International Automotive Components will continue to expand its auto plastics business despite a downturn in the auto industry in North America that the company's top official believes will get worse before it gets better.
Wilbur Ross, the chief executive officer and chairman of WL Ross & Co., said during a June 5 speech at Ward's Auto Interiors Show in Detroit that automakers are continuing to refer troubled suppliers to IAC, which Ross created two years ago through the acquisition of units of the former Collins & Aikman Corp., the interiors unit of Lear Corp. and other suppliers. The global company now has more than $5 billion in sales annually, with operations in Europe, Asia, South America and North America.
IAC North America LLC, with headquarters in Dearborn, Mich., injection molds and blow molds interior parts, including instrument panels, door panels and center consoles.
While Ross would not name specific potential acquisition targets, he said the company is considering ways to, ``continue to expand our plastics business and develop other business units.''
``We're in a growth pattern wherever we can be,'' he said.
That could be in regions where auto production in expanding, such as Eastern Europe or Asia, or in North America if an opportunity makes sense, he said.
But North American growth will be going up against an economy that Ross believes is in the midst of a recession. It also faces ``at least a year of stagflation or worse'' in the wake of the collapse of the housing bubble and oil prices that have hit more than $130 per barrel already, with at least one investment house predicting prices could hit $200 per barrel.
Americans are driving less, and less likely to buy cars, he said, and when they do buy, it will be smaller cars, which are less profitable for automakers and suppliers. He expects auto sales will not bottom out in North America until sometime in 2009. So automakers and the auto supply industry will have to change.
Suppliers cannot afford the traditional ``cost downs'' in the industry, which requires them to reduce the cost of their parts each year, Ross said. That is especially true with raw-material prices rising week after week.
And the industry cannot afford to spend millions of dollars supporting unprofitable suppliers. To succeed, the auto supply industry needs to reduce the amount of capacity in the marketplace. That means allowing some firms to fall by the wayside.
Companies cannot afford to survive running their equipment at 60 percent or 70 percent of capacity, he said. At higher capacity and volume levels, suppliers can amortize the cost of their equipment and research and development at more sustainable levels.
Ross said Chrysler LLC's move earlier this year to attempt to move tools from bankrupt supplier Plastech Engineering Co. - and General Motors Corp. and Ford Motor Co.'s support in court for Chrysler's actions - signals a clear move that automakers are willing to let poorly performing suppliers fail.
IAC's strategy to buy troubled suppliers may seem to be in conflict with Ross' belief that the industry must reduce capacity, but Ross noted IAC has cherry-picked its desired operations, allowing some plants and presses to go silent. The company only purchased specific operations from Collins & Aikman, he said, and realigned Lear's interiors units by closing some of those facilities.
Reducing capacity and consolidating facilities also will help plastics component suppliers caught between a limited number of automaker customers and a small number of resin suppliers.
``We've got a highly concentrated [automaker] base, and a higher concentrated resin base, but the supplier base in between is fragmented,'' he said.
Ross said he had expected the auto industry to go into decline when he first started creating IAC, though general economic conditions deteriorated even more than he'd expected.
``We did not anticipate $125 per barrel oil, and to that degree, we were wrong,'' he said.
But he remains positive about the auto industry's prospects once it survives the current downturn.
``The long-term outlook is pretty good, and we're used to going through short-term hiccups,'' he said.