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Supplier That Fought Back
From the Toronto Star Feb. 15, 2005. Business Section Front
By: VanAlphen, Tony
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
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.
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 canceling 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.
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
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.
primarily makes tooling and parts for window mechanisms, filed its
lawsuit last month seeking more than $30 million from Intier for
allegedly breaching contracts.
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.
officials would not comment on the case because it is before the
The Axiom case
reveals the impact of those price pressures on suppliers trying to
meet shareholder expectations, eke out meagre profits or simply
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.
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.
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
Di Serio, (One of)
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.
increasing in the mid 1990s when H&R expanded into plastic-parts
production. Its first big job was making hood release handles for
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.
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
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
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.
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
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
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.
Di Serio, Perry Rizzo and Herbert Jahn, who run
Aurora-based auto-parts maker Axiom Group Inc., are
pursuing a court injunction to stop Intier
Automotive from cancelling contracts after Intier
demanded a 32 per cent cost reduction from its
has the contractual right to terminate its
Harris, vice-president of global purchasing for Intier
me, this has been a nightmare.'
Di Serio, co-owner of Axiom Group
Axiom received bid
requests again but the company found it was no longer winning any
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
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.
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
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.
"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
Intier added it
doesn't prevent suppliers from negotiating lower costs with
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
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
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
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.
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."
during cross-examination on Axiom's application for the injunction
that Intier did not make the same 31 per cent demand to all
However, he said
Intier asked other suppliers for various cuts and they made price
concessions during their existing contracts.
with a give-and-take proposal. The company proposed a 0.5 per cent
reduction on existing contracts for every $1 million of new
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.
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
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
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
Harris denied Di
Serio's claim and said Intier made the move to meet global demands
from the auto makers and remain successful.
substantial period, Axiom has been unwilling or unable to work with
Windo-Motion to reduce its prices to a level satisfactory to Windo-Motion,"
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
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.