by John Porretto
Associated Press
DETROIT — Although new car and truck sales rose more than 2 percent during the first 10 months of 2004, many of the companies that supply parts to big automakers have little to celebrate. Their profits are shrinking as raw-material costs rise and production falls at General Motors Corp. and Ford Motor Co.
Already the nation’s two largest suppliers, Delphi Corp. and Visteon Corp., which had combined sales of $45.7 billion in 2003, have warned of lower-than-anticipated earnings this year. They cite higher materials expenses, particularly for steel, and plans by top U.S. automakers GM and Ford to turn out fewer vehicles.
No. 2 Visteon, the former Ford division that counts on the automaker for most of its business, said Monday it has offered buyouts to its 8,300 U.S. salaried workers as a way to trim costs and become more competitive. The supplier, which lost $1.36 billion in the third quarter and last recorded a full-year profit in 2000, has been in constant restructuring since its break from Ford four years ago.
No. 1 Delphi also is restructuring and says it is on track to reduce its U.S. hourly workforce by 6,000 by year’s end.
Smaller suppliers are hurting, too, and at least two have filed for bankruptcy protection in recent months, citing the skyrocketing tab for scrap steel.
Industry observers paint an uncertain, if not bleak, picture for suppliers in the months ahead. Among the reasons: little relief expected on materials costs and continued pressure from automakers to lower prices amid a highly competitive sales environment.
GM and Ford have laid out some of the highest consumer incentives on record this year and squeezed automotive profits in the process. Yet they’ve both had to trim production because of periods of sub-par sales that increased inventories.
“Suppliers, tire companies, dealers and aftermarket companies faced a challenging third quarter, and there is no end in sight,” Morgan Stanley analyst Stephen Girsky said in a research report.
Dana Corp., American Axle & Manufacturing Inc. and Tower Automotive Inc. — which ranked 14th, 26th and 40th, respectively, in global sales to automakers in 2003 — all cited lower vehicle production and rising metals costs in recent months as culprits for lower-than-forecast profits.
Two smaller companies, metal-casting firms Intermet Corp. of Troy and Citation Corp. of Birmingham, Ala., were forced to file for Chapter 11 bankruptcy protection in September. Citation President Ed Buker said at the time of the filing that scrap steel ranged from $120 to $180 a ton in the last 10 years but had climbed to more than $420 a ton. Some customers, he said, refused to pay the higher prices.
Ana Lopes, spokeswoman for the Motor & Equipment Manufacturers Association (MEMA), the trade group that represents major suppliers, said she was aware of a small metal-stamping firm that was able to charge $1 for a part that cost the stamper $1.10 to produce.
Like others familiar with the supply and pricing of steel, Lopes says she sees no sign that the situation is going to improve soon. Rising energy costs and raw-materials shortages have helped keep steel prices high. “We don’t see any diminishing price levels anytime soon,” said Lopes, who works in MEMA’s Washington, D.C., office.
Merrill Lynch analyst John Casesa agreed, saying in a recent report, “While lower production should resolve the inventory overhang this year, raw-material inflation will likely be a factor hurting 2005 results, as well.”
Restructuring and consolidation have been constants among suppliers in recent years, and that’s likely to continue given the industry’s fragmentation, manufacturing overcapacity and other factors, said Umar Riaz, managing partner for the automotive practice at consultant Accenture. A recently completed Accenture analysis of 31 of the largest publicly held global suppliers showed much room for restructuring remains but that several suppliers have overcome pricing and other obstacles to post hefty profits and operating margins.
Accenture didn’t name the high performers in its study, but in an interview Riaz referred to Milwaukee-based parts maker Johnson Controls Inc. as a company that has successfully refined its operations. Johnson Controls said last month it earned $273 million in the most recent quarter — up 24 percent from a year earlier — in part because of reduced costs.
Common among some successful suppliers is outsourcing work to lower-cost locations, including outside the United States.
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