It might come as no surprise to anyone that the tiered suppliers throughout the automotive supply chain face extreme pressure from all ends. By Wednesday, a case between Tier One automotive supplier American Axle and it’s steel bar supplier Republic Engineered Products could get resolved when a judge presiding over the case makes a decision as to whether or not Republic has to ship the parts under its contract.
The issue no doubt rests upon, once again, the validity of the blanket purchase order as we reported back in August of last year. The facts in this case involve Republic stopping steel shipments to American Axle and Manufacturing back on May 29 because American Axle refused to provide assurances to the supplier that it could pay for the goods. And in all fairness to Republic, according to this story, American Axle’s auditors had said the company could be in trouble. So American Axle in turn sued Republic to resume shipments, saying Republic was using the crisis in the auto industry to extract steel price increases for its steel.
We suspect that American Axle (like most automotive Tier One suppliers) had opened a blanket purchase order for the steel bars. But the only contractual commitment involves a commitment of volume which likely only came from purchase order releases (not the blanket PO) from American Axle. Hence Republic likely suspended shipments not because it had financial concerns for American Axle (though that appears to be a valid concern) but because they wanted to get out of the existing arrangement by either raising prices such that American Axle couldn’t or wouldn’t continue the current arrangement.
What happens then involves a series of court cases. The first involves an injunction (which is likely what American Axle filed) to force Republic to ship the parts. If the two parties have already been in negotiations, then American Axle would not be permitted to take Republic to court. So we will speculate that in this next round, Republic will be forced by the courts to ship parts to American Axle. Both parties will come to a negotiated settlement so as not to see the courts rule on the efficacy of the blanket purchase order.
However, given the state of the automotive market, perhaps it makes sense to let this one go through the court system? What do you think?