General Motors Co. will allow roughly 400 parts makers providing components for new vehicles in Mexico and Brazil to periodically renegotiate contracts, an unusual break for suppliers facing financial pressures from rising materials costs and unstable foreign currencies.
At least once a year, the parts makers can now renegotiate terms when hit by unexpected economic pressures, such as currency fluctuations, GM’s purchasing chief said Friday. The move comes as GM prepares to invest $ 5 billion over the next decade to develop a new group of Chevrolet vehicles to sell in Mexico and Brazil starting with the 2019 model year. Those vehicles are also set to be sold in India and China.
The concession is unusual for GM, which historically fights for ironclad contracts that squeeze suppliers dependent on them for business. But the Detroit auto maker, which spends $ 85 billion annually as the world’s largest car-parts purchaser, also needs to ensure suppliers don’t suffer too much financial strain to avoid production disruptions.
Economic turmoil in Brazil, for instance, lessens GM’s leverage at a time when the auto maker wants to roll out cars there. “There is a lot of hesitancy by suppliers to invest there,” said Steve Kiefer, GM’s purchasing chief, in an interview. “But we are focused on the Brazil market, and we want to work together with our suppliers to make that work.”
Mr. Kiefer has been exploring new strategies for dealing with suppliers since taking the purchasing helm at GM in November 2014. A former employee for three decades at Delphi Automotive PLC, one of GM’s largest suppliers, Mr. Kiefer is allowing longer-term contracts and consulting more with parts makers during early design stages for new vehicles.
He is also forging pacts that allow companies providing driverless-car technologies—such as adaptive cruise control and collision-warning systems—to supply competing car makers and maintain intellectual-property rights in exchange for giving GM first crack at their new technologies.
“What we have today are fixed, very rigid contracts and we tell the suppliers don’t bother us with the details,” Mr. Kiefer said. “On a very narrow band of business, that approach works. But when you have moving raw-material costs and currency rates, you find yourself spending too much time fighting over that.
“What we are trying to do here is take that all off the table by adopting a simple formula that is more predictable and allows both sides to share in the ups and downs of those costs.”
GM’s reputation among suppliers has long trailed competitors, with the Detroit auto maker finishing in fourth place in a recent survey of working relations. Toyota Motor Corp. of Japan took the top spot in the survey.
“I have never heard anything like this before,” said John Henke, president of Birmingham, Mich.-based Planning Perspectives Inc., referring to GM allowing parts makers to renegotiate contracts. “It will be prudent for the other auto makers to quickly follow since about 70% of their revenue is spent on suppliers.” Mr. Henke’s firm conducted the survey of supplier working relations by polling 647 salespeople from 492 top suppliers that negotiate with auto makers.
Write to Jeff Bennett at [email protected]