A new study by consulting firm A.T. Kearney has found that more than half of all current automotive suppliers could file for bankruptcy protection in 2009, resulting in at least 1 million job losses. Even the most optimistic scenario would have 35% of all suppliers facing insolvency, and some projections suggest as many as 70% could face restructuring through bankruptcy. No specific names were mentioned, but these suppliers could range in size from small Tier 2 companies all the way to the largest of all Tier 1 suppliers.
The $5 billion Supplier Support Program that was recently announced might help somewhat in this regard, but it's a far cry from the $18.5 billion that the industry had sought. The Kearney study suggests that the number of failed businesses would go down as the amount of government assistance goes up. We think we could have figured that part out ourselves. Thanks for the tip, Leonard!
[Source: A.T. Kearney via Automotive News - sub. req'd]
More Than Half of the Automotive Supply Base Could Go Bankrupt in 2009; at Least 1 Million Job Losses Expected, According to A.T. Kearney Study
Survey also provides insights on how Tier 1 Suppliers can weather the current auto industry storm and avoid liquidation
DETROIT and CHICAGO, March 20 /PRNewswire/ -- Current market conditions could cause more than half of the country's Tier 1 automotive suppliers to file for bankruptcy in 2009, creating 1 million additional job losses and creating an estimated $9 billion income tax revenue shortfall, according to a new study from global management consulting firm A.T. Kearney.
"The dramatic drop-off in sales volumes that is impacting the OEMs is having a ripple effect on the health of their Tier 1 suppliers," said A.T. Kearney Partner and North American Automotive Practice Leader Dan Cheng. "In particular, suppliers with large capital investments stranded in dedicated, underutilized facilities are especially at risk."
A.T. Kearney conducted a survey of the top-tier automotive suppliers to North America to assess the impact of the economic downturn on their financial health. In addition, the firm created a number of scenario-based market projections to analyze the health of these suppliers over the 2009-2010 timeframe.
Key findings from the survey include:
1. Volume Decline: A significant drop in auto sales has exposed under-utilized high capital intensive operations.
2. Commodity Prices: Raw material prices have increased 24% over the past year - a portion of which some suppliers have still been unable to totally pass onto their OEM customers.
3. Operational Issues: High fixed costs and excess capacity present a significant challenge in the face of falling demand that has impacted cash flow, bringing many suppliers to the brink of bankruptcy.
Tier 1 suppliers are in an especially difficult predicament. In addition to the difficulty of passing raw material costs on to OEM customers, their supply base (Tier 2 and 3 suppliers) is becoming increasingly fragile. A.T. Kearney's survey findings indicate that Tier 1 suppliers anticipate that up to an additional 23 percent of their supply base will be in immediate financial distress within the next 12 months and present a significant challenge to their own operations.
"The recent, extremely weak auto sales figures are the third blow to the industry this year, with consumer confidence driven to new lows from falling home prices, a declining stock market and an uncertain economic future," said A.T. Kearney Automotive Partner Doug Harvey, who led the comprehensive study. "There is some panic in the industry, as car companies and their suppliers realize that sales demand volume is not bouncing back anytime soon."
What Auto Suppliers Must Do -- Now
A.T. Kearney's survey indicates that more than 29 percent of Tier 1 suppliers place restructuring as a top priority in 2009, while more than 20 percent will choose to focus first on operational improvements. Activities in the short term can include financial restructuring and improving cash positions via wage adjustments, inventory or asset liquidation.
"To develop a sustainable business model in this changing industry, Tier 1 suppliers will undoubtedly have to reassess their own supply base and determine which suppliers should be chosen as long-term business partners," Harvey said. "However, currently less than 40 percent of major Tier 1 suppliers frequently use a supplier risk mitigation plan."
A.T. Kearney has identified a set of actions that Tier 1 suppliers should put in place to navigate through the months ahead:
Manage Cash Aggressively: Suppliers should take short-term actions to limit cash burn rate and create incremental liquidity to survive the crisis
Develop a Supplier Risk Mitigation Plan: Taking a proactive stance to stem dependence on failing suppliers will minimize the part-price increase due to last minute re-sourcing in the event of bankruptcy.
Develop a Financial and Operational Restructuring Plan: Take near-term actions to resolve liquidity and debt issues should be taken, along with longer-term actions to restructure business model and restore profitability.
Develop a Market Share Expansion Plan: Strategically seek opportunities to gain market share, taking advantage of competitors in financial distress or bankruptcy, as a means to achieve market leadership as demand rebounds.
About the survey
A.T. Kearney's Automotive Supply Base Financial Health Survey focuses on three topics to assess the threat of bankruptcy within the Tier 1 Supply Base. These topics include: Bankruptcy Impact of Tier 2 and 3 Suppliers, Supplier Base Performance measured in quality, pricing, communications, and Risk Mitigation Techniques employed including diversification, negotiations and restructuring. The respondent company profile included over seven industry segments within the Tier 1 supply base, with Chassis and Frames comprising the largest portion - 24% of respondents.
About A.T. Kearney
A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world's leading corporations across all major industries. A.T. Kearney's offices are located in major business centers in 36 countries. For more information, please visit www.atkearney.com.