BIRMINGHAM, MI – North America’s supply base is on its own in the struggle to survive soaring material costs, declining volumes and a rapidly changing market, says a new A.T. Kearney study.

The consultancy’s 12th annual industry analysis suggests $39 billion in capital investment is needed to stabilize a supply base battered by bankruptcies and pricing pressure.

But, handcuffed by the lending crisis and discouraged by a grim economic outlook, capital markets and banks are turning a blind eye to the industry. Even private equity firms, seen recently as industry saviors, are shying away as they begin to view automotive investments as “low return,” the study says.

That leaves well-heeled companies in growth regions such as India and China. But instead of mergers and acquisitions, these would-be partners are focused on technologies and emerging markets, respectively, according to A.T. Kearney’s research, which is derived from interviews with 105 suppliers, auto makers and commercial-vehicle manufacturers around the globe.

In particular, Indian companies – from Tata Motors Ltd. to Tier 1 supplier India Pistons Ltd. – are keen on investing in alternative powertrain technologies, as well as advanced electronics. Meanwhile, China-based companies appear set on leveraging their current technology in emerging markets such as Southeast Asia.

More than 50% of those interviewed cited “strict” North American labor laws that favor workers as an investment deterrent, the study says.

Consequently, North American suppliers will “basically be forced to rely upon operational improvements and restructuring,” warns Daniel C. Cheng, A.T. Kearney partner and vice president in charge of the consultancy’s North American automotive practice.

This will not be easy, Cheng adds, because “a lot of the low-hanging fruit already has been picked.” In addition, common-sense measures such as reducing manufacturing complexity is beyond suppliers’ control.

“Suppliers can reduce complexity only to the extent that the OEMs allow them to,” Cheng tells reporters at a media briefing.

Against a backdrop of indifference by traditional lenders, A.T. Kearney explored the possibility that industry players in India and China would consider mergers and acquisitions as a means of gaining a foothold in the North American market. Such deals are plausible, the consultancy proposed, because the nations have significant foreign exchange reserves.

China ranks first with $1.8 trillion, while India is fourth with $300 billion, Cheng estimates.

Still, of the $56.8 billion funneled into 133 outbound investments by China-based companies between 2005 and June of this year, just $132 million was spent on eight auto-sector deals, the study shows.

India-based companies spent $4 billion on 27 auto-sector deals from a total of 527 outbound investments worth $46.7 billion.

And in both cases, Europe was the most-preferred investment region overall, followed by the U.S.

From India’s Kirloskar Oil Engines Ltd., to China’s Chery Automobile Co. Ltd., executives tell A.T. Kearney researchers the North American supply base is not on anyone’s radar.

As a result, some suppliers will be unable to exit bankruptcy, but Cheng could not provide an estimate of how much the supply base might contract.

The study also suggests:

  • Steel prices will either stabilize next year or begin to decline, reaching 2005 levels by 2013.
  • Aluminum prices likely will remain high through 2010, before leveling off or declining.
  • Should oil prices stabilize, the interior/heating, ventilation and air-conditioning supply segment will outperform powertrain by 2012.
  • North American suppliers will realize an accumulated loss of $49.7 billion between 2008 and 2011.

Meanwhile, the study applies the Saffir-Simpson Scale used for hurricane ratings to define the “perfect storm” so often used to describe the state of the U.S. auto industry.

Factoring in forces such as sagging consumer confidence and a growing market preference for smaller, thriftier vehicles, current conditions are equivalent to a Category 4 hurricane, which is capable of “heavy damage” and “near complete destruction of smaller structures.”

emayne@wardsauto.com