"You have a fairly fragile base that you asked to invest in EVs alongside of you as an OEM, and then you tell them several quarters later, 'Oh, by the way, thanks for coming with us, but the ride's not gonna start for another year,'" said Steve Wybo, senior restructuring and management consultant at Riveron in Birmingham, Mich.
Wybo said he has a client that spent millions of dollars on a line to supply GM's Orion Assembly. Because suppliers traditionally carry the risk of such investments and recover their capital through the piece price, GM's delay left the parts producer burned with no avenue for recourse.
"They don't have any contractual legal recourse because there's no guarantee when you're awarded a purchase order that a program is going to launch on time at certain volumes," Wybo said.
Auto makers are motivated to overshoot volume projections for two reasons, Sharkey said. The first is obvious: The juicier the volumes, the better the bidding war. But there's also a legal reason.
U.S. law governing the sale of goods states that a buyer cannot demand a "quantity unreasonably disproportionate to any stated estimate," with a general variance of 20 to 30 percent. That means a buyer cannot demand more than what was quoted to a supplier, but the law does not work the opposite way, Sharkey said. A buyer can take anything less than the estimate without punishment.
"It's a running joke in automotive. No one believes volumes in a quote package," Sharkey said. "The art of being an automotive supplier is to guess how much are they overshooting and then price accordingly."
The risk dynamic could be shifting, however. With so much uncertainty about new technologies and consumer demand, suppliers are pushing harder for exposure to be spread more evenly.
At French auto supply giant Forvia, the trick is weighing a stack of new EV and hydrogen awards against the reality on the road, said Nik Endrud, the company's executive vice president for the Americas.
"The capital investment of our industry is borne by the suppliers almost exclusively," Endrud told Crain's Detroit Business, in an interview at Forvia's North American headquarters in Auburn Hills, Mich. "The customers are good at what they do, too, when they buy. We don't get to write all the terms of the contract. We're not semiconductor manufacturers."
Forvia last month announced a pair of awards to supply hydrogen storage systems for commercial vehicles in North America starting in 2025. In finalizing its build-out plans for a plant, executives need to move quickly so they can support a tight launch turnaround, but also carefully so they don't overinvest.
"The worst is you build a giant factory, you have a bunch of winders and you have two of them at the end running," Endrud said. "That's the disaster scenario for us and our customers."
Vehicle manufacturers have been more flexible when it comes to contract terms for new technologies, Endrud said, but suppliers have only so much leverage.
"The riskier the technology, the more you maybe can exercise some provisions in a contract to protect yourself in the event that it doesn't materialize, but recognize that there's two big guys at least, and actually three or four, that all are in this nascent space and want to plant their flag," he said.
Like Endrud, executives at other suppliers are moving to protect themselves from the low side.
Aptiv is structuring contracts with provisions to hedge against lower volumes, according to the company's CEO Kevin Clark.
"On the bulk of those programs, we have scaling price relative to volume," Clark said on a call with investment analysts last month. "So to the extent an OEM does not achieve their particular targets, we have the ability to adjust pricing, and that's contractual, so we've protected ourselves that way."
Customers of seating and electronics supplier Lear Corp. have been "collaborative with regards to changes in their production plans," company Chief Financial Officer Jason Cardew told investment analysts in October. Lear has not moved forward on the $80 million EV parts plant in Michigan it announced a year ago that was to supply GM's now-delayed electric trucks.
The supplier worked with its customers to reduce its capital expense outlook by $25 million and may eliminate some expenditures if volumes don't materialize, Cardew said. "So we're much more deliberate in putting new capacity in, and then of course there are discussions around piece price tied to volume changes as well."
While risk avoidance is generally a sound strategy, suppliers could also face repercussions for being too pushy. "When they're quoting a program, they don't like to get their customer mad," Sharkey said. "They're worried that if they get too aggressive on the front end, they won't get the business. It's a classic risk-return trade-off."
