DETROIT (Reuters) - The auto supplier industry will see a wave of consolidations next year as federal bailouts for automakers and a recent uptick in sales provided only a temporary reprieve and simply postponed the inevitable, several executives told Reuters this week.
Speaking at the Reuters Autos Summit in Detroit, executives said the auto supplier base faces excess capacity but has been able to avoid the big wave of expected consolidation.
Auto sales have been hurt in the past year as customers tightened purse strings amid a weak economy, which came on the heels of already-slowing vehicle demand amid high gasoline prices last year. U.S. vehicle sales are expected to come in at just above 10 million units on an annualized basis in 2009, far below the levels of 17 million units just four years ago.
"There are too many suppliers," Earl Hesterberg, chief executive of auto retailer Group One GPI.N, said at the summit. "The longer this market stays at 10, 11 even 12 million units, it will put financial pressure on suppliers and drive consolidation."
Hurt by weak auto sales and squeezed by demands for lower prices, many suppliers have been struggling to stay afloat. “Suppliers are very cash-sensitive,” Hesterberg said.
Dura Automotive Systems Inc Chief Executive Tim Leuliette said liquidations are happening, but quietly. About 200 U.S. suppliers are going through quiet liquidation processes in which they are slowly selling assets to other suppliers or private equity companies, Leuliette said.
“We are seeing this more quiet, more cost-effective transition than a bankruptcy proceeding,” he said, adding that falling valuations will drive more consolidation next year.
Dura is in talks to buy two suppliers -- one in Asia and another in Europe. “We are a buyer in this market because we’re paying with 8 cents (on the) dollar or 12 cents (on the) dollar,” Leuliette said, adding that it will consider more acquisitions next year as valuations drop even further.
Automotive suppliers make up the largest manufacturing sector in the United States, directly employing 686,000 people in 2008, according to data from the Original Equipment Suppliers Association.
The U.S. government saved the U.S. auto industry earlier this year by funding bankruptcies at General Motors Co GM.UL and Chrysler. "No one expected that we'd see bankruptcies that provided 100 percent protection to supply bases," Bill Diehl, chief executive at advisory firm BBK, said at the summit. "The view was we would see a tsunami of suppliers who were not going to get funded and crash and burn."
The U.S. government’s “Cash for Clunkers” trade-in incentives also boosted auto sales in July and August, restoring production schedules.
Tough credit markets have also prevented deals, and a weak economy has prompted suppliers to focus on their own balance sheets rather than acquisitions. Several executives said at the summit that deals are necessary and will finally get done next year as markets ease and executives gain confidence.
“We will now see that rationalization of capacity happen on an accelerated basis,” Diehl said. “We’ll see private equity, we’ll see some strategic buyers ... and we’ll see a number of liquidations where a book of business will move to another supplier.” He said 30 percent of publicly traded suppliers are financially distressed.
A report by A.T. Kearney said suppliers are expected to lose $23.7 billion in 2009, and could need up to $33.5 billion in cash through 2012.
Despite that need for cash, United Auto Workers union chief Ron Gettelfinger said he did not expect to see any government aid for the sector. “I don’t think there’s a large role for the government at this point in time because there are too many suppliers,” he said at the summit.
Mike Jackson, chief executive of dealership chain AutoNation Inc AN.N, said he expects to see a lot more consolidation in the sector next year, driven by excess capacity.
Canadian Auto Workers union chief Ken Lewenza said he expects supplier consolidation to be driven partly by distressed companies and partly by automakers’ increasing requirements to standardize parts instead of having many variations for different models.
Peter Marks, chief executive of supplier Robert Bosch LLC ROBG.UL, said he sees suppliers engaging in more partnerships and mergers next year. "I think the world is more global than we ever thought ... and that increases the need to work across the different market segments," Marks said.
“The smaller companies will have a difficult time to do so, and I believe in the next year there will be more consolidation taking place. (Manufacturers) need fewer, stronger players.”
(For summit blog: blogs.reuters.com/summits/)
Reporting by Jui Chakravorty Das; Editing by Phil Berlowitz
Our Standards: The Thomson Reuters Trust Principles.