With North America’s automakers halting production because of the crippling COVID-19 pandemic, many of their suppliers have been forced to follow suit. In response, the Motor & Equipment Manufacturers Association — the trade group for U.S. auto suppliers — asked congressional leaders March 19 to create a grant program to help prevent bankruptcies resulting from shutdowns.
Many major suppliers have already begun winding down to prepare for the worst — among them, Continental, Bosch and Delphi Technologies. Several other suppliers declined to comment on the rapidly evolving situation last week.
The sudden talk of industry bailouts, coupled with the plunge in the U.S. stock market and last week’s production halts, has many observers making comparisons to the financial crisis of 2008.
But the dire outlook due to COVID-19 is unlike the 2008 industry catastrophe, said Bill Diehl, who worked with suppliers then and is now executive adviser for consulting firm Umlaut.
By the time the financial crisis hit, Diehl told Automotive News, many U.S. suppliers were already struggling financially. They had been starved for profits for years by unrewarding automaker contracts, and many faced bankruptcy before the crisis.
Suppliers today have much healthier balance sheets, Diehl said.
“Up until now, we’ve had a strong economy with strong consumer demand,” he said. “Today, the OEMs and banks are healthy, and the private equity sector has significant dry powder.”
Dietmar Ostermann, who tracks the supplier sector as advisory leader for automotive at PwC, said the industry went through a pruning process in the lead-up to the 2008 crash. Approximately 30 percent of auto suppliers were consolidated or left the industry in 2007 and 2008.
Today, he said, the top 100 global auto suppliers operate at a 13 percent margin for earnings before interest, taxes, depreciation and amortization — compared with 8.6 percent in post-crash 2009.
Suppliers will struggle, he predicted of the new crisis. But with new-and-improved product lines and more agile business strategies, they should be able to weather an oncoming financial slump.
"The supply industry is in better shape now than the industry was at that time,” Ostermann said of 2008-09. “On the other hand, I would also argue that this shock is potentially a stronger shock to the system because you’re really shutting everything down, and you have so much insecurity all over the place. It will be very difficult to ramp this back up once it’s over.”