DETROIT -- Steep production cuts by Ford Motor Co. and General Motors would make suppliers' recent headaches just the warm-up act for a full-blown migraine, says a prominent auto analyst.
"The effect on the supply base of a downsized GM and Ford could be horrific in the short term - more failures, fewer plants and fewer jobs," John Casesa of Merrill Lynch said during a panel discussion at the Automotive News World Congress.
Citing the examples of the U.S. steel industry in the 1990s and U.S. airlines this decade, Casesa said: "Parallels suggest it gets worse before it gets better."
And things have been plenty bad already.
Staggered by higher energy and steel costs, heavy debt and overcapacity caused by production cuts at Ford and GM, more than a dozen suppliers filed for bankruptcy protection last year.
Dana Corp. reported a $1.3 billion loss for the third quarter of 2005 and said it will take additional charges in the fourth quarter. Lear Corp. has reported $1.01 billion in restructuring charges since October. And Visteon Corp. this month announced an $800 million restructuring charge, the second big charge in less than a year.
Too much hardball
Many of the suppliers' problems can be laid at the doorstep of the Big 3's harsh procurement tactics, said Tom Stallkamp, industrial partner of Ripplewood Holdings LLC and the former president of Chrysler Corp.
"Based on the re-sourcing threats and actions of many of the automakers, it's obvious that they are about as loyal to their old-line partners as Brad Pitt was to Jennifer Aniston," Stallkamp said.
But in any event, he said, U.S. automakers are too strapped to help their suppliers out of trouble. And there are too many troubled suppliers to deal with anyway, he said.
"So it is up to the supply base to correct itself rather than rely on some automaker father figure to step in," Stallkamp said.
William Diehl, COO of turnaround specialist BBK Ltd., said too many suppliers are suffering because they seek to be jacks of all trades.
"You have to focus on what you are good at. You cannot use limited resources to pursue many strategies," Diehl said.
Parts makers need to protect themselves by diversifying their customer base, the number of vehicle platforms they work on and their product offerings, he said.
Lots of buyers
But distressed companies are finding no shortage of interested buyers. Buyers ranging from hedge funds to private equity buyers have cast their fishing lines into the industry's roiled waters.
Ripplewood, a private equity player, has acquired three aluminum casting companies outside the United States. Individually, the companies could not become global players. But bolting them together creates a giant supplier with global reach.
David Treadwell, a turnaround expert and COO of Eagle-Picher Industries Inc., which is operating under Chapter 11 bankruptcy protection, said traditional sources of financing for companies needing to restructure have dried up.
Banks aren't much help, and private equity investors demand excessive returns for their investments, Treadwell suggested.
The shortage of funding worries automakers and suppliers alike, he said.
"For a supplier today, the traditional lending markets are not there," Treadwell said. "You are going to have to look for creative financial alternatives to help you manage your business."
A touch of optimism
But Robin Adams, CFO of BorgWarner Inc., said things aren't all that bad in the industry.
He said BorgWarner Inc., which ranks No. 22 on the Automotive News list of the top 150 suppliers to North America with North American original-equipment sales of $1.9 million in 2004, has built strong operating margins with highly engineered, high-technology products such as drivetrain components and engine controls.
"We invest in technology and make sure we have the balance sheet to be able to do that," he said.
In addition, no one customer exceeds 14 percent of BorgWarner's sales, he said. This means that no single customer has the weight to hurt the company if it leaves.
Yet even BorgWarner's strategy has been blunted by weakening industry conditions. Standard & Poor's downgraded the company from "Hold" to "Sell."