DETROIT -(Dow Jones)- U.S. auto parts makers, the backbone of the North American automotive industry, are bracing for a summer that promises to cut profits, increase layoffs and may drive more companies into bankruptcy.
American Axle & Manufacturing Holdings Inc. (NYSE:AXL) (AXL), Lear Corp. (NYSE:LEA) (LEA), Visteon Corp. (NYSE:VC) (VC) and other suppliers are scrambling to realign their work forces and production as U.S. auto makers slash production of sport-utility vehicles and pickup trucks in response to plunging sales.
Shares of several parts manufacturers hit 52-week lows on Friday after Ford Motor Co. (NYSE:F) (F) announced deeper production cuts than those that were unveiled just one month ago. With the pace of the sales decline accelerating, concerns are mounting that General Motors Corp. (NYSE:GM) (GM) and Chrysler LLC could also be forced to move more aggressively.
"It is far worse than anyone had anticipated at this point," said Jim Gillette, an automotive supplier analyst with CSM Worldwide, a market-research firm in Michigan. "I don't care what name you throw out there. There isn't any one out there that is going to be safe."
In addition to losing business as production gets cut, the parts suppliers face the prospect of lower margins on the business that remains, as auto makers increasingly turn their focus to smaller cars that bring smaller profits but are selling well with gasoline at $4 a gallon.
Most North American suppliers have gone through extensive restructuring over the past three years, with many opting for bankruptcy protection as they grappled with high costs and the fading fortunes of their main customers. While many diversified their product offerings and their geographic presence, helping insulate themselves from the current auto maker meltdown, many still rely heavily on the Detroit Three.
"The people who are the most vulnerable are those that don't have geographic diversity, they heavily rely on SUVs and pickups or they are still in the midst of a turnaround," said Shelly Lombard, a high-yield analyst with Gimme Credit. " The suppliers will have to do more restructuring and more cuts."
Many Companies Vulnerable
The likely top candidates to take the biggest financial hits include American Axle, Visteon (NYSE:VC) , Lear and Canada's Magna International Inc. (NYSE:MGA) (MGA), analysts say. Others that will be hurt include ArvinMeritor Inc. (NYSE:ARM) (ARM) and Tenneco Inc. (NYSE:TEN) (TEN).
Tenneco (NYSE:TEN) shares were leading the decliners among the parts makers on Friday, down 12% at $16.32, trading at their lowest level since late 2005. Shares of American Axle slid 4.5% to $10.97 and were at their lowest level since September 2001.
Lear, a major GM supplier, has responded to recent developments by cutting its 2008 sales outlook to $15.3 billion from $15.5 billion and lowering its pre-tax income forecast to a range of $600 million to $640 million from as much as $700 million. Magna said it will lay off about 400 workers starting Sept. 8.
Smaller private companies, such as plastic molders and stamping companies, will also feel the impact and some may seek bankruptcy. Even those companies in bankruptcy, such as Dura Automotive Inc. (DRRAQ), won't escape unscathed.
Ford and Chrysler are closing plants beginning next week and plan to keep them closed weeks beyond the traditional two-week summer shutdown. Ford, for example, will close its Michigan Truck factory, home to the Ford Expedition and Lincoln Navigator, for nine weeks starting Monday. GM, meanwhile, will permanently eliminate shifts at four plants starting in July.
Ford said Friday it plans to cut production in the third quarter by 25% from a year earlier and as much as 14% in the fourth quarter. The company also said it plans to delay the launch of its F-150 pickup by two months due to slumping sales. The delay further pressures suppliers who had geared their plants for an early autumn launch of the product.
GM announced earlier this month that it plans to close four North American plants that produce trucks and SUVs, while also considering the sale of its Hummer brand of large SUVs. GM said this week it is delaying the redesign of SUVs and full-size trucks as part of a wholesale review of its product and brand portfolio.
2005 All Over Again?
Fears of more bankruptcies and job losses come as many suppliers were just regaining a financial foothold after the production drop and spiking raw material prices of 2005. Delphi Corp. (NYSE:DPH) (DPHIQ), (TWRAQ), Collins & Aikman Corp., Dana Holding Corp. (NYSE:DAN) (DAN) and Dura were all forced to seek Chapter 11. Dana has been the only company to exit bankruptcy.
This time the rapid decline of pickup truck and SUV sales is to blame. Pickups and SUVs became lucrative for suppliers since auto makers ordered more features and products to fill the bigger vehicles. Auto makers made upwards of almost three times the profit on SUVs compared with small cars. That money had trickled down to the suppliers who were providing everything from truck bodies to interiors.
U.S. consumers, who had begun shifting away from pickups and SUVS in late 2007, quickened their pace in April and May as gas prices hovered near $4 a gallon. The change caught Ford, GM and Chrysler by surprise and forced the auto makers to cut production rather than overload dealer lots with unwanted product.
Suppliers, using their internal forecasts, began scaling back but many found themselves scrambling as auto makers started announcing production cuts without warning. The cuts are costly to parts makers in lost revenue and the expenses involved in changing output and manpower needs, since those decisions are made months in advance based on auto maker projections.
Despite the bleak production outlook, there will be some winners, Lombard and Gillette agreed. Such companies as Johnson Controls Inc. (NYSE:JCI) (JCI), BorgWarner Inc. (NYSE:BWA) (BWA) and privately held Robert Bosch LLC may all benefit, since they have stronger balance sheets and offer cutting-edge technologies.
Johnson Controls (NYSE:JCI) offers interior electronics and batteries, BorgWarner (NYSE:BWA) produces turbochargers that increase fuel efficiency, and Bosch provides gasoline systems and other automotive electronics.
-By Jeff Bennett, Dow Jones Newswires; (248) 204-5542; jeff.bennett@ dowjones.com
(END) Dow Jones Newswires 06-20-08 1535 Copyright (c) 2008 Dow Jones & Company, Inc.
