Despite years of rapid growth, up to 30 percent of North America's largest automotive parts makers are scratching along with net profits at or below the level of grocery stores.
Last year, industry powers such as Borg-Warner Automotive, Dana Corp. and Federal-Mogul Corp. produced profit margins on a par with high performers in the grocery industry, an industry known for low profits.
These results underscore the automotive supplier industry's problems with managing growth, according to Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Mich. His firm analyzed 53 publicly traded North American suppliers.
The largest group of automotive suppliers - which includes 32 companies ranked as average performers - had profits of only about 4 percent. This 'demonstrates that today's average auto supplier is only as good as high-performing grocers, and not as good as the best of grocers,' Virag said.
Investors are rewarding companies for the way they manage growth, rather than for growth itself, he said. Poor performance by so many companies indicates that 'that the correction process is far from over,' he said.
MEDIAN INCOME RISES
So far this year, the attrition of marginal suppliers has resulted in the sale of Walbro Corp. of Auburn Hills, Mich., and the bankruptcy court filing for Breed Technologies Inc. of Lakeland, Fla.
The industry's 'get big or get out' mantra spurred the tripling of the companies' median income from $403 million in 1992 to $1.1 billion last year. But the growth has had a disparate impact on parts makers. Last year, low-performing companies enjoyed exponential growth but poor and sinking profits.
The median profit margin for the survey's 11 worst performers last year was just 2.8 percent, down from 5.7 percent five years earlier.
The group Virag characterized as 'high performers,' enjoyed modest growth with strong profits. Median profits for this group of 10 suppliers was 12.8 percent last year, according to Virag.
But even high performers experienced profit erosion last year. Their median profit fell from a high of 15.7 percent in 1994.
The North American companies Virag studied include suppliers in all vehicle areas - interior, exterior, powertrain, chassis and electronics.
High-performing companies - including Eaton Automotive of Cleveland; Superior Industries International Inc. of Van Nuys, Calif.; Cooper Tire and Rubber Co. of Auburn, Ind.; and others - 'are interested in more than just buying market share,' Virag said. 'They make fewer acquisitions, allowing them to better manage the integration of the companies, and are more selective in their investment strategy.'
Low performers are 'having difficulty managing that growth so it is not translating into profitability,' said Hiro Mori, a manager for the research and consulting firm.
He had little praise for the 32 companies the study ranked as average. He said they track closer to the low performers in revenue growth, return on assets and 'cost of goods sold,' a measure of the costs directly related to the production of the final product.
The report found that the most striking difference between the top and bottom performance group was cost of goods sold. Virag said he found that industrywide cost containment efforts are beginning to take effect at the best parts makers.
High performers reduced costs from 81 percent of revenue in 1992 to 71 percent last year. But for low performers, those costs jumped from 77 percent to 85.5 percent. High performers have more efficient factories, and they are better able to manage wages, raw materials, tooling and other costs. They also are better able to manage their supplier networks.
Corporate debt also is a problem for low performers. Median debt totaled 73 percent of assets, a jump of 30 percentage points over the past four years. That indicates the companies took on heavy debt to finance growth.
By contrast, high performers maintained a relatively low debt level over the past seven years. Some even operate with no long-term debt, Virag said.