Uncommon Events Can Hurt Auto Parts Suppliers

June 5, 2002
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GRAND RAPIDS — Auto parts suppliers don’t only suffer when car makers lay off workers, cut production, or demand price concessions as DaimlerChrysler has.

No, it doesn’t always take a major event to cause suppliers to take a financial blow. A simple delay in launching a model also can have that effect.

ADAC Plastics Inc., the city’s largest plastics manufacturer with 990 employees and 1999 revenue of $133 million, knows that scenario all too well.

ADAC provides the Ford Motor Co. with exterior door handles for the latest version of the world’s top selling sports-utility vehicle, the Explorer. It’s a good contract for the local parts producer. But when Ford delayed launching the Explorer, it cost ADAC some cash.

“It’s a very large prominent door handle that we have. It’s a very high content vehicle for us,” said Jim Teets, executive vice president of sales and marketing for ADAC.

“The delayed launch of about five months really chewed into both sales and profits from the October-November time frame,” he added, while retaining his sense of humor about the matter. “Just like the spring weather, we’re waiting for things to heat up — literally.”

ADAC Plastics has two automotive divisions, one that makes door handles and another that manufactures trim parts.

Ford held up the Explorer launch to compensate for the recall of 6.5 million Firestone tires, which the automaker put on its sports-utility line of vehicles. Lawsuits against Ford from last year’s massive tire recall total $590 million.

But the Explorer remains a bright spot for the automaker and the vehicle’s parts suppliers. In past years, the SUV has generated up to $2 billion in annual profits for Ford. That margin, however, is expected to decline — not because of the tires, but because the market now is more crowded with about 60 different SUV models being offered.

The good news for Ford is that analysts have reported the 2002 Explorer has been improved, even over the previous best-selling models. The new version has a wider wheelbase, an independent rear suspension, new safety features and optional third-row seating. The Explorer’s new ad campaign made its debut last week.

Suppliers can also suffer when another supplier produces a bad part. For instance, a mechanical diode on some of the bigger V-8s that Ford puts in Expeditions malfunctioned last summer and damaged transmissions.

“It was a new part. I guess we should have stuck with the old part,” said George Pipas, a Ford spokesman, to the Detroit News.

Although Pipas refused to reveal the maker of the def

ective part, which also stopped production of the Lincoln Navigator, auto analysts readily told the media that the delay likely cost Ford $16 million a day in profits. Plus the snafu parked about 7,000 Expeditions and Navigators, products worth about $300,000 to Ford.

More recently, slow sales have affected production of the Expedition.

Early this month, Ford officials said they plan to produce 65,000 fewer models this year, downsizing their original estimate of 270,000 to 205,000. Sales of the Expedition were down by 13 percent from last year.

Overall, Ford expects that first quarter North American production will be down about 16 percent from the first three months of 2000. The company also plans to produce about 5 percent fewer vehicles for the second quarter this year when compared to last year’s second quarter number.

At the same time, General Motors also announced production cutbacks. GM plans to trim its output by 17 percent for the second quarter.

Of course, parts suppliers will feel the effects of those decisions.

On the other hand, just a few weeks ago industry analysts projected that 16.5 million new vehicles would be sold this calendar year — a 5 percent drop from last year when 17.35 million vehicles were sold.

But a 5 percent cut may not be big enough, so let’s triple it. Even if production this year drops by 15 percent from last year, 2001 could still be a pretty good year for suppliers — as 14.75 million vehicles would be made.

“The last two years in the United States were record sales years. They were anomalies across the board. If you look at the year we’re in as far as U.S. sales is going, if it weren’t for the last two years this would be a record sales year,” said Teets.

“But we’re used to the two-year spike that got everybody, maybe, a little too fat and happy.”

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