The Big Hangover

What a party. Lots of great food and good company, the wine overfloweth. Things got a little wild. You remember the table dancing, followed by the spur-of-the-moment trip on the company jet to Memphis for fried peanut-butter-and-banana sandwiches.

So now that New Year's Eve is over, you feel like two miles of the Southfield Freeway. The human body, you mutter, isn't supposed to take this much abuse. But hey, you only live once.

Yeah, auto suppliers woke up on New Year's Day with one whopper of a hangover. The signs were there in the fourth quarter that trouble was looming, that the party would end, that these two record production years obviously would not become a threepeat. Consumer confidence was eroding along with savings accounts thanks to the stumbling stock markets.

When it became clear that new vehicle inventories needed thinning especially at DaimlerChrysler Corp. suppliers didn't know what hit them. Right up until the last working week in December, employees at several auto assembly plants were working daily overtime.

As of early February, auto plants were more likely to be down for inventory control than paying overtime. Since the beginning of the year, first-quarter production schedules for North America have been scaled back by 27% at Chrysler, 22% at General Motors Corp. and 16% at Ford Motor Co.

The industry got a little intoxicated with projections in early 2000 of 18 million sales for the year, observes David Andrea, chief economist at CSM Worldwide. Those numbers were not sustainable. Rather than ratchet down production, the industry kept it running until the fourth quarter.

Stock market corrections, the California energy crisis and high costs for natural gas, electricity and home-heating fuel oil started hitting household budgets hard. The automobile is still the most postponable expenditure of discretionary income a household can make, Mr. Andrea says.

With vehicle production on a downward slide, suppliers are suffering. Valeo SA will lay off 1,000 North American workers and cut its supply base in half. That's on top of the 1,500 Valeo employees laid off last year. Tower Automotive swallows a $141 million restructuring charge and records an operating loss of $104 million in the fourth quarter. Tenneco Automotive says it will discharge as many as 405 salaried employees (8% of its white-collar ranks), on top of the 700 salaried jobs that it earlier announced it would eliminate. Cummins Inc. says it will lay off 500 employees by spring, bringing its total worldwide planned layoffs to about 1,500. Delphi Automotive Systems reduces its Mexican workforce by more than 5,000 and considers more temporary layoffs in the U.S., on top of the 1,700 already announced.

The reasons were the same from company to company: a stumbling aftermarket, a seriously stagnant heavy-truck market and weak European currency. For the hardest-hit suppliers, it was a combination of all three. Ford light-truck production stoppages due to the Firestone tire recall didn't help.

One supplier, Dura Automotive Systems Inc. even attributed some of its fourth-quarter difficulties to the low-volume recreational vehicle market. The company reports net income of $3.5 million, a whopping 67% below $10.8 million in fourth-quarter 99.

One supplier exec says it all: Bad news isn't even bad news anymore because that's all there is.

A prime example is Dana Corp., whose biggest problems a year ago were premium freight charges and excess overtime. Last month, the company reported operating earnings for the year of $377 million, down from $678 million in 99. In September, Dana said it would slash 3,000 production jobs.

Dana's plight illustrates that all the happy talk about an industry that has shed much of its cyclical baggage is perhaps more wishful thinking than reality.

If It Isn't Core, Show It The Door

In a well-reasoned bid to minimize losses, a growing number of suppliers are eager to unload operations that fall on the fringe of their core capabilities. Visteon Corp. has identified several segments it plans to exit, the latest being occupant restraint electronic components. The No. 2 supplier wants to sell the Markham, Ont., plant that makes the components. If a buyer cannot be found, the site is expected to close within 24 months. The plant also produces components for climate control systems, and those operations will be moved to a site to be named later. Markham employs 1,200 workers, and no buyers were in the wings as of early last month. Meanwhile, Visteon creates a customer-facing organization with two regions Europe/South America and North America/Asia-Pacific. Manufacturing, product development and materials management will be centralized to reduce costs.

Around the Industry

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