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As investment expenses rise, car manufacturers and primary suppliers seek postponements in paying for components
This request might provide a chance for suppliers facing financial difficulties to secure future benefits.
A number of vehicle and component manufacturers are asking for extended payment terms for components. Shown here is the preparation of wiper systems for dispatch at a Bosch facility in Pecinci, Serbia.
Over the last two to three years, vendors have approached their clients requesting price modifications to cope with increased costs of raw materials and labor.
The roles have been reversed.
Car manufacturers and primary suppliers, burdened with significant investments in new technologies, are progressively requesting their vendors to prolong payment terms or to postpone payments altogether, according to Adam Ratliff, a partner at Warner Norcross + Judd, a law firm based in Detroit, Michigan.
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Ratliff, an advisor to numerous component manufacturers, had a discussion with Staff Reporter John Irwin on the reaction of smaller businesses and how these demands might pose a chance for vendors. Below are the modified snippets.
Q: What feedback are you getting from suppliers regarding delayed payments?
Towards the end of last year, there was a noticeable increase in the number of requests our clients, who are suppliers, received from their downstream partners. These requests primarily came in two varieties: one involved suppliers seeking to lengthen their payment periods, moving from net 45 or net 60 days to perhaps net 75 or net 90 days. The second variety was requests to defer payments until the following year.
What motivates their actions?
It is believed that several factors are at play here. A primary one could be the heightened spending on innovative technologies by Original Equipment Manufacturers (OEMs) and Tier 1 companies. This surge in investment seems to stem, in part, from granting extended payment terms to their suppliers, which is thought to be a contributing element.
In recent years, the trend has predominantly seen suppliers approaching their clients to negotiate adjustments in pricing. This move is mainly to cope with the escalating costs of raw materials and inflation among other factors. It appears that customers are now starting to respond to these adjustments, potentially trying to balance out from the numerous requests they’ve received from suppliers.
What is the reaction from suppliers?
We recommend that suppliers consider the customer’s request seriously and question: How would this affect their financial liquidity? If the conclusion is, „It would cause a minor disturbance, but it’s manageable and would benefit our customer,“ it doesn’t warrant every supplier taking a firm stance against it.
It’s understandable that worries intensify when making accommodations could lead to the shutdown of their activities or significantly impact their financial liquidity, to the extent that they are unable to compensate their suppliers. This could result in a scarcity of raw materials due to their inability to expand their network of suppliers.
Most discussions have focused on finding a middle ground that satisfies both sides. It’s about understanding the essential requirements of the client and what the provider can realistically offer.
What is the usual flow of these discussions?
It’s common to find a compromise. We’ve recommended to our suppliers that they ensure clarity regarding the agreements made, record them accurately, and specify if and when standard payment terms or business operations will resume.
Clients who approach the situation with a sensible attitude have not significantly resisted this method.
When a customer crosses the line, it can present a chance for the vendor to negotiate certain advantages. Encountering such situations from clients isn’t always detrimental, as it may open up opportunities for negotiation. If a firm is in need of financial resources in a given year, this could potentially lead to securing a favorable agreement in a subsequent year.
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