Canadian auto suppliers go get a piece of the American pie

By all reports the Detroit Auto Show, held earlier than usual in January, was the perfect remedy for post-holiday zombie-dom. Not only did it offer the thousands of show-goers the chance to ogle, touch and drool over the cars of their dreams, but the floor was giddy with rumors. After the Daimler-Chrysler wedding, who would be next to tie the knot? Ford and Nissan? Nissan and BMW? Ford and BMW?

Such speculation, which may turn into reality in some form even before this issue finds print, is not merely the work of hyper-active imaginations. The car industry has been rife with over-capacity for years. Lining up partners and rationalizing model styles and manufacturing volumes is, after behemoth egos are laid aside, a sound business strategy; just the type of thing to buoy the value of lagging stock prices.

Overlooked in all this rumor mongering and merger-mania, however, is one teensy-weensy little fact–the auto companies are getting out of the auto business. At least they’re getting out of the side of the business the public traditionally associates with the nameplates of the models in the showroom. For the foreseeable future, automotive OEMs will continue to oversee product line conception, design and marketing, but their days as true vehicle makers, fabricating and riveting together the guts of cars and trucks, are numbered.

Remember the “good old days” when a company like GM was totally vertically integrated: Fisher Body made car interiors, AC Delco made electronic components, Hydra-matic made transmissions and a huge factory complex like Buick City in Flint, MI put it all together. Those days, as TV’s Kojak used to say, are long gone, baby. GM is shedding Delphi, the remnant of AC, at the end of this year. In Brazil, VW has been using contractors to assemble its vehicles for several years. In Europe, Magna’s Steyr-Daimler-Puch assembles vehicles for Chrysler and Daimler-Benz, and has already been awarded a contract to assemble the Mercedes M-class sport utility vehicle. North American car companies aren’t to this stage yet, but would desperately love to extricate themselves from their high-priced labor and farm out vehicle assembly to the lowest bidder. And, one feels, if the CEOs of GM and Ford really want do something, they’ll eventually find a way to do it.

As Quebec Tier 2 supplier IPL’s recent purchase of small Windsor, Ont.-molder Prelude Plastics Products suggests, this restructuring auto market implies more buyouts and mergers in the supplier base. Why? Because just as the auto OEMs were themselves once vertically integrated, now so do suppliers need to have location advanatage, capacity and different capabilities that stretch beyond what were once their home base and core business.

Under these conditions, buying and selling of U.S. and Canadian auto suppliers appears a natural. In Canada there are over 550 auto suppliers (not all in plastics) which generated over $25 billion in sales in 1997. With the cheap loonie and higher (though falling) unemployment here, good Canadian molders will look especially attractive to U.S.-based Tier 1 and Tier 2 suppliers.

But Canadian companies would be remiss to ignore opportunities south of the border too. In the changing dynamics of the auto market, with its emphasis on suppliers with multi-faceted capabilities, Canadian suppliers bold enough to stake out a piece of the action could become the next Royal, ABC or Twinpak.

After all, whether their built by GM or Mac-Tier 1, cars, it’s a safe bet, will continue to be an important part of people’s lives. And cars are made of parts, more and more of which are plastic.

e-mail: mlegault@southam.ca