Turnaround specialists: Commandos of the supplier world

Desperate times breed desperate measures. When parts makers stagger near the brink, they get the call.

Key players
Some turnaround firms that work with auto suppliers

  • Jay Alix & Associates, Southfield, Mich.

  • BBK Ltd., Southfield

  • Plante & Moran LLP, Southfield

  • Stout Risius Ross Inc., Southfield

  • Conway MacKenzie & Dunleavy, Birmingham, Mich.

  • PricewaterhouseCoopers LLC, New York

  • Turnaround firms closely identified with the Big 3

  • BBK Ltd. - General Motors

  • Stout Risius Ross Inc. - Ford Motor Co.

  • Conway MacKenzie & Dunleavy - DaimlerChrysler

    To the rescue

    Suppliers that have worked with Jay Alix & Associates of Southfield, Mich., and the year the work began

  • Hayes Lemmerz International Inc. - 2001: Work in progress

  • Exide Technologies - 2001: Work in progress

  • Peregrine Inc. - 1998: 3 businesses sold, 2 plants closed; no parts interruption to General Motors

  • Tube Products Corp. - 1995: Restructured and sold

    Source: Jay Alix & Associates

  • Just hours after Federal-Mogul Corp. filed for Chapter 11 bankruptcy court protection last month, three other auto parts makers scrambled to Kimberly Rodriguez for shelter of their own.

    For these Tier 2 suppliers with overextended bank credit lines, trouble at a $6 billion customer was one blow too many in a difficult year. So they called on Rodriguez, a corporate turnaround specialist, to rescue them.

    Rodriguez, managing director at Stout Risius Ross Inc. in Southfield, Mich., has thrown her share of lifelines this year. The downturn in the auto industry has ravaged a sector long on debt and short on cash. Parts makers have been struggling to meet pricing pressure from automakers while coping with declines in production.

    Psst! I'm in trouble

    In the medical world, patients call the Mayo Clinic when the neighborhood doctors run out of options. In the auto supply world, when suppliers can't heal themselves, they secretly knock on the door of one of a dozen or so top turnaround firms that cater to the auto parts industry.

    Turnaround specialists - also known as workout artists - are the commandos of the business world. They parachute into troubled territory and assess a company's problems and prospects with fresh eyes. They fire people, jawbone angry creditors and step onto hostile factory floors and proclaim them in need of repair.

    They are often there at the behest of an automaker, whether or not the troubled company wants them. In some cases, automakers require a right-of-access agreement - a document signed by a supplier when a contract is awarded that conveys legal authority for a virtual takeover should the flow of parts be threatened.

    An automaker can wind up calling the shots even when no such agreement exists, because a supplier in dire straits knows that losing such a major customer would be the beginning of the end.

    Sometimes turnaround specialists bring aboard investment bankers to scour the landscape for buyers of business units. Often, they work with existing management to negotiate with lenders and vendors.

    And they don't work cheap. The fees - borne by the supplier and paid up front - can be $100,000 a month or more.

    Growing pains

    Two years ago, Davis Industries Inc. of Plymouth, Mich., stumbled as it tried to grow quickly and retain its Tier 1 status with Ford Motor Co., Nissan North America Inc. and other automakers.

    But the stamping company was in trouble. Its spending for new tooling and a new plant in Tennessee to keep up with automakers' demands had exceeded its resources.

    Jeffry Davis and John Groustra

    John Groustra, right, of Conway MacKenzie & Dunleavy, prescribed a fix for troubled stamping supplier Davis Industries. Its vice chairman, Jeffrey Davis, left, steers a company that now can manage growth smoothly. PHOTO: JOHN SOBCZAK

    So Davis called on John Groustra, a partner with turnaround and consulting firm Conway MacKenzie & Dunleavy of Birmingham, Mich.

    Groustra advised the company to add a COO and negotiated new bank financing, and worked with Davis' suppliers.

    The plan worked. Davis righted itself. Today it is developing new products, and it is profitable and growing - but in a more controlled fashion.

    To be sure, most auto suppliers get through their troubles without such help. They work smarter, slash the frills and tighten their belts another notch.

    But the crunch in the supplier sector this year has proved too much for some companies. And for suppliers who need help but don't seek it on their own, a bank or an automaker often will push the supplier into the arms of the turnaround artist.

    It's impossible to say how many auto suppliers are seeking relief from turnaround specialists, who rarely discuss their clients.

    Keep it quiet

    "Financial troubles are something you keep quiet because it affects employees and customer relations," says Neil De Koker, managing director of the Original Equipment Suppliers Association, a trade group with 265 member companies.

    Interviews with a dozen specialists who work with auto suppliers put the number of U.S. automotive suppliers getting special aid - whether for turnarounds, liquidation or outright sale - at 200 to 300 companies.

    "Problems are good for the consulting business," said workout specialist Jerry Barefoot, in an obvious understatement. Barefoot, like many of his peers, knows the supplier world from the inside. He was CEO of Rieter Automotive North America Inc., a Farmington Hills, Mich., manufacturer of soundproofing material and parts.

    When he left four years ago to create Barefoot, Cramer & Associates LLC in Birmingham, Mich., he had plenty of work. Now, he says, the level of pain in the supplier sector has increased.

    "I'm concerned because so many companies are beyond help because their business has dried up."

    The need for workout specialists is not limited to the auto industry. Where there's a need - whether in earth-moving equipment or washing machines - they exist.

    At the extreme, such companies all are trying to avoid becoming a statistic in what is shaping up as a record year for U.S. bankruptcy filings. New bankruptcies filed nationwide during the second quarter rose 25 percent from year-ago levels to 400,000, the American Bankruptcy Institute reports.

    While the percentage of auto suppliers in that group is small, auto suppliers who file for bankruptcy protection is "just the tip of the iceberg" when it comes to suppliers in trouble, says Craig Fitzgerald, a partner with accounting and consulting firm Plante & Moran LLP of Southfield, Mich.

    The vast majority of troubled suppliers, he says, seek a way out of their woes through mergers or joint ventures. They might restructure on their own or do it with the aid of a workout specialist. If all else fails, some simply close.

    No guarantees

    Even when the specialists are called in, things don't always work.

    In 1999, so-called financial buyers - investors looking to buy, fix and sell companies - purchased Jackson Precision Die Casting Co. of Jackson, Mich., out of bankruptcy court. They brought in John Stein, a former Ford purchasing agent, as COO, and later BBK Ltd. of Southfield, Mich., a turnaround firm frequently used by General Motors to help troubled companies.

    Craig Fitzgerald

    Turnaround artist Craig Fitzgerald of Plante & Moran LLP helps steer ailing suppliers toward recovery. Companies that seek bankruptcy protection, he says, "are just the tip of the iceberg," when it comes to suppliers in trouble. PHOTO: JOHN SOBCZAK

    But a two-year effort failed to eliminate production and quality problems or overcome the cost of UAW wages and work rules. Then, a June 2000 fire wiped out 20 percent of the supplier's production capacity. It was the last straw.

    Stein said GM, Jackson's biggest customer, was forced to find a half-dozen competitors to pick up all of his production as he closed the company last month. More than 200 employees lost their jobs.

    In this case, GM's wait for a Jackson Precision recovery failed to pay off. But automakers must be vigilant with their supply base. They must be poised to act at the first sign of a red flag, such as cash flow, delivery, quality or other problems that can send a supplier into insolvency.

    "They want to be sure these suppliers have the wherewithal to stay in business," says consultant Fitzgerald. "The automakers have been burned (by failed suppliers), and the cost of moving work from a sickly supplier is great."

    Two of Fitzgerald's clients were told to produce three years of audited financial statements and two years of projected financial statements before their customers - an automaker and a Tier 1 supplier - would give them additional work.

    And Groustra says that a few automaker assembly lines have shut down this year because troubled suppliers have been unable to deliver parts. He added: "There have been many, many times where it has come real close."

    The condition often is ugly by the time most firms get the call. A company's owner may finally recognize the gravity of situation. In other cases, it's the supplier's banker or the automaker customer.

    In rare cases, GM has BBK take control of a sick supplier until a buyer can be found who can guarantee GM that its parts will be produced and delivered.

    While the cost of failure is great, so, too, is the price for survival. Turnaround pros seek payment in advance, and the troubled firm foots the bill.

    Turnaround firms bill hourly fees based on the number of people on site and their expertise. Charges ranging from $10,000 to $100,000 a month are not unusual. Al Koch, managing principal of Jay Alix & Associates, also of Southfield, said complicated workouts with performance goals could double those fees.

    Engagements can last six months, depending on whether the mission is to rescue, sell or liquidate.

    Fewer options

    Turnaround experts say the auto industry's cycle is different than previous ones. They report greater difficulties and fewer options for troubled suppliers.

    "It's not gradual this time," says Rodriguez of Stout Risius Ross "It's more like falling off a cliff."

    That's because suppliers are so heavily in debt. Over the last decade, they have taken on the engineering and product development costs. They have built plants to service automakers around the world, and they bulked up with acquisitions.

    But when the industry started going soft, suppliers got demands for price cuts instead of greater revenues. Instead of additional volume, they got production cutbacks. Many smaller companies haven't had the reserves to hang on.

    And after a federal tightening of lending standards this year, many bankers have slammed shut their lending windows. In some cases, a "For Sale" sign is the only way out for many owners to rescue the equity they've built in their companies.

    "Sales of troubled businesses have increased dramatically," says David Eberly, a managing director of investment banking firm GMA Capital LLC of Farmington Hills. "But for every sale, there are untold numbers of auto suppliers that have had their business pulled" by the automakers.

    Those who are successful may be eligible for several types of help, including short-term price increases and automakers' guarantees on a portion of their bank loans. In extreme cases they can even get an automaker to pick up the tab for materials.

    "At the end of the day," says Rodriguez, "the solution requires the cooperation of all stake holders - the company, the vendors, the lenders and the customers."

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