CHICAGO -- Slowing auto sales and production cutbacks will accelerate the shakeout in the U.S. auto parts industry, pushing struggling companies out of business or into the arms of larger competitors, industry experts said.
Many smaller, privately held suppliers, burdened by debt and surviving on razor-thin profit margins, have remained afloat despite brutal pricing pressures only because auto production has held at record levels for several years.
But generous incentives on new vehicles pushed consumer demand to an unsustainable pace.
General Motors and Ford Motor Co. announced plans this week to curtail vehicle production in the second quarter, after sales of cars and light trucks slowed in February. That could push many of the smaller auto component suppliers to the brink.
"It's survival of the fittest out there," said David Healy, an auto industry analyst with Burnham Securities. "The natural outcome is more consolidation."
Auto parts suppliers make components, everything from chassis and interior assemblies to steering, braking and electrical systems, that represent 70 percent of the cost of the average vehicle, according to the Original Equipment Suppliers Association, a trade group.
The number of automotive suppliers has dwindled over the past decade to about 10,000 in 2000, a third of what it was in 1990. By the end of this decade, only 4,000 to 5,000 suppliers are expected to remain, the OESA predicts.
Forecasts for slower auto sales and production in 2003, especially if consumer worries about a looming war with Iraq persist beyond the second quarter, will compound the pressure on suppliers, which already are receiving lower prices from automakers for their parts.
FEELING THE PINCH
"The small and middle market players are going to truly feel the pinch. What they were making up on volume, they were giving away on price," said David Eberly, senior managing director of Beringea, a private equity and investment banking firm.
Companies with annual revenues of $10 million to $100 million are the most vulnerable, especially the hundreds of mom-and-pop operations specializing in metal stampings, injection-molded plastics and electrical parts, said Eberly and others.
"You will see suppliers hit bank covenants. You will see some acceleration of the consolidation trend because of this," said J. Ferron, automotive partner for consulting firm PricewaterhouseCoopers.
At the same time, top suppliers stand to gain at the expense of their smaller competitors. Automakers have indicated a desire to work with fewer suppliers and incorporate larger modules and systems into their vehicles, a trend that has benefited big suppliers such as Johnson Controls Inc. and Lear Corp.
A parts maker, for example, now will supply an entire instrument panel, including the heating vents, radio and electronics. In the past, those components would have arrived separately for assembly at the automaker's plant.
"There are a number of very large, Tier 1 and Tier 2 suppliers that are expecting volume increases" as competitors go out of business, Eberly said. He noted that could put a strain on their production capacity, a situation that "we haven't seen in a while."
Suppliers said they are bracing for the production slowdowns, which are expected to be announced by the automakers on a weekly, plant-by-plant basis.
"We're waiting to see how many units they are going to reduce," said Greg Gardner, spokesman for Visteon Corp., whose largest customer is former parent Ford.
American Axle & Manufacturing Holdings Inc., which derives about 84 percent of its sales from GM, said it foresees no major changes for the light trucks and SUVs it supplies.
"Fluctuating volumes are part of business, and we make our production plans accordingly," said Renee Rogers, spokesman for American Axle.