TRAVERSE CITY, MI – On the last day of the Management Briefing Seminars here, an automotive executive turns to students from Detroit’s Focus: HOPE who are collecting questions from the audience.
“After listening to all this, do you still want to join our industry?” Frank Olivetto, Advics of North America Inc. vice president-sales, a brake component supplier, asks.
Olivetto describes to students how much he has enjoyed his career over the years, including the industry’s ups and downs.
Unfortunately, for today’s small and medium-size suppliers with historical ties toCorp. and Motor Co., there has been little encouraging news to come out of these sessions.
Material prices are rising, and GM won’t consider any material economics in parts contracts. A supplier can’t sell its GM receivables to get cash today, and financing is getting harder to find.
A Tier 1 supplier is telling its vendors they won’t be paid until the Tier 1 is paid by its customer.
The U.S. supply base is predicted to drop from 3,000 in 2004 to 1,320 companies by 2008, and 65% of the companies disappearing will be liquidated, not acquired.
Half the companies with GM’s credit rating of Caa1 fail in five years, as do 24% with’s rating of B2. The implications for suppliers suggested by panelists are manifold.
Amherst Partners LLC, a Southeast Michigan restructuring consultant, makes the prediction that only 35% of automotive suppliers going out of business today will be able to find a buyer. Such companies will need new technology, a niche and an idea of how to defend it.
Chinese and Indian buyers particularly are interested in buying Western technology, says Scott Eisenberg, an Amherst co-founder. In several such cases, a distressed U.S. business was brought back to life because the new Chinese owner could lower costs.
Finding non-automotive customers could be good for a supplier’s health and might make it more attractive to a domestic buyer, but it won’t help attract foreign buyers looking for modern-process technology. Another issue for all suppliers, but especially painful for smaller operations, is the fact commodity prices are continuing to climb. “We have to be realistic about how we deal with copper prices,”North America Inc. Associate Director Nigel Thompson says.
“China will be sucking in raw materials to sustain its growth” for years to come, agrees Johann Finkelmeier, executive vice president of brake supplier Akebono Corp. “There must be a way to hedge the risk,” he says, suggesting financial hedge products could arrive on the market for more commodities. J.D. Power & Associates forecaster Jeff Schuster advise small suppliers to turn their energies to getting business with Tier 1 suppliers forMotor Corp. and Motor Co. Ltd.
is the best bet for success in North America, Europe and Asia in the coming seven years, he says, with a likely big-growth assembler in North America.
“Easier said than done,” in a world where purchasing departments at all companies are trying to reduce the number of their suppliers, thus making new conquests an uphill battle, others here say.
It is particularly difficult to win business with Hyundai unless you are in a joint venture with a South Korean company, says Claude Mathieu, chief executive of Mann+Hummel Automotive Inc. in North America. However, he admits his company has won some business with Korean auto makers, and that “they are fair.” Meanwhile, cooperation among suppliers to work collaboratively on solutions may be getting easier.
“Don’t regard investors as a threat,”’s Thompson says. “We are working with banks and potential investors and another customer of a minority supplier, who was pushed into bankruptcy when his banker moved out of Michigan and the head office withdrew his financing.”
Other participants say although President Bush has told the auto industry to fix its own problems and has not helped by providing a clear energy policy, things could change.
“I’m skeptical that free trade will last forever,” says Finkelmeier. “If times are bad enough, we could put up trade barriers. Even though Bush has not helped the auto industry yet, he did impose a 30% import duty on imported steel a few years ago.”
But Bob Schnorbus, chief economist for J.D. Power, says the trend toward globalization will continue, “unless barriers raise their head.” Meanwhile, efforts to lower cost areas already can be seen among suppliers. Akebono, for example, is moving its U.S. headquarters from Farmington Hills, MI, to Kentucky and will make up the cost of the move in a year, Finkelmeier says.
Advics is trying to source domestically, instead of offshore, in an effort to build a more solid local supply base. “We feel that our suppliers are key to our success,” Olivetto says. In the end, if the decision is made to get out of business, suppliers should do it in a healthy way, participants advise. Count on a year or more to find the right buyer.
“When you’re selling, look for the best fit,” Amherst’s Eisenberg says. “It’s like finding a marriage partner. Maybe the best fit is in Europe, or someone 50 miles away, or in China or India. Prepare to go through the process, and get your house in order.”