Holiday cheer: suppliers enjoying good times, yet tread carefully

Tim Keenan, Michelle Kaczynski

Would the looming holiday season be the reason why supplier executives are in such a cheerful mood these days? More likely it is the waterfall of black ink on their balance sheets in 1995 and projected good times at least through 1996.

If one believes in the power of positive vibes, those emanating from supplier officials indicate 1996 will be a very solid year for the auto industry. Supplier executives queried by Ward's appear in near-complete harmony on issues ranging from next year's industry outlook to market trends and customer relationships.

One trend affecting every supplier is globalization, which caused a consolidation frenzy during the last 11 months. Nearly 100 globalization initiatives have been announced since January (see chart "SUPPLIER GLOBALIZATION"). These have come in the form of acquisitions, joint ventures, strategic partnerships and facility openings.

Since July, at least 40 corporate marriages -- including Collins & Aikman Corp.'s purchase of Larizza Industries Inc. to boost its interior system capability -- have been consummated. Twenty-six of those activities were aimed at expanding one or both companies' global presence. Another example is a joint venture between Lucas Industries and Sumitomo Electric Industries to produce antilock braking system control units for the Asian market. In November alone, Dana Corp. completed the acquisition of GKN plc's European axle group, the light axle business of Rockwell do Brasil, and one of Europe's leading starter motor producers, M. Friesen GmbH of Germany.

"Globalization is going to be driving suppliers for the next couple of years," explains Marc Santucci, a supplier analyst and consultant with Elm International of East Lansing, MI. "It's on everybody's mind."

General Motors Corp.'s global purchasing strategy, Ford Motor Co.'s Ford 2000 worldwide purchasing and Chrysler Corp.'s expansion plans are leading many suppliers to expedite their globalization plans. "(Ford 2000) really made us move faster on a global basis to pursue joint ventures and other kinds of business arrangements globally," says Kris Pfaehler, vice president for business development at Talon Automotive.

"How do you remain in the game as a Tier I supplier?" asks Mr. Santucci hypothetically. "You either have to acquire a company in Europe or Asia, establish a greenfield operation, or form a strategic alliance there."

The world's largest supplier, GM's Delphi Automotive Systems, has made dozens of acquisitions around the globe during the last few years. "Global and system capability are the names of the game," says Delphi President J.T. Battenberg III. "Few companies have the total system capability of Delphi, and that's to our competitive advantage."

As the industry heads into 1996, supplier CEOs are keeping one eye on world events and another on the home front. Most agree that the domestic light vehicle market will be about the same as this year. Some say it will be a bit lower, others say the market will be higher than 1995. Those guessing on the low side say the affordability of automobiles, decreasing levels of consumer confidence and insignificant improvements in vehicle demand are the cause.

"It's difficult to know (where the economy and auto market will go)," says Joseph Gorman, chairman of TRW Corp. "We've been in a slowing period, and the economists say we've had our soft landing. But the difference between a soft landing and the beginning of a downturn is not very great. We see it at under 15 million, but we don't know how much under."

Reid Rundell, president of Takata Inc., also is cautious about next near. "We expect the market to be between 14.5 million and 14.7 million because there are some downside risks," he explains. "Weakening of consumer confidence is one. Others are the increasing personal debt, the affordability of vehicles and slower economic activity in both Canada and Mexico."

Suppliers belonging to 1996's optimists club expect election-year politics to keep the economy strong through next fall. Lear Seating Corp. Chairman Kenneth Way says the market will be up a bit because the economy is in "great shape" due to the upcoming election and low unemployment.

Richard Snell, president of Tenneco Automotive, and Louis Savelli, executive vice president and general manager of DuPont Automotive, also expect improvements next year. "We think the economy isn't finished growing," says Mr. Snell. "There are a lot of strong economic signs. We're mildly optimistic." Mr. Savelli says: "It'll be a lot like this year, maybe a little bit up. If the fourth quarter sales are strong, it'll help the first quarter of next year. It certainly would be an industry phenomenon if we had a flat spot rather than a cycle."

Few suppliers think Mr. Savelli's phenomenon will occur and expect some kind of downturn in 1997 or 1998. If a slowdown does come, most expect it to be weak compared to past cycles. Supplier executives tell WAW that they've taken steps to ensure the next downturn isn't as catastrophic as they have been.

"To get ready for (a downturn) we'll run overtime and weekends (now) rather than add capacity," says Robert A. Calder, president of Rockwell Automotive's light vehicle systems group. "We can't overextend in 1996, even though it might be more expensive right now."

"We're looking at restructuring activities because of the increased margin pressures," explains United Technologies Automotive President Norm Bodine. "We're looking at how we can trend down, consolidate inside our facilities. We'll make some investments to do that."

Despite rumblings in recent months from Ford suppliers because of the automaker's cost-saving edicts, suppliers are overwhelmingly positive -- at least on the record -- about their relationships with OEMS. Admitting that these dialogues can always be better and that OEM demands continue to increase, suppliers say relationships are improving and that they should continue to improve in 1996 as communication improves.

"Our relationships, as always, are very friendly with our customers on a one-to-one basis, but the policies of the OEMS are pretty tough, pretty demanding," says Mr. Savelli. "All the trends are still around."

"Relationships are good, but it's a constant that customers are asking for greater value every year," echoes AlliedSignal Automotive President John Barter. "We respect the needs for price and cost controls, but we don't think it should be mandated," states Ronald Weber, vice president of 3M Automotive's Engineered Systems Div. "That's not the most effective way to deal with the situation. We are strong advocates of (Chrysler's) SCORE program approach. It's reasonable."

Looking toward 1996, Duane Baumgartner, chairman & CEO of Donnelly Corp., says that "the trends are well-established. The competitiveness is going to continue to increase. We don't see any fundamental changes in the trends, only in the rate at which we all need to change so that we're all competitive."

Factors such as the effects of the last downturn and the near-overnight boost in demand for components that followed plus the industry-wide push toward lean systems has most supplier capacity running comfortably between 85% and 100%.

"We still have some capacity, we're at 85%-90%," states Richard Crawford, president of Cambridge Industries Inc. "We'll have more as we get more efficient. We have one plant that has been at 95% capacity for six years, and sales have doubled."

Suppliers that have components on a wide variety of vehicles have different capacity situations. "We have several plants that are very heavily dependent on the Ford Explorer, and they're running seven days a week," explains Borg Warner Automotive President John Fielder. "And we've got other plants dependent on the Chrysler LH and they cut back because the LH is not doing that well."

If the market stays close to the 1995 level and production efficiencies continue, suppliers can expect the flow of black ink to continue in 1996. Many suppliers are increasing per-vehicle content or have new products coming on stream in the coming year, which should improve their chances of prolonged profitability.

Kenneth LaGrand, executive vice president of Gentex Corp., says his company will see a 25% to 30% unit growth in 1996. George Perry, president of Siemens Automotive, says his organization's growth is tied to penetration gains in product areas like air bag systems and immobilization devices rather than an increase in vehicles. "Our sales will triple from fiscal year '94-'95 to '98-'99, based on booked business," says Mr. Perry.

Dana Corp. has several pieces of new business in 1996. "One is the new PN 96 frame for Ford," says Joseph Magliochetti, president of Dana's North American Operations. "Another is some new light-truck frame business that we have with NUMMI." Other new Dana business includes a frame for GM's GMT 600 and new axle projects in Europe, India and Thailand.

Dana is looking to full systems like frames, axles, driveshafts and transmissions as areas for future growth. Currently, Dana does deliver all of these systems on a line-set basis to customers such as Mack Truck, Navistar and other rental lines, says Mr. Magliochetti.

Talon also is planning on benefiting from the systems trend. It specializes in systems and assemblies that include interior trim, door trim, package tray shelf panel systems, trunk trim systems, bumper assemblies and radiator supports, just to name a few. "We operate both as a Tier 1 and Tier 2. The majority of '96 new business is Tier 2 but the majority of our total business still remains Tier 1," says Mr. Pfachler.

One company, in particular, that has some significant growth coming in '96 is Lear Seating, which specializes in interior systems and supplies all OEMS globally. "We have an incremental increase of new business of about $500,000," says Mr. Way.

Due to a greater expected demand from automakers, The Goodyear Tire & Rubber Co. is expanding capacity of its Lawton, OK, passenger tire plant to produce its Eagle line of run-flat high-performance tires. Goodyear will invest $26.2 million in the facility, about half of which will be used to increase the plant's capacity to produce the Eagle GS-C EMT (extended mobility tire).

"The new Grand Cherokee will have a new tire introduced on it called the Eagle LS," says Les Connelly, director of OE marketing & sales for Goodyear.

"The Eagle LS is just the beginning of replacing the Eagle GA over the next couple years," he adds.