Vol 7 (2010) - Issue 5

Article preview

Road Narrows Ahead: As the Automotive Industry in the West Consolidates, Who Will Be in the Driving Seat?

A troubled past – historic weakness in the supply chain
In the early days of the auto industry, major vehicle manufacturers produced virtually all the components needed to assemble an automobile. This arrangement continued well into the 1930s and 1940s. Then, as the complexity and number of parts increased, components started to be purchased from independent suppliers.
Even as late as the 1990s several major North American and European car manufacturers still exercised almost total control of their bill of material – comprising the thousands of components that went into the various sub-assemblies and final assembly of their finished vehicles – through wholly owned component subsidiaries.
Several well-known tier 1 suppliers, now independent, started life as automotive components subsidiaries of prominent Original Equipment Manufacturers (OEMs, i.e. the vehicle manufacturers) before being spun off during the late 1990s: for example Delphi (GM 1999) and Visteon (Ford 2000).
Both those companies have undergone restructuring during the 2000s, resulting in plant closures, job losses and significant financial assistance from their historical OEM parent. US operations from both companies have been protected from bankruptcy by Chapter 11 legislation.
The problems of automotive component suppliers have not just been linked to these spin-offs which when they were separated were saddled with inefficiencies, over-capacity and too high cost bases. Many other standalone tier 1 auto suppliers have filed Chapter 11 in the US or gone into administration in Europe during the 2000s. Examples include JPT, Federal Mogul, Leer and Cooper.
Reasons for the failures include:
– poorly executed M&A strategies (poorly integrated acquisitions)
– over-expansion and over-capacity
– too many competitors
– technology changes
– shifting production locations
– over-reliance on one product/technology
– failure/inability to invest in new technology
– consumer buying changes
– excessive financial leverage
– bullying purchasing strategies of OEMs
– suppliers chasing volumes at low gross margins
– inability to offset annual price reductions written in supplier agreements
– poor delivery/quality performance resulting in OEMs changing suppliers.
These failures have led in turn to considerable problems for the tier 2 and 3 automotive suppliers whose community has also seen its fair share of failures.
A critical point to note is that these failures amongst automotive suppliers were taking place at a time when actual global vehicle sales were increasing and the majority of OEMs were making profits.

As the recession hits, the pressure grows
With the European passenger new vehicle sales forecast to contract to around 12.0 million in 2010 from a recent high of 14.8 million vehicles in 2008 and, likewise, the US market to around 11.5 million vehicles from a recent high of 17.4 million in 2005, the automotive component supply market is likely see a significant reduction in volumes causing even more severe over-capacity.
Temporary respite has been provided in the US and major European markets by scrappage sales incentives. According to the Society of Motor Manufacturers and Traders, UK scrappage incentives accounted for 20% of all new car registrations since the scheme’s introduction. The scrappage schemes have also had the effect of skewing sales to cheaper and smaller, more efficient cars at the expense of sports, large and luxury segments.