Grant Thornton LLP Says Transplant Manufacturers Will Out-Build Detroit in 2012

Creating New Opportunities for North American Suppliers
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SOUTHFIELD, Mich., June 22, 2009 /PRNewswire/ – The U.S. government’s estimated $140 billion investment in the domestic auto industry may begin to pay off by 2012 with all three domestic automakers predicting a return to profitability. But for traditional suppliers to the “Detroit Three,” the path to long-term viability will require securing more business from European and Asian transplants, who are expected to build more vehicles in North America than the Detroit-based companies, according to Grant Thornton LLP’s Corporate Advisory and Restructuring Service.

“A new order is emerging where the Detroit companies may no longer be the volume leaders in their home market,” said Grant Thornton Principal Kimberly Rodriguez, co-leader of the firm’s global automotive practice. “Suppliers largely dependent on Detroit OEMs will have to present a new value equation to potential customers from Europe and Asia if they want to participate in the accelerated shift that is coming.”

The reordering of the North American auto industry will be far-reaching. By 2012, the domestic manufacturers are expected to reduce assembly capacity in North America by more than 4 million units, to 7.5 million units, a 35 percent reduction compared with 2008. All other automakers combined will increase capacity by about 20 percent, to more than 8 million units, an increase of 1.5 million.

  • Volkswagen and BMW will nearly double their combined capacity, increasing their output capability to approximately 1 million units.
  • Toyota, Honda, Nissan and Hyundai will expand their combined capacity by 20 percent, or nearly 1 million units.
  • Other market participants will add about 200,000 units of capacity.

Capacity utilization in North America should approach 90 percent, up from the 75 percent historical rate, assuming an annual sales rate of 15 million units in the United States for 2012.

According to Rodriguez, there will be a strong bias among Asian and European automakers investing in North America to source locally, but the rules of the game for these OEMs are different.

What will matter most in 2012 will no longer be historical relationships or being the lowest-cost supplier. There are opportunities, but suppliers must be flexible and meet a challenging set of criteria, including:

  • Low financial risk, including a strong balance sheet and cash flow.
  • A well-diversified customer mix, geographic footprint and product offerings, while having the requisite proximity to manufacturing centers.
  • Proven design and development capabilities at both the component and systems levels, while balancing the right technology mix to meet consumer and regulatory demands.
  • Demonstrated high quality and customer service.

Only a limited number of North American suppliers meet these criteria today. However there are steps companies can take to improve their ability to compete. Among the options:

  • Become a consolidator — Leading companies should actively seek to acquire key technologies and product lines through mergers and acquisitions, including strategic acquisitions from distressed or bankrupt competitors.
  • Become a consolidatee — A company that lacks the resources to compete effectively for new orders may find that selling all or part of its business, or repositioning itself within the supply chain, may be the best strategy for maximizing stakeholder value.
  • Aggressively deleverage — The expected recovery in consumer demand and vehicle production may not be enough to address the balance-sheet and liquidity issues many suppliers face. Furthermore, a number of industry trends will require significant reinvestment in the business in coming years, especially in the areas of R&D, flexibility and innovation. These critical investments may not be affordable if interest expense is too high.

Public companies may be able to swap debt for new equity, especially as the economy recovers. However, many suppliers may need to use bankruptcy to fix their balance sheets, assuming debtor-in-possession financing can be secured from a financial institution, customers or another source.

“At the end of the day, the European and Asian automakers will be looking for stable, proactive, long-term partners who offer good value,” Rodriguez said. “Domestic OEMs are seeking the same type of long-term partners and are working toward those goals, but the immediate expectations of the transplant companies are more challenging. In light of the dramatic restructurings that will occur over the next several years, North American suppliers have important strategic decisions to make, and the strategy must be defined and implemented quickly.”

About Grant Thornton LLP Corporate Advisory and Restructuring Services

Grant Thornton’s Corporate Advisory and Restructuring Services launched its U.S. practice in 2006 and has grown to include more than 75 professionals in eight offices, serving more than three dozen clients. The Corporate Advisory and Restructuring Services team works with underperforming and transitional companies and their stakeholders. They quickly evaluate the financial and operational issues adversely affecting performance, assess the strategic alternatives, and develop and execute comprehensive plans to address the challenges. Grant Thornton’s world-class advisory team delivers in-depth evaluations and balanced insight through a comprehensive, holistic approach.

About Grant Thornton LLP

The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.

In the United States, visit Grant Thornton LLP at www.GrantThornton.com.

Source: Grant Thornton LLP

CONTACT: Jim Cain, The Quell Group, for Grant Thornton LLP,
+1-248-649-8900, jcain@quell.com

Web Site: http://www.grantthornton.com/

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