Rise of Private Equity in Auto Interiors Business Good for Industry
By Christie Schweinsberg WardsAuto.com, Jun 6, 2008 3:11 PM

DETROIT – The high cost of oil is driving up the price of many petroleum-based commodities, none affecting auto makers and suppliers more than resin, one expert says.

“The price of oil has a monster impact” on interior components, says John Smail Jr., vice president-North America for International Automotive Components Group. Increases in the cost of resin usually lag oil prices by three to six months, he says.

“We have to get off this oil addiction or we won’t survive,” Smail tells attendees at the Wards Auto Interior Show here, stressing the need to find alternatives to traditional oil-based resins for automotive-interior parts. At the same time, he cautions, there is not enough capacity or scale in the market to make alternatives a viable replacement option just yet.

Smail expresses his concerns as part of a panel discussion on the rise of private-equity investments in the automotive interior business.

His company, IAC, was created from the assets of Lear Corp.’s North American interiors business and since has purchased former plants associated with Collins & Aikman Corp.’s Soft Trim division.

IAC is owned by billionaire investor Wilbur Ross, dubbed the “king of bankruptcy” by Fortune magazine due to his penchant for purchasing and restructuring distressed companies.

Under Ross’ leadership, IAC has been able to break even, and then some, Smail says. “It’s been quite refreshing – we actually have some development funds.”

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Panel-member Scott Eisenberg, managing partner for Amherst Partners LLC, a restructuring consulting firm, says the importance of private equity to the survival of the auto industry, especially in Michigan, cannot be overstated.

“I think we would have had a complete meltdown in this town if (not for) private equity (investing in distressed firms),” he says.

Eisenberg cites the former Venture Industries LLC as an example. The company was one of the largest suppliers of plastics to auto makers, with instrument panels a specialty product. He says Venture struggled to find a buyer after it filed for Chapter 11 in 2003 and in 2005 was forced to liquidate its assets.

Yet, many auto makers worry about negotiating pricing with private equity-controlled Tier 1 suppliers. “They’re afraid these guys are going to be a lot more aggressive in holding them hostage,” Eisenberg says, noting suppliers historically have been flexible for fear of burning bridges.

Lon Offenbacher, president and CEO of Inteva Products LLC, predicts more partnerships and strategic supplier relationships will result between private-equity controlled Tier 1s and smaller suppliers.

However, partnerships between other companies controlled by private-equity generally are not possible he says. For example, The Renco Group, which owns Inteva – a spinoff of Delphi Corp.’s interiors business – also owns AM General LLC.

After remarking to Renco officials that an Inteva instrument panel would look nice in a Hummer, Offenbacher was told, “We’ll tell you who to call, but we won’t intercede.”

cschweinsberg@wardsauto.com