As TRW Automotive is being readied for sale, the auto industry awaits the answer to a key question: Will it emerge as a healthy, $10 billion-a-year supplier, or be hobbled by debt shifted from its corporate parent?
Buyout firms Blackstone Group and Carlyle Group are said to be deep in talks with defense contractor Northrop Grumman Corp., which wants to buy TRW Inc. of Cleveland but has no use for its Livonia, Mich., automotive unit.
The companies would not comment, but a key issue in any such talks would be the parent company's $5.8 billion in debt - much of it from former Chief Executive Officer Joseph Gorman's 1999 purchase of auto parts maker LucasVarity plc for nearly $7 billion.
A key to the success of a Northrop takeover of TRW would be disposing of that debt - and one possible strategy would be to link it to the sale of TRW Automotive.
If it emerges with an acceptable level of debt, a newly independent TRW Automotive could develop several key strengths: a broad base of automaker customers; strong technology; and a No. 1 or No. 2 global position in its seven product lines.
``Outsized debt is a plague on a major portion of the automotive supply base,'' said investment banker John Eberhardt Jr. of Austin-Pierce Ltd. of New York, because it restricts a company's flexibility.
And TRW Automotive will need flexibility. Its profit margins are less than 5 percent, compared with 9.4 percent in 1996. Profit before taxes last year was $499 million, compared with $609 million five years earlier.
Analysts say TRW Automotive must move quickly to reduce debt, cut costs and keep up with market-share gains by key competitors. The firm has sustained plant closings and layoffs since 2001.
TRW Automotive's dominance of North American safety systems, which once included 100 percent of Ford Motor Co.'s air-bag business, has eroded.
It is still the North American market leader in safety systems, said analyst Scott Upham. But Autoliv Inc. of Sweden, the global safety systems leader, and Japanese supplier T.K. Holdings Inc. have closed the gap, said Upham, a director with consulting firm J.D. Power-LMC of Troy, Mich.
One area in which TRW Automotive is well-positioned is electric-assisted steering, which offers promise over hydraulic systems. The company has invested heavily for more than a decade and hopes to tie together steering, braking and safety systems for a comprehensive smart system.
Upham, who once worked for TRW Automotive, said the company's brake business, part of which came from the LucasVarity acquisition, is profitable. It is a key supplier to General Motors.
But competition with Continental AG, Robert Bosch GmbH and Delphi Corp. is fierce. ``TRW is up there with the competition,'' Upham said, ``but it does not now have breakthrough technology.''
Upham contends that a spinoff is the boost TRW Automotive needs, even if the unit takes on considerable debt, because it has suffered from the bureaucratic influence from TRW's government defense business.