A season of price-cutting demands from General Motors, Ford Motor Co. and now DaimlerChrysler has Wall Street worried that skinnier profits in the face of falling new-vehicle production will spell financial trouble for auto parts makers.
Declining production of new cars and trucks prompted Standard & Poor's analyst Efriam Levy on Friday, Dec. 8, to downgrade the industry's top parts makers. They include Delphi Automotive Systems Corp., Dana Corp., TRW Inc. and Magna International Inc.
Levy said even top performers such as Johnson Controls Inc. and Superior Industries International Inc. may no longer be able to avoid the damage.
Many top suppliers are expected to issue fourth-quarter profit warnings because of the double whammy of falling production and increased price cuts.
Shares of many parts makers last week hit new 52-week lows after Visteon Corp. on Tuesday, Dec. 5, warned that it would not come even close to Wall Street's earnings consensus for the fourth quarter.
Some analysts say the prospect of more bankruptcy court filings among the auto supplier sector is increasing. One analyst who recently spoke with the Big 3's purchasing executives found little concern that the automakers may be bankrupting their supply base. 'They are clearly in a state of denial and are being extremely short-sighted,' he said.
Analyst Charles Brady takes a less sanguine view. Price cuts from DaimlerChrysler, GM and Ford have a minimal impact on suppliers of highly engineered systems and modules, he said.
Brady, of Credit Lyonnais Securities Inc. in New York, said such suppliers are better positioned to resist big price cuts and can demand new business in return. A critical supplier is not a company an automaker can afford to go bankrupt, he said.
He said parts makers could profit if annual vehicle production falls to 15 million to 16 million cars and trucks - an optimal production level for parts makers. They are suffering under this year's record 17 million-unit production level, he said, because of higher costs from overtime, premium freight charges and overcapacity of plants.
But analyst Eric Goldstein said years of price cuts have left parts makers vulnerable to a downturn. They have taken on higher fixed costs from years of outsourcing of design and development.
'The last thing most suppliers need at this point is pricing pressure from the company that had been their biggest supporter,' said Goldstein, of Bear, Stearns & Co. Inc. in New York.
Goldstein said DaimlerChrysler's announcement might be a big test for the supplier base to see if they can begin standing up to their customers. 'It's not their fault Chrysler is losing money,' he said.
Until then, investor concerns over earnings and the latest announcement from DaimlerChrysler may continue to put pressure on supplier stock prices.