DETROIT -- Many auto parts makers squandered 7 years of boom times in light vehicle sales and are so loaded with debt that they are ill equipped to catch the next industry sales upturn.
This grim analysis comes from former Reagan Administration budget chief David Stockman, who is busy investing billions of dollars of private equity into auto suppliers so that his investors will be poised to profit from the next rebound.
Stockman, who attended Harvard University's divinity school, told the Automotive News World Congress that the legacy of 7 years of unprecedented plenty has been a capital squeeze "that will continue and shape the future in some profound ways."
Stockman, senior managing director of Heartland Industrial Partners of Greenwich, Conn., co-founded the firm in 1999. He then went on to sponsor 3 of the 6 largest buyout deals during 2000.
Now he's consolidating major Tier 2 suppliers into one-stop shopping platforms, including the metal-forming company Metaldyne Corp. and interior parts supplier Collins & Aikman Corp.
Stockman said the 1995-2001 period saw the industry's 23 largest public suppliers consolidate industry sales from $62 billion to $112 billion. That translated into solid gains for companies such as Johnson Controls Inc., Gentex Corp., Superior Industries International Inc. and a few others.
But shareholders at many others missed the boom, he said. The merger and acquisition boom left little trace of benefits to supplier operating margins and returns on capital employed. Disappointing share returns and large debt losses left a cloud over suppliers in much need of the capital markets, he said.
Moreover, bankruptcies and distressed credits have generated $8 billion in losses to auto supplier lenders since 1999.
Debt levels among the top 23 suppliers tripled during the 7 years - rising 5 times faster than the market value of the group's common stock. That could be a problem as the debt markets recover this year and beyond, he said, because "much of the industry will be unable to raise net new debt" at the companies current capital structure.
Alleviated the capital squeeze requires better supplier strategies, he said. Focused suppliers will need $5 billion to $10 billion in sales for economies of scale. Those who won't survive include big, the undiversified and unfocused; sub-scale regional players; vendors of "me-too" products and solutions; and risk adverse plodders.
Enlightened purchasing strategies from the automakers too are required, he said. "Long-term deals, not constant market tests (of supplier pricing) are essential,'' he said. And cutting supplier prices without allowing them to share in cost reductions is self-defeating.