Bruised, not Broken

The French Revolution, Charles Dickens once wrote, was the best of times and the worst of times for the people involved.

For Canada’s auto parts manufacturers, the past few years have definitely been among the worst of times. The global economy went into a tailspin, GM and Chrysler both scaled back production during their recent bankruptcy protection revamps, and dealers also cut back for fear they may get stuck with cars and trucks no one wanted. This has translated into considerably less business for part molders, to say the least.

But with the Bank of Canada declaring that the recession is over, and with all three Detroit automakers boosting the volumes of vehicles they make over the third and fourth quarter of 2009 thanks to federal incentives, is it safe to say that times might finally be getting — at least a little — better?

Not necessarily, according to at least some of Canada’s auto parts suppliers.

It turns out, in fact, that there are a host of problems still to be faced — and the only comfort may be that many of the parts suppliers still operating have probably already made the changes that will be necessary to see them through future crises.

The first problem might seem surprising, at first glance. Someone, somewhere, once said that good news can be bad news…and they weren’t just being clever. Some of the parts molders that used up their cash reserves to remain solvent over the past few months may find out that there’s some truth to the adage when they’re unable to afford to restart production. Simply put, while part orders may come in, these shops may not have the funds necessary to spend on materials and capital expenses.

And they probably shouldn’t look to the banks for help. “From a supply standpoint, the banks don’t like the automotive industry at present,” said the global marketing director at a Southern Ontario parts molder, who wished to remain anonymous. “A lot of the suppliers that are teetering on the edge may find that the banks will decide to close them down rather than help them to refinance.”

Small wonder, then, that Southfield, Mich.-based automotive consulting firm AlixPartners estimated recently that 24 per cent of all auto suppliers globally are in risk of going out of business within the next two years — a 25 per cent increase from just 12 months ago.

And even those suppliers that can afford to begin new production runs aren’t guaranteed to actually receive any orders. “The Big Three are evolving, studying what the foreign competition is doing, and adapting,” said Brad Wright, vice president, sales and engineering, at Toronto molder Innotech Precision Inc. “In awarding a contract, they and their customers are now looking at all of the facets that make a strong supplier, in particular a low debt-to-equity ratio.”

In a notable instance of good news, Innotech was able to score a coup recently by successfully bidding to mold parts for the new hybrid electric Chevrolet Volt. “We secured this contract because we were relatively strong financially, but also because we’ve proven ourselves in the past,” Wright said. “We’re an engineering-based firm, too, which is a quality that more and more customers are demanding of their part suppliers nowadays.”

But isn’t the success of the Obama administration’s “Cash for Clunkers” program — responsible for a distinct rise in U.S. auto sales — something for Canada’s parts suppliers to celebrate? Yes and no, some say, in that the short-term benefits might be outweighed by damage done in the longer term. “It’s true that production forecasts over the next six months are up, but a large portion of that — maybe as much as 75 per cent — is simply pulling forward future demand,” said the global marketing director of the Southern Ontario firm. “The industry will pay a price for this at some point in the future, perhaps even into 2011.”

On the topic of government and the auto industry, there are worried voices saying that the rebirth of GM as the so-called “Government Motors” — of which the governments of Canada and Ontario share 11.7 per cent ownership — will not be the cure-all that many hope.

Primarily, there is concern that politics, not technological advancement, will drive decision-making. “The market should be allowed to weigh cost, quality, reliability and risk regardless of short-term political considerations”, said Dave McCurdy, president and CEO of the Washington. D.C.-based Alliance of Automobile Manufacturers. “Technological development is inherently unpredictable, and the best policies will encourage a range of technologies to develop and enter the market.”

The results of government intervention for Canada’s auto parts suppliers? “It’s possible that some of the OEMs might have difficulty raising the capital they need to fund new development and introduce new models, and there might be some fallout from that a few years from now,” said the global marketing director at the Southern Ontario firm. “The bailouts and the GM takeover kept the Big Three alive and cleaned up their balance sheets, but it didn’t address the problems that got them into trouble in the first place, and I’m not convinced that they’ve learned anything.”

Trying to map out the emerging landscape facing Canada’s auto parts suppliers is difficult, but a few broad features can be seen. Clearly, there will be fewer auto parts molders around, which has the potential to offer more work to those that have survived. “The industry will come back, but not as strong as before,” said Innotech’s Brad Wright. “There will be fewer suppliers, but more strategic suppliers.”

The survivors will have learned some valuable lessons, too. “The molders that do survive will be a lot leaner and better educated, which might be the only good things to come out of this situation,” said the global marketing director at the Southern Ontario firm. “The industry will have a long memory, and we’ll deploy capital better and not necessarily get forced into situations by the OEM customer-base whereby they bully us into making investments.”

But this last point might breed a problem of its own, he continued. “Some of the R&D costs might get pushed back to the OEMs, which could wind up hurting the suppliers, since there’s no guarantee that the OEMs will be willing or able to pay these costs, either,” he explained. “This could cause otherwise viable projects to go overseas.”

On the job front, meanwhile, many of the positions that were lost over the past year may never come back. “Outside of the plant level, there may prove to be a jobless recovery,” the global marketing director said. “Even if the industry does bounce back to previous levels of unit orders, I suspect that there will still be 25 per cent fewer jobs, mainly as a result of leaner manufacturing processes.”

To return to Dickens, it’s clear that the good times haven’t come back just yet for Canada’s auto parts suppliers. But while many shops have definitely been bruised by recent events, they haven’t been broken — or lost their optimism. “It’s still an exciting industry, and people are excited about new possibilities when the market does rebound,” said Innotech’s Brad Wright. “We’ve all had to work that much harder to survive, but many of us will emerge stronger, leaner, and better at what we do.” CPL