New car and truck sales in the United States may have risen more than 2% during the first 10 months of 2004, but profits at parts suppliers are shrinking as raw materials costs rise and production falls at General Motors and Ford, the Associated Press said.
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The news agency said Delphi and Visteon, with combined sales of $45.7 billion in 2003, have already warned of lower-than-anticipated earnings this year because of higher materials expenses, particularly for steel, and because GM and Ford plan to make fewer vehicles.
AP noted that second largest parts maker Visteon, the former Ford division that counts on the automaker for most of its business, this week offered buyouts to its 8,300 U.S. salaried workers as a way to trim costs and become more competitive. The supplier, which lost $1.36 billion in the third quarter and last recorded a full-year profit in 2000, has been in constant restructuring since its break from Ford four years ago.
Top dog Delphi also is restructuring and is on track to reduce its US hourly work force by 6,000 by year’s end, the report added, noting that smaller suppliers are also hurting, and at least two have filed for bankruptcy protection in recent months, citing the skyrocketing cost of scrap steel.
Industry observers told the news agency they see little relief on materials costs, and continued pressure from automakers to lower prices amid a highly competitive sales environment.
“Suppliers, tyre companies, dealers and aftermarket companies faced a challenging third quarter, and there is no end in sight,” Morgan Stanley analyst Stephen Girsky reportedly said in a recent research report.
Merrill Lynch said in a recent report cited by AP: “While lower production should resolve the inventory overhang this year, raw material inflation will likely be a factor hurting 2005 results as well.”
Restructuring and consolidation have been constants among suppliers in recent years, and that’s likely to continue given the industry’s fragmentation, manufacturing overcapacity and other factors, Umar Riaz, managing partner for the automotive practice at consulting firm Accenture Ltd., told the Associated Press.
A recently completed Accenture analysis of 31 of the largest publicly held global suppliers reportedly showed much room for restructuring remains but that several suppliers have been able to overcome pricing and other obstacles and post hefty profits and operating margins.
AP noted that Accenture didn’t name the “high performers” in its study, but in an interview Riaz referred to Milwaukee-based parts maker Johnson Controls Inc. as a company that has successfully refined its operations. Johnson Controls reportedly said last month it earned $273 million in the most recent quarter – up 24% from a year earlier – in part because of reduced costs.
A common practice among some successful suppliers is outsourcing work to lower-cost locations, including those outside the United States, and developing other operational efficiencies, Riaz told AP. Many have offset lost business from Ford and GM with new work from the Asian manufactures expanding their U.S. capabilities.
“High performers have figured out how to grow revenue at a large pace either through getting new customers, acquiring new programs at existing customers or geographic diversification,” he reportedly said. “There’s a significant amount of growth to be had in this industry if companies follow the right corporate strategies,” he added, according to the Associated Press.
