GM Yields to Higher Steel Prices
Wary of Parts Disruptions,
It Boosts Supplier Payments
As It Fights Rise in Court
By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL
March 23, 2004
General Motors Corp. agreed for now to pay two of its suppliers to cover rising steel costs rather than risk cutting off its supply of parts, even as the auto giant fights those price increases in court.
GM's willingness to pay -- an about-face from its previous statements against attempts to boost prices -- shows that even the biggest manufacturers, which hold tremendous bargaining power with steelmakers, are grappling with rapidly rising steel costs. They also demonstrate how vulnerable some big companies have become after years of streamlining their supply chains and relying on a smaller number of suppliers. But GM may not be able to pass the full impact on to consumers as it struggles to sustain market share in a highly competitive industry.
GM acknowledged paying higher prices for steel in court documents filed in a state court in Pontiac, Mich. Last week, GM filed a complaint against Fort Wayne, Ind., steelmaker Steel Dynamics Inc., which GM said in court documents supplied it with 20,000 tons of steel last year and is expected to buy about 50,000 tons of steel, valued at about $24 million, from the company for 2004. The suit seeks a declaratory judgment that would keep Steel Dynamics "bound by the fixed prices specified in the contract" and would reimburse it for price increases the auto maker paid in the interim.
Also, in the same court, GM on March 3 filed a complaint against a unit of Textron Inc. that supplies 80% of the steel fasteners GM uses in its cars and trucks. A court document said Textron, in a Jan. 30 letter, had demanded a 3% increase over contract prices that GM has continued to refuse to pay. The document said Textron then "threatened cessation of GM's supply of steel fasteners." GM seeks damages for payments above the prices outlined in its Textron contract and further damages if Textron fails to supply the parts.
A spokesman for Steel Dynamics said the company and its attorney haven't yet been served a copy of the complaint and couldn't comment. Textron spokeswoman Karen Gordon said the company declined to comment on the matter.
The move comes as a weak dollar, which discourages imports, and rising demand in Asia and other parts of the globe have boosted the price of U.S. steel. Prices for hot-rolled steel, a basic sheet product used by many industries, is expected to hit between $550 and $605 a ton for May deliveries, up from about $330 in January, according to New Jersey-based research firm World Steel Dynamics. Steel producers, citing their own higher costs, have added surcharges on top of prices guaranteed by long-term contracts with their biggest customers, boosting the earnings outlook for many of them. (Related article.)
Earlier this year, GM said it wouldn't pay price increases that suppliers were trying to pass through to cover their own rising steel costs. But in the court documents, GM said it was paying the price increases "that violate the contract" until the matter is settled in court, saying without doing so, "GM plants would be forced to shut down."
GM's complaint said Steel Dynamics wrote to the automotive giant on Feb. 3, stating it "can no longer provide steel at the [contract] pricing" and said it would use "market prices" on an order-by-order basis starting Feb. 16.
While GM publicly stated that it would hold suppliers to agreed-upon contracts, it claims Steel Dynamics reiterated several times throughout February that price increases, indeed, would take effect. The court document said that Steel Dynamics informed GM on March 12 that it was going to halt shipment of steel "effective immediately and to consider all other GM order requests terminated."
Textron Fastening Systems, a Troy, Michigan, unit of Textron, of Providence, R.I., produces high-tech nuts and bolts that hold automobile parts together. A court document said Textron in a Jan. 30 letter had demanded a price increase over its contract of 3%, which GM at the time refused to pay. The document said Textron then "threatened cessation of GM's supply of steel fasteners."
The move toward a leaner manufacturing process in the automotive industry with "just-in-time" supply methods left GM somewhat vulnerable to supply threats. GM doesn't keep a large inventory of fasteners or steel, according to Mr. Hill, GM's steel purchasing spokesman. |
