Being all it needs to be: International Automotive Components

January 22, 2010

If bigger is better, then IAC is a top-notch supplier of plastics components and systems for vehicle interiors. Economies of scale have come with the acquisitions of "distressed" Tier One suppliers Lear Corp.'s interiors business and Collins & Aikman's soft trim business in April 2007, creating a focused, thriving company. Are there lessons here for molders and mold makers?

Headquartered in Dearborn, MI, International Automotive Components North America LLC is comprised of a "Who's Who" of used-to-be top Tier One automotive suppliers. And that is no accident. John Smail, VP of commercial operations for IAC, says, "We're taking on the role of consolidator, strategically and globally. We won't be a conglomerate in the sense of being all things to all people. We're simply an interiors company and we believe we are the most viable in the industry today."

Smail explains that Wilbur Ross, owner of a private equity group, is a "distressed investor" who looked at the automotive segment a few years ago and predicted a downturn in both the automotive and supply segment. "Interior components looked like a good investment for Ross. It was distressed, but he was able to buy some historically valuable assets which allowed him to acquire a large asset base," Smail says. "He's a long-term investor and provides the capital to restructure the companies he purchases."

Collins & Aikman's soft trim business and the Lear interiors group were both companies that had a great heritage on their own, with great assets, and a great footprint, Smail notes. Those purchases created IAC North America LLC. "We believed the automotive industry needed an interiors-focused supplier, solely focused on vehicle interiors," comments Smail. "Historically, that business has been a mishmash of companies trying to provide a lot of different components."

In 2008, IAC reported global revenues of $4.5 billion with 70 facilities in 18 countries, and 205 suppliers. IAC North America encompasses 32 plants in the United States, two in Canada, and facilities in seven cities in Mexico. Lear alone had 53 plants when it was purchased. Before there was an IAC North America, there was an IAC Europe, notes Smail, and Asia has grown rapidly, with eight locations between China and India. The company has completed some consolidation in North America, closing four plants. But it acquired a German automotive flooring and acoustics company with operations in Europe.

To support its specialization in interiors, the company has core technologies in specific processes: blowmolding, injection molding, and compression molding for headliner substrates and flooring. Over the past three years, IAC's management has concentrated on getting the right footprint and investing in the technology that can move the company forward. Vertical integration has been key to this, and has helped IAC be competitive and provide a good foundation for its global business. Smail explains the areas in which IAC is vertically integrated:

1) Developing and manufacturing materials: "We've vertically integrated in this area and are compounding our own TPO," Smail says. "We can control our costs better and we can exactly tailor the TPO to a specific application. That really helps us be competitive. We also make our own TPU powder and PVC alloy, materials we use for the electroform nickel tools that is the core technology of our Iowa City plant."

2) Smail says that IAC is also vertically integrated in designing and making air registers that better control the flow of air to a vehicle's occupants, a core technology that fits the company's footprint well. "We're molders and can provide value there, a better value chain for those components," he adds.

3) In the company's Iowa City plant IAC makes electroformed nickel tooling (shells) for instrument panels, doors, and arm rests, a highly specialized process that few companies provide. IAC also makes compression tooling used largely for flooring and overhead systems, notes Smail, adding, "We design our tools to produce premium quality products."

4) Validation capability: "We validate our materials in our own test labs," Smail says. "We develop and validate materials and products in our Troy, Michigan facility."

5) NVH (noise and vibration harshness) testing is a cost internal capability IAC maintains at its Plymouth, MI, facility, one of the largest NVH test facilities in the industry.


Partners, not just suppliers
IAC has a large supplier base that the company depends upon to provide tooling, molds, and materials to support its large molding operations. Smail says that IAC is committed to its suppliers and their health, and recognizes that IAC's strengths depend upon supplier strengths. "We need a good, healthy supply base in those areas in which we choose to buy rather than to manufacture ourselves in-house," Smail says. 

While IAC makes some its own tooling, that tooling is specialized to IAC's specific processes, such as the electroformed nickel tooling made to support the Iowa City's cast skin applications, rotational molding, slush molding or spray urethane. "Iowa City serves as the company's global electroforming tooling center of expertise, and offers a tremendous range of demonstrated electroformed tooling capabilities," explains Smail.

For injection molds, the company has a number of mold manufacturers that supply its needs. "There's so much injection tooling capacity out there, as well as a lot of good mold makers who can make us very good injection tools, so that's something we purchase," Smail says.

However, Smail also recognizes the struggles that many mold companies have gone through, especially those serving the automotive industry. He acknowledges also that many mold manufacturers don't have the financial strength to support automotive OEMs' business model such as no progress payments and final payment at PPAP. "Specifically, to address the tool shops, I think we have excellent tool shops that provide the best molds to us, and we work well with our Tier Two suppliers," Smail states. "The OEMs have stepped up and improved payment terms throughout the supply chain, especially the tool shops that have a problem getting the finances required. We're trying to help all the way down the supply chain to get them paid. We have excellent tool shops in Michigan and hope that they can stay in this space."

Mold companies' problems are exacerbated by the quick turn of the mold programs—a turnover every 12-15 weeks—building a tool and getting it out the door. Smail said they need to turn their cash over quickly as well, and that doesn't happen in the automotive industry.

That said, however, mold companies must take some responsibility to create a viable business model, and that includes being financially strong, and putting in place other core strengths to sustain their businesses. "We can't be a banker for the tool shops. But, the OEMs have to help with the terms. There must be a collaboration between the OEMs, the Tier One and the Tier Two supply base to maintain a strong supply chain," Smail comments. "The ones who will stay in this space understand how to be competitive, understand their core competencies and which tool size in which they can be competitive. If OEMs can help get these guys paid in a timely manner—not wait until PPAP—that really helps. We want to continue to work together and try to help that situation."

Smail notes that the whole industry is getting much more specific on terms of doing business and clarifying contracts. "When we sit down with our suppliers, our tool shops know exactly what the terms are, so there are no surprises down the road," he states. "Before we source a program, do they have enough liquidity for working capital? We're all clear as to what the terms are. Can they handle that? If not, then we talk about that before hand to see what needs to be done."

Smail acknowledges that the automotive supply chain hasn't seen bottom yet. "We know there will be more fallout among the supplier companies—Tier One and Tier Two," Smail says. "Companies that are going to stay [in this segment] have to have strong balance sheets. There's no more pressing issue for any of us in this business than a healthy supply chain. It's such a delicate supply chain—once a supplier goes to his knees, he brings others down with him.

"It's imperative to manage those relationships, more so today than ever. It's your survival skills that sets you apart from the competition," Smail adds. When molders go under, as many large companies have over the past year or two, including large molders such as Cadence and Bluewater, the OEMs and the Tier Ones must scramble to remove molds from one company, find another molding company, and get the molds up and running at the new supplier. "This takes a good cross-functional team to get in there and assess the inventory: how much bank to product do they have?" Smail says, "We've become a specialist moving business from failed companies—we call it our airlift plan—and can move equipment and tooling in record time, sometimes in as little as two weeks."

Because of the still tenuous situation of some of the Tier One suppliers, Smail predicts that there is more M&A on the horizon globally. "There will be more consolidation going forward, and IAC continues to look at this picture. For example, Visteon is in Chapter 11, and have openly stated that interiors is no longer a core business.

Smail concluded that no matter how large or small your business, the key is knowing what you're good at, and focusing on that. "You really need to understand what your core products are, what your core technologies are and how those can provide the most value to the customer and the proper return on investment for the company and its investors," he advises other suppliers. "Focus on what can provide value in the market place. You can't be all things to all people." Clare Goldsberry





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