By James Treece, Automotive News
Detroit, Michigan -- Auto parts suppliers have emerged from the recession with an unfamiliar prospect amid lower volumes: profitability.
Parts makers are poised for strong -- perhaps even record -- profits because of lower breakevens, several supplier chief executives say.
Profits are possible at today's North American volumes of 11 million to 12 million units annually, compared with 17 million units seen at the start of the decade. But realising those profits will require continued discipline.
Five chief executives gathered for the Automotive News Supplier Roundtable agreed that the restructurings that got them through the past two years have left them leaner and stronger.
"We're definitely experiencing the new normal," said Kevin Baird, ceo of coated-trim maker SRG Global Inc. "We've all scaled our business to allow us to ensure profitability at a much lower level than before."
In addition, European production is showing a "slight recovery, which wasn't expected," said Heinz Otto, ceoa of Behr America. Sales in Europe are soft, panel members said, but production continues to grow because of solid exports from Europe to China and North America, aided by a favourable euro exchange rate.
The suppliers that survived the recession benefited from a shakeout but don't expect to see more rivals falling by the wayside.
"The economic tsunami really did a good job of shaking the tree, and the dead wood has fallen out," said James Rosseau, ceo of Magneti Marelli USA.
But not as many suppliers disappeared as some had expected.
"We had hoped that some wouldn't make it, but some of our competitors are still around," Otto said.
But neither he nor the other executives expects more waves of supplier shutdowns.
Credit remains a nagging problem. "Credit is still tight. Ratios are still tight," Baird said. "Banks are still very careful."
As volumes rise, panelists agreed, suppliers' ability to make money will depend on their sticking with the discipline that got them through the recession.
Suppliers have come to recognise that they need to attain profit margins "above 5 percent of sales," Otto said. "In the past, suppliers were OK with 2 or 3 percent."
That means being willing to walk away from unprofitable business, a stark change from prior years when some suppliers accepted low-margin contracts to use their excess capacity.
Said Rosseau: "We have to manage our business as if we're going out of business."
A complete version of this story appears in the 5 July edition of Automotive News.
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