DETROIT - Billionaire investor Wilbur Ross admits that the U.S. auto supply industry is in "a shambles."
Ross, who bought into the supplier business last year, ticked off a daunting series of problems facing the industry during a speech at a conference sponsored by the Detroit branch of the Federal Reserve Bank of Chicago.
"Almost half the 50 largest North American suppliers lost money last year, and few of the others earned as much as 5 percent on sales," he said.
Additionally, car sales probably will drop 2 to 4 percent this year. U.S. consumers are spending more than they're saving, but there are signs the "credit binge" is ending. Several years of incentives have sapped demand, Ross said. High fuel prices mean that cars that consumers do buy likely will be smaller and less parts-intensive.
So why would Ross, 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.
$500 billion industry
Because the domestic auto components industry alone is worth $200 billion annually and the global industry about $500 billion. That means plenty of opportunity for a company that can do business globally and make shrewd investments.
In 2005, Ross bought shares in Oxford Automotive ApS, a bankrupt French stamping company. He then staged a takeover of the British company Wagon Automotive, a maker of body assemblies such as door-frame modules, bumpers and stampings.
In January, Ross established the International Automotive Components Group, which bought most of the European interiors business of bankrupt supplier Collins & Aikman Corp.
On April 12, Ross acquired Collins & Aikman's 56.5 percent equity stake in Plascar Ltda., a Brazilian auto plastics company.
Ross also has a framework agreement with Lear Corp. to put his interiors business into a joint venture with Lear. The agreement depends on Ross' acquisition of Collins & Aikman's U.S. interiors business.
Ross said the industry is deeply fragmented. "At present, only (Robert) 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 10 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. 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."
But Ross said the current shakeout will eliminate costly capacity. Those with the means to compete in emerging markets such as India and China should have plenty of opportunities.
The future of the industry, Ross said, lies in mastering those two countries. 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 graduates about 240,000 engineers annually and China 200,000, vs. 60,000 in the United States. In India, a good engineer makes about $10,000 a year and a Ph.D. $12,000.
"Is it conceivable that our engineering graduates will be three times as good as the Indians and the Chinese?" Ross asked. "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."