U.S. Auto Suppliers See a Comeback

May 7, 2010
Suppliers such as Lear, Magna International, American Axle, ArvinMeritor, BorgWarner, Federal Mogul, TRW and Tenneco, all posted profits.

Only a year ago, the North American auto industry was in shambles as suppliers grappled with mounting losses and many contemplated bankruptcy. But a combination of aggressive cost-cutting, an upturn in production and a loosening of credit has triggered a turnaround among an array of top tier suppliers critical to General Motors, Chrysler and Ford, moving them from deep in the red back into the black in the first quarter.

After watching more than 40 U.S.-based suppliers file for bankruptcy, Ford reported it spent less on assisting suppliers during the first quarter of 2010 than originally planned.

Lear Corp., which filed for Chapter 11 protection last year and emerged from bankruptcy only last November, posted a $66.1-million profit for the first quarter after losing $265 million in the same period last year. It also canceled salary cuts imposed on white-collar employees.

Magna International Inc., which has major contracts with all three of Detroit's big automakers saw its sales increase by 56%, while it earned $223 million, after losing $223 million in the first quarter last year.

"North American light vehicle production increased 67% in the first quarter of 2010, compared to the extremely low level of production experienced in the first quarter of 2009," said Magna chief financial officer Vince Galifi, noting the company was restoring the dividend eliminated last year. "Even compared to the fourth quarter of 2009, North American light vehicle production increased 3% in the first quarter of 2010."

He pointed to improving North American auto sales and low levels of dealer inventories as the key reasons for the increase in light vehicle production.

Detroit-based suppliers such as American Axle, ArvinMeritor, BorgWarner, Federal Mogul and TRW, as well as Chicago-based Tenneco, all posted profits after losing money during the same three-month period in 2009.

Richard Dauch, CEO of American Axle, which last fall faced an uphill battle to obtain financing need to avoid bankruptcy, cited the "favorable impact of improving global industry conditions and cost cutting" for the improved results.

BorgWarner Inc., which supplies Detroit's automakers as well as European and Asian carmakers, raised its outlook for the rest of the year after a strong first quarter as the automotive sector recovers around the world.

"Given the dramatic decline in production volumes, especially in early 2009, suppliers were forced to make drastic, unprecedented reductions, including plant closings, massive layoffs, benefit and pay reductions," said Steve Wybo of Conway MacKenzie Inc., which has helped companies reorganize and prepare for bankruptcy.

"As volumes started to slowly come back in late 2009, suppliers that "survived the storm" were relatively well-positioned for profitability going into 2010. Also, several suppliers were able to restructure debt in 2009, therefore eliminating or reducing cash debt service and preserving cash flow for operations," Wybo added.

After eliminating hundreds of jobs over the past two years, suppliers are beginning to hire new employees again, said Jeff Davis, automotive practice director of The Mergis Group.

TRW CEO Thomas Plant, however, noted suppliers are still facing significant challenges such as rising prices of steel and cooper. And some U.S. suppliers are still mired in bankruptcy.

North American suppliers also benefited from a surge in auto production in Europe during the first quarter. But new car sales in Europe have begun to decline and the trend is expected to continue through the second half of 2010, Magna's Galifi said.

Copyright Agence France-Presse, 2010

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