Experts: automotive supply base needs to consolidate further
With automotive sales on a lower plateau, overcapacity remains in the supply base
Dave Hannon -- Purchasing, 11/4/2009 2:14:34 PM
What do you think?
The word around Detroit is that the automotive supply base still has some "thinning" to do before it accurately reflects the level of capacity needed by today's automotive industry.
Speakers at this week's Reuters Automotive Summit and beyond uniformly forecast that both the U.S. and the global automotive supply base will continue to consolidate and provide OEM buyers fewer choices for parts and components. William Diehl, head of auto industry consultancy BBK, said the automotive supply sector must shrink rapidly to match output with vehicle sales. Diehl said suppliers have not "gotten any healthier" and perhaps have gotten worse, which has driven the need for consolidations or liquidations. "We have to see that rationalization on an accelerated basis," Diehl said
Tim Leuliette, CEO of Michigan-based Dura Automotive Systems, said about 200 U.S. automotive suppliers went through quiet liquidation processes in the past year in which they slowly sell assets to other suppliers or private equity companies. Leuliette sees more supplier consolidation and liquidations globally in 2010 as valuations continue to drop.
In its most recent Supplier Barometer report released in September, the Original Equipment Suppliers Association said "cautiously optimistic" is the best description of the North American supply base. "Cash for clunkers, from the suppliers' perspective, was a great success, triggering an increase in production orders, general business confidence and capital expenditure programs."
And while the OESA's Automotive Supplier Barometer Sentiment index rose a full 10 points to 72 in September, the survey's respondents sprinkled their comments with phrases such as "a blip" and "blip too early to celebrate" such that it is easy to see there is a great amount of reserve that the spike in production schedules is far from permanent.
In an interview with Purhcasing.com, Dave Andrea, vice president of industry analysis at OESA, says the supply base does have to consolidate, but not to match the current level of automotive production in the U.S. He says overall, the supply industry had 15-20% overcapacity in it when industry production volumes were 5 million units above current run-rates.
"So, yes, it does need to consolidate," Andrea tells Purchasing.com. "But not to the current 10 million unit North American production rate but probably more in line with a 13-15 million unit production rate. In addition, the suppliers have taken out tremendous amounts of fixed costs that have increased their productivity and throughput rates, so that too will put downward pressure on capacity."
Dave Cole, chairman at the Center for Automotive Research in Ann Arbor, Mich. says the commodity type suppliers still have thinning to do but are making progress, while non-commodity suppliers such as engineered systems are a more difficult market to forecast. However, like Andrea, Cole tells Purchasing.com he is truly impressed with how much automotive suppliers have been able to lower capacity utilization and still remain profitable. "All domestic auto makers are rationalizing their suppliers but not to the point where the suppliers could get a partial monopoly. I am not concerned that we will see shortages of key parts and systems."
One trend working in suppliers' favor, says Cole, is that with OEMs focusing so much on overall cost reduction during the recession, they will not have to put the level of pressure on suppliers we have seen for the past few years.
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