DETROIT – Weak automotive suppliers will not be able to stay in business much longer due to a lethal combination of declining vehicle sales, skyrocketing raw-material prices and unrelenting pressure from auto makers to reduce component prices, turnaround specialist Wilbur Ross Jr. says at this week’s Ward’s Auto Interiors Show here.

“At some point, everyone in the supply chain will have to make a difficult decision to stop supporting the weaker suppliers in order to concentrate assistance on core long-term suppliers,” Ross says in his keynote speech. “As this occurs, the long-awaited industry consolidation and rationalization will become a reality, and the OEMs’ costs will eventually go down as a result.”

The chairman and CEO of W.L. Ross & Co. formed International Automotive Components in 2005 by deploying private equity to acquire and consolidate divisions of Collins & Aikman Corp., Lear Corp. and other suppliers in the financially distressed interior-trim sector, which relies heavily on petroleum-based plastics.

Until recently, IAC has been able to resist or offset most commodity price pressures. Raw materials are up to 65% of a supplier’s costs, Ross says.

“But most of our suppliers would no longer exist unless we let them raise prices. I believe other Tier 1s are in a similar position. In many overseas markets, we’ve been able to contractually pass along most of the increase, generally on a lagged basis.”

After his speech, Ross declines to discuss with journalists the state of price discussions with U.S. auto makers. Generally, those talks center on decreases.

Ross says IAC is working hard to confront its own operating costs. “We are experimenting with composites and natural materials as potential substitutes for petroleum-based resins,” he says. “Recycling helps, as does reduction of scrap and waste. We’ve also consolidated facilities and received cooperation from labor.”

A major problem facing the automotive supply chain is overcapacity. “Many segments are operating at 70% or less of capacity and will be at even lower rates next year, making overhead absorption a bigger and bigger problem,” Ross says.

Meanwhile, North American auto makers are looking increasingly to source more parts from low-cost countries, as well as complete vehicles.

“These pressures have caused many (supplier) bankruptcies … and will cause more,” Ross says, noting the trend has not reduced much supplier manufacturing capacity.

Although auto makers have rallied to support bankrupt suppliers, industry conditions now limit their ability to do so, Ross says.

Chrysler’s efforts to remove tooling from Plastech’s (Plastech Engineering Products Inc.’s) bankruptcy may mark the beginning of a change in OE attitude,” he says. “It is noteworthy that while they did not try to remove their own tools, both GM (General Motors Corp.) and Ford (Motor Co.) supported Chrysler’s unsuccessful bankruptcy court petition to do so.”

As a private company, IAC – and Ross’ other industrial holdings – do not publicly report financial statements. But he says all of his companies “exceeded budget last year and had a good start in 2008 until the American Axle strike.”

The 81-day American Axle strike cost IAC about $32 million in pretax earnings by halting vehicle production at more than 30 GM plants, he says.

Overcapacity has forced some suppliers to “take a contract at no profit, maybe even at a loss, just to get some business,” Ross says. The same was said often about Collins & Aikman, which landed in bankruptcy and no longer exists.

“I think as this problem continues, the higher-cost and the less-efficient capacity will eventually get weeded out,” he says. “That will be a benefit to the survivors.”

Although some suppliers will not survive the shakeout from a treacherous economy, Ross says IAC will succeed.

“We’re working hard to be among those who make the cut and to benefit from the long-term international growth trends,” he says. “We are encouraged by the fact that both the OEs and unions now acknowledge we are serious long-term players, not hedge funds looking for a quick killing.”

He says many auto makers “have been referring their distressed suppliers to us. We, therefore, are willing to continue to expand our plastics business and to develop a large share in other segments.”

IAC, with annual sales of $5.5 billion globally, will continue to cultivate operations in low-cost countries, such as China and India.

“We have growing presences in Poland, Czech Republic, Slovakia, Spain, Brazil, Argentina and Guatemala,” Ross says. “We also took over business from troubled suppliers in the U.S., Mexico, Canada and the U.K. Most importantly, our company has no net debt.”

He also plugs IAC’s contributions to the Chrysler Town & Country minivan, which earned a Ward’s Interior of the Year Award in the premium-truck category at this week’s show.

“This is an accomplishment we take great pride in, as we are responsible for 80% of the interior content” in the minivan, Ross says.

He admits his near-term outlook is “discouraging,” but his long-term view is more upbeat.

“Nobody’s going to make a huge return on equity as an auto supplier. I think we all know that,” Ross says. “The question is, can you earn an adequate one to keep yourself going and growing.”

tmurphy@wardsauto.com