More Capacity Needed

The auto interiors sector in North America is in shambles, with Collins & Aikman Corp. and Delphi Corp. in bankruptcy and Lear Corp. and Visteon Corp. disposing of assets.

So it is with great caution that France's Faurecia SA, the second largest supplier in Europe (behind Robert Bosch GmbH), proceeds with a risky strategy to grow its auto interiors business in North America.

A year ago, Faurecia announced plans to build six new plants in the U.S. Today, all six are fully operational and most are supporting new vehicle programs with Detroit's Big Three auto makers. Established interiors specialists are bowing out or scaling back their operations in North America, opening the door for Faurecia.

“As these players exit the business and we obtain the prices we need to be viable, it opens up an awful lot of opportunities for us,” says Michael Heneka, CEO of Faurecia North America's interiors division.

Faurecia's challenge is to bypass the brutal pricing environment that led the long-standing players to accept money-losing contracts with the Big Three in recent years. “We are going to offer prices that are sustainable, or we're not going to do it,” Heneka says. “We just want to make a realistic profit margin.”

In cockpits, Heneka estimates North American auto makers purchase about 4.3 million units a year from suppliers, and he expects that number to reach 4.7 million in 2010. Faurecia defines a fully assembled cockpit as an instrument panel with all the electronics and gauges integrated.

“Fifty-three percent of those cockpits are being produced by companies that are in bankruptcy or coming out of it,” he says. “We can expand our sales not based on the number of cockpits increasing but by the falling away of those companies who are having difficulties right now.”

By 2010, Heneka projects many established players will lose cockpit market share, including Delphi, Visteon, Johnson Controls Inc., Magna International Inc.'s Intier unit, Cadence Innovation and Japan's Calsonic Kansei.

Meanwhile, Heneka says Faurecia, along with its SAS cockpit joint venture partner Siemens VDO Automotive, will grow its North American cockpit share from 10% currently to 14% by 2010. He says some 40% of the cockpit business is up for grabs due to bankruptcies and spin-offs.

In Sterling Heights, MI, Faurecia recently opened a plant to produce fully assembled cockpits and front-end modules for the new Chrysler Sebring and Dodge Avenger. Chrysler Group produces the vehicles 4 miles (6.4 km) away at its Sterling Heights Assembly Plant.

From the time Chrysler orders the parts, Faurecia has 5.3 hours to deliver the fully assembled front-end modules and 2.7 hours to deliver the cockpits, just in time and in sequence.

The cockpit includes 70 components, including the steering column; passenger-side airbag; controls; instrumentation; structural components; and heating, ventilation and air conditioning. The front-end module integrates 36 components, including bumpers, hood latches, headlamps, cooling fans and other subassemblies. Each assembly line produces about 1,000 modules per day.

The Faurecia plant's only customer is Sterling Heights Assembly, and it receives certain components from another new Faurecia plant in the nearby city of Fraser.

The plant employs 230 people working two shifts, and the front-end module assembly line has achieved zero defective parts per million since production started in July.

Faurecia has several plants around the world producing, in total, about 5 million front-end modules per year, and the Sterling Heights plant is identical to the supplier's other facilities, most of them in Europe.

Besides Sterling Heights and Fraser, Faurecia's four other new plants are in Fountain Inn, SC (producing seats for BMW AG vehicles); Toledo, OH (producing exhaust systems for Chrysler's Jeeps); Northwood, OH (producing door modules for the Dodge Nitro); and another new facility in Sterling Heights, producing seats.

Fraser and Toledo are the only facilities without collective bargaining agreements with the United Auto Workers union.

Even with union wages, James Orchard, president of Faurecia North America, says the new facilities are highly competitive.

Orchard concedes Faurecia lost money in North America in 2005 and 2006 because the company spent about $70 million to launch the new plants. “But it is expected to turn back to profitability in 2007 as we get through six new plants and a lot of launch costs,” he says. “The exhaust division is profitable, very profitable.”

Besides interiors, Orchard says Faurecia is well positioned for growth in the exhaust sector with both Big Three and Asian auto makers. His market forecast calls for Tenneco Automotive and Faurecia to grow their share of the North American OEM exhaust segment by 2010, at the expense of ArvinMeritor Inc., Delphi and Visteon.

In the seating sector, Faurecia is a bit player in North America, but Orchard says its seat sales in the region should grow from about $800 million to $1.4 billion annually by 2010.

Faurecia says it also will launch four new interior programs with GM in North America by the end of 2008. Although traditional Big Three suppliers are struggling, Orchard says he has no fear of tying his company's future with that of the Detroit-based auto makers. In its home market of Europe, however, Faurecia has more manufacturing capacity than it needs.

“Everyone talks about the fear of the shrinking of the Big Three,” Orchard says. “Being a European-based supplier, we still believe Chrysler, Ford and GM will be around.”

He says Faurecia has 26 plants in North America — all of them relatively new — and low legacy costs in the region. “The Big Three present us, frankly, our largest opportunity and will continue to be our largest opportunity for the next few years.”

At its current pace of growth, Orchard says he expects Faurecia, even with its six new plants, will need additional capacity in North America in the coming years.

Meanwhile, Orchard admits Faurecia has been part of extensive negotiations toward potential acquisitions of interior component facilities from distressed suppliers in the U.S. “Everybody is talking to everybody about everything,” Orchard says of supplier deals in the works. “We are looking at everything.”

He does not rule out the possibility of an acquisition, “but we are not going to do so on a stupid basis.”

Before landing at Faurecia, Orchard worked as a top executive at Visteon, and he says efforts are under way to deal with the high legacy costs that saddle Delphi, Visteon and the 12 former Visteon plants now for sale as part of Automotive Components Holdings LLC.