If auto suppliers are doing poorly now, what will happen when the industry takes a real downturn?
Processors in all end markets would be wise to pay attention to what's going wrong in Motown, because some of the same problems may begin to hit other industries very soon.
As Rhoda Miel, our Detroit-based staff reporter, revealed last week, 17 publicly traded automotive parts suppliers have announced recently that they would fail to meet third-quarter profit estimates. Privately held companies face the same problems, but they've not had to advertise their financial misery.
And that doesn't include the major processors that already were forced into Chapter 11 earlier this year: Cambridge Industries Inc. and Key Plastics LLC. Cambridge now has a new owner, but Key still is searching for a buyer.
What's amazing is that this is all happening despite the U.S. auto industry's record-setting sales — and regardless of plastics' ongoing success in tackling new applications.
What happened? Each company's case is different, but a variety of factors are to blame:
* The Bridgestone/Firestone tire recall, and related temporary shutdown of Ford Motor Co. light-truck production, was a catalyst. It's one of those unpredictable disasters that hit all manufacturers from time to time, like a work stoppage or a rail strike.
* Some companies have been hurt by unfavorable foreign exchange rates, particularly in Europe. Parts suppliers have rushed to become global companies in the past decade, and now some are seeing that decision hurt their bottom line.
* Many companies are running into acquisition-related problems. Some paid too much, or took on too much debt, when they added to their empires. Others are having trouble integrating the acquired firms, or they aren't achieving the savings or the growth that they predicted.
* Pricing remains a major issue. Customers loathe accepting price hikes, and many actually demand rebates as a cost of winning new contracts.
* Higher gasoline prices have chilled vehicle sales this summer and fall, especially in the truck and recreational vehicle niches. Watch for that virus to spread if fuel prices stay high.
* Moderately high interest rates are compounding many problems, and unfortunately rates don't look to be shrinking anytime soon.
Readers, notice that some of the trends hurting processors are aggravated by some of fads of the past decade — hyperactive merger and acquisition activity, globalization, and concentration of business in a handful of suppliers (or customers). Does this mean those strategies were bad? No, but it does mean processors need to be careful and make sure their decisions make business sense for them, not just for their lenders and financial advisors.
The auto industry has been a leader in many of these new ways of doing business, but it hasn't been alone. If other end markets suffer hiccups like the Ford/Firestone troubles, then beware. There are plenty more overleveraged, overextended processors waiting to tumble, or even fail.