Thursday, March 10, 2005

Thousands of supplier jobs at risk

Rising material costs and production cuts by automakers make future of industry grim.

By Brett Clanton / The Detroit News

Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

Auto production cuts, rising steel prices and fierce competition have pushed the U.S. auto supply industry to the verge of a crisis.

The signs of distress -- plummeting stock values, credit ratings cuts, profit warnings and Chapter 11 filings -- are mounting on an almost daily basis. Companies that once seemed bulletproof are struggling to survive the turmoil. Many weaker players face the prospect of bankruptcy.

"This is undoubtedly the most difficult and economically pressured time I've ever seen in the automotive industry anywhere in the world," Steven G. Brown, CEO of BBi Enterprises in Bloomfield Hills, an auto interiors component supplier that filed for Chapter 11 bankruptcy protection last week.

On Wednesday the litany of bad news continued for an industry that employs 180,000 in Michigan.

Detroit-based American Axle & Manufacturing Holdings Inc. became the latest major supplier to lower its profit forecast for the first quarter, citing production cuts by Ford Motor Co. and General Motors Corp.

Southfield-based auto interiors giant Lear Corp. issued a profit warning. Lear and American Axle had been two of the industry's strongest performers.

"If Lear can't make any money, imagine what's going on at the other companies," said Stephen Girsky, an analyst with Morgan Stanley.

Also Wednesday, Delphi's stock fell to an all-time low in the wake of a developing accounting scandal and ongoing financial problems. UBS Investment Bank analysts Robert Hinchcliffe said in a research note Wednesday the company should consider bankruptcy.

Investors have fled from many auto supplier stocks this month in reaction to the reports, and more could flee when quarterly earnings are reported by many suppliers in the weeks ahead.

The disappointing start to the year comes follows a rough 2004 that saw several high-profile bankruptcies.

Who will survive?

The survivors, say industry observers, will be those suppliers who diversify beyond the Big Three, wring out unnecessary costs and reinvest in their businesses to stand apart from competitors.

But that will be a tall order for many players in the supplier industry, which with the exception of a small group of high-performing companies, is still lagging in many areas, said Umar Riaz, managing partner of Accenture's Automotive Practice in Southfield.

"We believe the supplier industry is still in need of significant restructuring," he said.

Auto supplier are cutting costs and jobs to survive.

Delphi had already announced plans to cut more than 8,000 jobs this year as part of an ongoing bid to trim costs and dig out of a slump. No. 2 supplier Visteon, which has not turned a profit since a spinoff from Ford in 2000, is planning a restructuring after posting deep losses last year. Other big U.S. suppliers are also in recovery mode.

"As long as this industry has the competitive pressures and the overcapacity that exists, it's going to require suppliers and (automakers) to be extremely sharp in the way they conduct business," said Rakesh Sachdev, vice president and controller at Troy-based supplier ArvinMeritor Inc., which recently launched a plan to refocus its business on growth areas after reporting a $42 million loss last year.

"Those suppliers who are nimble will succeed, and there will be handsome rewards. For those who are not fast, the outcome will not be favorable."

Auto sales healthy

One positive sign: The U.S. auto market is expected to remain healthy in 2005. Sales are expected to come at roughly the same level as 2004, when 16.9 million cars and trucks were purchased.

But U.S. suppliers heavily tied to GM, whose sales are down 10 percent this year, and Ford, whose sales are down 7 percent, could still be hurt, even if the overall industry turns in a good year.

"It's so dependent on what specific customer you have and what vehicle platforms you have business with," said Neil De Koker, president of the Original Equipment Manufacturers Association, a supplier trade group in Troy. "It's a cyclical thing."

Automotive seat maker Lear lowered its first quarter earning guidance last week to "break even" after GM and Ford expanded production cuts in some factories.

Yet Johnson Controls Inc., Lear's chief competitor in auto interiors, raised its outlook for second quarter earnings this week and left its guidance for the year unchanged.

"JCI is a perfect example of a company that has the same external environment as everyone else and is continuing to perform well," Riaz said, explaining the Milwaukee, Wisc.-based supplier is better diversified than many of its peers.

American Axle lowered its first quarter profit outlook on the assumption that North American light truck production will fall 14 percent this year.

It will be a "challenging year for the entire domestic automotive industry. The same is true for (our company)," American Axle Chairman and CEO Richard E. Dauch said in a statement.

American Axle is not alone in that opinion.

"I would say the pressures throughout 2004 and the beginning of 2005 have reached a crescendo to the like that I've never seen before," said BBi Enterprises' Brown.

Bankruptcies loom

BBi -- a $120 million company with 780 employees -- was driven into bankruptcy because of expenses related to new vehicle launches last year, double-digit increases in commodity prices, and the negative impact of currency exchange rates in Canada, Brown said.

In a restructuring, the company will try to rebuild anyway it can. "We're not closing any doors," Brown said.

Industry headwinds have pushed much larger suppliers such as Tower Automotive, Oxford Automotive and Intermet Corp. into bankruptcy in recent months.

And as pressures intensify, the parade of filings could continue.

"There are a lot more people walking closer to the edge of the bankruptcy cliff than there were a year ago," said Tim Manganello, chairman and CEO of BorgWarner Inc, an engine and transmission component supplier in Auburn Hills. "To be honest with you, it's not even a word in my vocabulary, so I don't pay much attention even thinking about it. But there are a lot of suppliers who think about it every day."

The industry is ripe for consolidation, said Chas Chandler, managing director from Amherst Capital Partners in Birmingham, who follows merger and acquisition, trends in the automotive industry. "It's safe to say in the next 18 to 24 months you're going to see more activity."

The number of suppliers in business today will be cut in half to 4,000 by the end of the decade, according to a projection by OESA. While some suppliers will go out of business, others will be absorbed into larger companies seeking to diversify, De Koker said.

The shakeout is likely to cost more jobs in Michigan. Since 2000, the supplier industry has shed more than 40,000 jobs, according to the Michigan Economic Development Corp.

You can reach Brett Clanton at (313) 222-2612 or bclanton@detnews.com.