CEO James McElya led Cooper-Standard Holdings Inc. back into the black last year.
The maker of sealing products, fluid-handling systems and anti-vibration products gets 95 percent of its approximately $2.2 billion in revenues from sales of parts to light-vehicle automakers, led by Ford Motor Co., General Motors Co., Fiat S.p.A. and Volkswagen AG.
McElya (pronounced MAC'-el-ay) is a past chairman of the Original Equipment Suppliers Association and the Motor & Equipment Manufacturers Association.
McElya, 63, spoke about the outlook for 2011 with Industry Editor James B. Treece at Cooper-Standard's suburban Detroit headquarters.
Q: What if U.S. light-vehicle sales jump to more than 13 million units in 2011?
A: It'll be very difficult for the industry to take that kind of an increase, especially if it was pretty rapid. Right now, there are still shortages of raw materials in our supply base, especially in Europe.
The Tier 2 and Tier 3 subsuppliers are really going to be the gate event as to whether the industry will be able to ramp up to the area of 13 to 14 million units.
In 2008-09, only about a third of the supply base restructured. Two-thirds kicked the can down the road. They got amendments and waivers to their credit agreements. Most of that debt will mature in 2011 and 2012. When that debt matures, will the banks renew their loans? Under what conditions? The smaller guys, I think, are going to feel that impact the most.
Do you expect the automakers to allow you to pass through the cost increases on raw materials, or will you get push-back?
You always get push-back. It's all a matter of degree.
[Last year,] the car companies were extremely supportive. There was more of a common-sense approach to what are we going to do with pricing of commodities that went sky-high.
I think you'll see that continue. If prices go up moderately, I don't think the car companies are expecting suppliers to come in asking for adjustments. But if commodities go [up sharply], I know some companies are looking to put more commodities on indexes to take this volatility out of the equation.
Which raw-material supplies are tight?
One of our largest raw materials is EPDM, which is synthetic rubber. When the bottom fell out, a lot of people took capacity out. They closed chemical plants and the like. It's not easy to turn those things back on.
The same thing happened with steel. A lot of the steel companies shuttered furnaces. Now that demand is coming back, it takes them awhile to get this stuff ramped up.
I've heard third-hand that a similar thing happened with resins, but I can't speak to that directly.
Cooper-Standard, like a lot of suppliers, has been slashing debt and holding onto cash. Do you see that continuing, or is it time to invest?
A couple of trends tie into this.
There is a trend for globalization and global platforms. At the last OESA conference, there was a number thrown out that by 2015, of the global volume, 85 percent or more will be based off of global platforms. If you believe that, and I do, regional players are going to be in trouble.
Ford said it will go from 2,600 down to 750 suppliers, and the vast majority of those will be suppliers that can service Ford globally. Again, that's going to put pressure on the regional supplier.
Couple that with what we talked about with financing, and suppliers needing to refinance their companies. Banks are going to say, when asked to refinance loans, "Are you one of the chosen few that are going to be selected by Ford, or by Chrysler?"
Put all that together, and I think there is going to be M&A activity that's going to be unprecedented. A lot of guys will start offering up their businesses for sale.
As you said, a lot of people have a lot of cash and less debt.
It's incumbent on companies to select the right acquisition candidates, ones that fit what you're trying to do, whether in the area of technology or filling out your product portfolio.
That's when I expect to see people spending their cash.
How much concern do you have about your Tier 2 and Tier 3 subsuppliers?
A lot of concern. I think you will see large Tier 1s either helping out some of the Tier 2s and 3s, or maybe even acquiring some of the Tier 2 and Tier 3 suppliers, in order to keep things going.
That's one reason why you'll see large Tier 1s keep their powder dry with a lot of cash until we're out of this thing.
Some suppliers were cautious about adding a second shift, preferring to run overtime on one shift as demand grew. Are you adding that second shift?
I think that's healthy for the industry that we are reluctantly adding back the costs.
I think that's also fueling what I'll call the extraordinary profit in the supply base today. There are people who've never had double-digit EBITDA [earnings before interest, taxes, depreciation and amortization] margins and suddenly they're reporting double-digit EBITDA margins.
Volumes are surging ahead of the hiring, and so we're lagging behind on bringing back the costs.
It's a concern I have when you look at the private equity folks and the analysts in New York. They say, "Well, if we go to 13 million units in volume, I can draw a straight line on that volume and all the contribution will fall to the bottom line and the suppliers are going to make unprecedented profits." It's not going to happen.
Everyone will be bringing back people to support that volume and those new programs. So you'll have overhead costs coming in.
We keep coming back to this: If the volumes come back, what other concerns do you see? You've mentioned raw materials. What else?
There will be some issues hiring and finding the right employees. I think there's some talent that has left the industry and moved on.
What keeps you up at night?
I've been in the business over 30 years. I never would have predicted the steep recession, the depression we went into in the middle of 2008. In June of 2008, we were looking for a record year for sales and profit. At the end of the year, it was a completely different story. Everybody was just scrambling to survive.
What keeps me up at night? Knowing that it happened. Can it happen again? What would it take to create that problem?
I think the other challenges we're talking about -- globalization, raw materials, alternative energy products -- that's all manageable, because it's not going to happen so rapidly.
From an industry perspective, there's still an awful lot of concern about the stability of Europe and what's going to happen. It's very difficult in Europe to flex your work force because of all the rules and regulations. If there is a precipitous drop in volume in Europe, it really hurts the supply base.
We've talked about the challenges. What are the opportunities you see in 2011?
Volume will be up. The question is how much.
There'll be plenty of opportunities in mergers and acquisitions for good companies that have cash and a good balance sheet.
Also, there are what I call unnatural owners of companies in the supply base. So many of the people that owned debt, now are equity owners [after suppliers converted debt to equity]. They're not natural equity owners. They'd like to get their cash and go back to being lenders, as they were.
That all has to unwind itself. As it does, I think it'll create opportunities for a lot of people. I think it'll be a positive trend, and very good for people like us and others in the industry in 2011 and 2012.