To Be or Not to Be - That Is the Question... What Lies Ahead for U.S. Automotive Suppliers?

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Researched by Industrial Information Resources, Incorporated; Houston, Texas). It won't come as news to anyone in the business that U.S. tier suppliers to the automotive industry are in big trouble. What is news, ominous news, is the ever-increasing number of suppliers that have joined their fellows in bankruptcy court in the last year or so.

Since 1999, some fifteen or more tier suppliers have declared bankruptcy, most of which have not been able to regroup and reinvent themselves. Some of the most prominent of these tier suppliers are:

Valeo Electrical Systems, which has, after a rocky beginning entailing union- breaking attempts, which is also illegal in France, received a $226 million inversion from its parent company in France to recapitalize. Valeo is a Tier I supplier of wiper and airflow systems, compressors, and electric motors to all the major OEMs.

Federal-Mogul (NYSE:FMO) (Southfield, Michigan), which was brought down by huge asbestos-liability suits inherited from its acquisition of T&N.

Venture Gear (Frasier, Michigan) was pulled down by its German subsidiary, Peguform GmbH and its problems, and still seems unable to come to a meeting of minds with its German unit.

DCT Incorporated (Sterling Heights, Michigan), a Tier I manufacturer of automotive assembly lines and automotive tooling was forced into bankruptcy when it couldn't meet its debts.

Harvard Industries (Lebanon, New Jersey), an aluminum caster providing door and roof beams, transmission components, and vehicle door frames to OEM's.

Hayes Lemmerz (Northville, Michigan) (NYSE:HAZ) was brought to its knees by its over-zealous $2.65 billion worth of acquisitions. Its 22 U.S.-based plants and one in Mexico are included in the bankruptcy proceedings, but its foreign-based plants, numbering approximately 24, are not.

Pilot Industries, Incorporated (Dexter, Michigan), Tier I supplier of fuel-delivery systems and brake components.

Oxford Automotive (Troy, Michigan), Tier I supplier of metal components, assemblies, and modules. Oxford closed its Cambridge and Chatham, Ontario, plants earlier this year, and may be forced to close others.

Newcor Incorporated (Bloomfield Hills, Michigan), supplier of automotive and truck components and assemblies, was unable to restructure its loans.

Aetna Industries (Detroit, Michigan), a subsidiary of Trianon Industries Corporation, a Tier I supplier to DaimlerChrysler, Ford, and General Motors, ascribes its demise to intense pricing pressure, which it could not absorb.

A.G. Simpson (Toronto, Ontario), supplier of bumpers and other stamped metal components.

Mexican Industries in Michigan (Detroit, Michigan), a plastics and metal stamping supplier that manufactured door panels, airbags, cargo nets, spare tire covers, and leather-wrapped steering wheels, was a victim of pricing pressures and reduced demand for its labor-intensive products, which were having to compete with cheaper products from Mexico.

Penske Corporation (Detroit, Michigan), an umbrella company for nine companies, among other things, a manufacturer of diesel engines.

Loranger Manufacturing Corporation (Warren, Pennsylvania), a Tier II injection molder of plastic automotive components, was forced into bankruptcy when Delphi and Visteon pulled their contracts.

C.M. Smilie & Company (Ferndale, Michigan) was done in by a family feud and a failed loan.

Noble International Limited (NASDAQ: NOBL) (Warren, Michigan), producer of laser-welded blanks and assembler of heavy lift trucks and truck-mounted forklifts, was unable to raise enough from stock sales to cover its loans.

Talon Automotive Group, Incorporated (Troy, Michigan), a supplier of large stamped steel panels, had invested heavily since 1999 in presses and equipment to supply DaimlerChrysler, GM, Ford, and Honda.

Davis Industries, Incorporated (Plymouth, Michigan), which does automotive metal stampings, was ultimately brought down by an expansion it undertook in Tennessee to meet its production obligations to an OEM.

Wheland Automotive Industries (Chattanooga, Tennessee) declared bankruptcy in December 2001, hoping it could keep its foundries in Chattanooga, Tennessee, and Warrenton, Georgia, open until it could find a buyer. Wheland provided brake castings and other parts used in nearly half of all U.S.-produced vehicles.

Breed Technologies (Lakeland, Florida), manufacturer of seat belts, has been in and out of bankruptcy since September 1999. Now, with the sale of TRW's Automotive unit, several foreign-based restraint manufacturers, such as Takata, Incorporated (Japan) and Autoliv (Sweden), are snapping up the passenger restraint system business at TRW's expense. This can't be good news to smaller companies such as Breed. Will Autoliv buy out Breed, as it did Morton International a few years ago?

Key Plastics (Novi, Michigan) operated in bankruptcy for a year before Carlysle Management Group (Dallas, Texas) bought it in March 2001 and closed the plant in Port Huron, Michigan, and announced massive layoffs at the Chesterfield Township, Michigan plant. Key Plastics supplied injection molded parts to the automotive industry.

Pilot Industries, Incorporated (Dexter, Michigan), under a $56 million debt accrued from speculative contracts, has managed to pull itself out of bankruptcy after its recent reorganization and has received contracts from three OEMs, DCX, Ford, and Jaguar, as well as Tier I suppliers Freudenberg, Valeo, and Visteon.

At a time when OEMs are encouraging their tier suppliers to incur engineering and product development costs, in order to build new plants, to meet increased production demand, and to produce whole modules rather than just individual components, they are also pressuring suppliers for price cuts while parts makers are straining to support new programs that require large amounts of capital. Vehicle launches are difficult times for automotive suppliers, since they don't get a financial return on the huge capital costs of a new launch until production begins. With the decline in demand, they are being forced to work smarter (an empty phrase to already over-stressed, over-extended suppliers), slash frills, and tighten their belts yet another notch, but when the last notch is right next to the buckle, where does a supplier put the next notch? What are his choices? To merge with a larger, more substantial tier supplier? To close his doors?

How is it that every week, reported statistics show single-digit percentage increases in North American production, but OEMs are screaming about decreased demand in the market and pushing suppliers to grant as much as 30% price decreases? Production continues unabated as inventories rise, creating a softer market and increased sales incentives, which is good from a buyer's perspective, but really hurts everyone in the long run. What's wrong with this picture? Could it be that we've long since lost the concept of producing vehicles simply as a means of transportation, having been encouraged to purchase as an ego extension? But that's another story, and nobody wants to hear it.

While it is true that OEMs and larger tier suppliers cannot forever support and nurse ailing suppliers, something has got to give. OEMs will have to find a more viable way to curb costs without squeezing the lifeblood out of their suppliers. A way must be found to maintain a reliable supply chain for OEMs and the larger tier suppliers that do not choke smaller suppliers to death. The ultimate loss of jobs, quite aside from the loss of a supply chain member, is devastating to the economy, both local and national. Suppliers are not responsible for the OEMs' pension fund follies or the union's insatiable demands for more money, more holidays, and more benefits, and they should not be required to pay for them. It's time for OEMs to assume their own responsibilities and find workable solutions to problems they themselves have created, instead of leaving the road littered with the bodies of dead suppliers in their rush to cut costs at any expense.