Automotive Pressures Mount

October 20, 2006
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Many automotive suppliers have discovered that diversification and innovation is the best answer to volume cutbacks and pricing pressure. But as an equal number of suppliers on both sides of the state will attest, that is easier said than done.

A week ago, Rochester Hills’ Dura Automotive Systems Inc. announced that it will not make a $17.25 million interest payment due on $400 million of bonds. The company has a 30-day grace period to make the payment, but industry analysts appear convinced that the $2.34 billion Dura — the world’s No. 65 automotive supplier — will likely default on other credit arrangements, with a Chapter 11 filing in U.S. Bankruptcy Court imminent.

“Industry conditions continue to deteriorate,” with Big 3 automakers all planning significant cuts in output, Dura said in a filing with the U.S. Securities and Exchange Commission. “In addition, raw material prices have continued to be at or near record levels. Dura expects that the deterioration of industry conditions will require it to undertake a debt restructuring in the near term.”

The maker of automotive control systems and door modules is suffering from what Citigroup has estimated to be a 13 percent reduction in North American output in the third quarter, with additional cuts slated for the current quarter.

The largest West Michigan-based automotive supplier, Lacks Enterprises, attributed these cutbacks to a 7.5 percent reduction in its sales forecast for the coming fiscal year.

Another of the region’s largest automotive suppliers, ADAC Automotive, was also rocked by the news. The cutbacks announcement squashed the company’s hopes for a growth year, and if not for another company’s earlier collapse, ADAC could have teetered into the red itself. When MacDonald’s Industrial Products went bankrupt, ADAC was able to absorb the bulk of its business.

“Somebody’s misfortune is somebody else’s good fortune,” said Jim Green, ADAC Automotive’s director of human resources.

Roger Andrzejewski, executive director of Lacks Enterprises, believes this will be an all-too-common occurrence over the next decade, as the supplier industry undergoes a significant “weeding out” of less innovative, less efficient companies.

“Those that survive will be very successful,” he said. “The work has to go someplace.”

Commenting on the Dura situation, Birmingham supplier consultant John Henke told The Detroit News that the production cuts could “nail a lot of the suppliers which are on the edge.”

“As these cutbacks continue, suppliers will have fewer sales, and that will translate into fewer suppliers,” said Patrick Mears, an attorney at Barnes Thornburg LLP in Grand Rapids who has worked on several automotive bankruptcy cases, including Delphi Corp.

He noted that automotive troubles tend to have a domino effect. The Delphi situation, for instance, posed a dire concern for its own suppliers and customers, particularly from the threat of a union-led work stoppage.

While those fears have not been realized, Delphi and other large Detroit firms recently or currently under Chapter 11 protection (including Collins & Aikman and EaglePicher Corp.) represent the front lines of an industry-wide pricing war.

Even as raw material prices and other expenses grow, domestic automotive customers are demanding deeper and deeper discounts. Some suppliers have taken to accepting unprofitable work with the intention of subsidizing it elsewhere; many are an unfavorable Big 3 announcement away from major financial difficulty themselves.

“As we see additional pricing pressure, we will start to see suppliers fall by the wayside,” Mears said.

Of late, first tier suppliers have fought that pressure fiercely. Delphi intends to shed more than 5,000 unprofitable GM parts contracts, with the OEM fighting the effort in bankruptcy court. Most recently, a steering knuckle contract was shifted to EaglePicher, and several sparkplug and manifold contracts appear destined for Siemens VDO, Denso Corp. in Battle Creek, and a host of others.

Collins & Aikman last week halted parts shipments to a Ford plant in Mexico as part of a price dispute on the supplier’s largest single program, estimated by The Wall Street Journal at well over $1 billion.

Well down the supply chain, Grand Rapids-based Nicholas Plastics has none of the leverage of a large corporation such as Delphi, Johnson Controls or Lear, so the pressure to lower prices remains dramatic.

“We’re seeing good volume, but it’s getting very, very difficult to make money,” said Nicholas Executive Vice President Carl Brown. “Our prices are so squeezed and costs are rising; that’s put us in a very difficult situation.”

With 80 percent of its business in automotive, Nicholas weathered the cutbacks remarkably well. It cut its six-day workweek to five, but still reported strong sales volume and is not anticipating layoffs.

Andy Harder, a sales and marketing consultant working with the Machine Tooling Group tool and die coalition, is well aware of the effects of pricing pressure. In common practice, suppliers are fighting to keep process improvements under wraps for fear of losing efficiency gains to discounts. Many forgo aesthetic facility improvements on the basis that it could project an image of success and high profitability, signaling an opportunity for customers to bargain for discounts.

“That’s where the market is today,” said Richard Perreault, president of Gill Industries. “The purchasing segment is broken.”

Gill is one of a host of companies locally that is eyeing growth from innovative product launches and by limiting its exposure to the domestic automotive market. Automotive is today only 65 percent of its business, down from nearly 100 percent three years ago, and it is growing its business with fast-growing “new domestic” manufacturers like Honda, Toyota and Nissan.

“You would love to have 20 percent of your business in another industry,” said ADAC’s Green. “But the reality is there is no easy market to enter into.”

The $165 million ADAC counts the entirety of its business within the automotive sector, and has no intention of changing that. It has aggressively worked for growth with the new domestics, and has seen considerable success with Honda and Nissan. Still, it remains very much involved with the Big 3.

Hill Manufacturing, in business since 1911, does have limited penetration with the new domestics, but most of its customers, 100 percent automotive, remain Ford and GM suppliers. As a result of the cutbacks, nearly 40 percent of its staff is currently laid off.

“Who else would we do work for?” asked Hill President Donald Vanden Bos Jr., rhetorically. “There are a lot of people that want to work, a lot of people chasing it. Generally, you have to know people and have a relationship with them — that takes years to develop; you don’t just pop in overnight and start doing work for somebody just because they’re not automotive or not one of the Big 3.”    

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