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OEM Report: Automotive

Supplying change

By Russ Olexa

August 2009- Although both General Motors and Chrysler should come out of their Chapter 11 filings as leaner and more productive companies, the automotive tier suppliers that serve the Tier 1 companies might not be so lucky, even though they're still a vital part of the supply chain.

The future of Tier 2 and Tier 3 automotive suppliers is still tied to their ability to get financing to weather the current lack of auto production. This important conclusion regarding the survival of the supplier industry was discussed at the Society of Automotive Analysts networking breakfast presentation, "The Supplier Roadmap--How to Make It," on June 11 in Troy, Mich.

At the breakfast, four speakers gave presentations: Kimberly Rodriguez, principal of advisory services, Grant Thornton LLP, Southfield, Mich.; Cindy Warner, managing director, AlixPartners, Southfield, Mich.; Durc Savini, managing director, Miller Buckfire & Co. LLC, New York; and Larry Denton, owner, Denton Consulting, Rochester Hills, Mich.

Rodriguez gave a presentation on the rebirth of the auto industry. She forecasted that car and truck volumes should come back to a 15 million production level in as early as 2013, and automakers will start experiencing a sales volume increase soon. She also added that there will be a reshuffling of brands, with GM going from eight to four with the loss of Hummer, Pontiac, Saturn and Saab. She said all other manufacturers' brands would stay the same.

Her presentation also noted that over the long term, the strengthening of foreign currencies (among other factors) has led to increased production in North America. But by 2012, there will be a reduction of 2.6 million units of North American assembly capacity, most of which will come from the U.S. automakers. And there will be an increase of 1.5 million units of new domestic assembly capacity expected from foreign automakers by 2012. This will either give domestic auto part and product suppliers new opportunities, or it could cause them to flounder.

But she predicts, "As [auto] volumes increase, the supply base will become phenomenally healthy."

Innovative ideas
Warner's presentation, "Managing Cash as a Means to Invest in Technology For the Future," is a roadmap to help a company's recovery during rough fiscal times. Key areas that she covered included innovation being a catalyst for the successful future of the automotive industry and that nondiscretionary spending must be reduced to 30 percent to invest in innovation. She also explained that the role of the CIO within automotive will become highly strategic, and that person will become a key enabler of the future strategy. Attracting and retaining talent is the key to innovation, yet today's talent is not interested in "keeping the lights on" as a career challenge, according to Warner.

Savini's presentation reviewed the current situation in capital markets for automotive suppliers. He believes a large number of auto suppliers will default on their loans. He also noted that there's little private equity in the market to help companies.

He gave an example of bank asking a large plastic-injection molding company to purchase a small molding company. The larger company wouldn't do it because it felt that rather than pay a high price for the company, it would rather see it default and later have the bank give it to the company for pennies on the dollar. This doesn't help the bank, or the defaulting company, and tends to reduce the amount of capital available to the small, family-owned auto suppliers, Savini said.

Denton, who worked at Ford for many years and brought the auto supplier Dura Automotive Systems, Rochester Hills, Mich., through Chapter 11, presented information on surviving Chapter 11 bankruptcy. In his presentation he states that a company should start restructuring before filing. It should develop a single timeline for what needs to be done, pick an exit date and "own" the process. It must identify key employees and develop a retention plan for them. Management must expect things to go wrong. The company must also leverage the process to accelerate cost reduction while increasing transparency to let customers know what's going on. All employees must remain as enthusiastic and optimistic as possible. Also, management mustn't lose sight of the company's five-year vision. For long-term success, the company must meet and exceed quality and delivery goals.

During the panel discussion at the end of the presentations, Savini said the Tier 2 and Tier 3 suppliers that are in the $30 million to $100 million sales range are the ones that need to "rely on the extraordinary ability of the banks to provide funding" for the current downturn in the industry. Without it, the consensus was that many will not make it through this period. It was also noted that the supply base needs to contract and that cash flow will be important to the tiers' survival. FFJ

Sources

  • Society of Automotive Analysts
    Ann Arbor, Mich.
    phone: 734/677-3518
    fax: 734/677-2407
    www.cybersaa.org
    e-mail: cybersaa@cybersaa.org

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