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Many auto parts suppliers failed to widen base - Industry Supplies
Many auto parts suppliers failed to widen base - Industry Supplies
Small suppliers change habits
Laurie Schmald Moncrieff, the third-generation owner of Schmald Tool & Die in Burton, Mich., says the downturn took many small suppliers by surprise. Business flattened out until 2000, then took "a steep dive," she says.
"We always had the luxury of being order-takers and focusing inward," she says. "The phone always rang, and orders always came in.
"But now, because the market is turning over a lot, you have to continually be replacing customers. It's a new intensity of getting out there and keeping up with the market."
And that can be especially difficult for smaller suppliers, who often earned business through personal connections and word-of-mouth, and didn't even keep a sales staff on hand.
The smaller companies' products often go into the parts assemblies of larger suppliers, who in turn sell those to the automaker.
Moncrieff says she's working to diversify into growing markets, such as helping other suppliers make parts for alternative-fuel vehicles.
And she's attempted to earn new customers who work with automakers such as Toyota and Honda, but getting business from those companies can be difficult.
Asian automakers take a long time to decide whether they want to do business with a new supplier, and will often visit the supplier's plants and the plants of the supplier's suppliers.
It can be a grueling process for many small companies, but the payoff is big. Once an Asian automaker picks a supplier, the relationship could last decades.
The Asian automakers "are very, very demanding" on quality issues, says D'Arcy of PricewaterhouseCoopers. "However, once you are established, they tend to be very good customers."
Big suppliers heirs to high costs
Some of the biggest suppliers face special problems. Companies including Delphi, Visteon and American Axle all were once subsidiaries of an automaker. When they were spun off into independent companies, they were saddled with the same high labor costs as their former parents.
That's part of what's behind the current strike at American Axle, formed by GM as a separate business in 1994, as the company attempts to get its labor costs in line with other suppliers of similar size. Delphi, a GM unit until 1999, has been under bankruptcy court protection for nearly three years, and Visteon, a Ford unit until 2000, has posted seven-consecutive unprofitable years.
But they also share many of the same problems as smaller suppliers. They're working to diversify their customer bases, struggling with rising raw material costs and working to cut their prices.
For many of the largest suppliers, which sell parts directly to the automakers, the answer may be a Chapter 11 bankruptcy filing. Under court protection, the companies can renegotiate contracts, break agreements in unprofitable areas and shed labor contracts and high-price workers.
The February bankruptcy filings of Plastech and Blue Water Automotive Systems, another plastics company, are "just the tip of the iceberg," says Pat Furey, automotive manager for consultant Ariba. "Unfortunately, more will come."
A shakeout coming
Bankruptcy filings seem idyllic compared with what Craig Fitzgerald, a partner at Plante & Moran, predicts. He expects 50% of small and midsize suppliers will go out of business in the next five years, either selling their operations to larger suppliers or just closing up shop.
Part of the problem, he says, is that suppliers can't persuade enough engineers and sales managers to work for them.
"They don't see a future in the business," he says.
Taking the Chapter 11 route means the company owners see a viable long-term business when it emerges from court protection. But Fitzgerald says a lot of suppliers will realize their hopes to stay in business are far-fetched as they see more operations move abroad and sense a growing desire by automakers to work with fewer suppliers.
"Many of them would prefer to sell their business," he says. "But for many, that's not going to be realistic, and they'll simply wind the business down.
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