Now that AlliedSignal Inc. and ITT Corp. have decided the returns from most of their automotive businesses aren't high enough to stay in the game, don't be surprised to see more conglomerates cash in their chips.

But as these once-dominant suppliers dispose of their under-performing automotive operations, what had been regarded as a healthy, market-driven shakeout could lead to thorny anti-trust questions and give certain mega-suppliers more leverage than their automaking customers would like to see.

Consider this scenario.

Among the expected suitors for ITT Automotive's ABS business are LucasVarity PLC, TRW Inc. and Robert Bosch GmbH, which acquired Allied-Signal's brake business in 1996.

If Bosch acquired ITT's ABS business, it would control more than 85% of the ABS market in Europe and 38% in North America, based on data published by ITT itself. If LucasVarity were to prevail, it would have 52% of the ABS market in North America.

"You might even see something happen with (General Motors Corp.'s) Delphi's brake business," predicts David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation. "Then you're going to see some problems with anti-trust. I don't think the Justice Department will just pass some of these deals by."

But that likely won't stop the conglomerate exodus. United Technologies Automotive (UTA) and Textron are names that surface among industry observers when the conversation turns to how much farther this trend will run.

"I'm on the board of five different (supplier) companies and I can tell you everybody is talking to everybody," says U-M's Mr. Cole. "Everything's in play right now."

What's new is that supplier consolidation no longer is a matter of the big fish swallowing the minnows and anchovies. Now trophy fish are biting. Some of the supply chain's historically strongest links are finding they just can't meet profit expectations of bosses in distant headquarters and unforgiving investors on Wall Street.

"Conglomerates have been able to improve profitability in other industries. But in the auto business it seems to be more difficult," says Phua Young, an analyst who tracks ITT Industries for Lehman Brothers Inc. "The market punishes you with lower multiples if you have any presence in the auto sector."

C. Scott Greer, the for-mer Echlin Inc. executive who United Technologies Corp. (UTC) Chairman George David tapped about a year ago to turn around its languishing $3 billion-a-year automotive unit, has heard the speculation that his company could be next.

"We're in a different position," he says. "AlliedSignal had pretty much lost its brake system market share to ITT, (Robert) Bosch (Corp.) and Lucas Varity plc. We're in different product lines (wiring systems, instrument panels, headliners, integrated doors, junction boxes, electric motors), and we're better situated from a technical standpoint."

Like AlliedSignal Automotive and ITT Automotive, however, UTA is part of a large industrial conglomerate headquartered on the east coast (Hartford, CT). Its automotive business is compared constantly with sister operations, and often comes up lacking. UTA's operating profit margin for 1997 was 5.8%, compared with 11% for Pratt & Whitney (jet engines), 10% for UTC's Flight Systems unit, 8.4% for Otis Elevator and 7.6% for Carrier (air conditioning).

Granted, UTA showed a strong 8.3% margin for the fourth-quarter of 1997. Still, the jury is out as to whether that is sustainable.

ITT Corp., which had been earning about 6% on sales from its automotive unit, was trying to reach 8% by 1999 before it hired Lazard Freres & Co. and Goldman Sachs & Co. to decide whether it should sell its brake, chassis and electric systems businesses. For the time being it will keep its fluid-handling, friction, shock absorber and automotive switches businesses.

"The downside of being part of a conglomerate is that we have to compete with other corporate partners for investment dollars," says UTA's Mr. Greer. "We're essentially a microcosm of the global investment community."

On one side you have mutual fund managers and other large institutional investors clamoring for 20% to 30% annual returns from their portfolios. On the other side automakers act as if they can squeeze suppliers indefinitely.

Add to that the voracious appetite for acquisitions as the winners seek greater economies of scale, and it's easy to see why more industry giants are concluding they can better serve shareholders by selling.

It's one thing when Lear Corp. buys an Automotive Industries, or even when Johnson Controls Inc. acquires Prince Automotive. The purpose is to expand engineering capability to build a larger module at lower cost. Sure, some jobs are lost. True, some executives must relinquish power. But in the end the costs of building a car or truck come down. Consumers buy more vehicles. Investors see their stock appreciate.

But when some of the industry's largest players decide to get out, the dynamics change. "I don't think you'll find a situation where the automakers are stuck with just one supplier," says Mr. Cole. "I'm still a firm believer that the guy with the gold rules, and that's still the OEM."

David Andrea, an analyst who tracks suppliers for the Detroit investment firm Roney & Co., agrees. "It's up to purchasing and advanced engineering people in each automaker to make sure there's always a strong second or third supplier in the chain," Mr. Andrea says. But "I'm not saying you have to go back to a whipsawing situation like we saw with General Motors a few years ago."

Indeed, selling isn't the only solution. Spin-offs are another option. That's what Rockwell International Corp. did recently, shedding its automotive division and creating a new independent company called Meritor that focuses exclusively on the auto industry.

Cooper Industries Inc., manufacturer of Wagner lighting and brake parts, Anco wipers, Champion spark plugs, Moog steering parts and Precision universal joints, recently retained Merrill Lynch & Co. to advise it on how to dispose of its $1.9 billion automotive unit. Cooper CEO H. John Riley Jr. told Wall Street analysts he wants to focus on making tools and electrical products. The company earned 14% return on sales in those businesses last year. Its automotive unit earned 10% on sales.

"We just reached the point where there was more value to be gotten for our shareholders by exiting the (automotive) business than by staying in it," Mr. Riley says.

But being part of a diversified corporation has some advantages. UTA, for example, was able to use software developed for Pratt & Whitney for a fan blade found on the Jaguar XJ8 that also benefited from Carrier's expertise in air flow technology.

When Pratt & Whitney tries to sell jet engines to an airline in Hungary, it can use import credits earned by UTA's wiring harnesses factory in that country.

Although corporate parents may be more reluctant to spend on acquisitions, they frequently have abundant capital to upgrade existing plant and equipment.

UTC's cash flow exceeds $1 billion, more than enough to grow the business if the returns are adequate.

If UTA is to remain a long-term player, however, it will have to execute Mr. Greer's game plan to near perfection.

That means growing its interior business (headliners, instrument panels, integrated doors) in Europe, where it has succeeded in almost doubling sales of wiring harness, motors, electronics and junction box businesses from 1993 to 1997 (from $500 million to $950 million).

Richard Sloan, who recently took over the international interior systems group after serving as president of UTA Europe, plans to build on the more customer-focused organization he put in place to transform the once-marginal European business into a profit center.

Neither Mr. Greer nor Mr. Sloan see seat-making as a necessary component of the company's integration of its interior product development. Rather, they view the ability to offer a modular instrument panel with all electronics pre-packaged as the competitive edge they can offer that others, except perhaps for Delphi Automotive Systems, cannot.

"One of the most critical features of a vehicle is its electrical systems, and I can't think of another interior supplier that has as much expertise in that as we do," Mr. Greer says. "We see interiors as the carrier of our power and signal distribution systems."

Mr. Sloan says his goal is to triple UTA's interiors business over five years from approximately $600 million revenues in 1997.

"Interiors has been the under-performing business," says Joseph Campbell, an analyst who follows UTC for Lehman Brothers Inc. in New York. "If they can't fix what they have, the question becomes whether the remaining piece is big enough to be viable. Unfortunately, the UTA people don't have the luxury of pursuing any acquisition of a major scale."

UTA has proven its mettle in the wiring harness, or power distribution, business. It was one of the earlier suppliers to establish a manufacturing presence in Asia, where it has been making wiring harnesses in Cebu, the Philippines, for nearly a decade. That operation has seen some negative impact from the currency collapse in many Asian nations, but it also has benefited from lower costs in exporting to customers in North America and Europe. Because the value of the Philippine peso has declined over the last year, UTA's production costs there have fallen.

It also broke ground there last year on a $5 million technology center.

But interiors are controlled more and more by the major seat suppliers such as Lear Corp., Johnson Controls Inc., Magna International Inc. and Bertrand Faure SA.

Despite the evolution toward ever larger modules, UTA doesn't see a need to make seats to carve its niche as a global interior supplier. Much of the strategy is really quite simple. As its OEM customers expect more from UTA, it in turn will ask more from its suppliers.

Tony Brown, UTA's vice president of purchasing, recently told a group of second and third-tier suppliers that UTA would be buying from no more than 1,000 vendors five years from now, down from 10,000 now. It's all part of a broader campaign by UTA to save $750 million from all its divisions by 2000.

Like Chrysler Corp.'s Supplier Cost Reduction Effort (SCORE) UTA's new initiative (called PERC$ - for Partners in Excellence Resulting in Cost Savings) is meant to encourage suggestions from the supply chain's lower links.

To succeed, such efforts must be based on a minimal level of trust that some portion of the savings will be shared with the second- and third-tier suppliers.

But with the pressure from Hartford, not to mention the 5%-plus price cuts expected annually by its customers, there's no time to lose.

"We are in economic warfare, and in warfare there are winners and losers," Mr. Brown says before the supplier meeting. "We expect to be victorious, and it's up to the suppliers to help us to be victorious."

Or they may be dealing with another owner.