Get Big Or Get Out Of The Auto Parts Biz

How Detroit is driving consolidation among parts makers

Masland Corp. was being hounded to death by the world's auto giants, who piled demand atop demand. Hoping to satisfy its overseas customers, the Carlisle (Pa.)-based maker of automotive carpets formed a manufacturing joint venture last year in Britain. But Masland soon realized its British thrust wasn't enough to assure long-term survival.

Enter Lear Corp. in Southfield, Mich., the world's largest auto-seat maker and a voracious player in the buying binge sweeping the auto-parts industry. Since 1991, Lear has gobbled up the seating businesses of Fiat, Ford, Volvo, and Saab. And last year, it stunned competitors with its $900 million acquisition of interior-parts supplier Automotive Industries Inc.

STEEP PRICE. With Masland looking for a white knight, Lear Chairman Kenneth L. Way was ready to take another bold step toward becoming the first supplier capable of producing the entire interior of an automobile. In July, Lear paid $384 million for Masland, a steep price for a supplier with annual sales of only $500 million. Lear will carve out room in its overseas factories for Masland to set up operations quickly and cheaply.

To meet the demands of auto makers, top-tier suppliers such as Lear don't just supply widgets. They design them, too, and integrate them into big, complex assemblies. And they do it globally. The number of major parts makers will shrink from 5,000 to 2,000 over the next five years, predicts International Business Development Corp., a consultancy in Westport, Conn. Lear, with revenues of $4.7 billion in 1995, sees the shakeout as a golden opportunity to grow. "Our focus is on the $40 billion-a-year global interior market," says Way. "We think we can get a third of that."

Growth is not always easy. As they expand, first-tier suppliers are being forced by auto makers to assume complicated new responsibilities, such as systems design, without being fully compensated for the extra risk and cost. What's more, Wall Street analysts are wondering whether the feeding frenzy will load debt and bureaucracy onto an industry that has traditionally been fiercely independent. "The feeling is that suppliers have to get bigger--or get out," says John A. Casesa, managing director at Schroder, Wertheim & Co. "But in seeking critical mass, they are making some very expensive deals."

The price tags are steep indeed. British parts maker Lucas Industries PLC has agreed to acquire a U.S. maker of antilock brake systems, Varity Corp., for $2 billion, pending regulatory approvals. This spring, German supplier Robert Bosch acquired the brake-manufacturing operations of AlliedSignal Inc. for $1.5 billion. And in July, Johnson Controls Inc.--a major rival of Lear's in seats--announced a $1.35 billion purchase of interior-parts powerhouse Prince Corp. of Holland, Mich.

For Prince, pummeled by the same demands as Masland, selling out to a bigger supplier was inevitable given the worldwide sourcing demands of its customers. Together, the companies can share research and development, factory space, and marketing worldwide. "Prince doesn't need a lot of help to run its business, but we need help to take it around the globe," says Prince Chief Executive John Spoelhof.

NO EXTRA PAY? Who's driving the consolidation? In their efforts to cut costs, the Big Three auto makers have shifted design and engineering work to their top suppliers, even requiring them to supervise smaller suppliers as well. Chrysler Corp., for example, entrusted the auto-parts unit of Textron Inc. with the coordination of the work of other suppliers on the interior of its new minivans--yet didn't pay Textron any extra cash for the service. Industry sources say Canadian parts maker Magna International Inc. will produce the complete interior for a new Ford Motor Co. sport-utility vehicle that is scheduled to debut in the 2000 model year, and Lear is bidding on similar total-interior projects.

Escaping unions is generally not at the top of the Big Three's priority list in outsourcing to the likes of Lear and Johnson Controls. For one thing, the unions are going where the action is, organizing workers at first-tier auto suppliers that are adding jobs even as the Big Three shrink. Johnson Controls, for example, recently recognized the United Auto Workers at its plants in Plymouth, Mich., and Oberlin, Ohio.

The savings come elsewhere. Casesa, the analyst, says Lear and rivals are more focused and have larger economies of scale. He figures they can produce seats at one-third the cost that Chrysler and Ford used to spend. "The interior systems now cost about $900," he says. "If the same one-third formula applies, a total-interior supplier could save $300 a car, and that's serious money."

The Big Three can save on design and engineering as well. "At one time, we had 250 engineers here, just designing seat covers," says Thomas T. Stallkamp, Chrysler's executive vice-president for procurement and supply. "Now, the suppliers are the experts."

"SPECIALIZATION." But Stallkamp worries that suppliers may go overboard in their rush to provide more content. "Guys who do instrument panels want to do whole interiors, and that might not work," he says. "We think that specialization can be lost." Way frets about diluting the expertise of companies Lear acquires. "We want to preserve their entrepreneurial spirit," he says.

Sometimes getting bigger means the departure of the managers who produced the growth. For example, the president of Automotive Industries, Frederick F. Sommer, decided Lear has become too big for his likes. So he quit in July to head a smaller, independent supplier: Citation Corp. of Birmingham, Ala., a maker of forgings and castings.

No U.S. supplier has ridden the wave of consolidation as Lear has. Formerly a unit of Lear Siegler Inc., the company went private in a leveraged buyout in 1987. Management acquired the business a year later, and since then Lear's content per vehicle in North America has skyrocketed from an average of $60 to $285, and from $7 per vehicle in Europe to $111. Lear went public two years ago, and its stock has doubled in value, to about $36 a share, since the initial public offering.

Lear already makes parts ranging from seats to floor mats to door panels to window-washer reservoirs. With Masland and Automotive Industries, it can now supply virtually the entire passenger compartment except dashboards--and that's the next acquisition target. "We want to be able to supply the total interior product to an assembly plant on a just-in-time basis," Way says. "I don't think there's any question that's where the industry is going." The same trends are evident in brakes, fuel systems, and exterior trim. And if the Big Three want more, Lear and its rivals will oblige. As the auto industry races to cut costs, they have little choice.

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