M&A experts predict more U.S. auto supplier mergers

November 22, 2004

According to the International Network of Merger and Acquisition Partners (IMAP), too many U.S. auto suppliers, rising interest rates, soaring raw material prices, and U.S. automaker overcapacity, coupled with a 20-year history of downward price pressure, have created a fiercely tough operating environment in which firms will be merged, acquired, or forced to seek bankruptcy protection. These companies must compete on price and quality with suppliers from around the world, including low-wage nations, such as China and Mexico.

"If 20 percent of your cost is in labor and you're providing a commodity-oriented product, you've probably been in trouble for some time," noted Chas Chandler, a Detroit-based IMAP member who specializes in the global auto industry. "This wave of mergers and acquisitions we're seeing with auto suppliers will continue and may accelerate over the next year."

Chandler and his IMAP colleagues noted at the recent IMAP meeting in Vienna that China's low wage levels, coupled with tight government control over workers and organized labor, place North American and European suppliers at a competitive disadvantage. Soaring health care costs and cost-cutting pressure from the Big Three U.S. manufacturers point to evaporating profits and additional work force reductions.

"During the next decade, we expect up to one quarter of U.S. and European automotive supplier jobs will disappear," predicted Kerry Dustin, IMAP past president. "Some of the downsizing will occur because of productivity improvements, but jobs will be outsourced as well. Right now, there simply are too many suppliers."

The IMAP noted that as the Big Three continue to lose market share against imports, vehicle sales are at historic highs and the U.S. market is approaching its limit. "In the early 1980s, selling 13 million units pulled the industry and its suppliers out of trouble," said Chandler. "Now, they're selling more than 16 million units and still having problems. For suppliers, if you want to be a winner, you must be efficient, manage costs effectively, and have good technologies. Manufacturing unique products also helps immensely."

According to IMAP, suppliers who grow larger, offer more comprehensive services, invest in transplants, and tap into Japanese automaker supply chains also can survive.

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