Charles Dickens may have had automotive suppliers in mind when he began A Tale of Two Cities with the famous words about the best of times and the worst of times.
Across North America, 2005 was a watershed year for the supply community, punctuated with significantly more pain than gain. The top two U.S. suppliers – Delphi Corp. and Visteon Corp. – teetered on the brink of insolvency, and dozens of others big and small went broke, continued bleeding money, struggled with too much capacity or landed in bankruptcy court.
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The biggest to seek Chapter 11 shelter from creditors was Troy, MI-based Delphi, which ended the year with delisted stock and the threat of a United Auto Workers strike in protest of drastic pay cuts the supplier was demanding.
In the spring, Visteon unloaded its weakest plants – 23 facilities in all – on former parentMotor Co., which has set out to sell or fix the operations under a new temporary entity, Automotive Components Holdings LLC. Massive restructuring was in store for both Delphi and Visteon.
Transplant Suppliers Thrived
The darker the days grew for suppliers reliant on Big Three volumes, the brighter the prospects became for a handful of transplant suppliers more closely aligned with Japanese and Korean auto makers ramping up production in the U.S.
Denso Corp., partially owned byMotor Corp. and its No.1 supplier, celebrated in November the grand opening of its new plant in Osceola, AR, to manufacture vehicle heating, ventilation and air conditioning (HVAC) modules and radiators for Toyota and Motor Co. Ltd. vehicles.
Osceola, a Mississippi Delta town decimated by massive losses of manufacturing jobs for two decades, was more than eager to welcome Denso. The starting wage at the plant, which employs nearly 400 people, is just under $10 an hour.
Throughout Japan, component manufacturers enjoyed record sales and profits in 2005 and were upbeat about the future.
Even Bridgestone Corp. posted earnings in excess of $1.5 billion in 2005, despite having paid$240 million in October to settle the Explorer tire recall dispute.
Other Japanese standouts, particularly-affiliated suppliers, included Seiki Co. Ltd., Toyota Industries Corp. and Koyo Seiko Corp.
Analysts credited the strong performance to the solid fundamentals and sales of their customers, includingMotor Co. Ltd. and Motor Co. Ltd.
"In the current fiscal year, nine of Japan's 12 vehicle manufacturers will report record profits, 11 of 12 are profitable, and even(Motors Corp.), the only company expected to report a loss, will make money in the fourth quarter," said Koji Endo, auto analyst at Credit Suisse First Boston (Japan).
In some cases, foreign suppliers bought their way into the Japanese market with varying degrees of success by way of acquisitions. Among them: RobertGmbH (with Zexel Corp.), GKN plc (with Tochigi Sangyo K.K.), Goodyear Tire & Rubber Co. (with Sumitomo Rubber Industries Ltd.) and Johnson Controls Inc. (with Ikeda Busan Co.).
Despite a bustling industry in Asia – bolstered in no small measure by explosive growth in China – the scene in the U.S. was quite different.
David Andrea, vice president-business development at the Original Equipment Suppliers Assn. in Troy, MI, said he will remember 2005 as one of the most turbulent years he has ever observed.
"There are really two auto industries, both at the OEM level as well as through the supply chain," Andrea said. Even through the recent travails, Andrea still perceived the auto industry as "a good place to generate good cashflow and return on investment."
But the turbulence became severe for those suppliers heavily tied toCorp. and Ford as their production schedules unraveled in 2005.
"You look at all the uncertainty around all the significant suppliers – Intermet Corp., Tower, Collins & Aikman, Delphi," Andrea said. "They were looking at both their supply contracts as well as their sourcing contracts and their labor contracts."
For OESA and its 390 supplier members, Andrea said the biggest challenge at the end of 2005 was addressing "how financially fragile the entire supply chain is right now."
About 225 of those 390 members reported sales under $250 million, and most of them were Tier 2 and 3 suppliers selling to the larger Tier 1s.
"These guys are concerned about a customer that potentially could go into Chapter 11, or a sub-tier supplier that they are counting on to go into Chapter 11," Andrea said.
Watching for telltale signs and safeguarding against supply-chain disruptions is part of OESA's mission, as well as helping suppliers manage cashflow.
Survey Charted Profit Skid
Some suppliers did a better job than others in protecting their profitability in an intense marketplace in 2005, according to a survey released in December by IRN Inc., a Grand Rapids, MI, consulting and forecasting firm.
IRN conducted its fifth biennial Supplier Survey in tandem with a companion study in Europe. Some 170 component suppliers in North America, Germany and France participated.
Survey respondents reported experiencing, on average, a 12% decline in their profitability due to increases in raw-material prices. Auto makers and Tier 1 suppliers demanded an average of 6.2% in price reductions from their North American suppliers – down slightly from 6.3% in an IRN survey two years earlier.
Overall, the survey found pressure abated slightly on component suppliers to give price reductions to their auto maker and Tier 1 customers, but the overall environment remained extremely challenging.
Delphi and Visteon’s struggles were merely the tip of the iceberg.
Collins & Aikman filed for bankruptcy May 17 and spent most of the year embroiled in legal disputes. David Stockman, C&A's former chairman and CEO, was forced out by the company's board of directors shortly before the filing. In July, former Federal-Mogul Corp. CEO Frank Macher took over as CEO.
The C&A bankruptcy was the subject of a tirade at the 2005 Frankfurt auto show by Delphi Corp. CEO Robert "Steve" Miller, who used a speech at the show to describe the C&A bankruptcy as “an embarrassment” and to assure that a Delphi bankruptcy would be well financed and not interrupt the delivery of parts worldwide to customers.
Delphi filed for Chapter 11 Oct. 8, but the case immediately was frought with controversy, as the company demanded massive pay cuts of more than 60% from its unions while sweetened severance packages and bonuses were offered top management to keep them on the job.
The United Auto Workers union, which represents 24,000 Delphi employees, banded together with five other unions to form the Mobilizing @ Delphi coalition, which recruited community leaders and Delphi’s investors and others to oppose Miller’s cost-cutting methods.
“This is not just an attack on union people or unions,” UAW President Ron Gettelfinger said. “This is an attack on communities, on our nation, and it shows corporations will go anywhere in a race to the bottom to find the lowest wage. It is a national disgrace that a company should be able to file for bankruptcy here and continue to operate offshore.”
Also late in the year,Corp. announced it would eliminate about 800 jobs at three of its facilities in Canada and Australia as production contracts at the plants expired.
By December 2006, approximately 500 jobs were to be lost at the company's Thorold, Ont., Canada, Structural Products plant (truck frames). By mid-2006,was to axe about 300 positions from its Traction Products facilities in Salisbury, Cheltenham and Yennora, Australia (rear-axle modules).
The Toledo, OH, supplier spent part of 2005 restating financial performance for 2000-2004 and the first half of 2005. The restatements resulted from improper accounting of customer pricing and transactions with suppliers in Dana's commercial-vehicle unit.
Financial restatements served as a precursor for Delphi’s bankruptcy. The same ultimately would be true for Dana, which filed for Chapter 11 protection in early 2006.
If bankrupt suppliers expected sympathy from auto makers, they were sorely disappointed. In a series of interviews with Ward’s, Big Three purchasing executives said they would help bankrupt Tier 1 suppliers as much as possible – and even would step in to pay their debts on occasion.
But they ultimately denied responsibility for their suppliers landing in bankruptcy court because of a prolonged bare-knuckled pricing environment.
"To say we are responsible goes way too far," Peter Rosenfeld, executive vice president-procurement and supply forGroup, told Ward’s. "I don't force one supplier to take business with DaimlerChrysler – it is the supplier's choice."
Economic pain for U.S. suppliers, because of the nation's free flow of financial information on public companies, is readily more visible here than in other countries, Rosenfeld said.
"Are there suppliers in financial distress in Japan? Yes. Do they have Chapter 11 bankruptcy laws? No. Are there suppliers in Korea that are financially distressed? Yes. Do they have U.S. bankruptcy law that says they have to reveal everything so that all can see? No," he said.
Bo Andersson, GM's vice president-worldwide purchasing, said the auto maker typically does not source business to companies in bankruptcy.
“If you're in bankruptcy for two years, you don't get any new business for two years,” Andersson said. “When you are out, it's more or less getting out of jail, right? Why should you hire a guy who has been in jail for two years?"
Tony Brown, Ford's senior vice president-global purchasing, dismissed the notion that auto makers bear responsibility for supplier bankruptcies.
"If they had streaming profits over the moon, would they declare me responsible for that?" Brown asked. "It doesn't connect for me because in the end, it's a 2-sided transaction. There's an offer and an acceptance (to do business). So I struggle with it."
Big 3 Revised Purchasing
Still, the Big Three appeared to be reaching out to suppliers for greater collaboration, as each auto maker in 2005 announced new purchasing strategies designed to focus less on piece price and more on product development and engineering.
“The realization is, that is where the cost saving comes in at the component and system level,” OESA’s Andrea said. “That is progress there.” The new purchasing strategies also recognized suppliers are wrestling with exorbitant price increases for raw materials, and the auto makers said they planned to work more closely with fewer suppliers.
“I think suppliers generally welcomed the chance to improve the working relationships and the methodologies of working on overall cost reductions,” Andrea said.
GM said later in 2005 it was crafting new cost-reduction targets for suppliers, effective in 2006. Likewise, Ford began assembling a pool of “preferred” suppliers it intends to tap for “high-impact” commodities as part of its “Aligned Business Framework.” By the start of 2006, Ford had identified 27 such suppliers.
– with Roger Schreffler