stable. They value what we can do.” During the GM strike in 2019, some of them actually called (because they knew the company depended on GM for a significant portion of their business) and offered to work. It looks like a strategic partnership designed to provide long-term supply.

Everyone talks about supply chain resilience and regionalization of production these days. Detroit automakers may not realize how fragile some of their mid-tier suppliers are after two years of battling Covid. One executive told me that a few of their domestic suppliers had already thrown in the towel, forcing them to source from China at a time of skyrocketing logistics costs. It hardly looks like a trend going in the right direction. Detroit automakers should consider whether their smaller domestic suppliers will be able to stay in business and whether they should invest some of those profits to ensure the health of their supply chains. That way, when the next inevitable crisis hits, those companies could still be there.