Denso and Delphi operate in the same industry, producing a wide range of automotive parts for major global automakers. However, their contrasting performances highlight the differences between Japanese and North American suppliers. In the final quarter of 2005, Denso saw a 42% surge in net income, with management projecting a record $1.4 billion in profits for the fiscal year ending March 31, 2006. Meanwhile, Delphi faced severe financial trouble, losing $1.5 billion in the first nine months of 2005 and filing for bankruptcy protection in October 2005. CEO Steve Miller warned that without significant cost-cutting and restructuring, the company would not survive. These two companies exemplify the challenges and opportunities in the global auto parts industry.
The struggles of North American automakers like General Motors and Ford have rippled through the supply chain, affecting many related businesses. Companies with large workforces and strong union presence often face high labor costs, making them vulnerable. Dozens of North American suppliers have either shut down or entered court-supervised restructurings. In 2005, Standard & Poor’s downgraded over 20 suppliers, with only one receiving an upgrade. In contrast, companies with diverse customer bases and global operations—such as those linked to Toyota, Honda, and Hyundai—have fared better. These automakers have gained market share from Detroit-based manufacturers. For instance, GM accounted for half of Delphi’s revenue, while Toyota plays a similar role in its electric equipment division. Toyota also holds a 23% stake in Denso, highlighting the deep interconnection between automakers and suppliers.
Ernst & Young recently noted that many suppliers are facing financial constraints, poor returns on capital, and threats from international competitors. Companies in distress are shrinking, and investment in R&D has become less of a priority during times of crisis. Pierre Lévi of Faurecia, a leading supplier controlled by PSA Peugeot Citroën, emphasized this point. As part of its restructuring, Delphi plans to close several U.S. plants, while Visteon transferred 23 underperforming factories back to Ford. Even diversified suppliers like BorgWarner and Magna International have expressed concerns about uncertain production levels and currency fluctuations. Energy, plastic, and steel prices are also rising, adding to the pressure.
The impact is not limited to parts suppliers. Allied Holdings, the largest caravan company, and Performance Transportation Services both filed for Chapter 11 bankruptcy due to heavy reliance on GM, Ford, and Chrysler. In contrast, Denso is expanding its operations, investing $185 million in Tennessee to grow its electronics factory and building new facilities in Japan, Poland, and China. Similarly, Faurecia announced plans to open six new U.S. factories, increasing its workforce from 7,000 to 9,000 over three years. “If we only focused on European suppliers, our risk would be even greater,†said Mr. Levy, reflecting the growing trend of globalization in the industry.
Globalization offers flexibility, according to José Maria Alapont of Federal-Mogul, a Michigan-based supplier expected to exit bankruptcy soon. Federal-Mogul revealed that only 4.9% of its revenue came from North America last year, compared to 12.4% from Europe and 21.4% from China. The company plans to shift production to low-cost regions, spending $150 million on this strategy. This approach is not limited to manufacturing but extends to engineering and procurement, with more components sourced from countries like China, India, and Turkey.
Automakers are also becoming more involved in their supplier networks. Toyota has sent experts to Tao’s factory to identify cost-saving opportunities, while GM has assigned over 12 engineers to Delphi. Some component manufacturers are now helping their own suppliers, but Tao recently stated that it may not meet all the cost-reduction expectations from customers. The company has asked the bankruptcy court to allow it to renegotiate labor contracts. Delphi had previously threatened to do the same if its unions did not agree to wage and benefit cuts.
The widening gap between strong and weak suppliers, along with increased interest from private equity and investors, signals a period of intense change. Ernst & Young noted that most suppliers are currently undergoing a clean-up, predicting that hundreds will be sold, restructured, or liquidated in the next three to five years. The auto parts industry is at a turning point, with survival depending on adaptability, innovation, and global diversification.
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