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January 10, 2000 01:00 AM

Auto-parts makers cautious after big year

Joseph Pryweller PLASTICS NEWS STAFF
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    DETROIT — The automotive industry in the year 2000 could be a lot like the home-run pace of Mark McGwire — the year after he hit 70. "We expect it to be a very good year," said Alan Dawes, chief financial officer of Troy, Mich.-based Delphi Automotive Systems. "But after you have the best year ever, you can't always do it over again. Mark McGwire found that out, too."

    Like that muscle-bound baseball slugger, the automotive industry swung for the fences in 1999. The harmonic convergence of high disposable income, low interest rates and minimal inflation — thank you, Alan Greenspan — helped push vehicle sales in North America to their loftiest perch ever.

    Estimates by automotive economists have 1999 vehicle sales ending the year at about 17.4 million units sold. Comparatively, 1998 was no slouch of a year either. But, even then, the industry sold only 16 million vehicles in North America.

    Economist Van Bussmann of DaimlerChrysler Corp. and others forecast a dropoff back to the still-solid but pre-1999 levels. Bussmann expects vehicle sales to reach 16.6 million units in 2000 and 15.8 million in 2001.

    Why the change back, when the economy still hums like a piston in a Lambourghini? Bussmann, speaking to a group of journalists, cited higher consumer debt and a shakier stock market.

    Interest rate hikes, a sensitive area that can slow consumer sales, also could play a part, Dawes said. But, in general, it is difficult for consumer vehicle spending to stay at such a towering height, he said.

    "Vehicle build schedules are strong for the first half of the year," Dawes said. "But they might tend to taper off later, especially in an election year. No one's clear what the back end of the year will bring us."

    While the macro economy looks good, the micro picture poses other threats to parts suppliers in 2000. Automakers are suffering from excess capacity in plants, while suppliers are attempting to decide where they need new facilities, Dawes said.

    "The challenge for suppliers is figuring out where the long-term demand is going to be," Dawes said.

    Another challenge could be figuring out which suppliers will be left standing. Consolidation among larger molders — a hot topic in the late 1990s — seems to be slowing, said David Strickler, who heads automotive merger and acquisition research at First Union Securities Inc. in Charlotte, N.C.

    But the next wave of consolidation should affect smaller, Tier 2 suppliers and toolmakers, Strickler said.

    "A tremendous amount of consolidation will occur," Strickler said. "The fact that Tier 1 suppliers have consolidated means that they need Tier 2 suppliers to provide a higher volume of components and potentially move globally.

    "There's a lot of opportunities for suppliers who want to grow large enough to be competitive."

    More Tier 2 suppliers will grow to $500 million to $1 billion in sales, a volume not currently reached by many of those smaller molders.

    And as large suppliers continue to ask for price breaks, some retroactive, from toolmakers, that group will have to grow larger to pay the tab, Strickler said. Large suppliers also would like to work with fewer toolmakers, Strickler said.

    "They'd rather work with one toolmaker to supply the content for a complete interior system than with 10-20 tooling suppliers," he said. "It's less efficient to deal with more companies."

    Ultimately, even with more price and size pressure on suppliers, some areas always will remain the same, Dawes said.

    "A lot is happening in the industry under the surface," Dawes said. "But the companies that are nimble and react well to market changes will continue to do well."

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