In the spring, as auto suppliers braced for the bankruptcies of Chrysler and General Motors Corp., and steep production cuts by other automakers, their industry associations pleaded for a federal bailout of up to $10 billion to prevent a bloodbath of bankruptcies and liquidations.
The money never came. But neither did the bloodbath. Parts suppliers survived better than anyone had forecast.
The relatively few large-scale bankruptcies filed by suppliers have mostly been financial restructurings rather than liquidations.
Now, though, some industry executives and consultants are lamenting a lost opportunity. They say a shakeout would have been in the best long-term interest of the industry.
Without the forecast wave of liquidations, they said, price competition will remain ferocious. Stronger suppliers will be dragged down by weaker ones willing to make unrealistic, low-ball bids for business.
Only when healthy suppliers can insist on contracts that allow them to turn a profit will they be able to make the necessary investments in research and development that the industry needs, the executives and consultants said.
To be sure, the winnowing continues as the credit crunch drives suppliers to file for bankruptcy. But few in the industry said they expect to see a massive wave of failures.
'Too many mouths'
We have a vehicle market of 10 [million] to 12 million, said one senior executive of an interiors maker. But we still have supplier capacity for at least 15 million vehicles. The fact is, we have too many mouths to feed out here.
Suppliers such as Glenn Reid survived the summer by putting their auto parts companies into what amounted to hibernation.
Reid owns Flexible Products Co., a maker of molded rubber muffler hangers in suburban Detroit. When Chrysler, his largest customer, stopped making vehicles during its bankruptcy, Reid laid off nearly half his 253 employees, furloughed his R&D staff, slashed salaries and sales commissions and halted customer entertainment.
It was a drill repeated across the parts industry, allowing Flexible Products and other resilient suppliers to survive a two-month production shutdown by Chrysler, rolling plant closures at GM and steep North American production cuts by virtually every other carmaker.
Suppliers got a break from decisions Chrysler and Detroit-based GM made in bankruptcy. The automakers went to great lengths to minimize the impact of their restructuring on their suppliers. Indeed, the automakers' treatment of their suppliers contrasts starkly with the culling of their dealers.
For example, Chrysler convinced a U.S. Bankruptcy Court in New York that the preservation of its supply base required Chrysler to pay nearly the entire $1.7 billion that it owed suppliers for parts delivered before the bankruptcy filing.
Those types of unsecured claims typically are paid only partially, at best, at the end of a bankruptcy.
When Fiat SpA took control of Chrysler at the end of the 41-day bankruptcy, it decided to keep contracts with 1,200 of the 1,300 direct parts suppliers Chrysler had in its stable. If it had chosen to, Chrysler could have asked the court for permission to shed unwanted contracts.
Contrast that with the way Chrysler dealt with dealers while in Chapter 11. With the court's permission, it chose not to pay nearly a quarter of the $1 billion in incentive payments it owed dealers. It followed that up by terminating 789 of its 3,200 dealerships.
Chrysler Group LLC spokesman Max Gates said Auburn Hills, Mich.-based Chrysler paid suppliers in bankruptcy to protect future production. We were driven by self-interest, he said.
Not having paid the claims would have damaged suppliers already hurt by production cuts, he said. Gates noted that Chrysler shares more than three-quarters of its suppliers with GM and Ford Motor Co., calling into question whether Chrysler could have encouraged a shakeout on its own.
In contrast, Chrysler's ties with its dealers were exclusive and direct, he said. That allowed dealership reductions without any influence from competitors. We didn't close any Toyota stores, Gates said.
GM also paid most of its suppliers in bankruptcy for pre-bankruptcy parts deliveries, spokesman Dan Flores said. But unlike Chrysler, which halted all production while in Chapter 11, GM's factories took turns closing so that at least one plant somewhere was always building vehicles.
The failure to pay suppliers could have caused parts interruptions for the GM plants that continued to operate, Flores said. You can't build cars and trucks with most of the parts, he said. You need all of the parts.
Thinning the herd
Flores said GM has been reducing its direct suppliers in order to concentrate business with the ablest few. By the end of 2011, GM intends to cut the number of direct North American suppliers to 1,000, from about 1,500.
The reduction will be accomplished largely by moving work as vehicles are re-engineered or new models are brought out, Flores said.
GM acknowledged that its suppliers need bigger volumes to provide development budgets for technologies that will serve the automaker in the future, Flores said.
Investor Wilbur Ross still predicts a round of supplier consolidation.
The New York financier said a recent uptick of liquidations and Chapter 11 filings should accelerate by year-end. The failed companies' contracts will be transferred to surviving suppliers, he said.
Ross' giant International Automotive Components Group LLC in Dearborn, Mich., was formed by a series of mergers with several interior parts companies.
Magna International Inc. sees the same trend. Year-to-date, the Aurora, Ontario, supplier has picked up $650 million in annualized revenue by taking over the work of distressed suppliers or acquiring some of their facilities, Magna Chief Financial Officer Vince Galifi said last month during an earnings call with analysts and the media.
Some of that business came from the defunct Cadence Innovation LLC, which was sold during Chapter 11 reorganization, and from Meridian Automotive Systems Inc., which also is being liquidated, Magna co-CEO Don Walker said during the same call.
Plastic trim supplier Cadence had North American sales of about $746 million in 2007, according to Plastics News. Bumper systems supplier Meridian had estimated North American sales to automakers of $500 million last year.
But consolidation is moving slowly. The estimated 19 supplier bankruptcies so far this year is double the number for all of last year. But in a year of seismic disruptions, that hardly suggests wholesale collapse.
And overpopulation in the supplier ranks breeds cutthroat bidding that is lethal to a segment's financial health.
For example, an executive at a North American interiors company said he is bidding to supply a center console on a new vehicle. He's up against 10 competitors; in his opinion, there should only be two or three others. That plethora of bidders is likely to lead to a contract with little or no profit margin, he said.
Dan Sharkey, a lawyer whose firm represents many suppliers, said automakers have pushed consolidation, but there are no dumb or fat companies left. The suppliers that are still standing had to survive the steel and resin price surges of 2004 and the recession and historically low volumes of 2008 and 2009, said Sharkey, a partner with the firm Brooks Wilkins Sharkey & Turco PLLC in Birmingham, Mich.
Survival of fittest?
The attrition will continue, turnaround expert John Groustra said. Automakers will concentrate business among fewer, stronger suppliers as new program awards are made.
That, in fact, is Ford's strategy. In 2008, Ford cut the ranks of its global direct production suppliers eligible for future business 26 percent to 1,600. Its goal is 750, though Ford hasn't set a date for reaching that level. Just five years ago, Ford had 3,300 suppliers worldwide.
Ford is the most precisely stated example of that strategy, but all leading automakers are following similar plans, said Yann Delabriere, CEO of French supplier Faurecia.
But Groustra, senior managing director of Birmingham-based Conway MacKenzie Inc., said, It will be interesting to see if the automakers stick to that plan.
In the past, automakers could not resist having several suppliers for a given part, in the hope that one of the companies competing for the contract would offer a low-ball price. It's a cultural thing.
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