Parts makers need strong nerves and a steady hand. According to some expert witnesses, the closure of unwanted US auto component capacity will start in earnest this month (March) or April at the latest. For Europe it’s June.
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Magna and GKN – two of the big listed Tier 1s – reported their financial results for 2008 recently. Both sets of executives were revealing about the state of car component manufacturing.
Magna is pure automotive but a hybrid company in that it also assembles complete vehicles. GKN is an oddball too because it is also an aircraft engineer and supplier. This year it turned 250 so knows a thing or two about cheating the gallows in time of engineering recession. Its smartest move was quitting the manufacture of nuts and bolts half a century ago.
For the Tier 2 and 3 suppliers, listening to Magna’s Don Walker (CEO) and Vince Galifi (CFO) chewing the fat on the evolving situation for component makers was quite chilling (catch the replay on the Magna investor site). First, their background is that they have plenty of cash and they have an US$800m credit facility – “a revolver” in the parlance of the finance industry. They started to draw it down, but they have decided they do not need it and plan to pay it back in two US$400m tranches.
According to the Magna boys, 30% of the supply industry could fail. GM has set the hare running, they say, by announcing that it will reduce its suppliers by 30% over two years.
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By GlobalDataIts easy to spot the companies at risk: “the failing companies are those that cut off R&D, development engineering and skimp programme management.” If you are an assembler or a Tier 1 and you see those signs a tier below you, you have to be proactive and you have to be quick. “To get ahead of the curve you have to do it. Those companies will close.”
Magna is quite cheery about the situation. It believes that it will be a net beneficiary. The business has to go somewhere when the current supplier closes, and Magna believes that GM and others will approve transfer of the business to them. “We will move fast to take the business over. We do not want to wait and go through all the difficulty of reopening closed factories. We will make decisions instantly when companies start to fail.” There are guys out there clearly who are staring down the barrel of a gun.
Not Magna. “We have US$2.9bn of liquidity and we believe that the banks will be there for us if we have to draw more. We have the potential to make it through a really bad scenario.”
At GKN, the patter was initially cheery but one of the final remarks in the answers to analysts questions seemed to strike a different note.
Sir Kevin Smith, the chief executive of GKN admitted that “we were chasing the lift down the shaft in the automotive business in the second half of last year, but the aero business was profitable.”
It was the first time in 29 years that GKN has not paid a dividend. It’s that bad. “Our style is to get back to paying the dividend as soon as we can.”
But then came this: “We have GBP708m of debt and want to keep that below GBP800m. If things get really bad we always have a GBP350m revolver.”
Steady on fellers. Stay cheerful. And anyway if it comes to that, surely a cup of hemlock is cheaper?
Rob Golding
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