Auto Suppliers’ Growth Can Gain Speed Through Specialty Lenders

The auto industry is on a roll.

After severe declines in 2009 and the bankruptcy of two of the industry's biggest car makers, General Motors and Chrysler, North American production almost has doubled to 16 million units.

At the same time, global production has jumped from about 60 million vehicles to 80 million in 2013, attributed in part to growth in emerging markets.

As welcome as these developments are, this surge in demand creates significant operational challenges for domestic middle-market automotive suppliers.

Just four short years ago, many went out of business or hurriedly reorganized and slashed capacity to stay afloat. Now to keep up with demand, they are stretching that scaled-down capacity to the outer limits – sometimes adding a third or fourth shift.

Nevertheless, suppliers remain reluctant to add new plants or equipment after such a painful period.

But with global unit sales expected to top 100 million in less than five years according to forecaster IHS Automotive, many suppliers have reached a tipping point. New capital expenditures and the requisite financing no longer can be delayed.

Investment is necessary not only to keep up with current demand, but also to ensure suppliers have the appropriate facilities and technologies in place to add value and maintain pricing power as the industry evolves over the next five years.

Adding to the complex financial calculus for the chief financial officers of these middle-market companies is globalization, which is pressuring suppliers to build and finance new capabilities overseas in order to be close to the OEMs that have set up operations in those markets.

Given this context, middle-market CFOs searching for capital and financing partners should consider specialty lenders with a deep understanding of their industry and a broad, global perspective.

A specialty lender's domain expertise can translate into at least six clear advantages for companies: improved cycle time, liquidity, flexibility, patience, insight and global reach. Companies looking to establish a long-term, strategic relationship with a lender and not merely a transactional relationship should consider all six when vetting candidates.

Improved Cycle Time: Cycle time is how long it takes for a lender to “get to yes,” close the transaction and releases the funds. A lender with a deep understanding of the industry can compress cycle time and deliver funds faster. Given the rapid growth of the auto industry, and the fact that most suppliers already have waited as long possible before deciding to put new plants and equipment in place, time is of the essence. A specialty lender makes a company more nimble to take advantage of time-sensitive opportunities.

Smarter Liquidity: An asset-based lender that understands the business can often make smarter, more confident valuations of a company's assets, thereby increasing liquidity. It's important that the real estate, equipment and inventory backing the loan all are appraised by experts dedicated to the auto segment in order to get the most accurate valuations and free up the most capital for expansion plans. Conversely, the less a lender understands an industry the less it usually is willing to lend against certain collateral.

For example, an auto supplier might have equipment that individually is not particularly valuable, but a specialty lender might determine that this equipment collectively is quite valuable because the factory is the sole supplier of a certain component for a high volume OEM platform. Thus, the system is unique and critical and as a result more valuable than the sum of its parts. A specialty lender can recognize and leverage that value to extend more credit to the company.

Enhanced Flexibility: It's helpful to work with a specialty lender that offers a variety of financing options, including equipment leasing as well as asset-based and cash-flow loans. Flexibility also means offering or accepting creative financing strategies, which can be particularly critical for suppliers under financial pressure.

For instance, an auto supplier's end customer (an OEM, for instance) might be willing to purchase the raw materials the supplier needs to machine certain automotive castings. This “supplier support” arrangement helps the supplier reduce the amount of financing necessary to run its operations.

Patience: By understanding the industry's business cycle, specialty lenders are more likely to be patient with the company during economic downturns and other macroeconomic factors that can hurt performance in the short term. The last thing a borrower needs is a lender threatening to pull a line of credit at the first bump in the road.

Suppliers should bear this in mind now that capital providers are flooding the market and credit is relatively easy to get. The good times won't last forever. It's worth forging a relationship today with a lender with a clear long-term commitment to the industry and that saw its customers through the latest economic crisis.

Broader Insights: A lender with broad industry-wide knowledge can draw upon its expertise to help companies craft and execute strategies that it has seen in action elsewhere in the industry and knows work.

Consider again the earlier example of supplier support to secure financing. The benefit of having a specialty lender is not just its willingness to accept such a structure, but also the insight and confidence to suggest it to the supplier who might not otherwise have considered it.

Global Reach: North American-based auto suppliers face a challenge that's somewhat unusual. The rapid globalization of the auto industry means that OEMs are opening facilities all over the world, from Mexico to China. In fact, German OEMs are even moving to the U.S. for lower labor costs compared to Europe. This is pressuring suppliers to follow OEMs into these overseas markets to serve them better.

For CFOs, this poses perplexing financial issues. While it's relatively easy to borrow against U.S. assets to expand overseas, the challenge comes in borrowing against overseas assets to fund continued expansion in those markets. If a company can't leverage local assets in Mexico or China, it must rely on U.S. assets to expand overseas. That necessarily reduces the amount of capital available to expand domestically. A specialty lender with global reach understands local tax codes and regulations and can fund operations in the overseas market.

As the global automotive industry accelerates, middle-market auto suppliers have enormous growth opportunities.

But there also are enormous operational and financial challenges to put the right facilities in place, with the right technologies, in the right markets.

Any expansion must proceed with extreme care, and to this end auto suppliers should marshal as much expertise as possible. This should include a specialty lender that can be a long-term partner in the company's growth plans here and abroad.

Eric Dusch is chief commercial officer-equipment at GE Capital, Corporate Finance, specializing in providing commercial loans and equipment leases to midsize companies for growth, acquisitions, turnarounds and balance sheet optimization. gecapital.com/americas.