Auto-parts suppliers feel the squeeze

Auto-parts suppliers feel the squeeze

On one side is the rising cost of raw materials like steel, and on the other are automobile manufacturers, who habitually seek price reductions every year. Stuck in the middle are the auto-parts suppliers, many of whom are finding it harder to stay afloat. Tower Automotive Inc., which filed for bankruptcy protection on Wednesday, February 3, 2005, is the largest among at least four auto-parts companies that filed for protection in the last six months. Oxford Automotive filed for protection in December, while Intermet Corp. and Citation Corp. filed last fall. High steel prices and a slow down in automobile production helped push Tower past the breaking point. In its filing with the US Bankruptcy Court for the Southern District of New York, the company listed $787.9 million in assets and $1.3 billion in debts. Tower, which employs over 12’000 worldwide, indicated that the bankruptcy affects only its US operations. Tower’s European, Asian, Brazilian and Canadian businesses will not be affected. Among the operations likely to be closed during Tower’s impending restructuring is the company’s plant in Corydon, Indiana. The plant had been producing car bodies for the Ford Explorer; however, in 2003 Tower decided that it would not supply frames for the new Explorer model. Tower competitor Magna International of America Inc. will instead supply frames for the new Explorer model, which will be released later this year. Another plant though to be on the chopping block is Tower’s Kendallville, Indiana, operation. That plant produces brake products and engine mounts. Such items are easily shipped, and therefore Tower could relocate production to a region outside the US where labor costs are lower. Several other large auto-parts suppliers are also feeling the crunch, but the have not gone as far as declaring bankruptcy. Delphi indicated that it expected to post a loss of $200 million in 2005, more than what it had incurred in both 2003 and 2004 combined. The auto-part maker, which has eliminated nearly 28’000 jobs in the past four years, said it plans to trim an additional 8’500 jobs from its work force this year. If Delphi follows through with this plan it will bring its worldwide workforce down to 176’500. The company had employed as many as 213’000 people worldwide in 2000. Especially worrisome is Visteon, which was made independent from Ford Motor Co. in 2000. Visteon’s original net worth of $3.58 billion fell to $434 million in 2004, a year in which the company posted a loss of $1.49 billion. In addition to the rising prices of raw materials such as steel, Visteon has been especially hurt by the fact that it has retained nearly 18’000 unionized Ford employees. The unionized employees that Visteon inherited when it was spun off by Ford are paid on average $25 an hour. For comparison, non-unionized employees at Visteon’s competitors make between $10-14 an hour. In May 2004, Visteon successfully negotiated with UAW for a $14 an hour starting wage for new employees, but that still does not resolve the burden posed by the Ford workers. While it may seem like the future for auto-part manufacturers is extremely gloomy, long time industry observers indicate that the sector should rebound in the next few years. Even though North American automobile production fell in 2004 to 15.8 million units from 15.9 in 2003, the industry is expected to churn out 16 million units in 2005 and hit 17 million units by 2008. New models, more affordable automobiles, greater disposable consumer incomes and an ever increasing driving population could mean that a boom is just around the corner for the ailing auto-parts industry.