November is bringing more good news for suppliers. Now OEMs fear the sector's expected consolidation will not happen, says SupplierBusiness
 
October produced the first signs that US suppliers are on the road back to prosperity and still more positive news has followed in November. There is even sporadic, anecdotal evidence of loosening credit for suppliers, including Tier 2s, albeit at higher rates.

Some bigger companies are successfully going to the capital markets to raise money. It all bodes well for the "great ramp-up" said to be on the horizon in North America. Cost-cutting has been the key to resurgent bottom lines - that and the uptick in vehicle output caused by cash-for-clunkers.

In fact, suppliers have reduced their cost bases by so much, that if production does pick up in 2010, even slightly, several suppliers will be well-positioned to reap big earnings. Thus the supplier industry may have dodged the great bullet. And therein lies the problem.

The concern within OEM purchasing organisations is that weak companies are not falling by the wayside at a quick-enough rate. The industry consensus is that about 150 suppliers in North America are likely to liquidate in the next six months and it is not enough consolidation for the long-term health of the industry. The expectation six months ago was than many more suppliers would collapse.

The apprehension is being heard not just among the Detroit 3, but at some import manufacturers in North America. Signs of incipient health in the supplier community continue. Lear pulled out of bankruptcy after just four months and swung into the black during the third quarter. The company reported net income of US$25 million on revenue of US$2.5 billion.

"We have streamlined our global cost footprint and improved our operating efficiency in every region of the world," CEO Bob Rossiter said in the statement.

And according to court documents, JPMorgan Chase & Co. is providing Lear with US$950 million in loans. ArvinMeritor this month reported a smaller quarterly loss as cost cuts kicked in. The company forecast better earnings for the fourth quarter. "With the steps we have taken to manage costs...we believe we are on track to benefit from future recoveries in the global markets," ArvinMeritor CEO Chip McClure said in a statement.

TRW and Tenneco have issued stock or debt to raise cash. Visteon has received court approval for a series of measures for restructuring operations and obtaining financing. The growing strength of large suppliers is helping lower tier firms. So after pulling in their horns, a higher percentage of small part makers are likely to stay in business in time for a production pickup in the next 12-24 months.

US automakers are unable to control the size of their supplier networks in the way they have been able to pare back their dealer bodies. But industry watchers expect vehicle manufacturers to get more aggressive in moving business to healthier suppliers and allowing others to collapse. And company sources acknowledge that that will happen.

Ford, GM and Chrysler have been urging suppliers to take advantage of the auto industry's restructuring to create a more financially viable business model that will help suppliers and automakers alike when the economy recovers. General Motors' new purchasing chief, Robert Socia, says many suppliers are having trouble generating short-term cash flow and need propping up. The problems will not be resolved any time soon, he said.

Socia said he is "keeping a close check" on GM's North American supply base of 1,300 companies. Chrysler is moving quickly to fix or replace its troubled suppliers. Since Fiat took control six months ago, Chrysler has shifted sourcing away from 60 troubled suppliers representing 5 percent of the annual purchasing spend and it has "jump-started" efforts to optimise its supply base, according to purchasing chief Daniel Knott.

He said that Chrysler and Fiat are moving fast to use more common suppliers.

And Ford, which has been the most systematic and insistent of the Detroit 3 in rationalising its supplier base, is expected to accelerate its Aligned Business Framework consolidation effort in the next couple of months.

This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.