Daily Management Review

German Automakers Balk At Supplier Demands Regarding Energy Price Increases


German Automakers Balk At Supplier Demands Regarding Energy Price Increases
Although Germany's large automakers may have guaranteed their own energy supplies, thousands of small suppliers who are under pressure from rising prices run the risk of disrupting production throughout the winter.
As energy costs continue to rise, more and more suppliers are urging the industry to renegotiate contracts to include energy clauses.
Top automakers Mercedes-Benz, Volkswagen, and BMW have all claimed that their own energy supplies are safe; however, if their supply chain goes down, their production lines may come to a grinding halt.
"If we can't build a car because of one missing part, that hits all of us," Geng Wu, head of group purchasing at Volkswagen said at a supplier conference in Wolfsburg this week.
The auto and electronics industries' supplier Kron Solingen is trying to renegotiate contracts but is running out of time because it faces a tenfold increase in energy costs and only two weeks to commit to an energy contract that takes effect on January 1.
"We're asking for help with raw material costs, for clauses incorporating inflation - but the red line is energy costs. If customers don't contribute to those, we can't go on ... we'll cancel the contracts ourselves," sales manager Christian Hofmann told Reuters.
In order to aid in customer negotiations and determine what it could produce with less power, the 112-year-old company, whose customers are typically larger suppliers in the chain like Bosch, is calculating precisely how much electricity goes into each of its products, Hofmann said.
There were no comments from Bosch on any contract negotiations as did BMW while  Mercedes-Benz also refused to make any comment.
Volkswagen stated that it was in close contact with its suppliers regarding shared solutions but was unable to provide more details.
"Our primary goal is to maintain production and avoid negative impacts on business operations," a spokesperson said.
The German government has yet to put into effect its proposed relief package for small businesses' energy bills, which would implement a mechanism to limit prices starting in March and give a one-time payment equal to this year's gas bill.
Energy clauses are much less common in contracts in Germany's automotive supply chain than clauses that adjust prices in accordance with the cost of raw materials. They can be challenging to calculate and call for suppliers to divulge specifics regarding their margins, the production process, and their energy contracts.
Even so, according to Max Schumacher, head of the Association for German Foundries, many smaller suppliers lack sufficient liquidity to cover energy costs for the three to four months it may take for invoices to be paid.
"There are no good options," Schumacher said.
However, by passing on costs to customers through price increases, carmakers and their major suppliers have largely been able to maintain their financial targets despite facing higher costs and ongoing semiconductor shortages.
Recently, some have suggested that in order to ensure the security of their production, they could source from vendors in nations with more reliable energy supplies.
German automakers are asking for quotes more frequently than usual, according to Soplast, a Portuguese auto supplier, as they become more and more interested in knowing their energy mix.
Even so, according to Mauricio Morales, senior purchasing director at Wuerth Industrie Service, one of the world's largest suppliers of screws, nuts, and bolts to automakers, establishing a new supplier in the automotive sector can take at least six months.
To ensure the component's quality, automakers may need to conduct new crash tests on vehicles, even for something as small as a screw.
"At a car manufacturer it's a lot of effort," he said, adding that his company only had energy clauses with a few important suppliers.
According to Christian Hennerkes, chief executive of a company that manufactures thermal protection for batteries and has factories in Asia, Europe, and the United States, suppliers who already have multiple locations for their factories anticipate moving more energy-intensive production abroad in the future.
Energy costs have been negotiated into some of Hennerkes' company Von Roll's contracts with the battery joint venture ACC, a joint venture between Mercedes-Benz, Stellantis, and TotalEnergies.
"Carmakers weren't willing to do this in the past, but they are now, if only for a limited period of time... it's not in their interests for their supplier network to collapse," Hennerkes said.
The CEO added that Von Roll is currently negotiating with its workers' council to add additional shifts and produce as much as possible before a new energy contract takes effect next year.
"These energy price increases are long-term," he said. "Short-term assistance from the government is only buying us time ... this isn't a wildfire, it's a drought."