Laurie Harbour-Felax, Stout Risius Ross Report 2006 OEM Profitability Gap, Impact on Automotive Industry Consolidation

Profitability Gap Increases Between Domestic and Japanese Automakers

TRAVERSE CITY, Mich., Aug. 7 -- Stout Risius Ross (SRR), a leading financial and operational advisory firm and Laurie Harbour-Felax, Managing Director, Operational Strategy & Performance Improvement Group, SRR, report the 2006 profit-per-vehicle gap between the Domestic Three and the Japanese Three automakers is $3,814 (including special writeoffs), representing a 32 percent increase over 2005.

The key factor contributing to this growing gap is lack of commonization. Although the domestic OEMs are making strides in global parts and platform/architecture consolidation, additional efforts in product development and engineering can achieve significant cost reductions while improving quality and efficiency. Additionally, benefits resulting from commonization are improved supplier relationships and purchasing, manufacturing and engineering efficiencies.

Also, market share loss trends indicate domestic OEM vehicle designs are not meeting today's consumer expectations while quality perception of domestic brands continues to be poor. July vehicle sales demonstrate this critical factor, as it was the first time in history that the foreign automakers' market share in the U.S. was above 50 percent. Other barriers facing automakers include the fluctuating U.S. economy, increased raw material costs and the impact of foreign currency.

Among the Domestic Three, General Motors has made the most significant strides in terms of improving profit per vehicle. Several factors are contributing to this, but the two primary reasons are the introduction of new vehicle designs that consumers enjoy and significant cost reductions in the areas of purchasing, product engineering and process engineering through their transformation plan. Additionally GM is diversifying outside North America and focusing on global profit per vehicle.

"GM continues to improve in the key areas that will allow them to be successful," said Harbour-Felax. "However, in addition to the impact these factors have on the OEMs, they also play a role in supplier community transformation. Suppliers must act now before they become victims of unavoidable industry change."

In recent years, bankruptcy has become common throughout the supplier industry with more than 30 bankruptcies of major automotive suppliers since 1999 and many other smaller companies facing some form of liquidity crisis. Merger and acquisition activity within the automotive community has increased approximately 250 percent among announced transactions between 2001 and 2006. There are a number of outside pressures that influence this consolidation, including domestic overcapacity, low-cost country opportunities, OEM purchasing shifts, interest of foreign buyers, commonizing components and the OEM's shift towards preferred suppliers.

"These pressures will continue to impact consolidation and challenge suppliers as they evaluate their businesses and make critical decisions that impact their companies," said Harbour-Felax. "Ultimately, however, supplier success will be dictated by collaboration and speed of execution."

To assist automotive suppliers through this transition, SRR provides resources and expertise in the areas of investment banking; operational strategy & performance improvement, including Asia strategy development and implementation; restructuring & turnaround; valuation & financial opinions and dispute advisory & forensic services.

"SRR is dedicated to helping the automotive supplier community succeed and seeing it through this transition," said Rich Flynn, Managing Director, Investment Banking and Board Member, SRR. "The expertise and resources of SRR can help companies navigate the consolidation trend by improving their operating performance or identifying strategic alternatives that will maximize value."

In addition to providing services to align manufacturing strategy, SRR's restructuring and turnaround group, and investment banking group help companies evaluate their financial and strategic alternatives. The firm also provides business and restructuring plan review and development, cash-flow management, cost reduction strategy development and crisis management services.

In June, Harbour-Felax and the Harbour-Felax Group joined SRR to strengthen its Operational Strategy & Performance Improvement Group. As Managing Director, Harbour-Felax will utilize her vast experience in the transportation industry (automotive, heavy truck, agriculture equipment and aerospace) to assist companies in aligning their manufacturing strategies with key corporate goals and objectives to maximize shareholder value.

About Stout Risius Ross

Stout Risius Ross is a 200 person financial and operational advisory firm. The firm specializes in investment banking, through its subsidiary Stout Risius Ross Advisors, LLC, operational strategy & performance improvement, restructuring & turnaround, valuation & financial opinions and dispute advisory & forensic services. SRR's clients include Fortune 500 corporations, middle market companies and private equity firms that operate in a wide range of industries around the globe. More information can be found at www.srr.com.