Payback Time

Payback Time

Brooks

The effects are everywhere. From aluminum wheels to ductile iron exhaust manifolds, metalcasters exposed to the automotive industry collapse are cutting their losses. Suppliers to passenger car and light truck producers, as well as commercial and off-road vehicle manufacturers. From large installations, like Nemak’s Essex and Windsor plants in Ontario, to smaller operations like Domestic Casting in Shippensburg, PA, the message has sunk in. Finally.

When the Pennsylvania foundry laid off 25% of its workers in mid January, the plant manager gave a measured, but sensible statement to a local reporter. “Business must pick up before we’ll be able to call them back,” he said. “We expect business to bounce back, and our plan is to call these people back. We’re not planning to go anywhere.”

So, it’s a “demand” issue for these suppliers, obviously, but a larger, more crucial point is that the auto industry’s immolation is destroying the supply chain that was carefully, and sometimes painfully, built to serve it. Look at the metalcasters in that chain: they’re scaling back, in some cases scaling down. If possible, they’re cashing out. Accuride has a buyer for its Anniston, AL, plant, which produces structural and other components for buses. TRW Automotive seeks a buyer for the gray iron foundry in Warrenton, GA. ArvinMeritor has pulled its Light Vehicle Systems unit back from sale, for now.

Here’s another observation: as Chrysler, Ford, and General Motors stagger their way through the downsizing process, their suppliers are getting on with it, and they’re not trying to negotiate away the hard choices. Maybe because they’ve had to do it before.

To be clear, some automotive suppliers are getting in line for a share of federal assistance. Two trade groups, the Original Equipment Suppliers Assn. and the Motor Equipment Manufacturers Assn. are leading an effort to collect $25.5 billion, including $7 billion to be sent to automakers with a requirement for them to expedite payments to the suppliers. Another $8 billion would be direct loans, and $10.5 billion would be federal guarantees of future payments by GM and Chrysler. In an age when “billion” connotes a reasonable measure of responsibility (not a reckless waste of taxpayers’ dollars) this seems like a fairly modest proposal. Hardly worth spending much time debating. “You can’t just provide support for the manufacturers, which I hope we do, and then see the suppliers go under,” says Michigan’s Sen. Carl Levin. “It takes both parts to hold up the industry.”

Of course, this is a message that might well have been delivered to the automakers over the past decades, as they egged on the cost-saving and margin trimming that has made their suppliers lean and responsive. Most of these suppliers have been restructured, recapitalized, and re-energized over that period. Now, they wouldn’t need federal support if they weren’t so closely linked to the automakers.

Automotive metalcasters and other suppliers face all the challenges everyone does these days — unavailable credit, historically weak demand, and rising operating and material costs. But, these problems are magnified by their interdependence with the OEMs.

Automakers have demanded and received a degree of design consistency, product quality, production scheduling and delivery, and cost competitiveness — but cannot maintain any of these for their own part. Now, they cannot pay suppliers, and cannot commit to product design or production programs for the foreseeable future. “Our orders are directly connected to the ‘vehicle build’ schedules of domestic automakers,” J.L. French v.p. Tim Kellner explained in a layoff notice. “Their recent projections of a 28% reduction in 2009 vehicle production off of a level that was already below 2007 levels causes a large ripple effect to suppliers like J.L. French. We can’t bring people back to work like we had planned, and we have to change our manufacturing structure.”

Changing the manufacturing structure? Let’s hope so. Some metalcasters may return to their “manufacturing structure,” but that will be a choice for their managements to make based on facts the automakers still can’t supply. Others will target new markets. What’s plain is that there will no longer be a compliant supply chain grateful for the automakers’ business, which is a problem they’ve never faced before.

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