With their breakeven levels way, way down, long-suffering suppliers are poised to make a boatload of money with the slightest uptick in production. And don't look now, but North American production is booming.
As the industry crashed in 2008 and 2009, parts makers slashed payroll and other costs.
"Many suppliers are doing better on profitability now than when they were producing for a 16 or 17 million market," said Anthony Pratt, head of PricewaterhouseCoopers' automotive practice. "The irony after all the cost cutting is that our clients are most worried about having enough capacity to meet demand."
The survivors are so lean that even a small boost in volume could produce big profits.
"Where the industry sits now is a better place than where it was," said John Hoffecker, a managing director of the supplier consultancy AlixPartners in suburban Detroit. In 2009, Hoffecker said, North American suppliers cut operating expenses 13 percent -- "much more than comparable industries," he said.
With North American production on a 12 million-unit pace in the first quarter, suppliers averaged 6 percent operating margins, AlixPartners estimates. Suppliers could boost that to 9 to 12 percent as production volume grows closer to 15 million, the consulting firm said in a new study.
In the first quarter, TRW Automotive managed an operating margin of 8.1 percent on revenue of $3.6 billion. With about the same revenue in the first quarter of 2007, TRW's margin was 5.2 percent.
In the first quarter of 2009, the worst quarter for suppliers, TRW reported an operating loss on revenue of $2.4 billion.
Continental AG in Germany has lowered breakevens at every division in the past 18 months, said Ralf Cramer, head of safety and chassis at Continental in Germany.
"We've seen significant volume increases this year, and that has put our business on a path for better profitability," Cramer said.
Jose Avila, head of Continental's powertrain division, said that with the lower overhead, "we are ahead of plan on revenue."
And output is rising quickly. In North America, manufacturers posted the biggest year-over-year production surge on record in May -- almost half a million units higher than May 2009. For the first five months, output is up 2 million vehicles.
But the production increase says more about weakness in 2009 than current strength. The surge this year can't match a 2.9 million-unit plunge in the first five months last year.
Still, things are clearly looking up. Last week, General Motors Co. said it would keep assembly plants running instead of taking its normal two-week summer break to rebuild low inventory. And Toyota announced plans to open its partially built Mississippi assembly plant in 2011.
No clear consensus has emerged either on the strength of the recovery or on peak volumes of production and sales in the medium term. That creates concern that the recovery will be neither big enough nor fast enough to save weakened suppliers.
Standard & Poor's notes that a big wave of commercial borrowing comes due from 2011 to 2014 and warns that risk-averse lenders cannot refinance every borrower.
The AlixPartners study spells it out for the auto industry: The weakest one-fourth of suppliers will either be unable to refinance or have to borrow at interest rates that will doom them long term. The study suggests that healthy suppliers with low debt are in position to trigger a fresh round of consolidation.
But there also are positive signs.
-- The sharp increase in production is appropriate for demand. Despite the record May assembly increase, June dealer inventory shrank rather than grew. Unsold vehicles stood at a 48-day supply, the fifth-lowest level in two decades. Dealers are demanding more iron to sell, which suggests strong demand for increased production.
-- After slashing and burning to cut overhead, surviving companies have increasing volume that will generate cash flow and profits.
-- Even the fact that 2010 production gains are less robust than the reduction last year signals a dampening of the extreme volatility of the past two years. Despite the misgivings, the auto industry appears to be on a sustainable growth arc.
Jason Stein contributed to this report