Companies That Supply Parts to Auto Industry Are Ailing Despite Increased Outlooks, Study Says

DETROIT reported that companies that supply parts and components to the auto industry are "gravely ailing," a report released Wednesday said, despite increased earnings outlooks this week from two of the world's top three suppliers.

Median revenue of 43 publicly traded suppliers declined by 11.6 percent from 2000 to 2001, and median profitability plummeted by 54.4 percent to a new 10-year low of 2.9 percent in 2001, according to the study conducted by Ann Arbor-based Automotive Consulting Group Inc.

"The sharp drop in profitability of North American suppliers is closely related to the erosion in (major domestic automakers') market position," the report states.

The market share for General Motors Corp., Ford Motor Co. and the Chrysler Group of DaimlerChrysler AG has declined about 5 percent since 1999 from about 68 percent to 63 percent, the report says.

Visteon Corp., the world's third-largest supplier based on sales, raised its second-quarter earnings forecast on Wednesday.

The Dearborn-based company expects second quarter net income of $70 million to $75 million, excluding special items. Including the items already reported in the first quarter, Visteon expects a full-year loss of between $259 million and $289 million.

Visteon previously projected net income of $60 million to $70 million in the second quarter and $25 million to $75 million for the full year.

On Tuesday, the world's largest supplier, Delphi Corp. , also raised its second-quarter and full-year earnings forecasts.

Troy-based Delphi said it expected revenues for the quarter ending June 30 would range between $7.2 billion and $7.3 billion, up from $7.1 billion. Its earlier estimate of $200 million in net income was raised to between $210 million and $220 million.

Delphi spokesman Brad Jackson said the company would need to thoroughly examine the study before responding directly.

"Delphi proactively used this down time to prepare for the future by implementing aggressive restructuring, shifting its product focus toward high-tech electronics and new market opportunities," Jackson said.

The rosy forecasts are a result of increased production by the major automakers sparked by better than expected sales, rather than an indicator of long-term financial health, according to the study.

"Whether or not production is going to stay at current levels is still a question," Automotive Consulting Group president Dennis Virag said. "We're beginning to see consumer sentiment decline, and that's basically a harboring of future spending and auto sales."

As the automakers look to cut costs, the suppliers are feeling the heat to follow suit, in large part by reducing their profit margins.

The suppliers may not have too much more to trim, which could lead to some either filing for bankruptcy or being sold, according to the report.

"There's a limit, and we're fast approaching it, but there's still waste that can be cut," said Hiro Mori, Automotive Consulting Group's project manager.

Despite Visteon's raised expectations, chairman and chief operating officer Peter Pestillo told investment analysts Wednesday that Ford's declining market share was making it difficult for the supplier to increase its earnings.

He said, however, that Ford's restructuring program announced last January seems to be working, and he predicted the automaker would bounce back from its financial challenges.

Pestillo said he was optimistic about Visteon's future as it looks for ways to become more efficient, broaden its customer base and cut costs.

He also warned the automakers his company would not foot the bill for late design changes.

"When you make changes, you pay for the changes," he said.

A Visteon spokesman said no one from the company was available to read the study and formulate a response.

The company, spun off from Ford in 2000, earned $60 million in the second quarter of 2001 and $3 million for the year, excluding restructuring charges of $100 million for the quarter and $121 million for the full year.

Visteon has 79,000 employees in 25 countries.