The Auto Channel
The Largest Independent Automotive Research Resource
The Largest Independent Automotive Research Resource
Official Website of the New Car Buyer

Grant Thornton LLP Says Transplant Manufacturers Will Out-Build Detroit in 2012, Creating New Opportunities for North American Suppliers

SOUTHFIELD, Mich., June 22 -- The U.S. government's estimated $140 billion investment in the domestic auto industry may begin to pay off by 2012 with all three domestic automakers predicting a return to profitability. But for traditional suppliers to the "Detroit Three," the path to long-term viability will require securing more business from European and Asian transplants, who are expected to build more vehicles in North America than the Detroit-based companies, according to Grant Thornton LLP's Corporate Advisory and Restructuring Service.

"A new order is emerging where the Detroit companies may no longer be the volume leaders in their home market," said Grant Thornton Principal Kimberly Rodriguez, co-leader of the firm's global automotive practice. "Suppliers largely dependent on Detroit OEMs will have to present a new value equation to potential customers from Europe and Asia if they want to participate in the accelerated shift that is coming."

The reordering of the North American auto industry will be far-reaching. By 2012, the domestic manufacturers are expected to reduce assembly capacity in North America by more than 4 million units, to 7.5 million units, a 35 percent reduction compared with 2008. All other automakers combined will increase capacity by about 20 percent, to more than 8 million units, an increase of 1.5 million.

  --  Volkswagen and BMW will nearly double their combined capacity,
      increasing their output capability to approximately 1 million units.
  --  Toyota, Honda, Nissan and Hyundai will expand their combined capacity
      by 20 percent, or nearly 1 million units.
  --  Other market participants will add about 200,000 units of capacity.
  --  Capacity utilization in North America should approach 90 percent, up
      from the 75 percent historical rate, assuming an annual sales rate of
      15 million units in the United States for 2012.

According to Rodriguez, there will be a strong bias among Asian and European automakers investing in North America to source locally, but the rules of the game for these OEMs are different.

What will matter most in 2012 will no longer be historical relationships or being the lowest-cost supplier. There are opportunities, but suppliers must be flexible and meet a challenging set of criteria, including:

  --  Low financial risk, including a strong balance sheet and cash flow.
  --  A well-diversified customer mix, geographic footprint and product
      offerings, while having the requisite proximity to manufacturing
  --  Proven design and development capabilities at both the component and
      systems levels, while balancing the right technology mix to meet
      consumer and regulatory demands.
  --  Demonstrated high quality and customer service.

Only a limited number of North American suppliers meet these criteria today. However there are steps companies can take to improve their ability to compete. Among the options:

  --  Become a consolidator -- Leading companies should actively seek to
      acquire key technologies and product lines through mergers and
      acquisitions, including strategic acquisitions from distressed or
      bankrupt competitors.
  --  Become a consolidatee -- A company that lacks the resources to compete
      effectively for new orders may find that selling all or part of its
      business, or repositioning itself within the supply chain, may be the
      best strategy for maximizing stakeholder value.

  --  Aggressively deleverage -- The expected recovery in consumer demand
      and vehicle production may not be enough to address the balance-sheet
      and liquidity issues many suppliers face.  Furthermore, a number of
      industry trends will require significant reinvestment in the business
      in coming years, especially in the areas of R&D, flexibility and
      innovation.  These critical investments may not be affordable if
      interest expense is too high.

Public companies may be able to swap debt for new equity, especially as the economy recovers. However, many suppliers may need to use bankruptcy to fix their balance sheets, assuming debtor-in-possession financing can be secured from a financial institution, customers or another source.

"At the end of the day, the European and Asian automakers will be looking for stable, proactive, long-term partners who offer good value," Rodriguez said. "Domestic OEMs are seeking the same type of long-term partners and are working toward those goals, but the immediate expectations of the transplant companies are more challenging. In light of the dramatic restructurings that will occur over the next several years, North American suppliers have important strategic decisions to make, and the strategy must be defined and implemented quickly."