Many auto parts suppliers failed to widen base
DETROIT -- A few years ago, Plastech Engineered Products was considered one of the auto supply industry's success stories.
The plastics company, which had revenue topping $1 billion in 2004, was heralded as a triumph in the auto industry. And CEO Julie Nguyen Brown and her plastics company were seen as the gold standard to which other minority-owned firms should aspire.
In February, however, Plastech crumbled under the pressures facing the entire automotive supply chain, filing for bankruptcy-court protection and ending up in a nasty public dispute with Chrysler, one of its primary customers.
Plastech was one of two plastics suppliers to file for bankruptcy protection last month, and industry watchers say more parts makers are on their way. The pressures building in the industry are too great.
"I can't in my 21-year history in the auto industry think of a time when it's been more difficult than this," says Laurie Harbour-Felax of consulting firm Stout Risius Ross. "More Chapter 11 filings are imminent in the next three to six months."
A multitude of economic factors are depressing the supply industry, including:
•Vehicle sales are expected to plummet to the mid-15 million range, after topping 17 million in 2000. Automakers are working hard to restrain production to stay in line with actual demand as the economy weakens. Ford announced earlier this month that it will slash second-quarter production by 10% to its lowest output since 1982.
•Pressure from automakers to cut parts prices continues to intensify as they restructure their operations.
North American suppliers must compete not only with each other but with suppliers in China and India, where labor costs are much lower.
•Raw material prices, from oil (to make plastics and transport parts to assembly lines) to metals used throughout cars, are on the rise.
In the current environment, suppliers often can't pass those cost increases along to their customers, the automakers.
•Credit lines are drying up, making it difficult for cash-strapped suppliers to survive while waiting for their customers to pay their bills.
Auto suppliers must have plenty of cash on hand, because they often don't get paid for at least 30 days after parts are delivered — and sometimes wait 90 days.
"I don't think you'd be going out on a limb to say that the current economic environment for North American suppliers is probably the worst it's ever been," says Stephen D'Arcy, global automotive leader for PricewaterhouseCoopers.
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