Automotive: In Search Of New Outlets

Fallout from GM and Ford's restructurings is hitting Tier 1 and lower-tier suppliers hard. The solution? Diversity.

When big guns such as General Motors Corp. and Ford Motor Co. reorganize, restructure, close plants or plan to close plants based on the reality of their market share in North America, it affects suppliers -- from Tier 1 down.

Tier 1 suppliers that count GM and Ford as their major customers need to diversify in order to survive. In fact, they should have been thinking diversity years ago. With 2005 sales falling 5% at Ford and 4.3% at GM, and market share tumbling 26.2% at GM and 18.6% at Ford, it's time to scramble for a bigger customer base.

Indeed, Delphi Corp., a major supplier to former parent GM, reported less-than-stellar third quarter 2005 results, which ended Sept. 30, 2005. Revenue for the Troy, Mich.-based company was $6.28 billion -- down $36 million from the third quarter 2004.

While Delphi is struggling to diversify its customer base -- non-GM revenue for the third quarter was up 6% to $3.33 billion -- a company statement also notes that non-GM growth was more than offset by a 16% year-over-year decline in GM revenues.

"Delphi cannot continue indefinitely to operate our facilities in the U.S., which lose a substantial amount of money, without being able to adjust our cost structure," said Robert S. Miller, Delphi's chairman and CEO, in a Nov. 9, 2005, press release. "The continued pressures Delphi faces from low GMNA [GM North America] production volumes, commodity price increases, pension and post retirement health-care cost increases, along with the cost of paying for idled workers, will only intensify our U.S. losses until we come up with a competitive, sustainable plan of reorganization for our U.S. operations through the Chapter 11 process."

Similarly, Visteon Corp., a major automotive supplier to Ford, reported shrinking sales for third-quarter 2005. Sales decreased $15 million to $4.1 billion, "as higher non-Ford sales of $108 million were offset by lower sales to Ford. Non-Ford sales for the quarter totaled 36% of total revenue, up three percentage points compared with the same period 2004," according to the Van Buren Township, Mich.-based company's Nov. 8 press release.

In October Visteon and Ford completed a transaction that transferred 23 of Visteon's North America facilities to a Ford-managed business entity, Automotive Components Holdings LLC.

"Completing this transaction gives Visteon a more cost-competitive North American structure, a more balanced customer portfolio and a more evenly distributed regional revenue mix," said CEO Mike Johnston in an Oct. 1, 2005, press release.

And while many lower-tier suppliers already have a diversified customer base, if their customers are Tier 1 automotive suppliers, they're in the soup, too.

"We have to recognize that we are moving from a price-based business model where you quote to as many suppliers as you can in the hopes of getting the lowest price to a more collaborative business model that says we need fewer suppliers who will get awarded a higher-level business so you have higher-capacity utilization and work together to take cost out of the system," says Neil DeKoker, president of the Original Equipment Suppliers Association, Troy, Mich. "That's the model that Toyota, Nissan, Honda and so forth are using."

And with Toyota and Honda reporting increased North American sales (10.1% and 5.2% respectively), it looks as if the model works.

According to DeKoker, the wrong direction for suppliers to take would be complying with customer price-down demands.

"Those suppliers are getting weaker and weaker and are going to end up in difficulty where it's not sustainable. So if they comply with their customer's demands for the price reductions, they need to also find the same level of cost reductions within their company or take some other steps."

According to DeKoker, Ford has announced that it is going from 2,500 suppliers to 800. And Delphi announced a couple years ago that it was going from 3,000-plus suppliers to 700 to 900 suppliers.

DeKoker notes that the collaborative business model will mean less suppliers, but won't necessarily result in factory doors closing.

"That means that there will be mergers and acquisitions and so forth as suppliers try to meet all of these customers needs by having the full range of capability," says DeKoker. Companies may choose to merge with or acquire other suppliers to extend footprints overseas or to diversify a customer base or gain certain innovative technologies, according to DeKoker.

"Absorbing a competitor also strengthens your ability to negotiate and strengthens your innovation capability and it reduces your overhead."

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