A.T. Kearney conducted a survey of the top-tier automotive suppliers to North America to assess the impact of the economic downturn on their financial health. In addition, the firm created a number of scenario-based market projections to analyze the health of these suppliers over the 2009-2010 timeframe.
Key findings from the survey include:
1.Volume Decline: A significant drop in auto sales has exposed under-utilized high capital intensive operations.
2.Commodity Prices: Raw material prices have increased 24% over the past year - a portion of which some suppliers have still been unable to totally pass onto their OEM customers.
3.Operational Issues: High fixed costs and excess capacity present a significant challenge in the face of falling demand that has impacted cash flow, bringing many suppliers to the brink of bankruptcy.
Tier 1 suppliers are in an especially difficult predicament. In addition to the difficulty of passing raw material costs on to OEM customers, their supply base (Tier 2 and 3 suppliers) is becoming increasingly fragile. A.T. Kearney's survey findings indicate that Tier 1 suppliers anticipate that up to an additional 23 percent of their supply base will be in immediate financial distress within the next 12 months and present a significant challenge to their own operations.
"The recent, extremely weak auto sales figures are the third blow to the industry this year, with consumer confidence driven to new lows from falling home prices, a declining stock market and an uncertain economic future," said A.T. Kearney Automotive Partner Doug Harvey, who led the comprehensive study. "There is some panic in the industry, as car companies and their suppliers realize that sales demand volume is not bouncing back anytime soon."
What Auto Suppliers Must Do - Now
A.T. Kearney's survey indicates that more than 29 percent of Tier 1 suppliers place restructuring as a top priority in 2009, while more than 20 percent will choose to focus first on operational improvements. Activities in the short term can include financial restructuring and improving cash positions via wage adjustments, inventory or asset liquidation.
"To develop a sustainable business model in this changing industry, Tier 1 suppliers will undoubtedly have to reassess their own supply base and determine which suppliers should be chosen as long-term business partners," Harvey said. "However, currently less than 40 percent of major Tier 1 suppliers frequently use a supplier risk mitigation plan."
