Exposures reveal supplier distress for auto industry says PricewaterhouseCoopers

London, 24 FEB 2009 -- Having just emerged from a period of inflated commodity prices, the supply sector is now facing declining volumes, difficulties obtaining credit, the risk of business failures of their own suppliers and liquidity concerns of their largest customers.

Michael McKenzie, global automotive analyst, PricewaterhouseCoopers, said: “Thanks to commodity price inflation and OEMs’ countervailing power, many suppliers have struggled to provide adequate returns, even during the sector’s growth years.”

“The current environment has left many suppliers exposed as auto manufacturers slash production. At the same time, the economic downturn has meant restricted access to credit hence difficult for suppliers to raise finance.”

Between 2003 and 2007, the top-20 suppliers (by sales revenue) saw revenues rise 36% yet witnessed a cost of revenue increase of 39%.

Cash flow reductions and curtailing of credit threatens the survival of the weakest suppliers and for the more robust suppliers – those with stronger balance sheets, high value-add products, concentrated market share or who are invested in growth technologies – there is still a danger to their long-term survival.

With cash management being key in the current environment, cuts in R&D investment and new capacity will be implemented, which will have long-term implications for competitiveness. Historically, suppliers have relied on customer receivables for collateral to secure working capital loans. However, the threat imposed by limited access to this source of credit has been magnified by first quarter production cuts and the severe downturn in global sales, resulting in a dangerous formula for suppliers shouldering heavy debt burdens.

It is estimated that one third of all suppliers are in in financial distress, with one third indicating they will be in distress in coming months.

Michael McKenzie, global automotive analyst, PricewaterhouseCoopers, said: “There is huge opportunity for suppliers that collaboratively invest in innovation (safety, fuel-saving technologies, lightweight materials etc.) with their critical customers. Emerging strategies will alter the competitive landscape and hierarchy, favouring suppliers with the ability to meet conflicting regulatory and consumer demands at the best cost, as well as meet requisite R&D investment.”

Under normal credit conditions, M&A activity would be the driving force guiding the reorientation of the supply sector – not the prevailing mergers of necessity.

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