Automotive

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State of the U.S. Automotive Supplier Industry

30 Apr, 2006

By: Neil De Koker

The automotive supplier industry -- including captive, independent, OE, and aftermarket suppliers -- represents almost 770,000 jobs in the U.S. and produces approximately $230 billion in shipments. While the automotive supplier industry is in a turbulent period, overall vehicle production schedules remain strong, over a third of the supply base is financially healthy (and a third at least above break-even) and capital through private equity and foreign direct investment channels is available. However, a major restructuring has begun and will continue through 2010. Bankruptcies have affected large and small firms. It is likely that the number of total suppliers will continue to consolidate through bankruptcies, companies exiting the sector, and mergers. The suppliers that remain will support the North American production of 16 to 17 million vehicles. This article outlines just a few of the business issues facing the industry.

Globalization

Automotive suppliers must compete with companies around the globe. Automotive suppliers have traditionally sought out low cost countries for manufacturing, and have followed their customers into new regions in order to continue to supply them in new locations. While vehicle production and large system integrator manufacturing will remain regionally based, all vehicle manufacturers and component suppliers will face global comparisons for cost, quality and innovation.

Mergers and Acquisitions and Capital Markets

According to Stout Risius Ross Advisors, LLC the number and the value of automotive merger and acquisition deals remained relatively constant in 2004 and 2003. While the number of deals has been trending in a relatively tight range between 70 and 80 deals per year since 2001, an increased level of divestitures by the large firms and activity in the middle-market has driven the average size of each deal below historical highs. With continued industry restructuring and consolidation, deal activity and valuations are expected to remain high over the next several years.

Raw Material Pricing

Across the globe, almost every raw material market is facing strong demand and tight supply. While steel reached its peak prices in the 3rd quarter of 2004, many other commodities such as resins, aluminum, copper, and nickel did not peak in price until the first six months of 2005. Suppliers have been hit with a continuous string of material price increases that will hold down financial returns. While a majority of suppliers responding to OESA surveys indicate that financial margins (earnings before interest and taxes) will decline by less than 10% in 2005 due to resins and steel, it is not uncommon for many suppliers facing EBIT declines of 11 to 50%.

Healthcare

In 2005, Watson Wyatt Worldwide forecasted health care inflation for the automotive industry averaged 10 percent, which is equal to the national average. However, as an industry, the rate is twice the inflation rate expected by best performing companies. OESA undertook several initiative to address those elements of health care over which supplier companies have some degree of control, in order to help them take as much cost out of the system as possible, and to glean the best value for their employees.

Customer – Supplier Relations

OESA has long advocated that all members of the supply chain work collaboratively to reduce cost and increase efficiency. However, the industry has a very few, large and influential vehicle manufacturer and supplier customers and thousands of smaller suppliers. This means that many suppliers have little opportunity to influence their customer or walk away from business that is either unprofitable or undesirable. Because of this disparity and the industry’s tremendous financial pressures, the ability to work in a collaborative and productive manner with customers is diminished. OESA is working with customers and suppliers to improve their working relationships and replicate best practices across the industry.

OESA Background

The Original Equipment Suppliers Association was founded in 1998 to represent automotive suppliers. OESA is a forum for suppliers to share information and ideas, and to act as a voice for the supplier industry when appropriate. OESA has nearly 400 members, representing global sales of more than $300 billion. Member sales represent over 65% of the North American market. More than half of OESA member companies have less than $150 million in sales. For additional information on industry issues and OESA, visit www.oesa.org.

 

About the Author

Neil De Koker

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