Auto supply companies feel squeeze of car rebates

Pain has a way of getting to the bottom of things. Consider the auto industry, where consumers now reside at the top.

Car and truck sales are soft. Consumers aren’t buying much that does not come with a rebate, 0% financing or some other sales incentive.

Those incentives cost money, which means they squeeze corporate profits. Exactly how much they cost and squeeze depends on who is doing the accounting.

For example, according to the latest True Cost of Incentives report released by www.edmunds.com on Dec. 2, car companies doing business in the U.S. offered an average $2,395 incentive per vehicle sold in November, up $9 per vehicle sold in the same month a year ago.

Domestic car companies -- General Motors Corp., Ford Motor Co. and the Chrysler Group of DaimlerChrysler AG -- led the incentives, with an average $3,379 per vehicle sold last month.

Japanese car companies spent an average $888 per vehicle on incentives in November, down $41 per vehicle sold in the same period a year ago. Korean car companies spent an average $1,828, down $357; and European manufacturers spent an average $1,765, down $565, according to Edmunds.com data.

Domestic car companies, struggling to boost profits while trying to halt a slide in their U.S. auto market share, have tried to cap incentives. Although their consumer inducement spending rose over the year-ago November period, it actually dropped nearly 10% from October 2004, Edmunds.com analysts say.

But that hold-the-line strategy fell apart when GM announced yet another incentive plan: its Red Tag sale. The program will offer consumer rebates of up to $5,500 on certain 2004 and 2005 models through Monday.

GM’s U.S. market share in November fell to a historical low of 24.6%, down from 28.2% a year earlier. The overall U.S. share for domestic car companies fell to 56.4% in November from 59.5% a year earlier; Asian car companies took their biggest-ever slice of U.S. car sales -- 35.9%, according to industry sales reports.

Car companies, their employees, stockholders and many of their dealers are feeling some pain. But it is their suppliers who are being brutally whacked, according to a series of recent reports.

Even the most optimistic of those reports, released by Accenture, a global management and marketing research firm, predicts continued consolidation and bankruptcies in an automotive supply industry that has witnessed tremendous shrinkage since 1990 -- down from 30,000 suppliers in 1990 to about 10,000 today.

Accenture says that by 2010 the world’s total number of auto suppliers will fall to 4,000. Of that number, a mere 100 will be regarded as Tier One suppliers, such as the giants Delphi Corp. and Visteon Corp., America’s two biggest auto suppliers with combined annual sales of $45.7 billion.

In 1990, there were 2,000 Tier One auto suppliers around the world who made tires, braking systems and other major components. Today, there are 600. These numbers will continue to shrink as automotive manufacturers come under increasing pressure to cut costs and earn more money, while coming up with more products and marketing schemes to keep customers coming to new-car showrooms, said Umar Riaz, North American managing partner of the Accenture Automotive Practice. Numbers within those companies will shrink as well: On Dec. 10, Delphi announced it would cut 8,500 jobs worldwide, about 1% of its work force. That followed elimination of more than 9,000 jobs earlier in the year.

In short, that means there will be winners and losers, jobs lost, gained and transferred in the auto supplier industry, Riaz said. But the winners, the “high performers� who survive the carnage, could wind up in a more powerful position than the companies they supply, Riaz said.

Even if car companies were to end all rebates today, they would continue to shift more of the costs and responsibilities for vehicle development to their highest-quality, most cost-efficient suppliers, Riaz said. “And size, in this instance, really doesn’t matter,� he said of the suppliers.

The leading suppliers will be those who continue to improve efficiencies and lower costs through better business processes -- including the adoption of new technologies and the use of outsourcing wherever necessary, Riaz said.

That means more pain for somebody -- for example, for the Delphi employee whose job moves from his or her country or state to another site. It also means a radical change in the way suppliers have done business, and the way they see themselves as business organizations, Riaz said.

Instead of being vendors, the successful suppliers will become partners and collaborators, having as much to do with vehicle development as the car manufacturers -- who truly become assemblers under the Accenture scenario.

And those suppliers that fail to make changes during this happy season of rebates for consumers and earnings grief for many auto manufacturers?

“They will go out of business, yes,� Riaz said.