Minority Suppliers Get a Boost

For years, minority-owned companies have done the grunt work of the automotive industry in the shadow of the major Tier 1 suppliers.

While big multi-national suppliers with deep pockets dazzle auto executives with sophisticated products or their ability to integrate components into ready-to-assemble systems, the role of minority suppliers generally has been more modest: often making money on simple, labor-intensive handiwork.

But with help from the U.S. Small Business Administration (SBA) and commitments from the U.S. Big Three, some minority-held companies finally might get a chance to break into the ranks of full-service suppliers.

With a hearty endorsement, albeit political, from the White House, General Motors Corp., Ford Motor Co. and Chrysler Corp. have agreed to step up purchases from minority suppliers from a current $5.8 billion per year to $8.8 billion over the next three years.

It's part of the Big Three's previously stated drive to make 5% of their North American purchases from minority suppliers and to urge their Tier 1 suppliers to do the same.

What's new, however, is a provision in the SBA pilot program that changes the definition of a minority-owned company.

Until now, a minimum of 51% control of a minority company had to rest with a member of a socially and economically disadvantaged ethnic group - African-Americans, Hispanics, Native Americans, Asian/Indians and Asian/Americans.

Under the pilot program, the ratio can be as low as 10% minority owned for Tier 1 suppliers, as long as minorities control the board and a member of a minority group manages the company day-to-day. The company also must attempt to hire minority employees.

The 51% threshold made it difficult for large minority companies to attract investment capital to grow the business and precluded an exit strategy for those who did invest. That has forced entrepreneurs to expand through bank debt, which is more expensive to pay off, cutting into profits.

With the more reasonable 10% requirement, those suppliers suddenly face a golden opportunity to go public by selling stock rather than having to finance their growth through bank loans.

Several minority suppliers say they are considering public offerings in light of the SBA pilot program. Still, others realize that going public is not for everyone, and that those who do must tread cautiously.

"If we have the wrong companies going out to the public market and they mess up, the investment bankers and everyone else will pull back," says minority businessman Wallace Tsuha Jr., chairman, CEO and president of Saturn Electronics & Engineering Inc. of Auburn Hills, MI.

"We have a responsibility for those companies that aren't qualified to go public to say to them, `You're just not ready yet,'" Mr. Tsuha says.

Born in Hawaii to Japanese and Korean parents, Mr. Tsuha founded Saturn in 1985 after working for 19 years in automotive electronics for GM, Rockwell and TRW. Last year, Saturn sold $160 million worth of automotive electronic and electromechanical components.

He says Saturn's turn for a public offering is likely to come within two years. "We've been thinking about going public and planning on it for the last five years," says Mr. Tsuha, who owns 51% of Saturn. "Without this pilot program, if we went public we would have lost our minority status. Today that hurdle's removed. I really applaud the Big Three."

Charlie Johnson says he's hoping the SBA deal will make it easier for businesses like his transport company to grow in the automotive market.

The former football player had worked 16 years for Ford in Louisville, KY, when he decided he wanted to try something new. He'd owned grocery stores and day care centers while working at Ford and always knew he wanted to be in business for himself.

So he worked out a deal with Ford to deliver parts to the plant. From his humble beginnings with two employees driving critical parts to Ford's sprawling Kentucky truck plant, the African-American entrepreneur has parlayed his holdings into a $350-million trucking empire, the largest minority-owned system in the country.

But because funding sometimes is hard to come by for smaller minority companies, Mr. Johnson says he had to briefly give up control of his company to grow. He joined a 40-60 partnership with a Chicago-area trucking company to gain a partner with the expertise to begin delivering vehicles instead of parts - a jump from $1 million to $60 million in annual sales over five years.

When one of his partners died, Mr. Johnson said he was able to buy back control of Active Transportation as part of a $100 million, bank-financed buyout. But he was lucky, he says. "Trucking requires a lot of capital, and raising capital is a big chore. many minorities don't have access to that kind of money. This will help."

And it beats the way Frank Venegas says he financed his entry into Ideal Steel, now a major Tier 1 and Tier 2 supplier to Ford, Chrysler and GM. "In 1979 I won a car. I sold the car and started a business," he says.

He since has teamed up with other minority suppliers to put together a major inner-city manufacturing project in Detroit that employs 256 people in a minority community with an unemployment rate as high as 28%.

Mr. Venegas also says he got a big boost from Ford in the form of a commitment letter that let him borrow $2.5 million for new equipment. "Ford taught us to make things better and faster," he says. "You have to want to grow. If you don't want to grow, you'll have problems."

Still, the SBA pilot program is no panacea for minority suppliers eager to grow. "It's nice, but you have to do the basics the same as everyone else," says Joe Anderson, who is rebuilding Chivas Products Ltd. of Sterling Heights, MI, after filing for bankruptcy protection earlier this year.

"You have to have margins and growth potential like any other business, and you have to demonstrate to investors that you are a good risk," he says.

As part of the Chivas restructuring, Mr. Anderson teams up with Continental Plastics Co. of Fraser, MI, to form a new joint venture called Chivas Industries LLC, owned more than 50% by Mr. Anderson.

As chairman and CEO of the new company, Mr. Anderson knows his company is a long way from even considering a public offering, but he's glad the opportunity exists for all minority suppliers.

Tier 1 suppliers also encourage minority suppliers. Johnson Control Inc. used its matchmaking skills to help minority businessman David Davis hook up in a joint venture with Windsor, Ont.-based Schukra North America. The resulting company, Advantage Technologies, went from startup in 1995 to $34 million this year. The Plymouth, MI, company supplies seat components for JCI contracts with Chrysler and Ford.

JCI also convinced Detroit minority entrepreneur Oliver Isaac to expand his manufacturing base into Tennessee with a $125-million automotive contract. The Manufacturers Industrial Group will supply seat adjusters from a Lexington, KY, plant for the Big Three, Honda of America Mfg. Inc. and Mercedes-Benz AG.

Existing efforts aside, observers say it's too early to tell what the SBA agreement will mean to the industry. Only large suppiers can seriously consider going public because Tier 2 minority suppliers still must meet a 51% threshold, says Ronald Hall, president of the Michigan Minority Business Development Council, which certifies about 180 minority suppliers in Michigan.

For automakers, the SBA pilot program is more than altruistic. Most significantly, it helps the Big Three achieve additional consolidation of the supply chain. Minority suppliers will now be able to grow more quickly and perhaps purchase or merge with other companies. Further consolidation means additional savings and potential price cuts.

Beyond that, minority suppliers with new funding sources have an opportunity to do added engineering, design and product development - the type of work that OEMs increasingly have passed on to suppliers.

The Big Three have a long history of helping minority suppliers achieve long-term stability and sustained growth. When Detroit applied to become an empowerment zone city in 1994, the Big Three offered money, help and jobs to boost the city's chances.

In the past two years, the automakers have invested $2 billion in the empowerment zone and have fostered joint ventures between large suppliers and minority entrepreneurs with contracts with one or more of the Big Three.

The Bing Group, for example, led by basketball Hall of Famer Dave Bing, has launched a joint venture with Lear Corp. in the zone to provide Ford with seats.

The Big Three also publish a directory containing 600 minority businesses in 31 states to help Tier 1 suppliers looking to do business with minority-owned companies.

But establishing preferences does not mean minority-owned suppliers will have any easier time getting business than other suppliers.

"They quote, and they have to win. They compete the same as any other supplier around the world," says Harold R. Kutner, GM's vice president for worldwide purchasing.

"Ask one of the assembly plants if the minority supplier's quality is any worse or any better than any one else's," Mr. Kutner says. "You get the answer that it's equal."

If successful, the Big Three's initiative could have wide-ranging implications, says Thomas Sidlik, Chrysler's new executive vice president of procurement and supply.

"I'm hopeful that this is a model that not only industry, but also government, can use to say that this was successful, and let's apply this same technique to another industry," Mr. Sidlik says.

Mr. Kutner says many minority suppliers are moving away from hand assembly work to higher skill operations, which means, in theory, better jobs for minorities.

The late Detroit Tigers pitcher Hank Aguirre founded Mexican Industries in 1979 in the shadow of Tiger Stadium not only to make money, but as a community outreach of sorts for local Hispanics, offering good jobs and impressive benefits. The company's workforce is 90% minority, 86% Hispanic.

The company's work had been labor-intensive and somewhat simple assemblies - hand-sewn leather-wrapped steering wheels, spare tire covers, headrests and floor mats.

But Mexican Industries is graduating to more complicated work, thanks to three new joint ventures that will double its sales in the next few years.

The company has partnered with Collins & Aikman's Manchester Plastics to make instrument panels for the 2000 Cadillac DeVille. Mexican Industries and Cambridge Industries Inc. also have joined to manufacture injection-molded interior systems. A third joint venture will soon be announced.

Mexican Industries President James Merkhofer says the three joint ventures resulted from the Big Three's push for greater minority content on vehicles.

While the SBA's pilot program opens a door for potential public offerings for the joint ventures, Chairman and CEO Pamela Aguirre says it's unlikely Mexican Industries will attempt to go public.