[A-List] Auto suppliers rocked

["Charles Brown" <cbrown@xxxxxxxxxxxxxxxxx>]

	Ty Wright / Associated Press

	Auto suppliers like Dana Corp., that lack cash to meet near-term
demands are more vulnerable to sudden industry swings.

Daniel Howes

Auto suppliers rocked

Bankruptcies ripple throughout industry in transformation that will separate
weak from strong.

T he auto supply industry is transforming with breathtaking speed, opening a
new front of scary change for Detroit and its automakers.

The bankruptcies of Delphi Corp., Tower Automotive, Collins & Aikman Corp.
and, last week, Dana Corp. are not the end of a long, painful shakeout.
They're the beginning of an upheaval that will separate the weak from the
strong, endanger more jobs, usher more private capital into town and
potentially destabilize the intricate web connecting suppliers to Detroit's
automakers.

"This industry is ripe for creative destruction," Metaldyne Corp. Chairman
Tim Leuliette told me Tuesday. "And it's going to happen. Sixty percent of
the auto industry is doing pretty good, 40 percent isn't. The 40 percent
will either fix itself or get run over by the 60 percent."

A crisis of confidence is building as speculation about "who's next?" throws
around names of perennial heavyweights -- Detroit's American Axle &
Manufacturing Inc. and Southfield-based Lear Corp., to name two -- even if
their balance sheets don't justify mentioning them and the "B-word" in the
same sentence.

"Lear's not going to file Chapter 11 anytime soon," Lear Chairman Robert
Rossiter said in an interview. "We have no plans to do it. We've never
discussed it. Never were we in financial difficulty, and we're not today. We
don't think it's as hopeless as everybody does out there. People have got to
calm down and use some common sense."

Meaning the industry's major suppliers aren't all in danger of going
bankrupt, closing their doors or selling out to private equity shops looking
for candidates to buy cheaply, restructure and sell three years or so down
the road at a tidy profit.

Players like TRW, Johnson Controls, BorgWarner, Magna International and
Metaldyne are profitable and expect to stay that way thanks to a diversified
portfolio of customers and products. Others, like Troy-based ArvinMeritor
Inc., have refinanced their debt and strengthened their cash position to
prepare for tough times ahead.

Then there are the others who employ tens of thousands nationwide and define
communities, their tax bases and working life.

Suppliers whose business is heavily weighted toward General Motors Corp. or
Ford Motor Co., with their production cutbacks and declining market share,
are more vulnerable. Suppliers with too much debt coming due too soon are
vulnerable, too.

Suppliers susceptible to prices for steel and resins are vulnerable because
automakers typically aren't willing to share the burden of rising raw
materials costs. Suppliers without enough cash to meet near-term demands --
what financial types call "a liquidity crisis" -- are quickly vulnerable, as
the implosion of Dana attests.

"We're not in the business to make cars," Leuliette said. "We're in the
business to make money making cars. Wall Street turned sour on this industry
in the 1990s. It's not about market share. It's about earnings-per-share and
returning that to shareholders."

Theoretically, yes. But not so much in practice. The past six months -- the
Delphi and Dana bankruptcies, restructurings at GM and Ford -- illustrate a
painful truth of today's auto industry:

What's broken isn't the car and truck business, because Asian rivals like
Toyota and Honda are making huge profits here. What's broken, irrevocably,
is the Made-in-Detroit model that public equity and debt markets
increasingly consider irredeemable.

To wit: Just four days after Delphi filed bankruptcy in October, a Dana
spokesman told the Toledo Blade that "bankruptcy is not an issue" for Dana.
That may have been true then, but the fact that the company is now bankrupt
illustrates how quickly apparently strong players can be swamped by harsh
financial reality.

Potential losers aren't just Dana employees, retirees and shareholders --
who likely regret the decision to spurn ArvinMeritor's final offer in late
2003 to acquire Dana for $18 per share.

The financial troubles of suppliers can be visited upon customers like GM
and Ford, imperiling turnaround strategies that depend partly on price
reductions from suppliers. Would-be strikes -- threatened this month at
bankrupt Tower Automotive and, perhaps, Delphi -- could halt production at
the automakers.

Suppliers desperate for cash or those losing confidence in a company's
ability to pay its bills could demand accelerated payment terms from their
customers, a legitimate process that can make tight financial straits even
tighter for a struggling company.

Think of it like a three-legged stool, and when one of those legs collapses,
you're in bankruptcy court, endangering customers, plants and the wages,
benefits and pensions accrued over generations. Dana is the latest casualty
of this automotive perfect storm, and it probably won't be the last.

"We believe that the entire automotive value chain is just beginning a long
restructuring process," John Murphy of Merrill Lynch wrote this week.
"Dana's bankruptcy is likely just the tip of the iceberg given the
burdensome high fixed cost structure facing the domestic auto industry."

Especially when suppliers deep into GM and Ford are seeing production
schedules and prices being cut while raw materials costs go up, debts stay
high, bond ratings drop and so do equity prices.

The net result is what we see unfolding among auto suppliers closely tied to
Detroit's automakers -- a transformation driven by declining confidence in
the public debt and equity markets. It creates opportunity for financially
healthy public companies and private equity firms looking to park their cash
behind the next big turnaround story.

"People are a little bit afraid of the auto industry, so finding lenders is
difficult," said Al Koch, vice chairman of Alix Partners, a Southfield
turnaround firm retained by Dana. "It causes a number of lenders to want to
reduce their exposure to the industry."

He should know. As Kmart Corp.'s chief financial officer during its
bankruptcy, he said companies slide into Chapter 11 because a sudden nasty
surprise emerges -- a strike, an accounting scandal, the failure to access
cash or the inability to negotiate new credit terms outside bankruptcy -- or
the executives don't grasp the depth of their company's troubles.

"Each new (bankruptcy) that occurs places a lot of pressure on the
community, places a lot of pressure on the Big Three who, through the last
few years, have pushed a lot of price concessions on suppliers," Koch said.
I don't think we've seen the last of the restructuring struggles."

Daniel Howes' column runs Sundays, Wednesdays and Fridays. Reach him at
dchowes@ detnews.com or (313) 222-2106.

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