Supplier Profits Down; GM Strike Won't Help

Purchasing execs from the major automakers often say suppliers are whining when they complain about disappearing profits caused by cutthroat price-cutting.

Well, here are some numbers that indicate it is, indeed, getting harder for suppliers to make a buck.

The Automotive Consulting Group (ACG) of Ann Arbor, MI, studied financial reports from 51 publicly-traded automotive suppliers from 1992 to 1997. Among the findings: median operating income as a percent of sales dropped from the 1995 high of 8.2% to 6.5% last year.

ACG President Dennis Virag notes that these same suppliers reported identical margins of 6.5% during the recession year of 1992.

What gives? Despite a booming economy, suppliers are facing constant pricing pressure and costly new product development responsibilities, and they are assuming more debt as they make acquisitions and expand their businesses.

Among the more profitable performers have been Gentex Corp., Superior Industries and Timken Co. Among those with the lowest margins were Detroit Diesel Corp., Donnelly Corp. and SPX Corp. Mid-level performers included Breed Technologies, Dana Corp., ITT Automotive and TRW Inc.

The ACG study found that in 1997 the strongest performers reported operating income of 13% on sales. The weakest group earned an average of 3%. Five of the 51 companies lost money in 1997.

In 1998, the outlook is uncertain due to the two United Auto Workers strikes in Flint against General Motors Corp. The ACG study included Lear Corp., which reports its second-quarter earnings will be off 14 cents per share because of the work stoppage that has idled 2,800 Lear employees.

Likewise, Simpson Industries and Standard Products Co. report their quarterly earnings will be down 3 to 5 cents and 10 cents per share, respectively, due to the strike.

"The year already has been ruined for a number of companies because of the strike," says automotive analyst Craig Fitzgerald of Plante & Moran LLP of Southfield, MI. "You cannot recover from what has happened. You've permanently lost volume, and you end up losing people and momentum."

But Mr. Fitzgerald says suppliers should not contemplate scaling back their full-service capabilities.

"If suppliers cut back on their engineering investment, it will be dangerous, because those capabilities will differentiate one supplier from another in the marketplace," he says.

Plante & Moran tracks 300 privately-held auto suppliers and finds that operating income for the group had been declining between 1992 and 1996 to 4. 5%, but they bucked the trend in 1997, jumping up to 6%.

In a June survey, Plante & Moran found that 30% of midsize suppliers were under-performing, with operating income levels of 3% or less, while 46% reported margins of 8% or better.

GM's Cash Conservation Hasn't Yet Reached Media Perks

General Motors Corp. has canceled receptions for summer interns, scaled back off-site meetings and asked salaried workers to cut back on non-essential travel as it conserves cash in the wake of a protracted UAW walkout at two Flint, MI, plants.

But one WAW staffer attended a preview of upcoming GM models recently and was nearly buried in trinkets. Clearly such freebies, ostensibly aimed at building (or buying) good will from those who review the vehicles, have not yet fallen within the category of discretionary spending.

Among the loot our esteemed colleague Bill Visnic collected were three hats, one Cadillac golf shirt, one Franklin Mint Buick collector knife, one Buick pen, a Monsoon compact disk holder, a jar of jalapeno jelly, a Blockbuster Video gift certificate, a country music compact disk and a leather Oldsmobile attache case.

Meanwhile, some of the talented people who helped engineer and build these impressive cars are having their Internet access rationed to every other day, and being prodded to turn out the lights when they go to lunch.

Heaven forbid that we pass ourselves off as cost-cutting consultants, but here's an unsolicited suggestion: let the products speak for themselves. Save the perks for the folks who created the vehicles.

The Lowly Lutz Bob Lutz didn't get an early start in the automotive industry. He was 32 when, with the ink still wet on his MBA degree from the University of California, he joined General Motors Corp.'s overseas operations in New York as a "senior analyst" in the forward planning department - something of a paper shuffler. He recalled those days in a recent WAW interview:

"The whole scene at that time was endless, endless rounds of presentation drafts ... all day long you'd incorporate comments from all the senior executives from all the drafts you'd sent out. Then you'd collect the drafts around 3 p.m., flip to page 13 and sometimes it would say `Expand this section,' or the other guy's comment would say `Strike out this section.' Then you had to decide who was (most) senior.

"Then you'd rewrite and recopy 20 or 30 copies of the draft on the Xerox machine. We'd be there until 7 or 8 o'clock at night just copying the pages one at a time, putting the damn things back together and distributing to everybody's office so they would have them in the morning. And this would go on 10 to 15 days at a time, leading up to the formal meeting of the overseas policy committee, where the presentation everybody had already seen at least 15 times finally got shown on the screen ...

"(But) I really enjoyed it. It became sort of a game. At that time I didn't have sufficient perspective to understand that this was not value-added work. This was the world's largest, most successful corporation, and if that's the way they work it must be the right way..."