Don't Look Now, but Things Are Perking Up for Auto-Part Suppliers
Auto suppliers like Delphi (DPHIQ.PK), Visteon (VSTNQ.PK), and Lear (LEA) have been through the mill, even more so than Chrysler, Ford (F) and General Motors -- and that's saying something.
Things are finally starting to look up for the auto suppliers, though. In tandem with the car companies, suppliers are cutting costs to the point where they can make money even at the bottom of the business cycle.
Surprisingly, the Original Equipment Suppliers Association said a recent survey of its members showed a shift of supplier opinion to "somewhat more optimistic." Specifically, the latest OESA survey focused on the supplier outlook for 2011.
"The positive bump in the Supplier Sentiment Index is contrary to current economic headlines," said Neil De Koker, president and CEO of the supplier group. "I believe we are seeing a slower but more predictable recovery path, and that is seen as being positive for suppliers."
With downsizing and cost-cutting, even a little bit of additional sales volume results in a disproportionate increase in earnings. That additional volume is forthcoming as auto sales recover, even if auto sales aren't coming back as fast as they have in previous economic cycles.
The old model was to try to earn enough money in the years when sales were above average to survive in the below-average years. With ever-tougher competition in the last 15 years or so, profit margins got so thin that the auto industry hardly made money even in the good years.
Wall Street analysts called the phenomenon "profitless prosperity." The sales downturn in late 2008 was the last straw. The net result was bankruptcy last year for Chrysler, GM and more than a dozen major auto suppliers.
Suppliers bore the brunt, even more so than the car companies, because the car companies protected their margins by cutting supplier margins. When Delphi emerged from bankruptcy last year, it had been in bankruptcy since 2005, way ahead of former parent company GM.
Visteon, the core of which used to be part of Ford, declared bankruptcy in May 2009, but it's set to emerge from bankruptcy effective Oct. 1. Lear is best known for manufacturing seating, but it has also diversified into electrical components and electronics. Lear declared bankruptcy in July 2009, and emerged from reorganization in November 2009.
In all, 13 major U.S. suppliers went bankrupt in the first half of 2009 or had their assets foreclosed, according to the OESA. Today, it's a good sign for the car companies if their suppliers are feeling the "trickle down" effect of more prosperity.
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Photo: Visteon