Auto sales in the U.S. have finally started moving again, thanks to federal incentives. Even without that funding, carmakers said they are seeing the first signs of improvement in nearly a year.
So automakers are finally talking about making more cars and trucks, which should be a good thing for automotive suppliers, right?
Not necessarily. In fact, restarting production may be just what sends more auto suppliers into bankruptcy.
The problem, said John Hoffecker, a managing director of consulting group AlixPartners LLP, is that some companies have used all their available cash to pay bills for the long months since early spring, when carmakers temporarily halted production.
Now some of them will not have cash on hand to spend on materials and capital expenses needed to start their lines back up — which means the industry will leave them behind.
AlixPartners, based in Southfield, Mich., estimates that 24 percent of all auto suppliers globally are in danger of bankruptcy within two years — which is up 25 percent from just a year ago.
“You have a real problem,” Hoffecker said during the Center for Automotive Research's Management Briefing Seminars, held Aug. 4-7 in Traverse City.
That 24 percent prediction, he said, is across every global region. European and Asian auto suppliers will not be spared. At the same time, though, he noted that another 25 percent of suppliers in the U.S. remain strong, and can compete with any other firms anywhere.
The federal government is aware of the problem, but has also warned suppliers that it will not intervene directly any further in the auto industry, although it is looking for ways to encourage banks to open credit to companies that need financial backing.
The supply base remains too large for today's auto industry and needs to downsize to match auto production lines, said Ron Bloom, the Treasury Department adviser who heads the Presidential Task Force on the Automotive Industry.
AlixPartners expects the North American auto industry to rebound slowly by 2013, but the expected sales base of 15 million to 16 million vehicles per year is about 4 million less than at the industry's height in the early part of this decade.
And, Hoffecker noted, at least half of any growth in the coming years will be in smaller, more fuel-efficient vehicles, which also have a smaller profit margin.
Detroit-based General Motors Corp., which just emerged from Chapter 11 bankruptcy restructuring in July, will still make trucks and large sport utility vehicles, but the bulk of its focus will be on “cars and crossovers,” said CEO Fritz Henderson at an Aug. 11 news conference.
Henderson said he expects U.S. gasoline prices to climb as the recession eases. An increase would mean continued interest by consumers in small, fuel-efficient vehicles and electric and hybrid vehicles, which are another GM focus.
More global growth will also continue to come from developing markets in places like China, Brazil, Russia and India — home to the ultra-inexpensive Nano car from Mumbai-based Tata Motors Ltd. And that raises another question surviving suppliers will have to answer as they determine where to invest in the future, Hoffecker noted.
“How do you make a profit off of a vehicle that costs $2,500?”
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