Almost every industry has been impacted by the “great recession.” For the automotive industry, that recession began in and around 2007 when the U.S. economy began to stall and automotive sales in the United States began to decline. The combined effect of a declining economy, decline in annual automotive sales and over-leveraged consumers led to the bankruptcy filings of Chrysler and GM and a decline in auto sales for all OEMs. This resulted in a decline of purchases from downstream suppliers. Because the business model of most automotive suppliers is focused on high volume and low profit, some suppliers found themselves in financial distress and forced to liquidate, sell their business (or a division of their business) to a competitor or file for bankruptcy protection; however, the downstream impact was not nearly as significant as those operating in the automotive industry feared.
It appeared that the ripple effect of the “OEM bailouts” had run their course, when the automotive industry was hit with another major industry changing event, the Japan earthquake and tsunami in 2011. The entire supply chain was impacted either directly or indirectly by the Japan earthquake and tsunami and profoundly disrupted automotive production (especially the Japanese OEMs). Once again, the automotive industry (for the most part) was resilient and found a way to navigate through a catastrophic event with, compared to what could have been, remarkably minimal disruption in supply and production on a macro-level.
As the automotive industry emerges from these industry changing events and attempts to return to its previous stature, the industry, specifically in North America, will eventually have to manage through a number of obstacles that have surfaced as a result of the events described above and the initial consolidation of the supply base. First, the industry continues to have excess capacity. Prior to the Chrysler and GM bankruptcies, the industry was selling around 18 million to 19 million units per year with many predicting annual sales would exceed 20 million units year over year. Now, however, the automotive industry which is built for this type of volume is only selling approximately 13 million units per year. This has resulted in some additional consolidation among the supply base; however, there is still extra capacity resulting in inherent distress and the need for even more consolidation. Second, automotive suppliers, in a bid to survive the trying times, stretched trade payables, extended loans with lenders, reduced labor, and took other cost-cutting measures. As a result, many suppliers are lacking working capital and if the industry does experience an increase in volume, many suppliers experience a liquidity “crunch”. They will not be able to handle a rapid increase in volume. Consequently, some companies will be forced to liquidate. For those that are in better shape, they will likely look to divest non-core business to increase liquidity. Additionally, if able, some suppliers are looking to pick-up operations by acquisition to improve economies of scale and to support short-term (and hopefully long-term) production demands.
