Despite the steady toppling of suppliers over the past several years, the automotive industry still seems to have blinders on when it comes to facing up to the next sector or commodity in potential danger. As we've seen time and time again, "It won't happen here" can be written on many a corporate tombstone. In 2005 and 2006 we saw companies suffering whose chief raw material was steel for stampings. Notable bankruptcies in this space included Dana, Dura and Tower, but also included an untold number of smaller stampers and fabricators. Shortly thereafter, it was time for machining and casting companies to feel the effects. Raw material costs, overcapacity and offshore competition all took their toll. The fallout included Amcan Castings (liquidated), Grenville Casting (sold), Ravenna Aluminum (liquidated) and Teksid (acquired by Nemak), while JL French, Intermet and Citation all declared bankruptcy. Most still consider this segment to be in financial and operational distress.
Now it's time for plastic manufacturers to endure a widespread shakeout, particularly hard-trim manufacturers, the makers of pillar covers, HVAC vents and other hard plastic parts. Despite the fact that the demise of Collins & Aikman took substantial capacity out of the industry, others have since fallen or find themselves in peril, including Pine River (liquidated), OEM Erie (liquidated), Blackhawk Plastics (operating in bankruptcy), Plastech (operating in bankruptcy), and Blue Water Automotive Systems (operating in bankruptcy). And many plastic manufacturers are rumored for sale, including Key Plastics and Cadence Innovation. All have been severely impacted by increasing resin prices and gross overcapacity in the industry. Like a classic Midwestern twister, we've seen suppliers wiped out in a seemingly random, zig-zag pattern. However, this storm is more predictable-and preventable. While not every firm cited can completely control its situation, we can discern a general trend: management didn't necessarily attempt to right size the business and cost structure until the market had already turned; the companies had a disproportionate share of domestic OEM exposure; and the product portfolio and manufacturing strategy wasn't prepared to compete globally.
Who will be winners and losers in 2008 as lower production volumes continue? The winners will be the companies that are ahead in rationalizing their capacity and cost structure and are aggressively improving manufacturing operations-both equipment and manpower-to effectively self-fund and take on new business with minimal impact to existing operations. The thing every auto supplier needs to realize is that you've got to know your business and work proactively to prepare for upcoming market changes. If you think your particular space or commodity is immune, you're fooling yourself. Going forward, anything that a BRIC or other emerging market country requires to grow its economy-oil, resin, steel or other raw materials-will impact the global economy and cause a strain in established markets.
Successful suppliers will be those that can realign their cost structure to be profitable at the current volume projections. According to CSM Worldwide, 2008 light vehicle production will reach 14.4 million units for North America, 21.9 million units for Europe and 14.9 million units for Japan and Korea. Within this volume scenario, opportunistic acquisitions can diversify your customer base, obtain lower cost operations, alter a company's regional presence and/or obtain specific technologies and processes.
It's critical to fundamentally understand your business, anticipate and know what components and parts are destined for low-cost-country sourcing, and which portion of the value chain will need to be closest to the customer. We advise our clients to not simply take shelter from the storm, but to find success through preparation and actions that can negate a potential clean-up operation.