Investors like successful restructuring efforts - and they like auto suppliers that diversify and gain market share. At the moment, most of the suppliers generating the best return for shareholders are Japanese and European.
That's the message from the latest Automotive News/PriceWaterhouseCoopers Total Shareholder Return Index for the first quarter of 2006, ranking the world's 38 largest suppliers.
"Suppliers whose customer base is heavily weighted toward the Asian OEMs have tended to greatly benefit from the upward trend in overall production volumes," said Aaron Witalec, PriceWaterhouseCoopers manager of transaction services.
Seven of the top 15 suppliers on the first-quarter list are Japanese: Stanley Electric Co., Akebono Brake Co., NSK Ltd., NHK Spring Co., CalsonicKansei Corp., Denso Corp., and Toyoda Gosei Co. Other top finishers included Rieter Holding AG of Switzerland, Autoliv Inc. of Sweden, Continental AG of Germany, GKN of England, and Valeo and Plastic Omnium Co. of France.
In a strange twist, Delphi Corp. and Tower Automotive Inc. - two suppliers currently mired in Chapter 11 bankruptcy proceedings - finished No. 1 and No. 4 on the list. Even though shareholders often lose their entire investments in Chapter 11 reorganizations, the stocks still can attract speculative investment.
Still, most investors in suppliers reorganizing under court protection have lost the majority of their holdings for the past year.
Overall for the first quarter, 18 suppliers finished above the 9.8 percent baseline average and 20 finished below that level. Nine companies posted a negative gain for the quarter - all but one of them were U.S.-based.
The only U.S.-based company not in bankruptcy reorganization that finished above average was Tenneco Inc. of Lake Forrest, Ill.
Earlier this month, Standard & Poor's upgraded the credit rating for Tenneco from BB- to B+, praising the company for its diversity of customers for its exhaust and drive-line systems. Tenneco is undertaking a big expansion in Japan and Korea. Such diversification pleases investors.
Japanese suppliers, many with ties to Toyota, also got help in other ways.
"The performance of the Japanese companies is partly a function of a strongly performing Japanese stock market," said John Lawson, an analyst for Citigroup in London. "All boats have been floated up."
Witalec said American manufacturers and suppliers also have been hurt by the weak U.S. dollar, which has just started to show signs of recovery.
U.S. business model broken
Said Lawson: "Poor shareholder returns do reflect investors' view that the business model in the U.S. is a very weak one compared to most international competitors and has fundamental flaws. That makes it difficult for the assemblers, GM and Ford, to compete on level terms."
That has made it harder for suppliers tied to those companies.
Christoph Dolleschal, an analyst for Dresdner Kleinwort Wasserstein in Frankfurt, said investors like companies that restructure and diversify. Continental is one such company, having expanded from tires into electronics, brakes and stability control. On April 3 the company announced plans to acquire Motorola Inc.'s automotive unit for $1 billion.
Continental "now has gone into a cash-generating machine, thanks to the acquisitions they have made," Dolleschal wrote in an e-mail.
Deming would be happy
Brett Hoselton, an analyst for KeyBanc Capital Markets, said companies that listened years ago to statistical-process-control guru W. Edwards Deming are the ones that are giving investors the best returns in 2006.
"Years and years ago, a guy named Deming went to GM and Ford and said, 'You guys can do a better job of manufacturing.' They said, 'Thanks, but no thanks.' So he went to Japan.
"He said variance is bad. Change for change's sake is not good. The supply chain is one of the keys to being successful in war. When you run out of supply, you have trouble fighting. If you disregard the importance of the supply chain, you're not going to be effective in battle."
Lack of variance helps the suppliers tied to Toyota, Hoselton said.
Relentless cost-cutting wars have destroyed value in the United States, both with manufacturers and suppliers.
Said Citigroup's Lawson: "Chapter 11 is the nadir for shareholders because by that time (that a company files for protection), there's no equity value left. It's unfortunate that Chapter 11 has been part of some strategies to try to rescue the business. That's tough for shareholders."
You may e-mail Bradford Wernle at [email protected]