Auto Suppliers Turn Around

By MATTHEW DOLAN And JEFF BENNETT Auto-parts suppliers are making a surprising turnaround, defying fears earlier in the year that many would collapse amid the car industry's downturn and the bankruptcy filings of General Motors Co. and Chrysler Group LLC. But quick restructurings, some through bankruptcy court, along with financial aid from the government and a brightening sales outlook for 2010 now have many suppliers looking up. The stocks of TRW Automotive Holdings Corp., BorgWarner Inc., ArvinMeritor Inc. and Goodyear Tire & Rubber Co. still trade well below their 2007 levels, but the shares have soared since hitting lows back in March. Goodyear, which supplies tires as well as parts like windshield wipers, above, has seen its shares rise as parts makers expect a stronger 2010. On Tuesday, TRW, a maker of brake, steering and electronic components, said it has raised $400 million in new loans, an accomplishment in a sector that had been all but locked out of new borrowing for most of the year. Other suppliers on the mend include seat-maker Lear Corp., which reorganized in bankruptcy court. Its new stock started trading at $50.50 in November but is now near $70. Dana Holding Corp., a maker of axles and drive shafts, slashed costs and is paying down debt, sold a piece of its business to a Mexican parts supplier and now expects a significant increase in earnings in 2010. Its stock fell to 19 cents in March but is now trading over $10.40. American Axle & Manufacturing Holdings Inc. has renegotiated its credit payments, booked new business and says it can now turn a profit even if 2010 U.S. auto sales only reach 11 million cars and trucks, which would still be a depressed level by historical standards. American Axle's stock is now hovering above $7.50, up from just 29 cents back in March. "The recession forced all parts suppliers to make their cost structures very lean and now they are potentially positioned for explosive earnings growth as vehicle production gets back to normal," said Morningstar Inc. auto analyst Dave Whiston. Earlier this year, many feared than the interdependent network of dozens of large suppliers supported by hundreds of small parts makers would struggle to stay in business as auto makers slashed production. Both GM and Chrysler shut down all of their North American plants for extended periods as part of their Chapter 11 reorganizations. Some suppliers are still hurting. Visteon Corp., for example, is still restructuring under Chapter 11 protection. But widespread disaster across the industry was averted when government cash infusions and payment guarantees for GM and Chrysler kept the most important suppliers afloat. Restructuring consultancy Grant Thornton International Ltd., for example, predicted in March that without a managed bankruptcy process, some 500 suppliers were at high risk of going out of business because of the cascading effect of reduced volumes and uncertainty around government support. Indeed this year, 14 of the top 150 auto-parts suppliers declared bankruptcy. More than 40 smaller parts makers sought similar restructuring protection and dozens of others quietly shuttered their doors permanently, according to an industry group's tally. Before filing for bankruptcy, GM made critical payments to suppliers early, which also helped cash-strapped companies avoid trouble. Suppliers even weathered the summer when GM and Chrysler temporarily shut down factories for up to three months to draw down their swollen inventories. Without the factories running, suppliers had no income. The government's cash-for-clunkers rebate program had the opposite effect, taxing suppliers to ramp up production quickly while it was still difficult to access the necessary capital because of tight credit markets. This fall GM said it began paying direct materials suppliers weekly instead of monthly in an effort to help struggling suppliers' cash flow and keep their doors open. GM also said it would let suppliers keep a larger share of savings generated from approved cost reductions. It's gone so well that GM is returning $140 million of the $290 million GM was loaned from the government's supplier bailout package. At its peak, GM's support program involved 375 suppliers, but only about 70 are now still enrolled. Many companies are finding that managing the upturn could be more difficult than weathering the downturn. With auto makers looking to ramp up production, many suppliers are finding it challenging to secure the necessary raw materials and the crucial working capital required to restart production. Still, even with the financial strides, the supplier sector faces a challenging 2010 and its health continues to worry the Obama Administration as well as the leading auto makers. Many suppliers will continue to see cash outflows in 2010 as a result of increases in working capital requirements to meet higher production demand, according to Fitch Ratings. Auto makers, which are continuing to shrink their supply base, are trying to pick the companies offering the best products and then rewarding them with more business. Ford Motor Co., for example, is aiming to reduce the number of suppliers it uses to 1,650 this year from 2,198 in 2008. The small private parts makers will take the biggest hit as the larger, healthier players begin buying assets to improve their product portfolio. "We have seen restructuring on the larger players but it's the smaller players where real focus will be in 2010," CSM Worldwide auto analyst Jim Gillette said. "There is still a huge amount of unneeded capacity."