Current market conditions could cause more than half of the tier one automotive suppliers in the US to file for bankruptcy in 2009, prompting 1m additional job losses and creating an estimated US$9bn income tax revenue shortfall, a new study has concluded.
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“The dramatic drop-off in sales volumes that is impacting the OEMs is having a ripple effect on the health of their tier one suppliers,” said global management consulting firm AT Kearney’s North American automotive head Dan Cheng.
“In particular, suppliers with large capital investments stranded in dedicated, underutilised facilities are especially at risk.”
The firm surveyed top-tier automotive suppliers to North America to assess the impact of the economic downturn on their financial health and also created a number of scenario-based market projections to analyse the health of these suppliers over the 2009-2010 period.
Key findings included:
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By GlobalData- A significant drop in auto sales has exposed under-utilized high capital intensive operations.
- Raw material prices have increased 24% over the past year – a portion of which some suppliers have still been unable to totally pass onto their OEM customers.
- High fixed costs and excess capacity present a significant challenge in the face of falling demand that has impacted cash flow, bringing many suppliers to the brink of bankruptcy.
Tier one suppliers are in an especially difficult predicament, AT Kearney said. In addition to the difficulty of passing raw material costs on to OEM customers, their supply base (tier twos and threes) is becoming increasingly fragile. There are indications tier one suppliers anticipate that up to an additional 23% of their supply base will be in immediate financial distress within the next 12 months and present a significant challenge to their own operations.
“The recent, extremely weak auto sales figures are the third blow to the industry this year, with consumer confidence driven to new lows from falling home prices, a declining stock market and an uncertain economic future,” said AT Kearney automotive partner Doug Harvey, who headed the study.
“There is some panic in the industry, as car companies and their suppliers realise that sales demand volume is not bouncing back anytime soon.”
The survey found that over 29% of tier one suppliers place restructuring as a top priority in 2009, while more than a fifth will choose to focus first on operational improvements.
The firm suggested short term measures can include financial restructuring and improving cash positions via wage adjustments, inventory or asset liquidation.
“To develop a sustainable business model in this changing industry, tier one suppliers will undoubtedly have to reassess their own supply base and determine which suppliers should be chosen as long-term business partners,” Harvey said.
“However, currently less than 40% of major tier one suppliers frequently use a supplier risk mitigation plan.”
The consultants suggest that tier one suppliers should:
- Manage cash aggressively and take short-term actions to limit cash burn rate and create incremental liquidity to survive the crisis.
- Develop a supplier risk mitigation plan by stemming dependence on failing suppliers to minimise the part-price increase due to last minute resourcing in the event of bankruptcy.
- Develop a financial and operational restructuring plan and act to resolve liquidity and debt issues along with longer-term actions to restructure the business model and restore profitability.
- Strategically seek opportunities to gain market share, taking advantage of competitors in financial distress or bankruptcy, as a means to achieve market leadership as demand rebounds.
The firm surveyed seven industry segments amongst tier one suppliers with chassis and frames comprising the largest portion – 24% of respondents.
