Restructurings at General Motors and Ford Motor Co. depend on their ability to cut production costs as well as build cars that customers want, which translates into costs pressure on parts suppliers, analysts said.
Most U.S. auto parts maker are restructuring, whether to preserve profits or, like Delphi Corp., to emerge from bankruptcy. Analysts see more bankruptcy filings as difficult conditions continue in 2007.
"The weaker players have already succumbed to a large degree, but the pressures have not been alleviated, especially for those exposed to Ford and GM," Fitch Ratings managing director Mark Oline said.
U.S. parts makers have little ability to absorb more costs and access to capital also may be more limited in 2007 after companies received great latitude from lenders to boost liquidity and extend out maturities in 2006, Oline added.
Suppliers with the highest exposure to U.S.-based automakers have the greatest risk in 2007, with a possible decline in U.S. auto sales due to slower economic growth, a weak housing market and reduced discretionary spending, Fitch said.
Lear Corp., American Axle & Manufacturing Holdings Inc. and Visteon Corp. have a high percentage of sales with Detroit-based automakers. Johnson Controls Inc., Tenneco Inc. and ArvinMeritor Inc. are less focus on the U.S.-based automakers.
Credit Suisse cut its rating on the auto and auto components sector to "underweight" from "market weight" on Tuesday, citing in part expectations for a 3 percent decline in U.S. light vehicle sales in 2007 that is likely to hit production of some high-profit vehicles harder than others.
Analysts expect U.S. sales of about 16.4 million vehicles in 2007, which would be about a nine year low after a roughly 3 percent decline in sales in 2006 from 2005.
WRINGING OUT THE WEAK
Credit Suisse cut Johnson Controls and Magna International Inc. "neutral" from "outperform," and cut its ratings on Visteon and Lear to "underperform" from "neutral."
The wringing out of weaker companies will continue with mergers, acquisitions and divestitures, Richard Spitzer, global industrial managing partner for Accenture's automotive and industrial equipment practices, said in a recent interview.
"The private equity world remains very active in the automotive space," Spitzer said. "That remains a strong signal that more business model transformation is required."
So far in 2006, billionaire financier Wilbur Ross has acquired Lear's interiors business in Europe and announced a deal to buy Lear's North American interiors unit among other acquisitions in the auto parts sector.
On Monday, Delphi said an investor group led by Cerberus Capital Management LP and Appaloosa Management LP had agreed to invest up to $3.4 billion to support its exit from bankruptcy.
Earlier in December, bankrupt Collins & Aikman Corp. said it had found a lead bidder for one-third of its business as it liquidates operations. Automotive News has reported Cerberus as the lead bidder.
Spitzer said some U.S. suppliers have not moved aggressively enough to shift production to lower-cost regions.
"Maintaining the status quo, as many suppliers have found, is just not going to work," Spitzer said.