TRAVERSE CITY, MICH. — Trickle-down economics is causing consternation for small molders in the automotive industry.
The same knotty problems facing large auto suppliers — consolidation moving at warp speed, the costly need to set up global plants, ever-thinning profit margins — have started trickling down to lower rungs of the supply ladder.
Several speakers at a weeklong automotive conference noted that the entire supply chain is entering a dicey era of change and heightened competitiveness. For Tier 1 suppliers, the growing pains already have intensified.
Now, Tier 2 suppliers are about to be gripped by the same concerns, said Lee Gardner, president of MascoTech Inc., a Tier 2 supplier based in Auburn Hills, Mich.
``The ground is constantly moving beneath us so that where we stand today may not even be close to where we will stand in the near future,'' said Gardner, whose company fabricates metal powertrain parts. ``It's an exciting time, but it can also be an unnerving one.''
It's also a time that can leave many smaller companies in the dust unless they adapt, Gardner said. He quoted a recent study by consulting firm Deloitte & Touche LLP that predicts the number of Tier 2 suppliers could be cut in half in two to three years.
``There may be only five vendors for a particular type of part when there used to be 50,'' said Gardner, quoting the study.
That central idea was expressed by several speakers Aug. 5 at the University of Michigan Management Briefing Seminars in Traverse City. The yearly event attracts thousands of top executives with auto companies and their parts suppliers.
Even General Motors Corp. Chairman Jack Smith, in the midst of some downsizing within his own company, acknowledged that companies need to adapt. That was big news for a firm not known for its nimbleness.
In a question-and-answer period following his speech, Smith said the recent merger between Daimler-Benz AG and Chrysler Corp. sent some shock waves through GM and its suppliers and forced them to consider how to move globally at a quicker pace.
``It caused a significant amount of flutter,'' Smith said. ``We have to take a hard look at things around the globe. It's a whole new ballgame.''
That game could involve asking more suppliers to set up international plants while they keep their prices down and returns on investment lean.
Yet, there's a fallacy in that thinking, said Alexander Cutler, president of Cleveland-based Eaton Corp. Smaller firms — and some larger ones — will be hard pressed to invest the resources to be global players, he said.
Already, profit margins are dwindling in the industry, Cutler said. Auto-part makers averaged a price-to-earning ratio of 12:1 between 1994 and 1997, Cutler said. Yet other industries, including specialty chemicals and machinery manufacturers, had a much higher ratio.
Low profit means suppliers lack the funds to reinvest in new plants and equipment. In 1997, only 4.8 percent of sales were so reinvested, compared with 6.3 percent in 1980, Cutler said.
That could cause another industry shakeout up and down the supply ladder, Cutler warned.
``Darwinian theory, as well as our own experience, tells us that as markets become more competitive, consolidation takes place at each tier of the supply chain,'' Cutler said. ``The magnitude of consolidation is staggering.''
According to a study from PriceWaterhouseCoopers LLC, there were 657 deals in the auto industry during 1997 with a combined valued of more than $28 billion.
But all is not bleak for small companies, Gardner said. Those that can change can prosper, by:
Evaluating the competition and deciding if the company can remain competitive and profitable.
Deciding how best to serve customers' needs — for example, by forming a partnership, or in dire circumstances, selling the company.