Wall Street has put an expiration date on the automotive industry.
Concerns about suppliers' abilities to make a solid return on capital improvements are prompting some institutional investors to say they may stop buying into the business within three years.
``The analysts are saying that if the industry does not change substantially by 2005, they will take a negative outlook,'' Randy Barba, a partner with consulting firm Accenture, said during the auto industry's Management Briefing Seminars, held Aug. 5-9 in Traverse City.
They want to see a real improvement on capital expenditure, he said.
``The level of frustration is growing,'' Barba said. ``The industry has got to fix the dynamics.''
In a survey of more than 50 major investment companies, Chicago-based Accenture found decision makers are losing faith in the industry's ability to improve the pricing and operating structure.
While suppliers are taking on more responsibility - requiring new machines, tools, subassembly operations, computers and software - they're seeing less out of every dollar, he said. In 1983, automakers took in 23.6 percent of each dollar of added value in the vehicle. By 1999, they claimed 30.6 percent.
``The OEM is capturing a disproportionate share of the value,'' he said.
Only those companies able to break out of that rut - in essence building a better mousetrap to attract customers and a greater share of each dollar - will win, not the industry as a whole.
``The way you protect yourself is to have a focus that makes your customers dependent on you,'' added Kim Korth, president of Grand Rapids, Mich.-based consulting group IRN Inc. ``Make it hurt for them to walk away from you.''
But with investors wary of putting money into companies for fear they will not get a solid return on investments, firms now are in a downward spiral, she said. There is no cash for new equipment or engineering, so there is no way of bringing something new to the market that would result in new contracts and guarantee a greater return on capital expenses.
``There will only be further underinvestment because the companies who need it can't get the capital needed to bring in new equipment,'' Barba said.
The situation is not hopeless, though, Korth said. Firms with good ideas can get fiscal backing, but not from public-sector investors.
``I've been involved more in taking companies private than public these days,'' she said. ``The advantage in being a midsize public company used to be that the stock would provide money to invest in new capital.''
Private equity firms are taking a growing interest in molders that can prove that they have something new to offer, if they can only get some fiscal support.
``And the nice thing is, there are more of them out there now than there have been in the past,'' Korth said.
The bottom line still comes down to finding some operating niche, and not relying on volume alone. Consider ways to package electronics into a system already under production, such as mirror suppliers Gentex Corp. and Donnelly Corp. That does not necessarily require hiring an electronics guru, but instead a molder can team up with other businesses to present a joint product.
Others succeed by making parts that require a high degree of precision - work that scares off competitors.
``There's no substitute for suppliers getting really, really focused,'' Barba said. ``If you're competing with seven other companies, there is no way you're ever going to be able to realize the price you want.''