It's hard to imagine a less sexy business than auto parts -- especially these days. The industry has nearly every problem afflicting American business: union strife, runaway health-care costs, heavy debt, overcapacity, and exposure to raging steel and fuel prices, not to mention an uncertain future amid rising competition from Asia and Eastern Europe.
And yet plenty of big money is chasing parts makers these days. From a passel of private equity buyers, including New York investor Wilbur Ross, to a handful of foreign parts makers, investors are trolling for deals among America's ailing auto suppliers. They've got plenty to choose from: Just since the start of 2004, 35 parts makers have filed for bankruptcy protection. Chunks of Delphi Corp. (DPH ) and Visteon Corp. (VC ) -- respectively the No. 1 and No. 2 industry players -- could soon be on the block. And dozens of small, still-healthy outfits are ready to sell out as big customers such as Ford Motor Co. (F )and General Motors Corp. (GM ) insist that more parts be manufactured in low-cost Asia. "Literally every day, some company comes up for sale," says Thomas T. Stallkamp, former Chrysler Group (DCX ) president and now a managing partner with New York private equity firm Ripplewood Holdings LLC.
The combination of eager buyers and frantic sellers is sparking a wave of consolidation that's expected to rapidly transform the parts business during the next several years. Some buyers are looking to snap up bankrupt companies so they can restructure the finances, fix up the underlying assets, and sell them for a profit. Others are aiming to roll up the smaller mom-and-pop shops into larger conglomerates that can compete globally. Some lesser-known European and Asian players are also trying to get a toehold in North America.
The upshot: In a few years, many of today's 10,000 parts makers may be gone. Those that survive will collectively have fewer plants -- and should be running a lot closer to full tilt. More production will move overseas. Eventually, say analysts and investors, the industry will start making serious money. "Half of the supplier names will not be around in five years," says Craig Fitzgerald, a partner at management consulting firm Plante & Moran. "The remaining companies will be bigger, better capitalized, and healthier."
No one is poised to spur -- or benefit from -- this shift more than Wilbur Ross. The 67-year-old investor, who rolled several failed steelmakers into the now-profitable International Steel Group Inc., has already doled out some of his $4.5 billion war chest to assemble a diverse portfolio of parts interests. He just bought a stake in Oxford Automotive Inc., which emerged from bankruptcy in April, and control of Safety Components International Inc. (SAFY ).
His biggest play is with auto interior company Collins & Aikman Corp. (CKC ), which filed for Chapter 11 on May 17. Ross and other investors bought just over half of its $750 million in bank debt. Depending on how the reorganization is structured, that should give them a decent equity position once Collins & Aikman emerges from bankruptcy. Ross also is bidding on the company's assets. Eventually, he may take some of the plants and roll them up with other companies in similar businesses. His plan: to create one or more makers with a global presence and a broader customer base. "That way," he says, "you aren't vulnerable to changes in [customers'] market share."
Bankrupt companies aren't the only targets. The vast majority of the industry's parts makers are independent players with less than $170 million in annual revenue. Many are family businesses that, while profitable, see the writing on the wall. Not only are their main customers reeling amid a fiercely competitive auto market but parts makers themselves are also increasingly being undercut by Asian rivals. Indeed, last year Chinese auto suppliers sent an estimated $3 billion worth of auto parts to the U.S., nearly triple the level of 2001.
So what do acquirers see in these smaller companies? In some cases, diversifying their customer base is the goal. Private equity investor Carlyle Group in Washington, D.C., which has deep roots in the defense industry, recently snapped up AxleTech International in Troy, Mich. Carlyle figures there's plenty of growth to be had expanding AxleTech's defense business by making more parts for tactical military vehicles.
In other cases, acquirers are simply bolting the small players together to gain global heft. Ripplewood, which has already acquired three aluminum casting companies outside the U.S., is looking for similar acquisitions in North America and elsewhere. Such companies, even healthy ones, lack sufficient cash to expand overseas. The idea, says Stallkamp, is to hitch a bunch of them together and build a giant global supplier with factories around the world that would provide many parts, including engine blocks, transmissions, and suspension parts to a range of auto makers.
Foreign players see a good time to buy cheap, too. European suppliers such as France's Faurecia and Spain's Gestamp are looking for deals. Companies from China and India also want a piece of the action. In June, Bharat Forge Ltd. of India bought bankrupt Federal Forge Inc. near Lansing, Mich. Other are sure to follow. "We have seen plenty of deals from Europe, and we expect more from Asia," says Jim Gillette, director of supplier analysis for research firm CSM Worldwide in Northville, Mich.
Things are about to get very Darwinian in the auto-parts industry -- and given the pricing pressures, overcapacity, and weak profits, that's exactly what it needs.
By David Welch in Detroit and Nanette Byrnes in New York