Worsening troubles in the auto supply industry could derail the supply chain and even halt vehicle production, suggests the latest study to underscore the gloomy future facing auto-parts makers.
The survey of 80 of the top auto suppliers finds that more than 20 percent of them could encounter significant financial hurdles in the next 12 months. And one-third of North American suppliers are financially distressed, said the report released Thursday by Southfield-based BBK, a business consulting firm.
“You have a number of things that are creating what some are calling the perfect storm,” BBK CEO Bill Diehl said. “It's affecting (automakers) as well as suppliers.”
High costs for raw materials, labor and health care, combined with the ever-increasing legacy costs for retirees, are burdening suppliers, pushing more to the brink of bankruptcy. Already, at least eight Detroit-area suppliers are in Chapter 11 bankruptcy reorganization. Continued turbulent times for parts makers could create major ripples for domestic auto manufacturers.
The study validates the financial fragility in the industry, said Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association. Secondly, it validates the two worlds in the auto industry.
“There are those that are performing financially well and the second industry that is in distress,” said Andrea, whose organization represents more than 300 suppliers.
However, he doesn't foresee production stoppages.
“As you look over the last two years — with all of the major suppliers that have filed Chapter 11 — the industry has done a very good job at preventing disruptions in production,” Andrea said.
The study also indicates that there might be a slight financial improvement among auto suppliers here, which is a positive, Andrea said. “If you look at 2005 and 2006 numbers for North American suppliers, the numbers actually trended a little bit better.”
Staying one step ahead
While Ford Motor Co. isn't necessarily bracing for the worst, it is becoming more proactive in heading off supplier trouble, Ford spokeswoman Becky Sanch said.
For example, the Dearborn-based automaker monitors the financial performance of its suppliers and has a laundry list of parts makers experiencing distress.
“We're not looking at suppliers and saying 'Oh my gosh! We have to horde parts right now,' ” she said. But “if we do realize that there is an issue, we flag it and communicate with our suppliers to resolve the situation.”
Monitoring is a standard business practice, Andrea said, and “in times like this, it's an absolute critical practice.”
Suppliers need to find customers other than the Big Three if they want to prosper, said Gregg Klein, a supplier analyst with BNP Paribas.
He points to Metaldyne Inc. as a company that's on the right path.
“They have an Asia partner, as opposed to continuing to go it alone,” Klein said. “That's a chance to increase their diversity by gaining access to Asian (automakers), which has been a tremendous challenge.” The Asian automakers historically have used only Asian suppliers.
On the macro level, said IRN Inc. analyst Erich Merkle, a slowing in the housing market is hurting pickup truck sales and is impacting some suppliers already stumbling from slower sport utility vehicle sales.
“Until the situation improves or suppliers are able to diversify, it's going to be rough,” Merkle said.
Worse than counterparts
Among those surveyed in the BBK study, 33 percent of North American suppliers fell into the financially distressed category versus 14 percent in Europe and none in Asia. North American suppliers collectively scored an average “B-” rating compared to a “B+” in Europe and an “A” in Asia.
Although U.S. suppliers here are faring worse than their European and Asian counterparts, it isn't all doom and gloom, Diehl said.
“The auto industry is going through a right-sizing,” he said. “We're kind of in the dark days of the right-sizing. I don't see it ending in the near terms, but I think we're making progress both on the (automakers) side and suppliers.”
Suppliers are shrinking to match smaller sizes of the domestic automakers and are focusing on their core products. “It's really a product mix change,” Diehl said.
