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Two reports show the prospects for the global automotive parts industry remain challenging as the industry struggles with uncertain production numbers, rising raw materials prices, and increased global competition.

Tony Deligio

September 15, 2011

3 Min Read
Automotive parts suppliers face greater challenges

Being an automotive parts supplier, either a Tier 1 or Tier 2, hasn't been a fun ride over the past few years. While 2010 was considered a "good" year by most in the industry, challenges continue to plague this industry segment. A recent report from SupplierBusiness, an IHS Global Insight business, said that ratings agency Moody's has revised its outlook for North American Suppliers to "stable" from "positive" on "expectations that global light-vehicle demand will soften through 2012 and also that rising costs will constrain profit margins."

IHS Automotive forecasts that full-year production for North America is expected to reach 12.88 million units, an increase of 8.2% over 2010. For the U.S., light-vehicle production is expected to rise 9.1% for 2011 to 8.3 million units. "Interestingly though, it is not North American demand that is likely to affect suppliers, but flat demand in Western Europe, where many North American suppliers are exposed," said the SupplierBusiness report.

The latest IHS Automotive data for Western Europe shows production for July 2011 estimated to be down 1.8% at 1.01 million units. However, full-year production is expected to reach 13.82 million units, a growth of 5.1%, fueled by exports.

However, challenges persist in spite of the fairly good news. "Even the top performers over the past 12 months are struggling," said SupplierBusiness. "BorgWarner and TRW Automotive outperformed the S&P by more than 100% from late 2010 through spring, but BorgWarner is down more than 10% since the start of August, and TRW is down more than 18%. Visteon is down by over 26% since suffering from a predominantly Asia-based business."

The Department of Commerce released its latest report on the automotive parts industry, "On the Road: U.S. Automotive Parts Industry Annual Assessment." While that report notes that there's been a "rebound" since 2010, the weak U.S. economy along with parts suppliers' "heavy debt and overcapacity" exacerbated by production cuts from the Detroit 3, has created havoc within the industry.

Within the last two years, the road became littered with the remains of failed parts suppliers. According to the DOC report, over 50 suppliers filed for Chapter 11 protection in 2009 and up to 200 suppliers were liquidated. Analysts project that while things leveled off in 2010, the road "will remain difficult for some suppliers."

Original Equipment (OE) parts production accounted for an estimated two-thirds to three-fourths of the total automotive parts production. Aftermarket parts, which has two categories - replacement parts and accessories - make up the rest.

Automotive OEMs squeeze supply chain

While the rebounding vehicle sales were good news, and suppliers started to realize some profit from their cost cutting efforts, "the auto makers have started to pressure suppliers to cut prices," noted the DOC report. "Industry analysts forecast 'severe' pricing pressure and shrinking margins globally for suppliers in 2011."

Pressures also exist from an increase in global competition in the parts industry, with many of the Japanese, German and Korean-based suppliers capturing a greater share of the U.S. market.  Competition from these suppliers continued as they opened manufacturing plants in North America - an estimated 800-1000 suppliers from overseas built plants in North America in the past 20 years, said the DOC report, creating a "mass localization" of the supplier sector.

The Detroit 3 have continued to purchase more foreign-based supplier components, yet the effect of foreign-based suppliers' increased production within the North American market means that some Japanese vehicles, such as the Toyota Sienna, had a  90% U.S. and Canadian component content. Traditional American vehicles, such as the Chevrolet Suburban, Ford Mustang and Jeep Grand Cherokee have between 61-72% U.S. and Canadian component content.

With those challenges continuing to put pressure on U.S. Tier 1s and especially the Tier 2 suppliers, the DOC report stated that "Most U.S. suppliers are ill-situated to withstand major disruptions to their sales and the impact upon suppliers when an automaker sharply curtails operations can be severe. It takes many months and significant resources to win business from vehicle assemblers or from the major 'Tier 1' suppliers."

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