Automotive costs are accelerating

By Tom Stundza -- Purchasing, 3/12/2008 9:13:00 AM

Despite attempts to cut production costs, major automakers are watching higher commodity prices drive up the cost of the average vehicle by about $350. So, the combination of weak demand and rising costs for raw materials threatens stagflation to an already struggling sector, Lehman Brothers analyst Brian Johnson writes in a note for clients. "If not abated by drops in the commodity market or price increases to the consumer, GM and Ford face additional significant profit headwinds ... in an already dismal 2008," he writes.

Commodity prices are escalating rapidly for many of the key components in cars, including a 24% increase in steel, a 73% increase in platinum and a 10% increase in aluminum, Johnson writes. So, he believes the net-cost increase per vehicle will be $350 over the industry’s 2007 average. And, he estimates the additional cost resulting from commodity price increases will be $892 million for General Motors and $459 million for Ford Motor. He also is pessimistic that the automakers will be able to pass all of these increases to customers—since high list prices for 2008 models already are being discounted through various incentives.