As mergers shake the auto world, privately held suppliers have readjusted their roles and sales efforts to grow and survive the coming shakeout. Right?
Wrong, if a three-month survey of more than 140 North American automotive suppliers is any indication. The survey was led by Craig Fitzgerald, head of the automotive services group at Plante & Moran LLP, based in Southfield, Mich.
A failure by most suppliers to add customers and provide different services has serious implications for many of the surveyed companies with annual sales in the $5 million to $1 billion range, Fitzgerald said. The combination of a future economic downturn and a broad change in the supply chain could trigger bankruptcies and more lower-tier supplier consolidations, he said.
'They have not redirected their marketing and sales efforts to grow their sales with future Tier 1 suppliers,' he said. Tier 1 companies supply the auto companies directly.
The industry conditions Fitzgerald's study found suggest a new wave of mergers and acquisitions, this time involving privately held suppliers with annual sales of $250 million or less. Much of the consolidation to date has involved large suppliers, he said.
THIS, TOO, SHALL PASS
Fitzgerald looked at a variety of companies, ranging from suppliers of entire systems to simple parts; the largest group included stamping companies.
Company owners are not facing up to the changing demands of the automobile industry, Fitzgerald said. They are taking a 'this, too, shall pass' or 'I don't know how to do it; give me a road map' attitude. They appear lulled by strong North American automobile sales and acceptable profits.
Operating income - income before taxes and interest - for a quarter of respondents ranged from 4 percent to 7 percent of sales, he said. A second group of more than 25 percent of respondents reported income at more than 11 percent.
Few of the sampled companies reported taking on the global contracts that suppliers will need to survive a changing auto industry. That need was highlighted recently by the proposed Daimler-Benz AG merger with Chrysler Corp.
Yet 91 percent of respondents reported that North American-only programs constitute the majority of their sales, Fitzgerald said.
SUPPLIERS DO MORE
On the plus side, he found that suppliers are taking on more responsibility. For 1995-97, the time frame Fitzgerald examined, suppliers provided more design and assumed greater product responsibility and other functions, he said.
A majority of suppliers said business with Ford Motor Co. provided the highest profit margins, according to Fitzgerald. That is a turnaround from an earlier study, which ranked Chrysler first, then General Motors, he said.
Fitzgerald found that although the return on assets has been stable for suppliers, the return necessary to retain risk capital in the business over the long term was being earned by less than 20 percent of survey respondents. Risk capital encompasses the funds invested with a large element of risk for the owners or shareholders.
He found that debt levels are manageable in the stable economy. But, he said, more than 25 percent of respondents have debt-to-equity ratios of greater than 3-to-1.
Said Fitzgerald: 'That ratio in a recession could become uncomfortable for banks.'