Automotive suppliers have had a rough year, and indications are that next year isn't going to be much better for most of them.
The first half of this year saw car and truck manufacturers reap the benefits of a strong market, posting monthly sales records. Light-vehicle sales are expected to come in just under 18 million units. However, suppliers saw little of that trickle down to their bottom lines.
The third quarter, which is typically tougher because of model changeovers, saw many suppliers post losses. Ford Motor Co.'s idling of three plants to solve its tire problem combined with currency fluctuations in Europe and Mexico also led to poor results for suppliers.
The slowdown in car and truck sales predicted for nearly two years is beginning to show up, and many suppliers are forecasting that it will really hit hard at the start of next year.
However, the sales figure many believe the industry will fall to next year - between 16 million and 17 million units - amounts to a historically strong market. Long-range forecasts suggest that in 2002, the market will come back down to a range of 15 million to 15.5 million units.
Sluggish car and truck sales combined with a still-struggling automotive aftermarket will pinch earnings growth for suppliers next year, said John Casesa, automotive analyst for Merrill Lynch & Co., in a recent report. However, some relief may come from a strengthening euro.
A few suppliers managed to come through the third quarter in good shape: Delphi Automotive Systems Corp., Johnson Controls Inc. and Lear Corp.
But Visteon Corp., American Axle and Manufacturing Holdings Inc., Collins & Aikman Corp. and Federal-Mogul Corp. all posted earnings declines in the third quarter.
Federal-Mogul may be the best example of a supplier gone awry. It grew quickly between 1996 and 1998, following the industry trend. It took on more responsibility for engineering and design work, got bigger to lower costs through economies of scale and diversified its product offerings. The company, which has $6 billion in revenue, now has $4 billion in debt.
One of the problems suppliers have faced is too much seat-of-the-pants planning. In Federal-Mogul's case, the company knew it had to get bigger to keep up with demand but has had no time to decide how to wring efficiencies from the acquisitions.
The frenetic pace of the industry, while a boon to revenue streams, hasn't been as kind to the bottom line, and suppliers are beginning to feel it.
Raj Kothari, a principal at GMA Capital LLC in Farmington Hills, Mich., said the best thing that could happen to suppliers is for car and truck sales to fall off, dipping to 15 million to 15.5 million units.
He said the slowdown would allow suppliers to closely examine their operations and figure out where to cut the fat. It would give them a chance to exploit the areas where they can get those economies of scale that were touted during the acquisition binge a few years back.
Conversely, many companies are using the rest of this year to position for the anticipated downturn. Collins & Aikman, an interior products supplier in Troy, Mich., took hits in the third quarter because of Ford's plant shutdown and the changeover in Chrysler Sebring convertible production.
However, it also retired some debt early and restructured part of the company to reduce costs, which added to the loss. As a result, Tom Evans, the company's CEO, said he believes the company is ideally positioned for the upcoming year. 'The smart thing we did was taking a cost restructuring to be as lean as we can be,' he said. 'We can still run with big volume if it's there, but if it's not, we're pretty lean. We proactively took out costs 12 to 18 months in advance.'
A recent A.T. Kearney study says suppliers are poised for a rebound in 2002. North America will be the first out of the doldrums. Europe will follow, and Japan will be last to enjoy the upswing as Asian economies dig their way out of the troubles of the past couple of years.
Covisint, the online trade exchange founded by General Motors, DaimlerChrysler AG and Ford, will affect how suppliers do business with the automakers and each other.
Some suggest the $300 billion exchange will take $3,500 out of the cost of every vehicle.
Though no one will confirm that possibility, some observers say it will spawn another round of supplier consolidations.
David Cole, director of the Center for Automotive Research and management partner for Environmental Research Institute of Michigan in Ann Arbor, Mich., said half of the current 800 Tier 1 suppliers will survive.
While it may take a big chunk out of manufacturing costs, those savings won't all find their way to customers. But they may allow suppliers to do something they've found difficult in the immediate past: turn a profit.