Going green puts the squeeze on suppliers 

Eric Morath / The Detroit News

While it’s the automakers that are touting their new, green machines at this year’s Detroit auto show, it’s the suppliers that have to do the heavy lifting to make the vehicles a reality — and at minimal cost.

Suppliers also want to be green and are spending millions to develop batteries, lightweight materials and other environmentally friendly components. But recouping that massive investment can be challenging as manufacturers squeeze suppliers for lower prices.

Delphi Corp., Dana Corp. and Tower Automotive and other suppliers have filed for bankruptcy as they face narrow margins, rising retiree and health care obligations, and foreign competition.

The development of hybrids and electric cars demonstrates a change in how vehicles are developed. In the past, automakers designed cars and then ordered tires, transmissions and mufflers from others. Today, suppliers often jointly develop the technology with automakers for the next generation of vehicles.

Those suppliers-turned-tech-firms risk not recouping the cost of that research. Those who don’t develop new technologies risk being shut out of the industry.

"They are never going to tell you they are willing to pay more, there is always continued pressure on cost," said Terry Helgesen, senior vice president for marketing at Denso International America. "You have to show there is a value, and that the end consumer is willing to pay for it."

The Japanese supplier makes a highly efficient alternator. With higher gas prices, sales of that alternator have increased.

"Now we sell that to every major manufacturer," Helgesen said. "The end user doesn’t really care about an alternator, but if it saves them gas mileage, they do."

Being green has taken on so much importance that German auto supplier and chemical company BASF Group runs an eco-analysis on each product, just as it would run a financial analysis. BASF will use the eco-analysis to compare formula of a paint primer to determine which one has minimum environmental impact at minimum cost.

The most financially successful automakers in the world are the ones with deep technological competencies — but they will be challenged to turn a large profit on batteries and other technology for hybrid and electric vehicles, said John Henke, a supplier analyst at Planning Perspective Inc.

Today’s hybrids cost several thousand dollars more than comparable vehicles and are still often sold at a loss.

"If automakers can’t pass the cost on to the consumer, they won’t be willing to give suppliers better margins," he said.

For suppliers to succeed, Henke said they must get creative. One way is to lock into long-term contracts, so the supplier reaps rewards if vehicle volumes increase.

Ford Motor Co. is working with suppliers to develop everything from advanced powertrains to fabrics made from recycled materials, said Sue Cischke, senior vice president for sustainability, environment and safety engineering. But cost remains a concern.

"We want to advance on the sustainability front, but not on the cost front," she said.

Johnson Controls Inc. this year will spend $37 million on hybrid research and development — triple what it spent in 2006.

At the Detroit auto show, the supplier unveiled its I3 concept — a crossover SUV with many Earth-friendly features, including a lithium-ion, plug-in hybrid.

To help recoup costs, Johnson Controls enters in contracts to develop the technology, separate from parts procurement.

That research is close to paying off for automakers seeking greener vehicles, said David Cue, vice president at the Johnson Controls-Saft battery joint venture.

"Now we have customers testing fleets, and that is big step from an electric motor that could propel a car a few feet at the Auto Show in years past," he said.

Cue said Johnson Controls will have lithium-ion batteries in production vehicles by year’s end.

Johnson Controls also introduced a headliner, the molded material on the interior overhead surface of a car, made of soy and natural fibers rather than fiberglass and plastic resins. The eco-friendly option is only viable, the supplier says, because the headliners fall in the same price range as its conventional products.

For Continental AG to compete on the green front, two years ago it committed to using the same basic building blocks for all its battery systems, said Corporate Technology Officer Karl-Thomas Neumann.

"We don’t have a customer that buys 500,000 electric vehicle components, we have customers that buy 5,000," he said. "That’s not typically where we can create economies of scale. But if you take all that volume together you can find that scale."

Neumann said recognizing consumers’ increasing desire for gas-sipping cars encouraged Continental to move into the battery technology even if profits weren’t immediately apparent.

"You have to see where the future is going," he said.

Betting on growing interest, battery systems could shortly become a big-volume, profitable business for the German supplier. But Neumann conceded, "That’s the idea, but you never know for sure."