DETROIT -- Billionaire investor Wilbur Ross admits that the American "auto supply industry is in a shambles."
Delivering the keynote speech at an industry conference sponsored by the Detroit branch of the Federal Reserve Bank of Chicago Tuesday night, Ross ticked off the daunting series of problems facing the industry.
"Almost half the fifty largest North American suppliers lost money last year and few of the others earned as much as 5 percent on sales," he said, speaking to the gathering at the Detroit Institute of Arts.
Additionally, car sales will probably drop 2-4 percent this year. American consumers are spending more than they're saving, but there are signs the "credit binge" is ending. Several years of incentives have sapped demand. And high fuel prices mean that those cars consumers do buy will likely be smaller and less parts intensive.
So why would Ross, the chairman of WL Ross & Co.& LLC, want to put his money into an industry in such a mess? He asked himself the question aloud before the conference gathering, themed The New Geography of Auto Production.
Because the domestic auto components industry alone is worth $200 billion annually and the global industry is worth about $500 billion. That means plenty of opportunity for a company that can do business globally and pick its openings shrewdly.
The industry is fragmented, Ross said, and that the current shakeout will eliminate costly capacity. Those companies with the means to compete in emerging markets like India and China should have plenty opportunities, he said.
"At present only Bosch has more than a 5 percent share," he said. "The top five companies only have about 22 percent of the combined market and the top ten only have 36 percent.
"The present high fixed cost structure encourages many struggling vendors to price based on forecast marginal costs of production and to absorb enormous commodity price risks.
"Some desperate companies actually seem to have taken the business at less than marginal cost in order to break into a new customer," he said. "They theorize that once they become a supplier by means of a losing contract, they will overcharge on some later contract and make it up. Only the later contract never comes in at an exaggerated price."
The future of the industry, Ross said, lies in mastering India and China. He recently returned from his 57th trip to Asia, "and in about 10 days I will be on my 58th," this time to China, he said.
India and China graduate huge numbers of engineers annually -- about 240,000 in India and 200,000 in China, compared to 60,000 in the U.S. In India, a good engineer makes about $10,000 a year. A PhD. makes $12,000.
"Is it conceivable that our engineering graduates will be three times as good as the Indians and the Chinese? If not, how will we retain our technological edge in automobiles -- or for that matter in any industry?
"Very few American auto suppliers have the combination of capital and experience operating in the developing world to develop and execute the kinds of global strategies that will soon become mandatory. We believe that we do."
In 2005, Ross bought shares in Oxford Automotive, a bankrupt French stamping firm. He then staged a reverse takeover of the British coachbuilder Wagon. In January he established the International Automotive Components Group, which bought most of the European interiors business of bankrupt supplier Collins & Aikman.
On April 12, Ross acquired Collins & Aikman's 56.5 percent equity stake in Plascar Ltda., a Brazilian auto plastics firm.
Ross also has a framework agreement with Lear Corp. to put his interiors business into a joint venture with Lear. The agreement is dependant on Ross's acquisition of Collins & Aikman's U.S. interiors business.
Ross said he is still predicting "a perfect storm" in the U.S. supply sector and that much depends upon how Delphi's bankruptcy plays out.
You may e-mail Bradford Wernle at [email protected]