Climbing toward recovery

Ross told Reuters that he has "great concerns for the stability of the U.S. supplier sector" while nonetheless noting some enticing investment possibilities. Firms from China or Japan may also be interested in acquiring existing American plants.

Although the pace of consolidations may have slackened slightly over the past year, the pattern of industry sell-offs and closures is expected to continue — driven by a host of factors including an over-abundance of manufacturing capacity combined with the slowdowns afflicting the Big Three automakers, older plants wrestling with bloated overhead and significant pricing pressures delivered by the lower cost of offshore sourcing.

The Associated Press quoted a Motor City-based university researcher who summed up the segment thusly: "The two big dogs, Delphi and Visteon, are struggling with the legacies that their parents left them," referring to the union contracts, unprofitable businesses and often outdated facilities that the suppliers retained when they were spun off from General Motors and Ford, respectively.

But both these suppliers, and many others, have invested time and resources in turning themselves around, and though news announcements abound about all the consolidations and restructurings taking place in the aftermarket, they now seem nothing more than business as usual for today's auto parts suppliers. Industry sources say the companies looking to survive will have to make many changes in order to exist in today's newly global, very competitive business environment.

The manufacturers may have enjoyed a pricing advantage in years past, contends Schwartz, but now "the leverage from distributors has tipped the scales a little bit in their favor.

"Many companies are realizing it's a global marketplace," adds Schwartz, admiring the fine financial performances being rung-up by Denso and Bosch. "They're having relatively good years; they're able to open plants in the U.S. without the burden of high union wages."

With an investment of more than $27 million, Denso's American subsidiary, Kyosan Denso, is growing capacity by adding 84,500 sq. feet to its existing 80,700-sq.-foot facility in Mt. Sterling, Ky., creating 150 new jobs by 2010.

Bosch has been doing business in the United States for more than a century. It recently expanded its North American presence when it, along with the Mann & Hummel Group, purchased Arvin-Meritor's Purolator replacement filter business. In 2005 Bosch's North American sales totaled more than $8.4 billion, up 8 percent over 2004's numbers.

A Federal-Mogul executive with direct knowledge of the U.S. aftermarket ruminates about how "it's almost like you have to be global to stay in the game nowadays. We're in the same situation that a lot of WDs are in — there's a lot of consolidation going on, and most of the manufacturers are trying to figure out how to manufacture things overseas."

The executive, requesting anonymity, says the distribution channel is better served by sticking with stalwarts. "Make sure the research is done correctly," he urges. "What are you buying and what are you bringing back?"

Decisions dictated by market demands

The demise of certain domestic manufacturers was bound to occur eventually based on economic conditions within the United States and a blossoming international financial world, says Ken Walker, president and CEO of Meineke Car Care Centers and a member of Aftermarket Business' Editorial Advisory Board. "There is a weakness in the market where consolidation makes sense to remove excess capacity. It is bigger players that are fewer in number," he says.

"We need to have strong manufacturers if we want to be strong warehouse distributors," according to Tim Lee, a top executive at Certified Automotive, Lang Distributing, Lang Auto Parts and Lee Auto Parts.

"My preference would be to go back to a strong domestic presence," says Lee, who has long held leadership positions with the Aftermarket Auto Parts Alliance (AAPA) and other industry institutions.

"We can't keep buying the cheap stuff from China and expect our domestic manufacturers to keep up with it and remain competitive. They're being slaughtered by the offshore manufacturers," he laments. "Now we're beginning to see a better quality Chinese product hitting our shores. It's a tough market."

It is a market that presents tough buying decisions. "We have to offer brands that are attractive to our customers," says Lee.

"My choices are entirely dictated by the choices of the marketplace," he explains. "You have very few professional installers saying, 'I want North American-made rotors.' When people go out on the street with $12 rotors, we have to sell $12 rotors — I have to respond."

Delphi has long had superior engineering capabilities, according to Lee, who is not yet totally convinced that foreign-based producers can meet those standards. "Delphi is struggling to keep its head above water in the United States. It hampers our ability to service the American car owner. It has a profound effect on us in the aftermarket."

He knows that transactions will continue to unfold, yet the industry is "at a point where we just expect it," says Lee. "The mergers and acquisitions have been so constant that we lose track of them when they occur."

This is also the case with most technicians, says Doug Washbish, the second-generation president and CEO of Moog Louisville Warehouse and a prominent participant in the Automotive Warehouse Distributors Association (AWDA). Tech customers don't concern themselves with the ebb and flow of manufacturer mergers and acquisitions, he says.

"All they know is there are a lot of parts stores," he observes, "with line cards full of private brand and branded parts making promises of exceptional pricing and service."

Washbish suggests a new type of relationship has been formed between warehouse distributors and their suppliers as equity investment groups replace the traditional manufacturers of the past. "The good ole boy network doesn't cut it anymore."

Although there exists a "tough hill to climb for our domestic vendors," WDs should remain focused on the mission at hand "because it really doesn't change the parts we are delivering to our customer. The survival of the aftermarket supply chain will be contingent on our ability to add value to the parts we sell," Washbish points out.

"Our vendor partners cannot afford to shrink on product innovation, education, advertising, professional sales teams, etc. They are just as we are, (and manufacturers) must continue to remind their customers why we chose them as our vendors in the first place," he asserts.

WDs and program groups are advised to take a proactive stance within this shifting marketplace.

"It involves a lot of sharing of information," says Scott Farber, a partner with Grant Thornton, which provides manufacturer-consulting services.

"All the companies need to be monitoring risks with their suppliers," he suggests. "They should start looking at alternate suppliers" should something go awry.

Setting up shop (overseas)

Many of today's aftermarket manufacturers have wasted no time going global — setting up shop in key regions in an effort to deliver a full product portfolio at more competitive prices.

Enhancing its worldwide distribution of water pumps, Gates Corp. formed a joint venture with Winhere Auto-Part Manufacturing Co. Ltd. of Yantai, China. The 10-year-old company annually sells more than 10 million water pumps and brake parts.

Mike Smith, president of the new operation, says the lines will meet or exceed OEM quality and performance. "The Gates Winhere state-of-the-art manufacturing facility will give our customers a product that provides worry-free vehicle operation."

Federal-Mogul, too, recently acquired the majority stake of its long-standing joint venture, Goetze Limited of India (GIL), which supplies pistons, rings, liners, pins and sintered products.

The firm's other businesses in India include a Champion ignition product manufacturer along with joint ventures supplying powertrain parts. These operations, including GIL, employ nearly 7,000 people in India.

"Federal-Mogul's increased investment in GIL is a key part of our strategy to drive global profitable growth by providing our leading technology, and world-class quality products and services in India, one of the most dynamic and growing economies of the world," said José Maria Alapont, the company's chairman, president and CEO, in a press announcement. "Developing best-cost capabilities and increasing our manufacturing footprint in India will enable us to better serve both new and existing customers in domestic and global markets."

United Components Inc. acquired water pump manufacturer ASC Industries and sold its Neapco driveline component and Pioneer specialty distribution operations earlier this year.

Bruce Zorich, UCI's CEO said in a recent statement that the addition of ASC dramatically expanded the global manufacturing and procurement platform. "ASC was a first-mover within the aftermarket supplier community in establishing manufacturing and sourcing operations in China, having operated multiple manufacturing and procurement facilities in China for more than 10 years. We believe that this base of operations and skilled management team will lead to improved product quality and lower costs across the company."

UCI is placing a tighter emphasis in its main aftermarket businesses: Airtex Products (fuel systems), Champion Laboratories (filtration), Wells Manufacturing (engine management) and ASC. "Every day we are faced with an increasingly challenging global marketplace," says Zorich. "We must make certain that our businesses are configured to compete and win. The focused resources and attention we will now be able to give our core 'Centers of Excellence' will help ensure we maintain the necessary competitive edge."

Koichi Fukaya, president and CEO of Denso, explains how "true globalization is more than just global business expansion. It also means building trust with customers worldwide, building and strengthening local operations and developing strong local management teams."

Denso is implementing a "mid-term plan for 2006 to 2010" that calls for achieving an "advanced automotive society" and "true globalization" for the firm. The company's array of aftermarket businesses are among the main sectors slated for growth.

Last year, Affinia embarked upon an international restructuring program, resulting in plans to close a number of its North American facilities, including its McHenry, Ill., drum and rotor plant, plus its Erie and North East, Pa., plants and its WIX Filtration manufacturing facility in Cambridge, Ontario.

"While these plant closures are in the best long-term interests of our company, we regret the disruption in the lives of our affected people, and we are working to mitigate the impact," said Terry McCormack, Affinia's president and CEO, in a press release.

"We are aggressively moving to complete our strategy of becoming a true international aftermarket manufacturer and distributor. However, we intend to maintain a significant North American manufacturing presence and also manage strategic initiatives, such as research and development, parts specifications and channel relationships, in North America," McCormack pointed out.

He added that in order for Affinia to remain competitive in the global economy, the company must take advantage of lower costs for select aftermarket components in production locations around the world.

"Our restructuring program will help to assure our continued success," McCormack said. "Most importantly, our strategic vision will assure that our customers have the best automotive replacement parts on the planet, offered at competitive prices and backed by innovative product design and responsive customer service."

Rebuilding business

Affinia is hardly alone in its efforts to reorganize its business to stay profitable. Delphi, which made history last year when it filed for Chapter 11 bankruptcy protection, announced a restructuring plan in March of this year. Rodney O'Neal, president and COO, said in a press statement that the company plans to sell one-third of its global manufacturing sites and will sell off or slow down non-core product lines by Jan. 1, 2008. That includes brake and chassis components and steering and wheel bearings.

In August, it announced the completed sale of its New Brunswick, N.J. battery manufacturing facility to Johnson Controls, Inc. (JCI). The transaction represents the final step in the two-stage global battery business sale announced in July 2005.

"The sale of this plant is an important step forward in our overall restructuring plan," said James A. Bertrand, president of the Delphi Automotive Holdings Group. "A consensual agreement with our customers and the International Union of Electrical Workers (IUE-CWA) paved the way for the sale of Delphi's U.S.-based battery assets, and concludes our effort to divest Delphi's global battery business."

Delphi has one remaining battery production facility in Fitzgerald, Ga., which will continue to build batteries as a Tier-2 supplier to JCI into 2007.

As part of its restructuring initiative, the supplier plans to concentrate on growing its controls and security, electrical and electronic architecture, entertainment and communication, powertrain, safety and thermal product lines. In fact, the company recently launched a new line of remanufactured engine and powertrain control modules for auto and light truck OBDI and OBDII applications.

"Engine and powertrain control modules are at the very heart of the vehicle's interrelated electronic systems, and having access to true OE-quality remanufactured units is vitally important to the independent service channel," explains Frank Ordoñez, president of Delphi's Product & Service Solutions division.

In public statements, Ordoñez said Delphi is leveraging the company's global OEM engine management heritage — including expertise in vehicle architecture, systems and component requirements, customized integrated circuit design and manufacturing, on-board diagnostics and software integration — to provide high-quality remanufactured product to the aftermarket.

Visteon is also in a reorganizational phase. In 2005, the global auto parts maker had record losses. Yet, after a transaction with Ford, it was able to shed 23 unprofitable facilities, focus its resources on core products and improve profitability. For the second quarter of 2006, the company reported a net income of $50 million as compared to a $1.2 billion loss during the same period last year. Based on the steady rise in the company's stock price (from $4.05 to approximately $8.90 over a 52-week period), Wall Street seems to believe Visteon has made a turnaround.

In terms of Visteon's aftermarket initiatives, it has earned several new key accounts in climate control products, starters and alternators and mobile electronics. It has also introduced a new line of remanufactured rack and pinion steering gears.

More collaboration ahead

Buyers throughout the supply chain are in position to benefit from these assorted market efforts.

"We're going to see more collaboration between distributors, program groups and manufacturers," reports Schwartz.

As manufacturers struggle for market share amid a vast array of available inventory, "they want to produce what is needed, and that requires corroboration" with the people doing the buying, he points out.

Among the program groups and larger distributors, "their long-term strategy is to ally themselves with manufacturers who really are well-run, efficient, low-cost producers," Schwartz reports.

"At the end of the day it's the marketplace that sets the price," he says. "Those who can meet the demands of the marketplace will figure it out, those who don't will get out; you'll see that with both distributors and manufacturers. We're seeing healthy competitive situations."

Shop owners consistently rank reliability and performance ahead of price, says Schwartz.

"They want quality and the right product — they don't want comebacks" from their car-repair clients. Reflecting upon typical American consumer buying patterns, he continues, technicians "have confidence in the brand names, but they want to know that they haven't paid too much. As long as the price is competitive, it doesn't have to be the cheapest."

And while the global business arena remains highly complex and at times contradictory, the aftermarket distribution channel is seeing opportunities associated with this ongoing migration.

In the not-too-distant past, the infamous "Chinese rotors" evolved from a derisive catchall term denoting inferior imports to a viable installer option representing the realities of selective outsourcing.

"Candidly, that's good for us from my perspective," says Walker with Meineke. "The offshore thing works for the aftermarket because it helps differentiate ourselves from the car dealers."

His company is able to buy and install Asian-built brake parts at half the cost of those found in the United States. "It's clearly been passed along to the distributor level," he explains, savoring the savings and original equipment performance.

He believes the "whole globalization issue is almost old news. Instead of 10 percent of the market, it's dramatically higher at this point. It feels normal," he notes.