For the past two to three years, auto suppliers have been going to their customers seeking pricing adjustments to help them deal with heightened raw materials and labor costs.
The tables have turned.
Auto makers and Tier 1 suppliers, on the hook for massive investments in emerging technologies, are increasingly asking their suppliers to extend payment lengths or to delay them outright, said Adam Ratliff, a partner in the Detroit office of Michigan law firm Warner Norcross + Judd.
Ratliff, whose firm advises many parts makers, spoke with Staff Reporter John Irwin about how the smaller companies are responding and how these requests could represent an opportunity for suppliers. Here are edited excerpts.
Q: What are you hearing from suppliers about deferred payments?
Ratliff: We really saw an uptick with some of our downstream supplier clients receiving these types of requests toward the end of last year. We saw them take two forms: It can be suppliers looking to extend out these payment terms a bit, from net 45 or net 60 days to net 75 or net 90, or whatever it might be. The other type of request is, "We want to pay you next year."
Q: What's driving them to do that?
Ratliff: We suspect there are a few drivers. One is the increased investment in new technologies by OEMs and Tier 1's. By getting a little more leash from payments to their suppliers, we suspect that might be a factor.
And over the past couple of years, most pricing requests have been in the other direction. It's been suppliers going to customers seeking pricing adjustments and trying to address raw material costs, inflation and things like that. What we suspect might be happening is a bit of catching up by the customer base from those types of requests.
Q: How are suppliers responding?
Ratliff: We advise suppliers to take the customer's request at face value, and ask: What would that do to their cash flow? If the answer is, "It would be a little blip, but it's not a big deal and would help out our customer," it's not the type of thing where every supplier needs to put their foot down.
You can imagine the more heightened concerns are when accommodating would shutter their operations or harm their cash flow to the point that they couldn't pay their own suppliers, causing a raw material shortage because they haven't been able to build up their supply base.
A conversation about what's feasible for both parties is where we've seen most of this go. The conversation becomes about what the customer really needs and what the supplier can afford.
Q: How do these conversations typically go?
Ratliff: There's often a meeting in the middle. We've advised our supplier clients to be clear about what's being agreed to and document it and be clear about if there's going to be a return to normal payment terms or business practices, and to be clear about when that's going to happen.
The customers that approach it with a reasonable mindset haven't really pushed back on that approach.
If the customer has overstepped, it might be an opportunity for the supplier to trade for some concessions. It's not always a negative when you get something like this from the customer, because there might be something to trade for here. If a company needs cash in year X, you might be able to get a concession in year Y.
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