Survival Advice for Auto Parts Suppliers

It is adapt-or-die time for many of the 10,730 small businesses that are lower-tier suppliers to the auto industry, and close to 400,000 jobs may be on the line. But while the situation is daunting, it's also a time of unprecedented opportunity for entrepreneurs willing to shake up their firms and think creatively, experts say.

With U.S. auto production down about a third over the past year, the spotlight has shined brightly on the extensive layoffs at large automakers, including the bankrupt General Motors and Chrysler, and on their so-called Tier One suppliers, many of which are publicly owned subsidiaries of corporations that rival the big automakers in size.

But far less attention has been paid to the struggling, family-owned machine shops, parts suppliers, and tool-and-die firms that are at risk of closure if they worked primarily for GM and Chrysler, both of which are shutting down some of their production lines this summer.

"A lot of them are not partaking in the $5 billion government bailout that was arranged through GM and Chrysler, and that has gone mainly to mop up the large Tier One receivables through April. Everybody big has been paid through Apr. 30, but the issue is since then —and the fact that the smaller people may not be getting paid by their Tier One customers," says Dan Luria, research director of the Michigan Manufacturing Technology Center, a not-for-profit that supports and advises small manufacturers.

downsizing to manage costs

It's difficult to get an exact count of small, privately owned firms, but Luria estimates that small parts suppliers, many clustered in the Upper Midwest, employ close to 398,000 people nationwide, with an average of 37 workers per business. There are around 1,200 Tier One supply firms, he estimates, averaging about 200 employees each.

It's difficult to predict many of these small companies' fates, but for those that were directly dependent for the lion's share of their sales on GM and Chrysler, delays in getting paid or even a temporary lack of orders will make it tough to hang on, he says.

"There are companies whose products go on vehicles whose production won't be shut down this summer, and they might make it. And there are small businesses that own their facilities, don't have rent payments, don't have big bank debt, and their equipment is largely depreciated. If they can ditch a lot of their people, they may be o.k. A lot of our clients have gone from 50 employees to five, so they've managed to take their costs down in proportion to their orders," he says.

The key to surviving this downturn, and what may be a permanent reduction in auto production, is partnerships and diversification, says Laurie Moncrieff, president and CEO of Schmald Tool & Die in Burton, Mich. The firm currently has a dozen employees.

focus on capabilities

She had worked 15 years as an engineer at large corporations around the country when she returned to her home state of Michigan to take over her father's firm in 1997. She was surprised—and concerned—when she discovered that the third-generation tool-and-die shop founded in 1948 was dependent on auto suppliers for 99% of its business.

"The first thing I knew is that we needed to diversify, but it was astounding the challenges that small businesses face in getting access to new markets because they don't have the resources," she says.

Mike Stevens, a manufacturing expert at who is writing a book about small manufacturers, agrees. Too many small suppliers are glorified order-takers for the auto industry and have virtually no sales departments, he says. Pursuing clients in new industries comes with a steep learning curve of new market knowledge and getting new manufacturing certifications, and may include adding employees dedicated to exploring new customers.

"The first rule for small manufacturers is to focus on your capabilities, not your product catalog. There may be no reason that a company making auto door handles couldn't make ball-and-socket joints for artificial shoulders," he says. "But it means they have to look outward and not focus inward so much."

It may be difficult, particularly in this economic climate, but survival is not impossible for enterprising small business owners willing to think outside the box, Stevens says. "Even something as simple as taking in a college senior as an intern for the summer could help you learn a ton of stuff you don't know right now," he says. "A company I talked to hired a guy from India who was here to study. Lo and behold, in a few months they were shipping products to his relatives' factory in India. The exact same thing happened with a company making valves that started selling good-quality American products to a firm in China that had connections to an employee they hired."

cooperative boosts purchasing power

Moncrieff is similarly optimistic. "I think there is more opportunity right now than there's been in a long time, as long as you take up the challenge," she says.

Since she bought Schmald more than a decade ago, it has gone from selling almost exclusively to auto suppliers to making parts for bar equipment, lock and key systems, ice cream machines, and custom cars. The key to her firm's success, she says, is Adaptive Manufacturing Solutions, a partnership she formed initially with two other small auto suppliers in 2007.

The group's members, which now number 16, maintain their separate entities and product lines but collaborate on high-cost items such as human resources, sales, and government contracting.

The cooperative approach allows the members to bid on contracts for finished parts that none of them could have produced singly in the past, she says. It also lends them increased purchasing power and the clout and visibility they wouldn't have as small, fragmented companies employing a few dozen individuals each. "We currently have close to 500 employees between us, and our goal is to get up to 1,000 or 1,500 employees combined, which will give us more of a voice," she says.

Building trust among a group of entrepreneurs used to doing things their own way has been difficult, she admits: "It's a challenge for companies that are used to competing against each other to recognize that their competition isn't across the street anymore, it's across the world."

But she is hopeful about the future. "I think that small companies are going to fare better [through this economic crisis] in the long term," Moncrieff says. "The markets that hold a lot of promise are alternative energy, the military, aerospace, and medical. They're all best served by small business because it's lower-volume work, and the big companies have too much overhead to be globally competitive in most instances."

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