Big Dents in Auto Parts
A shakeout is here, and not everyone will survive
If ever there was an industry begging for consolidation, it is auto parts. Big auto makers are trying to limit how many suppliers they deal with, technology is changing, margins and prices are both falling, and stock prices are low. So the deals are coming. In recent weeks, TRW Inc. has agreed to pay $7 billion for Britain's LucasVarity PLC, which makes brakes. Tenneco Inc. hopes to fetch $4 billion by selling off Tenneco Automotive, which makes shock absorbers and mufflers. United Technologies' automotive unit is being sold for $2.3 billion, and General Motors Corp. has spun off 18% of its Delphi parts operation for $1.7 billion.
It's all about getting the $600 billion global parts business ready for the 21st century. In a consolidating auto industry, giants such as GM, Ford, and Toyota want to manufacture and sell vehicles around the globe, and they need parts makers that can keep up with them. Those suppliers that make the cut will be called upon to design and build major chunks of those cars--not just stamp out thousands of tiny components. But the trend is already stirring labor tension, particularly with the United Auto Workers, which threatens to slow progress out of fear that the result will be far fewer high-paying union jobs.BUY, BUY, BUY. The deal-making, executives say, means the parts industry will shrink from more than 1,000 first-tier companies today to as few as 25 well-financed, global suppliers. "Some even believe that in the end there could be only half of that left," says Charles J. Speranzella Jr., vice-chairman and president of Breed Technologies Inc., a parts maker in Lakeland, Fla. His company has tripled its sales, to $1.4 billion, by snapping up 10 companies over the past 24 months to become the world's biggest maker of steering wheels.
Survivors will not only have to be big to serve auto giants with far-flung operating plants around the world but they will also have to be able to perform higher value-added work, including engineering and manufacturing entire auto sections such as chassis and steering. "Auto makers are really becoming more assemblers of systems and subsystems provided by component suppliers at a lower cost," says Eli S. Lustgarten, an auto-parts analyst at Schroder Wertheim & Co.
This could bode well for existing giants of the industry such as Dana, with $13 billion in sales; Delphi, with $28.5 billion; TRW, with $14 billion, after the LucasVarity merger; and France's Faurecia, with $6.6 billion. For example, Lear Corp., a $9.1 billion Michigan parts maker, used to make door panels for $50. Now, Lear has turned the door panel into a $200 module that includes glass and structural parts. "By building a module, we are selling a product for maybe three or four times what our component costs would be," says James H. Vandenberghe, vice-chairman of Lear. That's great for Lear and good for customers such as DaimlerChrysler, Ford, GM, Renault, and Toyota. Though the module is more expensive than the individual parts Lear once sold, it is still up to 20% cheaper than if the auto maker had made it. On Mar. 16, Lear upped its bet, agreeing to pay $2.3 billion for UT Automotive.
Efficiency is key. "A supplier has to keep working with us from the design process on down. That's where you have an opportunity to cut costs," says Robert A. Burkhart, executive director of purchasing for GM truck platforms. Today, Dana is regarded as the leader in new supplier technique. Its plant in Lancaster, Pa., is a pioneer in modular assembly. In 1986, it began putting together truck chassis assemblies for Mack Trucks Inc. tractors. The factory now churns out 32,000 custom-built chassis annually. Mack declines to put a specific number on the savings it gets from shifting away from its own assembly to buying subsystems, but Dana and Mack confirm it's substantial.
No doubt, much of that cost-saving can be attributed to lower labor costs. On average, nonunionized auto-parts workers earn $10 an hour without benefits. Their unionized counterparts at auto makers make close to double that, according to University of Michigan research. For this reason, labor relations have become a major issue for parts and auto makers as the industry consolidates. On Mar. 28, gearing up for contract talks, UAW President Stephen P. Yokich publicly blasted GM's plan to shift more work to lower-paying parts suppliers. According to the UAW, only 10% of the auto-parts industry is unionized, and it has made organizing them a priority. At GM, the UAW opposition is already slowing the move to modular manufacturing. Yokich calls it "just another way to destroy good-paying jobs and benefits that we intend to deal with." GM President G. Richard Wagoner Jr. acknowledges union concerns but says, "We'll get to a solution that works." For one thing, the union is negotiating to get the company's support for organizing efforts at various GM suppliers. This would be a condition for accepting modular plants to replace existing factories.RESISTANCE. Despite some clear advantages, modular assembly is just catching on in the U.S. It hasn't been widely accepted so far in part because of the hefty capital expenditures required to build entirely new plants and because of labor resistance. To date, it has taken place mostly in developing countries, where new plants are coming on line and wages are lower. As U.S. carmakers bring the modular concept home, pitting one supplier against another, investment and cost pressures on suppliers will intensify.
But if the carmakers stand to gain, in the end, "the suppliers themselves may be the big losers," says Gregory Kagay, an auto-parts analyst at McDonald & Co. "If they can't lower costs, they'll be stuck with more assets." To win, suppliers must get bigger without putting on any costly fat. That's a secret formula only a few seem even close to realizing.By Peter Galuszka in Cleveland, with Kathleen Kerwin and Joann Muller in Detroit and Aaron Bernstein in WashingtonReturn to top