Amid economic turmoil in Europe, auto parts suppliers are seeing drastically reduced sales. Changes in EU regulations have also added another layer of difficulty for these suppliers.
The exchange rate is a likely factor in these reduced sales. With the Euro still currently stronger than the dollar, parts suppliers might be able to export parts from American factories to European auto companies for less than the price of producing the same parts in Europe. The uncertain futures in many European nations also likely does not inspire hope in auto manufacturers relying on European parts suppliers who may be forced into bankruptcy due to economic downturn.
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To my knowledge, all large US and EU suppliers now have a global portfolio that tracks global auto sales. Brose, which we visited, is an example, with sales in the EU / China / NAFTA / Brazil / Southeast Asia that reflect the size of those markets, and with customers that are a who’s who of the motor vehicle industry. While problems in the EU will hurt profits, this recession is not coming off the peak of an M&A boom and so large suppliers have what they believe to be manageable debt loads.
Smaller suppliers (in Germany, the Mittelstand or middle companies) are not so insulated. We were unable to go into Delphi this time around, but I think we would have heard about “watch lists” of smaller and specialty suppliers that may be vulnerable. So the question is whether there might be DIP financing available if bad turns to worse (or worst). My sense is that this time around – unlike in 2008-9 – Chapter 11 restructuring bankruptcies are possible.
Finally, I wonder about Japanese suppliers. My impression is that they are less diversified in terms of geography and customer base. There are exceptions (Denso and Yazaki, to name two). I’d really like a study of them, to know whether they are falling behind. What I do know is that very few show up as PACE competition finalists.
The flexibility that a global portfolio provides seems to be essential with the current state of the industry. The easiest way to maximize returns are to use trade laws and cheaper labor/other costs in different countries to adapt your business model to match the global economic landscape. While some suppliers are sending business to Asia and Latin America now because of cheaper costs, once Europe stabilizes and the costs are low, perhaps the business will return because of low costs and better opportunities for suppliers.