Suppliers Losing Contracts to Rivals

Bankruptcy is not the worst thing troubled automotive suppliers have to contend with. Even as these distressed suppliers work to restructure, they also must deal with a growing trend: automakers stripping away contracts and giving them to healthier suppliers. Automotive suppliers, already squeezed by rising raw material prices and customer production cuts, are finding the gap widening between their healthy and weak peers. The trend is driven by automakers' desire to safeguard their operations by ensuring a continuous flow of parts.

From Detroit Free Press

Automotive suppliers, already squeezed by rising raw material prices and customer production cuts, are finding the gap widening between their healthy and weak peers. The trend is driven by automakers’ desire to safeguard their operations by ensuring a continuous flow of parts.

"We’re winning chassis business left and right because there’s hardly anyone left standing, and we see the stamping business going that same way," Mark Hogan, president of Magna International Inc., a $22-billion supplier based in Ontario, said last week at an industry seminar in Dearborn, MI.

Milwaukee-based Johnson Controls Inc. (JCI) began production Jan. 2 on a contract to supply interior components — a contract it won after a troubled supplier couldn’t meet the customer’s demand, said Jeff Williams, group vice president of Johnson Controls’ North American automotive experience division.

In March, JCI will start production on a second contract with another automaker that was uncomfortable with the work of a troubled supplier, Williams said.

Neil De Koker, president of the Original Equipment Supplier Association, said the trend will continue throughout this year as Ford Motor Co. and other automakers gradually reduce the number of suppliers they purchase from.

Tony Brown, Ford’s senior vice president of global purchasing, who buys more than $90 billion in parts annually for Ford’s eight worldwide brands, said he has had to strip business away from underperforming suppliers and give it to others, and he expects to do more of that this year.

"Where you can, you try to salvage the business," Brown said. "When you can’t, you move it to another supplier."

Brown said he expects February to be particularly rough for suppliers. Next month, there could be the largest number of bankruptcy filings among parts makers in U.S. history, Brown said.

Collins & Aikman Inc., Delphi Corp. and Visteon Corp. are among the suppliers that have either had contracts taken away or have voluntarily given them up because of bankruptcy or restructuring. Collins & Aikman’s directors have announced plans to sell the entire business, meaning some of its contracts are up for grabs.

Bo Andersson, General Motors Corp.’s vice president of global purchasing, said he recently took a contract away from Southfield, MI-based Collins & Aikman and gave it to Troy, MI-based Cadence Innovation, a $650-million automotive supplier offering assembly sequencing technology. Andersson said he estimates he took business away from troubled suppliers 100 times last year and gave it to stronger competitors.

Delphi and Visteon have been working to divest uncompetitive businesses, many of which came with contracts that stronger suppliers like Robert Bosch GmbH and Denso Corp., the world’s largest suppliers, have seized.

At least 13 auto suppliers have filed for bankruptcy in the last five years, including Tower Automotive Corp., Meridian Automotive Corp. and Delphi.

The plague of bankruptcies among North American auto-parts makers has had conflicting affects on Bosch, said Peter Marks, chairman, president and CEO of the Stuttgart, Germany, firm.

"The smaller ones were suppliers to us, so we were affected that way," Marks said. "But we also gained some business because of it."

Denso, an Aichi, Japan-based supplier of thermal, powertrain and electrical systems, is the world’s second-largest auto supplier, behind only Bosch, with $27.3 billion in sales last year, of which 23 percent came from the United States.

Denso CEO Matt Matsushita told the Free Press last week that he expects to grow that percentage through winning more business away from troubled U.S. suppliers. Last year, Denso’s U.S. business grew more than 8 percent, Matsushita said.

"To be sure, Delphi created business chances for other suppliers to get in," Matsushita said. The supplier industry’s overall health is getting worse, according to a study from BBK, a Southfield-based business consulting firm. The aggregate grade of 80 global suppliers it monitors has declined the past four years, from A- to B, using academic-style grading.

Alicia Masse, managing director of BBK’s automotive advisory group, predicts it will take at least two years before automakers have cleared contracts with troubled suppliers and shifted them to healthier ones.