GM has downgraded its profit estimates for 2005, citing lower production volumes in North America. This will add further pressure to the components supply industry, which has already been punished by savage raw material cost increases and aggressive cost cutting by the main vehicle manufacturers.
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General Motors, the world’s leading vehicle manufacturer, attributed the warning to the difficult climate for car manufacturers in North America. On the back of the news, shares in leading component manufacturers were trading lower. In itself, the production downgrade was relatively minor at just over 5% – representing volumes of 70,000 out of planned first quarter North American production of 1.25 million vehicles.
However, soaring raw material prices and brutal cost cutting by the major vehicle manufacturers will exacerbate the latest cuts, putting further pressure on the components supply industry. Big hikes in steel and oil prices have hit the industry hard and some suppliers have already been forced into bankruptcy protection. With the profitability of the vehicle manufacturers also under pressure, they have been pushing their suppliers hard for a reduction in the cost of their components.
The fear amongst the component manufacturers must now be that the production cuts from GM will not be the last. Like the vehicle manufacturers themselves, the component manufacturers have high operational gearing. This means they have relatively high fixed costs; increases or decreases in volumes have a disproportionate impact on profitability. Further cuts in volume would therefore hit profits badly.
Nevertheless, vehicle manufacturers rely on a healthy supplier base for the efficient running of their operations. It is certainly not in their interest for disruption at key component suppliers – hence the recent actions by Ford to help Visteon, its former parts division. As a result the vehicle manufacturers may not be able to push their suppliers as much as they have done of late. And in some cases they will have to stomach price rises, an anathema to the industry.
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By GlobalDataSOURCE: DATAMONITOR COMMENTWIRE (c) 2005 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.
