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March 10, 2003

USA: Slowing industry sales will shake out components sector – report

Slowing car sales and production cutbacks will accelerate the shakeout in the US automotive parts industry, pushing struggling companies out of business or into the arms of larger competitors, industry experts told Reuters.

By bcusack

Slowing car sales and production cutbacks will accelerate the shakeout in the US automotive parts industry, pushing struggling companies out of business or into the arms of larger competitors, industry experts told Reuters .

Many smaller, privately held suppliers, burdened by debt and surviving on razor-thin profit margins, have remained afloat despite brutal pricing pressures only because vehicle production has held at record levels for several years, Reuters noted, adding that generous incentives on new vehicles pushed consumer demand to an unsustainable pace.

Reuters said that General Motors and Ford announced plans last week to curtail vehicle production in the second quarter, after sales of cars and light trucks slowed in February. That could push many of the smaller auto component suppliers to the brink.

“It’s survival of the fittest out there,” David Healy, an auto industry analyst with Burnham Securities , told Reuters . “The natural outcome is more consolidation.”

Automotive parts suppliers make components, everything from chassis and interior assemblies to steering, braking and electrical systems, that represent 70% of the cost of the average vehicle, according to the Original Equipment Suppliers Association, a trade group, Reuters said.

The number of automotive suppliers has dwindled over the past decade to about 10,000 in 2000, a third of what it was in 1990. By the end of this decade, only 4,000 to 5,000 suppliers are expected to remain, the OESA predicts, according to Reuters .

Reuters said forecasts for slower car sales and production in 2003, especially if consumer worries about a looming war with Iraq persist beyond the second quarter, will compound the pressure on suppliers, which are already receiving lower prices from automakers for their parts.

“The small and middle market players are going to truly feel the pinch. What they were making up on volume, they were giving away on price,” David Eberly, senior managing director of Beringea , a private equity and investment banking firm, told the news agency.

Companies with annual revenues of $10 million to $100 million are the most vulnerable, especially the hundreds of ‘mom-and-pop’ operations specialising in metal stampings, injection-moulded plastics and electrical parts, Eberly and others told Reuters .

“You will see suppliers hit bank covenants. You will see some acceleration of the consolidation trend because of this,” J. Ferron, automotive partner for consulting firm PricewaterhouseCoopers , told Reuters .

The news agency noted that, at the same time, top suppliers stand to gain at the expense of their smaller competitors. Automakers have indicated a desire to work with fewer suppliers and incorporate larger modules and systems into their vehicles, a trend that has benefited big suppliers such as Johnson Controls and Lear Corporation.

“There are a number of very large, tier one and tier two suppliers that are expecting volume increases” as competitors go out of business, Eberly told Reuters . He noted that could put a strain on their production capacity, a situation that “we haven’t seen in a while.”

Suppliers told the news agency they are bracing for the production slowdowns, which are expected to be announced by the automakers on a weekly, plant-by-plant basis.

“We’re waiting to see how many units they are going to reduce,” Greg Gardner, spokesman for Visteon , whose largest customer is former parent Ford, told Reuters .

According to Reuters , American Axle & Manufacturing Holdings, which derives about 84% of its sales from GM, said it foresees no major changes for the light trucks and sport utility vehicles it supplies.

“Fluctuating volumes are part of business, and we make our production plans accordingly,” Renee Rogers, spokesman for American Axle, told Reuters .

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