BIRMINGHAM, MI – Assuming sales falling this year to about 10 million vehicles in the U.S., consulting firm A.T. Kearney expects 13 million units of pent-up demand over the past two years to drive a recovery that should allow most large suppliers to achieve profitability in 2011.

That’s not to say getting to 2011 will be easy for any parts makers. Along the way, dozens more will end up in bankruptcy, insolvent, acquired or consolidated, Daniel Cheng, partner and vice president of A.T. Kearney’s North American automotive practice, tells journalists here.

Cheng says the firm’s 13th annual industry report finds that without intervention, the 75 largest global Tier 1 suppliers surveyed will lose $23.7 billion in 2009 from their North American operations and burn through their entire cash balance – about $13.4 billion. In addition, those suppliers will need $24.1 billion in incremental cash to survive 2010.

The study says in 2008, the North American industry needed to produce 12.9 million vehicles for global suppliers operating in the region to break even. But North American production fell short, at about 12.6 million units, contributing to supplier losses on the continent in 2008.

As a result of parts makers downsizing and commodity costs falling, A.T. Kearney pegs the 2009 break-even point for suppliers at 11.9 million units. That threshold is considerably higher than the 8.6 million forecasted production volume, Cheng says.

Even though suppliers have been restructuring, they continue to have too much capacity for current market needs, according to the study.

It all sounds pretty depressing, but Cheng finds hopeful signs.

“I think there are very few people who think we will go through a sustained period of very low sales of 10 million units (in the U.S.) for the next five years,” he says.

In A.T. Kearney’s worst-case scenario, U.S. sales rise from 9.8 million units this year to 14.6 million in 2013. In the best case, assuming the economy recovers faster than anticipated, the study forecasts U.S. sales reaching 17.5 million units by 2012.

Also based on sales forecasts, A.T. Kearney says the 75 global suppliers should be able to achieve operating income of $7.6 billion in 2011, $11.3 billion in 2012, $12.2 billion in 2013 and $12 billion in 2014.

If the economic recovery is slow, suppliers could require cash infusions of $30 billion within the next two years to avoid bankruptcy, the study says.

On the OEM front, A.T. Kearney says “significant nameplate reductions are required for the industry to be sustainable in our baseline view.”

The study refers to the “Rule of Three,” which says competitive, mature markets only have room for three full-line generalists owning up to 90% of the market.

An example is a shopping mall with generalist anchor stores such as JC Penney, Sears and Macy’s, while product specialists such as Foot Locker and the Limited make up the rest.

In the 1970s, the U.S. auto industry lived by the Rule of Three, with Detroit’s auto makers in control. Since then, Toyota Motor Corp., Nissan Motor Co. Ltd. and Honda Motor Co. Ltd. have joined the ranks of full-line generalists.

As a result, consolidations through mergers and acquisitions are necessary, Cheng says.

Product portfolios also need to be condensed, the study finds. With regard to the light-truck market, A.T. Kearney says SUV nameplates expanded to 76 by 2006 and have remained stable since. But with fuel economy becoming a priority for consumers and environmental regulators, the firm expects the number of big SUVs – most of them powered with thirsty V-8s – to be replaced with more moderately sized cross/utility vehicles.

Auto makers must conserve capital investments in new product, so the days of “multiple flavors” of vehicles from a single SUV platform are numbered, says Doug Harvey, partner and vice president at A.T. Kearney.

“When you’re conserving cash and more in survival mode, you’ve got to pick your battles…make sure you have a winning vehicle in that segment, and do it with minimal cash,” Harvey says.

But the number of SUV nameplates inevitably will shrink, he says. “I think as those programs age and go away, it should be a straight line down,” Harvey says. “Where it ends up, I don’t know.”

On the retail front, Chrysler LLC’s announcement it will eliminate 789 dealers by June 9 sounds devastating for those affected, but Cheng sees a silver lining.

“In theory, if you rationalize the footprint (of dealers), then you can actually put more volume through the remaining dealers, so they should do better, assuming the franchises they own continue to do well,” he says. “Instead of selling 500 vehicles a year, all of a sudden you’re selling 1,000 vehicles a year. You’re a lot better off.”

tmurphy@wardsauto.com