Auto suppliers still at risk despite rebounding sales

While the outlook for auto sales in 2010 looks to be dramatically improved from 2009, excess capacity and difficult credit markets still plague auto suppliers that were built for a much bigger sales environment. The Detroit News reports:

The supply base collapse that many feared last fall may have been averted, but there is still too much capacity to meet the dramatically reduced demand for cars and trucks. And while production is expected to increase as the economy rebounds, many suppliers still are having a hard time securing the credit they need to keep their factories running.

“I don’t think we’re out of the woods,” said Tony Brown, Ford Motor Co.’s global head of purchasing. “We’ll continue to see failures. There’s still too much capacity. I am still concerned.”…

According to the Original Equipment Suppliers Association, almost 60 sought bankruptcy protection this year, while as many as 200 simply turned of the lights and closed. But these failures did not stop the assembly lines at Ford, GM or Chrysler.

OESA President Neil De Koker said that the Obama administration has made it clear that such losses are not only acceptable, but part of a broader strategy to consolidate the U.S. supply base.

“Ron Bloom told us the government will not step in unless supplier failures threaten to disrupt production at one of the automakers,” he said, referring to the president’s car czar. “Bloom told us industry consolidation needs to happen. They think capacity needs to be reduced by 30 percent.”

The American auto industry was built for annual domestic sales of 15-16 million vehicles per year. Sales in 2009 shrunk to around 10 million vehicles sold, and while that is expected to grow significantly in 2010 it almost certainly will not go over 12-13 million vehicles sold.

The automakers consolidated and shrunk their capacity through bankruptcy and layoffs, but that required tens of billions of federal dollars to achieve. The government is clearly hoping that the supply capacity is reduced through bankruptcies and acquisitions, as larger suppliers buy up smaller, financially troubled companies and the supply chain is thus maintained.