Rough Road Ahead
As the Management Briefing Seminars drew to a close recently in Traverse City, MI, an auto executive turns to students from Detroit's Focus: HOPE who are collecting questions from the crowd. After listening to all this, do you still want to join our industry? asks Frank Olivetto, vice president-sales for Advics of North America Inc., a brake component supplier. Olivetto describes to students how much
As the Management Briefing Seminars drew to a close recently in Traverse City, MI, an auto executive turns to students from Detroit's Focus: HOPE who are collecting questions from the crowd.
“After listening to all this, do you still want to join our industry?” asks Frank Olivetto, vice president-sales for Advics of North America Inc., a brake component supplier.
Olivetto describes to students how much he has enjoyed his career over the years, including the industry's ups and downs.
But for today's small and medium-size suppliers with historical ties to General Motors Corp. and Ford Motor Co., there has been little encouraging news.
Material prices are rising, and GM won't consider material economics in parts contracts. A supplier can't sell its GM receivables to get cash today, and financing is getting harder to find.
A Tier 1 supplier is telling its vendors they won't be paid until the Tier 1 is paid by its customer.
The U.S. supply base is predicted to drop from 3,000 in 2004 to 1,320 companies by 2008, and 65% of the companies disappearing will be liquidated, not acquired.
Half the companies with GM's credit rating of Caa1 fail in five years, as do 24% with Ford's rating of B2.
Amherst Partners LLC, a Southeast Michigan restructuring consultant, predicts only 35% of suppliers going out of business today will be able to find a buyer. Such companies will need new technology, a niche and a way to defend it.
Chinese and Indian buyers particularly are interested in buying Western technology, says Scott Eisenberg, an Amherst co-founder. In many cases, a distressed U.S. business came back to life because the new Chinese owner could lower costs.
Finding non-automotive customers could be good for a supplier's health and might make it more attractive to a domestic buyer, but it won't help attract foreign buyers looking for modern-process technology.
Another issue for all suppliers, but especially painful for smaller operations, is the fact commodity prices are continuing to climb. “We have to be realistic about how we deal with copper prices,” Yazaki North America Inc. Associate Director Nigel Thompson says.
“China will be sucking in raw materials to sustain its growth” for years to come, agrees Johann Finkelmeier, executive vice president of brake supplier Akebono Corp. “There must be a way to hedge the risk,” he says.
J.D. Power & Associates forecaster Jeff Schuster advises small suppliers to turn their energies to getting business with Tier 1 suppliers for Toyota Motor Corp. and Hyundai Motor Co. Ltd.
Toyota is the best bet for success in North America, Europe and Asia in the coming seven years, he says, with Hyundai a likely big-growth assembler in North America.
“Easier said than done,” in a world where purchasing departments at all companies are trying to reduce the number of their suppliers, thus making new conquests an uphill battle, others here say.
It is particularly difficult to win business with Hyundai unless you are in a joint venture with a South Korean company, says Claude Mathieu, chief executive of Mann+Hummel Automotive Inc. in North America. However, he admits his company has won some business with Korean auto makers, and that “they are fair.”
Meanwhile, cooperation among suppliers to work collaboratively on solutions may be getting easier.
“Don't regard investors as a threat,” Yazaki's Thompson says. “We are working with banks and potential investors and another customer of a minority supplier, who was pushed into bankruptcy when his banker moved out of Michigan and the head office withdrew his financing.”
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