Fresh efforts by Volkswagen and DaimlerChrysler to squeeze out savings are putting German auto parts suppliers through the same cost wringer that has plagued their US rivals, according to a Reuters report.
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Analysts have told the news agency that many smaller car parts and components groups may not survive another round of price cuts from their major customers but larger firms stand to benefit from the industry crisis if they can seize US business from struggling competitors.
Faced with intense downward pressure on prices from carmakers bent on defending margins, many suppliers have already shifted production offshore to low-wage countries over the past five years, and they are now running out of room for more efficiency gains, Reuters said.
“Most will have to bleed in 2006,” Juergen Pieper, an auto analyst at Bank Metzler, told the news agency.
Small and mid-sized suppliers that often depend on one big customer are in special danger, he reportedly said.
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By GlobalDataHe told Reuters that big listed groups such as Continental , cablemaker Leoni and cylinder seal maker ElringKlinger AG have the financial strength to survive thanks to innovation and efficiency gains.
The report noted that a wave of bankruptcies has claimed suffering US suppliers beset by high prices for raw materials but unable to charge more from hard-pressed customers who are cutting output – Visteon averted bankruptcy by cutting a deal with former parent Ford and Delphi is trying to do the same with General Motors.
Reuters said that Volkswagen and DaimlerChrysler have made clear to suppliers that costs have to come down in an intensely competitive market. Volkswagen aims to lop €5 billion in costs from its flagship VW brand alone, and incoming DaimlerChrysler boss Dieter Zetsche made a name for himself as a price-cutter as head of Chrysler.
Suppliers reportedly aren’t happy with the behaviour of automakers.
“They really have to get their own house in order and say what they can do better,” Peter Paul Moll, board member and former chief executive at auto seat heater specialist WET Automotive told Reuters.
He reportedly criticised “all too luxurious” wage agreements with carmakers’ staff and said suppliers alone could not be expected to make all the hard decisions.
“The screws have been turned very tightly in the years past,” crimping results at suppliers despite efforts to trim their own costs Leoni chef executive Klaus Probst told the news agency. “It is simply inconceivable that this goes on at the same extent year for year,” he added, suggesting suppliers get involved early in product development to tap savings potential.
Rolf Woller, an analyst at German bank HVB, told Reuters that solid European companies have a chance to take advantage of the troubles that Delphi and Visteon face as GM and Ford sales wobble.
“European companies ThyssenKrupp , Faurecia , Grammer , Leoni and ElringKlinger now have the chance to get new US orders above the usual scope,” he wrote in a note to clients cited by the news agency.
Reuters noted that lurking in the background are hedge funds and private equity groups, which have stepped up lending to smaller German suppliers or purchased their distressed debt, gaining leverage they can use to force consolidation in a sector with more than 1,000 firms.
