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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.

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    • 1 Second Ago
      • 6 Years Ago
      I guess than Toyota,Honda etc might have to import parts from their Japanese and foreign suppliers.
        • 6 Years Ago
        They are in trouble too, we just don't hear about it every 15 mins. No the grass isn't greener on the other side.
      • 6 Years Ago

      Small SUVs? GM and Chrysler do not even have one, Rav4, CR-V and Escape own it.
      I won't spend the time to argue with u, you only see what you want to see.

      Both GM (Saturn Vue) and Chrysler (Dodge Journey) are small SUVs, both were available to the public at the time of the Gas price spike. To say that they didn't have one, is ignorant at best, dishonest at worst.


      Family sedans? Are you kidding me? There's a reason that there's a term CAMCORD.

      Did you know that, that GM actually sells more cars in this segment than both Toyota and Homda?

      Go look it up:

      Aura, Malibu, CTS, Lucerne, G6, Impala.

      While none of these models outsell either the Camry or Accord, add their numbers up.

      Again, to say that they do not offer cars in this segment, is at best ignorant.....

      True, I would like to see GM consolidate their offerings in this segment.

      Funny, the gas price spike lasted all of 10 weeks, and panicky idiots made knee jerk decisions by trading their $50K+ vehicles at huge losses, only to have gas prices drop way past what it was when they bought those said vehicles.

      Just last week Autoblog ran a story about Honda leasing a shuttered Ford facility to house Civics that they CAN'T sell.

      How many Sequoias or Land Cruisers do you think Toyota has sold lately?

      This environment sucks for everyone, it just sucks a whole lot more for the bigger companies.

      These companies were ALL hit by a LEFT/RIGHT combination. The Left being the FINANCIAL Crisis, the Right being the constriction of the market place. They were all going to have trouble in the shrinking market place anyway.

      Honda's begging for money in the UK, and bullying the Japanese gov't into manipulating the currency, so that it works in their favor. Toyota have been shutting down plants everywhere. It sucks for EVERYONE right now.
      • 6 Years Ago
      Well if the sales are suppressed over the next several years by 30% or so, then I could see at least that percentage of suppliers dropping off. I imagine it's a waiting game...after a certain number drop off, then whatever business there is will start shifting around.

      Better news for shops that are the sole supplier of parts, unlike several in Indiana lately. They were one of 2 or 3 places making the same thing, so they got axed.

      It will be interesting to see how this plays out, as it will probably go hand in hand with car companies failing and others picking up the sales slack.
        • 6 Years Ago
        Look people have been buying these HUGE SUVs with V8, 500 HP, body on frame tanks. All based on cheap credit. In reality many of these people can only afford a car that costs much, much less, and many simply can not afford to buy them at all. So there's a need for an adjustment, the demand will fall, as will the need for car makers and suppliers.
        • 6 Years Ago
        Mr Oak, i am sorry, but you are either clueless or a complete hack.

        "Both Ford and GM were caught in transition, NO they did not bring this on themselves"--------------------OK look here, gas prices went thru the roof, what did Detroit offer to combat that? Subcompacts? NO, Aveo is a JOKE compared to Fit and Yaris. Auto Week OPENLY said that if you are on the market DO NOT buy Aveo, there are much better cars available.

        Compacts? Bob Lutz is ON THE RECORD saying that GM does not build good small cars, so i guess that leave Civic and Corolla on top.

        Family sedans? Are you kidding me? There's a reason that there's a term CAMCORD.

        Small SUVs? GM and Chrysler do not even have one, Rav4, CR-V and Escape own it.

        Now you will as usual say that D3 are "top heavy" they make cars that eat a lot of gas, so it is not managements fault, it is really Exxons. But how come Toyota and Honda make tons of money when gas is cheap? How come they make it when gas is some what affordable? How come they make money when gas is pricey?

        Yep, D3 management is perfect, Wagoner has been a CEO for 9 years prior to that he was a CFO....................so yeah, he is innocent, Wall Street and Republicans are guilty............................................have a cool aid.
        • 6 Years Ago
        It has nothing to do with horsepower of a car or suv vs car. The auto market was 17 million per year, its now 10 million a year. Suppliers will fold some will make it. We can not prop up that many suppliers. We have almost double the suppliers needed. We need to let the market consolidate. If half need to fail so the other half do not need to use my tax money then so be it.
        • 6 Years Ago
        Mike you are right. So i wonder why the government stepped in in the first place to help the suppliers. Some need to die, there's no other way around it, some of the suppliers need to go out of business.

        People and government have an "emotional" attachment to car makers but the same should not extend to suppliers. Especially if some will die one way or another.
        • 6 Years Ago
        Mike, you guys and your freaking "Tax" dollars. Guess what, your short-sighted, selfish (GOP) way of seeing things, will NOT work. The Gov't could sit on its hands and let this death spiral (CAUSED BY WALL ST. GREED), play its self out. Guess what the end result would be? There would be NO tax dollars to cry about.

        Both Ford and GM were caught in transition, NO they did not bring this on themselves any more than Honda & Toyota brought their problems on themselves. Note: Will not form an opinion on Chrysler, because there is no clear direction on where that company is being taken.

        I watch the financial news networks daily, this is how a typical day goes:

        9:00a.m. The gov't is going to Nationalize the Banks, this will be the end of Capitalism as we know it.

        10:00a.m. The Gov't NEEDs to come up with a plan to take the Toxic Assets of the books of these banks.

        11:00a.m. I think it is stupid of the gov't to invest in "Green Technologies" because oil is so cheap right now.

        11:15a.m. Let the domestic Auto Industry fail, its not worth saving.

        11:17a.m The Gov't was wrong to let Lehman Brothers fail.

        My take? The industrial wealth of this country was exported by Wall Street, in the name of the almighty "Dividend". We are no longer the country that makes stuff that world buys, we now buy the stuff the world makes.

        Everyone bought into the "Easy Money" scam. We handed over boat loads of our hard earned money to Wall Street, for our "Guaranteed Retirement" nest eggs.

        First they made our jobs disappear, then they make our money disappear, then they blame the Government for not being vigilant, then 10 mins. later cry about the government trying to over regulate the industry.

        Don't any of you find it funny that they implore us to leave our money in the market for the long term, and then they turn around and make daily, even hourly side bets AGAINST our money?

        Does it strike any of you funny, that since the major banks started taking over the investment firms, none of them pay any interest on savings accounts?

        The Citibank® Ultimate Savings Account. Earn 2.10% APY.
        Countrywide Bank® SavingsLink(TM) Earn 1.65% APY on $10,000 Balances.

        Chase Savings
        0.10% APY
        No Minimum Deposit, No Fees

        The article below was published in the UK, but its no different over here.

        I always preferred credit unions, now, they are starting to look more like the bloody thieving banks.
        • 6 Years Ago
        @Mr Oak,
        Thank you Mr Oak for the best post ever on Autoblog, I hope eveyone reads this, it's 100% pure truth.
      • 6 Years Ago
      Frankly speaking I'm hardly impressed with any of these so-called expert analyst companies, let alone A.T. Kearney. Each and every one of them is always a day late and a dollar short with their analysis. Any high school student could have predicted that if the Big 3 struggle that their suppliers would also struggle accordingly, duh Supply and Demand 101.

      And the 'What Auto Suppliers must do-Now" section is an absolute joke. What AT Kearney is telling them to do now should have been done 1-2 years ago when the auto slump began to rear its ugly head. If any auto supplier waited until now to heed Kearney's advice, I can guarantee you that they have either filed for Chapter 11 or are getting the paperwork done as we speak.

      I'm not sure who makes me more ill; these blowhard analysts that consistently have 20/20 hindsight or the so-called financial experts that need to be paid retention bonuses at AIG, Fannie Mae, Freddie Mac, Bof A, etc. Call me old school, but if cost my company billions of dollars in losses because of poor decisions I made, I shouldn't get a bonus I should be expecting a pink slip
      • 6 Years Ago
      There's simply too much capacity. There is no need for any intervention. There is no RIGHT amount of production, that needs to be sustained, only what consumers are willing and able to afford to buy. Suppliers exist to serve the needs of the manufacturers. They came into existence from nothing, and can go back to the nothingness from which they came. That is the life cycle of business.

      We have as many cars on the road as required. Probably more. We just need to use them a bit longer before throwing them out. And while we are using them a bit longer, we can hopefully save some money to put towards the next one, rather than buying a shiny new one on credit.

      I feel sorry for people who can not find work, but just because you exist and breathe, doesn't mean a job for you should also exist. That is faulty logic. That is not how life works. People exist for biological reasons that have nothing to do with economics. When the number of potential workers exceeds the number of actual workers required to run a society, the unwanted excess is the product of sex, not the product of a flawed economy. In an ideal world, people considering having a kid should consult a crystal ball to see if their son or daughter will be needed in the future. Not only did we produce too many cars for the market, we evidently produced too many people for the market as well.
      • 6 Years Ago
      There will be a disruption for sure, but the as long as the tooling and machinery don't go poof with the companies, parts production will go on.

      What the government should do if anything is ease the transition of workers from unproductive enterprises to productive ones. Otherwise, it drags down the country as a whole. We shouldn't get xenophobic either. The auto industry is the sad story we hear and read about everyday, but there are other US industries that thrive and export.

      People are getting whipsawed so fast they can't react. In that, I think government should take as warning signs frenzied speculation whether it be in real estate or oil. Look at both industries, they were lucrative and now in the doldrums and took the country down with them.
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