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OEM Report: Automotive

Tentative progress

By Michelle Martinez

Resilient suppliers are not resting easy despite improvement in the auto industry

September 2010 - Comfort for big automotive suppliers came in the form of double-digit sales increases during the first quarter of the calendar year.

But as good as the numbers were, nobody is resting easy, analysts say. Many of the gains were made from steep cutbacks made in the fiscal war years of 2008 and 2009 to scale back break-even points to keep companies afloat.

Visteon Corp., Van Buren Township., Mich., announced first-quarter sales of $1.85 billion, a 43 percent increase from the $1.3 billion it recorded for the same period last year. Arvin Meritor, Troy, Mich., posted sales for its fiscal second quarter ended March 31 of $1.2 billion, up 25 percent, or $245 million, from the second quarter of 2009. And for its fiscal second quarter, Johnson Controls, Milwaukee, reported a 32 percent increase in sales to $8.3 billion from $6.3 billion during the same period last year. Its automotive "experience" sales spiked 70 percent to $4.2 billion versus $2.4 billion last year, according to the company.

"We continue to be encouraged by the steady improvement in the automotive industry and, therefore, have increased our earnings outlook for 2010," said Johnson Controls Chairman and CEO Stephen A. Roell in a news release.

Although the crisis for large Tier 1 suppliers seems to have passed, analysts say, smaller suppliers down the chain are caught in a holding pattern of handling increasing production numbers with fewer resources to support them. Tier 2 and Tier 3 suppliers are adjusting to the notion of "the new normal," but when they’ll be able to fatten skinny operations to support new automotive programs is less certain.

"Everyone is having a better first half because they were able to lower their break-even point and resist strongly from having any new hires or adding any additional cost," says Wes Smith, president of stamper E&E Mfg. Co., Plymouth, Mich. "But the small-business credit market is pretty tight. My concern is that the guys that are even smaller than us--they didn’t have a lot of fat to take out to begin with."

Suppliers have been able to meet production increases with a cost structure 35 percent lower than what they had before the financial crisis, says Dave Andrea, senior vice president of industry analysis and economics for the Original Equipment Suppliers Association, Troy, Mich. "That’s where you see the financial swing very quickly."

But banks, still battling weakened portfolios, are skittish to lend to automotive suppliers that don’t have at least a year of solid financial performance under their belts, especially for smaller operators with less than $100 million in revenue, he says.

"Everyone is kind of holding on at 10 million or 11 million units, assuming it will go up to 14 million or 15 million when the economy recovers next year or 2012; nobody knows," says Brad Coulter, a director at the turnaround firm O’Keefe & Associates, Bloomfield Hills, Mich. "But when we talk to lenders, the view is still that there is a lot of overcapacity. Lenders are really deciding who is a long-term player and who is not."

That may take awhile for lenders to divine. Suppliers have heard for years that their ranks would be whittled at by OEMs looking to work with ever fewer vendors. But there’s been little aggressive action to back it up, Coulter says.

Suppliers have proven resilient, cutting salaries and slashing costs during the worst of the financial crisis but, for the most part, not quite closing their doors. And even with a crimp in available credit, those interested in exiting the market are waiting out the uncertain times.

Privately owned suppliers in particular are waiting, Coulter says. "Why sell now if the market recovers?" he asks. "Clients that want to sell are holding on to book a good 2010 to get value."

Marketplace changes
Automotive forecaster CSM Worldwide, Northville, Mich., projected North American automotive production for 2010 of 11.6 million, a step up from the 8.6 million units logged in 2009 but far below pre-crash unit numbers that averaged around 16 million units for much of the decade. CSM projects production of 12.6 million units next year, 13.5 million in 2012 and 14.6 million in 2013. Production finally may break 15 million in 2014, CSM said in its June report.

But with every sign of a slow recovery, changes to the marketplace are happening even faster, and suppliers will need to move quickly to catch up.

Foreign automakers continue to make market-share gains over domestic auto brands, according to a recent report from accounting and consulting firm Grant Thornton LLP, Chicago, and as soon as 2012, instead of the former "Big Three," the United States will be host to the "Big Six" of General Motors, Ford Motor Co., Chrysler Group LLC, Honda Motor Co. Inc., Toyota Motor Corp. and Nissan Motor Co. High-volume automakers build where they sell to mitigate currency risk, trade issues, shipping costs and supply chain risks, the report said, and as sales of foreign autos rise in North America so too will the units assembled here.

Volkswagen AG, Europe’s largest automaker, plans to start production at its $1 billion new plant in Chattanooga, Tenn., by the third quarter of 2011 and hopes to sell more than 1 million units by 2018. Toyota, Hyundai, Honda and Nissan are expected to expand their combined North American capacity by 27 percent, or about 1.3 million units.

In the meantime, domestic manufacturers are expected to reduce assembly capacity in North America by more than 4 million units to 7.5 million units, a 35 percent reduction compared with 2008, said the report.

By 2014, GM, Ford and Chrysler will have shrunk their combined number of vehicle platforms to 29 from 40 last year. Fourteen of the platforms will be global, which means they will be produced in North America and at least one other region, a separate Grant Thornton report said. Within four years, as many as two-thirds of GM and Ford vehicles in North America will be built from global platforms, up from 10 percent at the beginning of this year.

Supplier opportunity
The change likely will mean more opportunity for suppliers as VW and other automakers look to source locally, says James Ricci, a director in Grant Thornton’s Corporate Advisory Group in Detroit. But to compete in the new marketplace, suppliers will need to do more than leverage long-term relationships or tout lower costs, he says.

Instead, suppliers will have to sell on superior quality and customer service and show sophisticated design and development capabilities and sufficient technology to ramp up for new programs, among other things.

"The thing that all of the suppliers--whether $100 million or $1 billion--have to demonstrate is financial strength, some sort of technology capability," including the ability to manage new vehicle program launches, Ricci says.

As important is a geographic footprint that matches automakers and larger suppliers in North America and beyond, he says.

"Suppliers accustomed to working with GM, Ford and Chrysler exclusively must acknowledge that the rules of the game for Asian and European OEMs are different and plan accordingly," the report said.

Many suppliers are listening already. Stamper AZ Automotive, Center Line, Mich., in March announced Portugal-based Sodecia S.A. had taken majority ownership of the company.

"This transaction immediately and strongly positions our combined companies both globally and competitively," a news release from the newly formed Sodecia North America said. "We are truly global with manufacturing operations in the U.S., Canada, Brazil, Argentina, Germany, Portugal and China, along with a joint venture in India."

Michael Alcala, president, CEO and COO of Sodecia NA, declined to comment on the company’s recent majority-stake acquisition.

Motion-control-systems supplier Grand Rapids Controls, Rockford, Mich., has leased a plant in Quingdao, China, north of Shanghai since late 2004, says President James Bradbury.

The company is "doing a lot of programs for global platforms shipping out of China to various places around the globe," he says.

But competition is stiff. In China, there are more than 100 competitors, he says, adding volumes still have been quite small in that country. The company is looking to build the number of programs it services in North America, Bradbury says. Most of its opportunity is coming from large Tier 1 suppliers ramping up for new production programs, he says.

Going global
Companies that have lagged in figuring out how to go global may have difficulty squeezing their feet into the door.

By 2012, production in China is expected to hit 16 million units, eclipsing the United States, Ricci says. "If you don’t have business in that region, you’re going to have a hard time as a preferred supplier."

Some suppliers may be snapped up by Tier 1 companies looking to fill out their geographic or product portfolio, but others will need to consider different strategies to thrive in the future, he says.

Richard Dennis, president of stamper and metal former Die-Tech, York Haven, Pa., says the company is working to offer price and efficiency incentives to draw new automotive customers through the doors.

Automotive accounts for only about 5 percent to 8 percent of Die-Tech’s business, with industries like telecommunications and defense aerospace composing the lion’s share, Dennis says. But he sees opportunity for Die-Tech’s connectors in the increasing sensors and gadgets in automobiles to manage everything from parallel parking to automatic crash reporting.

"The price pressure that most people complain about is simply a challenge to do our job more effectively," Dennis says.

Die-Tech has worked on lean practices for nearly a decade, he says. The plant is only at one-third of its capacity but is profitable with about $8.5 million in annual revenue and a conservative balance sheet that’s left the company with cash reserves. Dennis has a goal to grow the company about $2 million per year, he says. "We need more work to fill capacity."

Dennis isn’t alone, and still other suppliers will have to examine other strategies, such as reconsidering their places in the supply chain, Ricci says.

But access to capital may still stymie suppliers seeking to retool for a new market. Lending for new equipment to supply new platforms or business lines is where the crunch is perhaps most acute, says Coulter. "It’s not an across-the-board problem, but it will affect all but the strongest," he says. FFJ

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