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Auto Suppliers Face Rough Road Ahead

11/21/2008 --

As bankruptcies rise, executive urges flexibility and innovation.

ANN ARBOR, Mich.—As U.S. automotive CEOs struggle to make the case for a federal loan from a skeptical Congress, lawmakers have to balance the cost of a bailout against the "staggering" impact if a major auto maker fails, said a parts supplier executive speaking at the Ross School of Business.

George Kostopoulos, vice president of sales for chassis systems brakes at Robert Bosch LLC, said the failure of a major Detroit auto maker would spark the collapse of several parts suppliers nationwide. The effects would ripple through the industry and could cause plant closures at seemingly immune auto makers like Toyota Motor Corp. and Nissan Motor Co., he warned.

"The impact is pretty staggering," said Kostopoulos during a Nov. 18 speaker series sponsored by the Tauber Institute for Global Operations. The event's timing coincided with last week's controversial trip to Capitol Hill by representatives of Detroit's Big Three auto makers--General Motors Corp., Ford Motor Co. and Chrysler LLC--in hopes of acquiring $25 billion in government bridge loans.

A bankruptcy filing by GM, the largest U.S. automaker, is "scary" to think about, noted Kostopoulos. Some 75 percent of a typical car's value comes from parts suppliers. If those suppliers close upon loss of their biggest client’s business, their other customers--Toyota and Nissan, for example--will suffer too.

"I don't know what the answer is," Kostopoulos told the audience. "My personal opinion is that you have to consider which is worse--a bridge loan or taking the risk that it won't cost us $60 billion in lost taxes."

While most attention has been on the auto makers of late, parts suppliers have been coping with their own set of challenges in this hostile economic downturn. Some 25 percent of the largest suppliers have filed for bankruptcy since 2001. Add high raw material costs, lower volume from customers, and tight credit markets and that shakeout is likely to continue. Bosch, a German-based company, is the largest automotive parts supplier in the world with 2007 sales of about $58 billion (46.3 Euros). The company produces brake, chassis, engine, and electronic systems and is privately held.

As the debate continues to rage among lawmakers about whether a bailout of the Big Three is merited, what Bosch, auto makers, and other suppliers need to do is innovate and create flexible business models that can adapt to changing customer demands, Kostopoulos said. Customers want fuel-efficient cars that are fun to drive but safe, easy to use, and personalized. For suppliers, that means the onus is on them to do customer research and develop new technology instead of waiting for auto maker specifications and orders.

"Product is the lifeblood of the industry," he said.

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu