Will We See an Automotive Supply Chain Recovery?

There have been quite a number of headlines of late about risk and renaissance in the automotive supplier community. When new bulbs eventually begin to break through the frozen economic tundra of the nuclear automotive winter, supply markets will definitely return. In their wake, however, will be the carcasses of many who failed to stock enough provisions during the cold spell. This point is particularly relevant for all companies higher in the manufacturing food chain, as lower-tier suppliers in the automotive market are often the same suppliers delivering parts and materials to other industries, including A&D and diversified manufacturing. Still, it is worth stepping away from our current challenges and asking what the future automotive supply chain will look like once the market returns.

A recent Dow Jones Newswire story suggests that we might be in for a new auto-parts renaissance in the coming decade. According to the article, "U.S. billionaire investor Wilbur Ross, who operates a global automotive supplier, is still sticking with his bet on the automotive industry, saying the sector will experience a renaissance over the next 10 years." The renaissance won't come quickly enough for some, however, because "regarding suppliers, Ross said he expects more bankruptcies as the problem of excess capacity remains. He expects larger suppliers to buy assets of failing companies as they expand globally to match pushes by Ford and GM to build more global cars." This is particularly interesting, because "[these global cars] such as the Ford Focus, are built and sold around the world using common parts, so that a car built in China is almost identical to one built in the U.S."

But even suppliers for these growing platforms and models aren't out of the blue just yet. Spend Matters research suggests that financing remains extremely challenging for many suppliers in the automotive market, even ones that can show a steady book of business. Moreover, according to Ross, many "suppliers [have] spent their cash-on-hand as they kept their companies running while auto makers cut production … [and] suppliers are struggling to find funding as production increases." Without question, surviving automotive-parts suppliers will, in the coming years, struggle with the Catch-22 of needing to accepting new orders in order to rebuild financial stability while their current financial instability has them struggling to find new ways to finance new orders.

All of which suggests to me that in the current environment, companies with a healthy balance sheet looking to put capital to work might find that the supply chain is the best place to do it. By financing early-payment discounts with a substantial APR and by making targeted investments in suppliers that protect downside risk (e.g., convertible debt), I believe that healthy and forward-thinking manufacturers stand to make a better margin in the coming years from their buying power and buying relationships than from the actual products they're selling. It's a once-in-a-lifetime opportunity to increase shareholder value by improving supplier relationships.

Jason Busch

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