A Crain's Detroit Business roundtable discussion last month on the problems facing automotive suppliers featured: James Carter, managing director of Giuliani Capital Advisors LLC of Troy, Mich.; Larry Gardner, president of Larry Gardner and Associates of Troy, Mich.; Al Koch, managing director of AlixPartners LLC of Southfield, Mich.; Kim Korth, president of IRN Inc. of Grand Rapids, Mich.; Kimberly Rodriguez, managing director of Stout Risius Ross Inc. of Farmington Hills, Mich.; and Mark Short, partner at Ernst & Young LLP's Global Automotive Center in Detroit.
Why are so many auto suppliers in trouble?
Korth: A lot of distressed companies are distressed because they had really bad management in the late 1990s that made really terrible decisions that have come home to roost. A lot of these companies chased market share and got seduced into 'it really didn't matter what your profit was, so yes, Mr. General Motors, I'll take another 5 percent price decline if you'll give me the next big XYZ program.' And as a result, they ended up building up a huge amount of debt, they drove profit out of large segments of this industry.
Kim Korth: Successful suppliers have said no to programs and have gotten price increases through. PHOTO: JOHN F. MARTIN
What worries me is that there's a tendency just to write this industry off. We have a tendency in the media to just say well, there goes the airlines, now here goes the auto, and I think that that is a very simplistic review based on some poster children that get publicity.
Gardner: Well, there's very little loyalty left after you win a purchase order, but one of our customers has been very successful in going after the transplants, the foreign transplants where there is customer loyalty, where they do understand price increases. Because they don't have pension and labor problems, they are
Larry Gardner: "There's very little loyalty left after you win a purchase order, but one of our customers has been very successful in going after the transplants, the foreign transplants where there is customer loyalty, where they do understand price increases." PHOTO: JOHN F. MARTIN
Koch: The capital intensity of the business is one where if you take a breakeven product, you'll run out of cash trying to get it to the market.
Korth: Combined with that is the trend toward more niche vehicles. Yes, you get some that are seven and 10 years, but a lot of them now you're getting two to three years. They're 50,000 to 150,000 units a year as opposed to five to seven years and, you know, 500,000 units. You don't even cover your cost of capital if you don't do it intelligently in terms of redeploying existing capital. A lot of times, you'll have salespeople making pricing decisions, and then they'll go back and do the analysis and realize from day one they're going to lose money.
What are potential acquirers looking for?
James Carter: A low-cost manufacturing strategy is essential for a successful company. PHOTO: JOHN F. MARTIN
Who are those companies?
Korth: I'm not at liberty to be able to give specific names, but a lot of them are privately held; they're in the $50 million to $200 million range. They've gone from being 80, 90 percent dependent on the Big 3 five years ago to probably closer to 40, 50 percent dependent.
We are relentlessly negative given what's going on. Now, we have lots of reasons to be relentlessly negative given what's happening with Ford and General Motors, but you have a lot of suppliers that are still very quietly making money, thank you very much, and are diversifying.
Now, are they interested in selling out at this point? I don't think so.
Diversification is one of the key value-drivers of some of these companies that you see in the market as being successful. What are some of the other characteristics of successful companies that we're seeing in the market today?
Carter: I think we mentioned customer mix. Product mix is equally important. Platform diversity is important. Frankly, growth rate is important; you know, today having a low-cost manufacturing strategy is essential, and whether that involves Mexico, China or other low-cost countries, you've got to have a low-cost manufacturing strategy. You've got to have process capabilities that are unique, processing capabilities that are unique, engineering design - design ultimately, you know, is a driver of long-term growth and profitability in your introducing product and better product, or you're being left behind.
Mark Short: Many deals fail because they don't integrate the business that was acquired. PHOTO: JOHN F. MARTIN
Do you see that intangible more important today than previously? Is there a private-equity buyer influence over the importance of that or is it equally important between strategic and private equity?
Short: In my opinion, it's clearly more important with the private equity guys because they are buying a business with a management team that presumably will stay intact.
Koch: Well, management is, you know, particularly important. There are a lot of private equity firms that have come into this automotive market and absolutely been slaughtered because they don't understand what's going to happen to them. So generally the Big 3 don't like private equity, but they're the only buyers for most of these properties that are being sold.
You know, a lot of suppliers that have a lot of sales are large companies that are supplying commodities. It's a very, very
"They're innovators," says turnaround expert Al Koch about suppliers that reject bad contracts. PHOTO: JOHN F. MARTIN
There have been some great success stories; American Axle & Manufacturing Holdings Inc. is a great success story. Oxford Automotive was a failure. It's an industry that whether you're an investor or a lender, if you're looking at a large company, you need to be very cautious.
What are the challenges of distressed-company deals?
Koch: When we go into a distressed company, you very often can look down the road and see a solution, and then you work toward that solution. In a seriously troubled automotive supplier, it is very hard to see a solution. So in a lot of cases, companies that get into trouble end up getting sold, very often in pieces, because the whole company is really not salable.
I think value is heavily driven by how much financing is available. When there is not much financing available, that drives values down. And these contracts last a long time, so if you make a bad deal, it's with you for a long, long time. The Big 3 tend to be unforgiving about bad contracts. If you make a bad contract, you have to live with it.
Executives don't like going to work. People who have worked in this industry for their whole careers generally tell you that it's not a fun job anymore.
What are the critical factors for a successful deal?
Kimberly Rodriguez: A successful deal takes making intellegent decisions right out of the box. PHOTO: JOHN F. MARTIN
Korth: Periodically, I think there's a bit of post-deal fatigue. You have a tendency to let some time drift. But you should be prepared to make decisions immediately. I think a lot of times people look back and say, "you know, it's two years later, and I should have done that the first six months we were there."
Koch: We go into every deal with a detailed 100-day plan, and particularly if you're talking about a turnaround situation. I think the difference between a great deal and a lousy deal in a lot of cases is how fast do I get out of the blocks, how fast do I get done what needs to get done so that I'm running a successful company and not perpetuating what is underperformance?
Short: You hear quotes that 80 percent of all deals are failures or something like that. Oftentimes, they weren't necessarily bad deals, but they failed to integrate the business that was acquired, and integration is key.
Korth: One challenge in getting a successful integration is that when people do a deal, even though it seems like a cast of thousands, it's actually a relatively small group. When you get to post-acquisition, you have a fair amount of agreement at the top of the organization, but that's not translated down to the trenches.