Automotive suppliers battle 
continued stress

Fred Keller, CEO of Cascade Engineering, a mold manufacturer and injection molder in Grand Rapids, MI and chairman of the Commerce Dept.’s Manufacturing Council, noted in a Bloomberg.com report, “Orders are starting to come back up, and [suppliers] need credit to fill them. If they don’t get credit within the next four months, [suppliers] are going to be gone.”

That fact is exacerbating the fear that the supply chain will dry up and further threaten the industry if something isn’t done to help suppliers. Wes Smith, president of E&E Mfg., a metal stamping supplier to the automotive industry, testified before the House Small Business Committee at a hearing in May on the critical nature of supporting small suppliers through this crisis.

Smith’s testimony came just days after the Motor & Equipment Manufacturers Assn. (MEMA) and the Original Equipment Suppliers Assn. (OESA), a market segment of MEMA, warned Congress that the result of then-impending bankruptcies and planned vehicle plant shutdowns could be “a supplier network no longer able to support vehicle manufacturing in this country,” according to a release from MEMA.

“We need to take immediate steps to further protect the supply base,” said OESA president and CEO Neil De Koker. “This is a critical time and the stakes could not be much higher. Thousands of good manufacturing jobs and the local economies those jobs support hang in the balance.”

MEMA recently released a report entitled, “Moving America Part by Part,” which shows that parts suppliers constitute the nation’s largest manufacturing sector, directly employing more than 686,000 people and contributing to more than 3.29 million jobs (find the report at www.mema.org; click on Industry Impact brochure).

With great attention focused on the plight of U.S. auto manufacturers and their suppliers, there’s been little attention paid to China’s automotive industry. But a new study released from AlixPartners, a global business advisory and consulting firm, says that more than 40% of China’s auto suppliers face liquidity issues and some may fail in the next 12-18 months unless they implement aggressive cash-conservation measures.

The annual study, the 2009 AlixPartners China Auto-Suppliers Outlook, analyzed data gathered from in-depth interviews of 40 senior executives from both foreign and domestic players in China’s auto-supply sector and coupled it with extensive research of the industry in China. It showed that China’s auto suppliers were both unprepared for and slow to react to the dramatic domestic and global automotive slowdown last year. In a similar survey in China by AlixPartners a year ago, 55% of suppliers expected to see more than 20% revenue growth in the 2008 timeframe, along with healthy profit margins, compared with the 40% now saying they face severe liquidity problems due to the downturn. More than 20% in this year’s survey said they endured net losses in 2008 and 50% said they expect to see net profit margins of less than 5%.

“With external financing difficult to come by, and 2009 likely to be another year of margin compression and slower growth rates, China’s auto suppliers need to radically improve their cash management to generate sufficient liquidity,” said Ivo Naumann, a managing director of AlixPartners and head of the firm’s Shanghai office. “The days of both easy credit and relatively easy cash-flow generation are long gone in the Chinese auto-supply market. Going forward, the winners in this market will be those who maximize all areas of cash management, starting with working capital and operational improvement.”

Total revenue for China’s auto-supplier sector was RMB928 billion in 2008, with 23% of that coming from exports, said the AlixPartners report. Historically, a quarter of total export revenue came from the U.S., but in 2008 that amount declined 10%—and 60% of respondents in the AlixPartners survey said they see decreasing export demand as the key challenge going forward as well, adding that they are likely to look more to their domestic market for potential growth.

M&A opportunities remain high on the agenda of supplier executives, and many say they are looking at domestic deals while 25% say they are looking globally. “With markets and valuations beginning to reach bottom, plus with growing competitive pressure inside the Chinese market, we expect to see significantly more M&A activity both inside and outside of China going forward,” said Naumann. “This will be a year of rapid change in China’s auto-supply industry, with some companies failing to manage liquidity and struggling to restructure internally, while others take advantage of this environment to transform themselves into even stronger players.” —Clare Goldsberry

Though the automakers are going through significant changes and some serious distress, their suppliers from the plastics sector are looking toward a better for future for the vehicle business. New product and technology just keep on coming. Here are a few examples.