James McElya is anxious to hear the ground rules for Ford Motor Co.'s Amazon Project in Brazil.
Ford wants only about 15 key suppliers for the planned $1 billion venture, set to launch in 2001. McElya, president of Siebe Automotive's worldwide operations, wants a contract for fluid-handling systems on the new Ford vehicles.
But Ford itself won't buy those parts. Another supplier will. The question for McElya: Which of those 15 'module' suppliers will be in charge of delivering the fluid-handling components? The powertrain supplier? The brakes maker? Somebody else?
Welcome to the 21st-century order of auto-parts suppliers - an industry that comprises ocean-straddling Gargantuas and some shrunken number of highly skilled 'component producers.'
It will be a world dominated by companies such as Delphi Automotive Systems (1997 sales: $26 billion) and Magna International Inc. ($5.5 billion). Industry executives and analysts agree that 40 or 50 such companies will broaden their powers in the coming decade by controlling major pieces of vehicle projects.
What they don't agree on is what everyone else will do. Here are some scenarios:
A massive industry consolidation will pair up hundreds of existing parts companies into 'module' makers. Those companies, which already operate in increasing numbers, can deliver an entire door handle and lock package, for example, instead of the individual components of one.
International trading companies of parts makers will be formed, based on partnerships instead of ownership. A U.S. producer of accelerator pedals, for example, might coordinate with a driveline supplier in Germany and an engine-control company in Japan. The team would work jointly to design and engineer each member's parts into a given vehicle.
The industry will return to the old world of build-to-spec parts. Independent part companies will receive orders to build already designed parts, as they were accustomed to doing before the 1990s. But the purchasing engineers handing out the blueprints will not work for the automakers, as they did in simpler times. They will work for other part companies. They will jealously guard their close relationships with the automakers by keeping component makers out of the loop and less powerful. In Brazil, they will hand over the blueprints to one company. In Poland they will share them with another, and in India with another.
A mixture of all of these scenarios will occur.
Getting a read on just how drastic the shrinkage will be is tough. So is knowing how many suppliers exist. A common estimate is 4,000. Yet UT Automotive Inc., No. 17 on the Automotive News list of top OEM suppliers to North America, says it has 10,000 alone. (It wants to chop that number to fewer than 1,000.)
On top of that, the industry rarely follows any strict rules of evolution. Every trend has its exceptions. The changes that revolutionize one corner of the business may skip over others.
But merger and acquisition activity is booming as suppliers try to position themselves for a transformed future. Craig Fitzgerald, head of the automotive services group at Plante & Moran LLP in Southfield, Mich., predicts at least 750 of the top 1,000 North American suppliers will 'merge away' over the next 10 years.
But the 250 that remain will not fall into a neat description, says Fitzgerald, whose firm consults with about 350 suppliers, most of them small- to mid-sized.
'The consolidation we've been seeing has been largely product driven,' he says, meaning suppliers trying to broaden their product offerings into component modules. 'What we'll see now is mergers driven more by geography, in order to work with their customers globally.'
Supplier consultant Donna Parolini has a more radical vision. She believes that automakers need - and want - only a few key suppliers worldwide. And those companies, in turn, also will need only a few sub-suppliers.
Parolini predicts that North America's supply base - a number she puts at 4,060 companies -will shrink to 940 in 10 years. Only 16 of them will be in the systems-integrator class - the type that would supply Ford's Amazon project, for example. Among those will be Magna and Dana Corp. Magna is now capable of supplying an entire body-in-white to BMW Manufacturing Corp. in South Carolina. Dana has been tapped to deliver a complete rolling chassis to Chrysler Corp.'s Brazilian pickup truck next year, accounting for 38 percent of the vehicle's cost.
Parolini forecasts that 75 suppliers will remain first-tier 'sub-system integrators.' In that role, they will manage and assemble families of parts from diverse sources, delivering an entire brake system, for example.
And in the humble component-making business, only 250 companies will remain.
'People always want me to try to name who will survive,' says Parolini, president of International Business Development Inc. in Troy, Mich. 'The names don't matter. The names are going away. The names that remain will represent different companies from who they are today. Allied Signal we now call Breed. Becker will be called Johnson Controls.'
The headlines of the last 90 days testify to her point:
Becker Group, an interior trim supplier with 1997 sales of $1.3 billion, is bought by Johnson Controls Inc. In making the move, a family-owned supplier gives up its quest to compete with the industry's biggies.
Echlin Inc., a $3.6 billion-a-year producer of brake and engine parts, is swallowed by Dana Corp. for $4.2 billion. It made the move to escape a hostile takeover.
TRW Inc. says it may shed some of its automotive businesses.
ITT Industries voices its intent to sell pieces of ITT Automotive, the continent's 13th-largest supplier.
Cooper Industries says it plans to sell its auto business, where its original-equipment and aftermarket lights, spark plugs and wipers produced about $1.9 billion in sales last year.
The reasons in the latter three cases are common: Conglomerates believe they can get higher returns on investment in other businesses. A Bowles Hollowell Conner & Co. study counted 165 supplier mergers and acquisitions in North America alone last year.
Yet a few observers suggest that, for some, the current urge to merge is misguided. Others say it is not a strategy at all.
'A lot of companies don't need to merge,' says Jesse Levine, senior vice president at the Ann Arbor, Mich., office of the New York consulting firm Seidman & Co. Inc. 'There are plenty of opportunities for niche Tier 2 players. We don't subscribe to the idea that in the future there will be only two levels of suppliers: the mega systems suppliers and the component assemblers. There will be roles for many other suppliers.'
In Knoxville, Tenn., Australian-based PBR Automotive USA has just invested $120 million to launch a new plant to supply brake calipers to Ford Motor Co. and General Motors. Despite the industrywide shift, the new venture has no plans to get into systems of parts.
'On the Ford project, we're Tier 1,' says PBR President Mark Koth, 'and on the GM project, we're Tier 2. That arrangement works for us.'
Amcast Automotive, a Southfield, Mich., maker of brake and suspension parts, last year bought the European aluminum wheel maker Speedline. Speedline products are geared for high-end cars, such as Rolls-Royce, Mercedes-Benz and the Corvette. Yet Amcast has no plans to unite its two product areas into a module, says Bill Sholudko, Amcast marketing manager.
The Speedline acquisition did give Amcast something customers increasingly want from a supplier: more size. 'We really have to position ourselves to have our voices heard at the OE level,' Sholudko says. 'We want to be known as a solutions-based supplier.'
Amcast will see sales of $450 mil-lion this year, thanks to the $200 million contributed by Speedline.
The head count
A bigger organization enables the company to spend more on research and engineering. But the industry is debating whether that means small firms will not be able to compete in the future.
'A lot of people have gotten the idea that if a supplier is not a Tier 1 company at the top of the spectrum, it's not in a good business,' counters John Casesa, industry analyst with New York's Schroder Wertheim & Co. 'We don't buy that. Our perspective is that if the technology is good enough and the quality and performance is good, you will survive in the consolidation. If you can develop proprietary technology, you'll build a moat around yourself.'
Daron Gifford, director of automotive consulting for Deloitte Consulting in Detroit, says, 'A lot of the companies out there say they want to be very large systems integrators. I don't know how many of them can actually play that role. I don't believe a company doing $100 million a year can afford to have the talent to manage, to achieve the efficiency levels, or even justify the value added that a $5 billion guy can.'
Yet the consolidation rolls on. Most everyone believes it will continue. Yet Plante & Moran's Fitzgerald thinks it will slow down among large companies and pick up steam among suppliers with $10 million to $200 million in annual sales.
Fitzgerald also predicts the idea of 'globalizing' will lose some of its luster. Low-volume parts factories around the world will be a financial drain on suppliers if they fail to attract other customers, he reasons.
Can the course of events be derailed? Many of those tracking this evolution believe that a downturn in the U.S. market could complicate the situation. Suppliers that have been avoiding a sell-out while making fat profits might throw in the towel. Other firms might give up on low-profit overseas investments, or even back-burner their ambitious acquisition strategies.
Conversely, depressed stock market prices among North American companies could mean easy pickings for European or Asian companies. U.S. companies currently dominate the list of the world's biggest suppliers. That could change. As Chrysler Corp.'s merger with Daimler-Benz AG demonstrates, nothing in the auto industry is permanent. It never has been.
Automotive News Staff Reporter Lind-say Chappell is based in Nashville, Tenn.