Supplier That Fought Back
Feb. 15, 2005. 06:54 AM
Rocco Di Serio looked at the letter and, for a moment, couldn't believe what he was reading. He read it again. And again.
It crushed him. He knew it could also crush Axiom Group Inc., his little company in Aurora, north of Toronto.
Intier Automotive Inc., a giant auto-parts manufacturer that buys components and tooling from smaller suppliers, had demanded that Di Serio's firm slash prices by 31.8 per cent on all existing contracts. Immediately.
"It was very hard to take," said Di Serio, one of three owners of Axiom.
Axiom, a maker of auto tooling and small parts, said it couldn't comply. But that wasn't the end of it.
In the same letter a year ago, Intier, a subsidiary of Aurora-based auto-parts colossus Magna International Inc., said the cuts would be no guarantee for long-term business. Furthermore, Intier noted it would need additional cost cuts from Axiom beyond the 31.8 per cent reduction.
Newmarket-based Intier said it continued experiencing pressure from auto makers for cost reductions and therefore the company had to seek cuts from its own suppliers.
In seeking the deep cuts, Intier described its contracts with Axiom as "uncompetitive."
Di Serio and his partners, Perry Rizzo and Herb Jahn, said they told Intier it would be impossible to meet the demand because of the devastating impact on Axiom's ability to survive. Axiom eventually proposed a much smaller cut.
Intier responded last fall by serving notice it would cancel all of Axiom's 40 contracts at the end of the year and transfer production elsewhere. Some of those contracts run through 2009.
Intier said provisions in its contracts give the company the flexibility to remain competitive and it had the legal right to cancel them.
Axiom, which relied on Intier for 60 per cent of it business, said Intier's latest move would cripple the company by causing it to default on loans and lay off two-thirds of staff of about 145.
Axiom said it would also lose its reputation as customers became uneasy about dealing with a struggling company.
Auto-industry officials say companies who can't deal with the continuing demands for cost cuts are simply walking away from contracts.
But in an unusual move in the industry, Axiom didn't walk away. The company is fighting back. It has sued Intier and is pursuing an injunction to stop the company from cancelling contracts until a trial.
The allegations have not been proven in court and Intier has indicated it will defend itself against the claims in the lawsuit.
However, extensive court submissions, affidavits, transcripts from examinations of key players and subsequent interviews in the current injunction proceedings provide a rare look behind the plant gates of one of the world's most ruthless industries.
During the last decade, all international auto manufacturers have improved their products dramatically to keep pace or stay ahead of rivals. But they are trying to hold the line on those improvement costs while competing in a market with too many players and too much production capacity.
In recent years, so-called Tier 2 suppliers like Axiom have reluctantly absorbed steady price cuts and passed savings to upper Tier 1 companies in the belief that it would lead to more business and extra efficiencies to make up for the hits.
Axiom, which primarily makes tooling and parts for window mechanisms, filed its lawsuit last month seeking more than $30 million from Intier for allegedly breaching contracts.
In the meantime, Axiom has also applied for an injunction to prevent Intier from terminating the contracts because such moves would cause irreparable harm. A judge reserved judgment earlier this month after a hearing.
Axiom says abrupt termination of contracts on the issue of pricing is contrary to industry practice of maintaining suppliers for the duration of a vehicle program.
Intier has agreed to continue accepting deliveries from Axiom under the contracts, pending a decision on the interim injunction.
Top Intier officials would not comment on the case because it is before the courts.
The Axiom case reveals the impact of those price pressures on suppliers trying to meet shareholder expectations, eke out meagre profits or simply survive.
Axiom alleges in its submissions that Intier went even further than pulling its business unfairly and in bad faith. It charges Intier acted to undermine the small firm's own cost- cutting efforts and then later took steps to help other rivals make lower bids.
Kent Harris, vice-president of global purchasing for Intier Automotive Closures, said in an affidavit that the contracts' terms don't support Axiom's arguments. Furthermore, it's not common industry practice to supply parts at a fixed term or price, he said.
"If Axiom is unwilling to agree to a price reduction as a solution to help meet the cost reduction targets of Intier and its customers, Intier has the contractual right to terminate its relationship with Axiom upon notice," said Harris.
Harris added the 90-day notice, which has now stretched to more than four months, is "reasonable."
Intier says it owes Axiom only the cost of tooling and any production in inventories.
Di Serio, Ontario's first certified mould maker, teamed up with Herb Jahn to open a tool and die shop under the name H&R Custom Moulds in suburban Scarborough in late 1987 just after the stock market crash.
In 1989, they gained their first tooling work from Magna's Windo-Motion, which makes window systems for numerous auto makers, including General Motors, Ford, DaimlerChrysler and Honda.
Contracts started increasing in the mid 1990s when H&R expanded into plastic-parts production. Its first big job was making hood release handles for Saturn cars.
In 1998, H&R turned into Axiom and embarked on expansion of operations to meet the growing needs of Intier and Windo-Motion. Over the next few years, it invested heavily and opened new operations in Italy and Aurora while closing its overcrowded Scarborough plant.
Windo-Motion thought highly of Axiom and named it "preferred supplier of the year" in 1997, 1998 and 1999 for scoring high in internal ratings for delivery, quality, service and cost.
In one letter, Windo-Motion described Axiom's performance as "remarkable."
"It is important that you understand that your efforts are not going unrecognized," the 1997 letter said. "The programs both in the past and present are truly supported by a great partnership."
In the same year, Intier introduced a rating system that included a component whereby suppliers had to reduce the cost of sales by a minimum of 5 per cent annually to score well and remain a preferred company.
Axiom flourished and grew quickly but in March 2001 relations between the two companies began to deteriorate. Intier assigned Axiom a "yellow rating," which meant it could no longer bid for new business.
The move came after Axiom fell short of meeting Intier's requests for price cuts. Axiom noted there was nothing in their contracts spelling out mandatory annual reductions.
Harris, a chartered accountant, said in his affidavit that Intier continued to face "substantial" pressure from auto makers to lower costs and pass on the savings. As a consequence, Intier needed the same relief from its suppliers, he said.
"Contrary to what Axiom alleges, there was no representation or agreement by Windo-Motion that the quoted price would apply for the term of the program," he added. "In fact, the opposite was true. There was an express representation that the price was expected to decrease annually."
In response to the rating, Axiom granted Intier a 2.5 per cent price cut on existing contracts in exchange for renewal of bidding opportunities.
Axiom received bid requests again but the company found it was no longer winning any new contracts.
The company worked on further cost-cutting efforts to try and satisfy Intier. The company discovered in 2002 that it could reduce its costs for resins — the primary raw material in plastic parts — by changing suppliers.
Axiom said its new supplier met Intier's specifications for the use of Dupont brand resins. However, Intier informed Axiom that it had to buy from Dupont Canada or a registered distributor.
In his affidavit for the injunction, Di Serio said Intier officials told him that if Axiom did not buy from the more expensive distributors, it would no longer get any bidding requests.
"The unfairness of this was obvious and appalling," Di Serio said. "We only looked for and found our less expensive supplier after being told by Intier that we absolutely had to cut our costs wherever and how ever possible. Now they were preventing us from doing so."
Axiom ignored Intier's ultimatum on bidding opportunities. It kept buying from the new supplier and saving money.
The company also discovered Intier had another reason for wanting suppliers to buy from Dupont Canada and recognized distributors. It had a rebate agreement with Dupont for the purchase of resins by its suppliers.
Intier "clearly told me, in no uncertain terms, that Axiom not buying materials from Dupont Canada was costing Intier money," Di Serio said in the affidavit. "At that time, Intier claimed to have lost $134,000 (U.S.)."
In its defence, Intier acknowledged the rebate program with Dupont and added they are common in the auto industry. Company policy called for the purchase of resin from an "authorized" Dupont representative.
Intier added it doesn't prevent suppliers from negotiating lower costs with authorized suppliers.
In its dispute, Intier noted Dupont could not ensure Axiom was buying the company's resins from an authorized source based on information it had received.
In response, Intier demanded money covering lost rebate money; Axiom's resumption of purchasing from Dupont distributors and disclosure of the new supplier. Axiom refused.
It said Intier started deducting the value of the rebate money from funds owed the company for production. When Axiom indicated it would no longer ship production and threatened legal action, Intier finally paid the money for deliveries, Di Serio said.
Meanwhile in Italy, Axiom's foray had turned into a disaster. Intier withdrew its major contract in January 2003, less than a year after Axiom opened operations there.
In 2003, Intier had also started requesting competitive bid quotes from all its suppliers. Harris acknowledged Intier didn't contact Axiom for bid requests but he didn't necessarily expect it in view of the firm's responses to cost issues.
Axiom received a further shock when Intier informed the company in July 2003 that it wanted a minimum of 20 per cent in price reductions on existing contracts during the next 18 months, including 10 per cent before the end of the year.
Intier warned in a letter that if Axiom did not meet the targets, it would expect "full co-operation" in moving existing parts contracts to other suppliers.
Intier added Axiom had fallen "significantly short" of Windo-Motion's overall "givebacks" to auto makers. The letter did not provide financial details on the demands from any auto makers, although DaimlerChrysler had confirmed publicly it had sought cuts.
Axiom president and co-owner Perry Rizzo said the company reminded Intier that it had already provided millions of dollars in cost savings through innovations and problem-solving that also helped the auto-parts giant win other contracts from vehicle manufacturers.
At the same time, Axiom appealed for help from its own suppliers in efforts to offer some cuts. The company received a cool response.
Rizzo, a former Windo-Motion manager, said his firm had no room to manoeuvre and he did not understand how Intier could legally terminate a contract solely because the seller didn't lower prices.
But Harris said Intier viewed Axiom's cost-reduction efforts as "shallow and insufficient."
In February last year, Intier sent the letter to Axiom requesting the huge immediate price cut.
"We require an immediate 31.8 per cent price reduction on all the components you supply to us," Harris said in the letter to Di Serio.
"While providing this reduction is not a guarantee of long-term business, it does begin to address what is currently an uncompetitive situation. In addition, we need you to pursue additional opportunities to further reduce cost and improve product performance."
Rizzo said in a recent interview that Intier's demands for deep cost cuts were "outrageous" and the company knew Axiom could not comply because details about profit potential was in contract bid forms.
Axiom said in its court filings that it estimated profit of 4 to 6 per cent on remaining contracts with Intier.
"If we had that kind of profit to make a 31 per cent cut, we wouldn't be here," Rizzo added. "We would be on a beach."
Harris acknowledged during cross-examination on Axiom's application for the injunction that Intier did not make the same 31 per cent demand to all suppliers.
However, he said Intier asked other suppliers for various cuts and they made price concessions during their existing contracts.
Axiom responded with a give-and-take proposal. The company proposed a 0.5 per cent reduction on existing contracts for every $1 million of new business.
It also offered a 2 per cent annual reduction on new work.
Intier responded by giving notice on Oct.1 that it would terminate all Axiom's contracts at the end of the year. Axiom estimates those deals are worth about $8 million annually.
Intier sought new suppliers for the work but Axiom says it never received an opportunity to bid on them again. Regardless, competitors already had the inside track, according to Axiom.
For example, a Chinese company will be able to purchase resins from cheaper suppliers under its Intier contract. A Canadian rival is getting tooling from Intier that will increase operating efficiencies significantly for another contract, Axiom says.
Intier has acknowledged those claims by Axiom.
The new suppliers will also receive Axiom's tooling on those contracts. That means they won't have to bear Axiom's original design, launch and testing costs.
Intier said it expects to save about $1.7 million this year by moving current Axiom contracts to other suppliers and $2.7 million over the lifetime of the agreements.
Di Serio said he believes Axiom's refusal to sever ties with its new resin provider prompted Intier to punish his company and arbitrarily cut it off as a supplier.
Harris denied Di Serio's claim and said Intier made the move to meet global demands from the auto makers and remain successful.
"For a substantial period, Axiom has been unwilling or unable to work with Windo-Motion to reduce its prices to a level satisfactory to Windo-Motion," he said.
But Di Serio said, despite the tough market conditions, Intier's fortunes have soared since Magna spun it off as a publicly traded company a few years ago.
Intier's profits jumped to $84.2 million in the first nine months of last year, more than double the earnings for the same period in 2003.
The three Axiom partners said, regardless of the outcome of the injunction and lawsuit, the relationship with Intier that grew for more than a decade is dead.
"For me, this has been a nightmare," Di Serio said.
Source: The Toronto Star http://www.thestar.com/NASApp/cs/Con...=1108422613312