11.10.2006

The Grim Automotive Industry Outlook

Comments at the recent Center for Automotive Research conference on “Supplier Challenges, Investor Opportunities” included some optimism that things will get better – after they get worse first.


            The optimism, such as it was, focused on the idea of a burning platform in the automotive industry. “I think the will for survival will cause these companies at the bottom to make gigantic adjustments,” said John Casesa, managing partner of Casesa Strategic Advisors.


            But he and other speakers said there will continue to be a major shakeout of suppliers first.


            For example, Brad Coulter, director of Amherst Capital Partners, said that a third of the nation’s tool and die shops – 4,000 out of 12,000 – have closed since the year 2000 – and we still have overcapacity. Meanwhile, prices have fallen up to 30 percent in the last four years.


            Casesa commented that the problems facing Detroit are structural, not cyclical.


            “I think it IS that bad now,” he said. “This crisis is upon us right now. We are in the eye of the storm right now.”


            He added, “Business failures and liquidations may be required. Companies have to go away. That’s going to be very painful.”


            He also said, “The data say to me: the domestic companies will continue to lose share for the foreseeable future. And the Japanese and the Koreans will continue to win for the foreseeable future.”


            What will it take to turn things around? “Right now the main theme is shrinkage,” Casesa noted. “It’s an absolute necessity, but probably not sufficient. It’s not the solution to the problem.”


            Tom Stallkamp of Ripplewood Holdings alluded to lean principles when he said “You have to get a culture where internally they know they have to generate cost reductions” that are greater than price cuts.


            However, he displayed some pessimism that suppliers understand that.


            “You can’t believe how unbelievably juvenile some of the business plans of suppliers are,” he said. “They’re all based on hope and prayer.”


            Stefano Aversa of AlixPartners commented that “cash is king” and “it’s wise to insist on a cash culture.” (Allow me to point out that lean companies typically have strong cash flow.)


            Aversa also singled out information technology as an area for improvement.


            “You are probably spending too much on IT,” he said. “We say that it’s time for lean IT. As a rule of thumb, virtually any company can cut IT spending by 20 percent and be better for it.”


            And perhaps the most telling comment on what is lacking in the industry came from Casesa, while he was discussing the need for automotive companies to go in new directions – consolidation or a different customer base, for example.


            “There has to be some vision of what the new business model is,” he said.


 

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