DETROIT – Automotive suppliers have had a tough go of it in the current economic recession that has sapped the volume out of the U.S. new car and truck market, but downsizing and other restructuring moves have put the parts industry on the precipice of profitability, says the head of the Original Equipment Suppliers Assn.
Speaking to the Society of Automotive Analysts here on the eve of the opening of the North American International Auto Show to the media, OESA President and CEO Neil DeKoker says the past year has seen 14 of the top 150 suppliers file for bankruptcy and another 40 smaller companies follow suit.
In addition, he says, 150-200 lower-tier suppliers were liquidated in the past year.
“That’s a story that hasn’t been covered much,” he says of the high number of small-business failures.
It would have been a lot worse, he admits, had the U.S. government not pumped nearly $120 billion into the industry, bailing out General Motors Co. and Chrysler Group LLC, backing the “Cash-for-Clunkers” program that boosted sales and providing funding indirectly to suppliers through the two auto makers.
But thanks to capacity cuts and financial restructurings, suppliers as a group told the OESA in a survey in September that their breakeven point had been lowered to just 9.5 million U.S. new vehicle sales. That’s an improvement even from a May survey in which they pegged the profitability tipping point at 10.5 million vehicles.
Last year, U.S. light-vehicle sales totaled 10.4 million, and most are forecasting an improvement to somewhere between 11 million and 12 million units this year.
“So we will see some significant profitability,” DeKoker says. “This will be a very profitable industry going forward.”
The supply industry has lost roughly half its workforce since 2000, with employment now at about 420,000 people, and some more capacity rationalization is needed, the OESA head says.
“We need to take another 2 million units in vehicle-supply capacity out,” DeKoker says, adding the parts industry needs to be running at 90% capacity utilization with a market at 15.5 million vehicles.
Currently, the supply sector is operating at about 55% capacity utilization, he says, an improvement from about a 45% nadir hit last year but a far cry from the 80% historically needed for profitability.
“We need breakeven to be at 50%-60% of capacity utilization, not the 80% we had before,” DeKoker says.
Auto makers will need to establish a more trusting relationship with suppliers in the future, sharing information and keeping it confidential, letting suppliers into the development process earlier and chipping in on engineering and tooling costs up front.
“OEs realize suppliers can’t continue to carry the cost of all engineering and tooling and get the cost back in piece price,” DeKoker says. “There’s going to have to be a lot more cooperation.”
Among the Detroit Three, Ford Motor Co. has the best supplier relations, but GM is “getting caught up to Ford – and it is actually paying off.”