Posted By
KIM KORTH
on
7/2/2010 5:45 PM
During the dark days of last year, many industry participants predicted a massive downsizing of the supplier industry. Some analysts predicted as much as 30-40% of suppliers would not survive the dramatic downturn in sales of the first half of 2009. As many of you know, IRN never believed that was likely to happen (for a variety of reasons) and while there were a large number of bankruptcies and liquidations between October of 2008 and June of 2009, most of the supply base survived. After this massive “cleansing” of the supply base failed to occur, many of these same analysts argued that many suppliers were able to survive by basically mothballing their facilities. The real test, they claimed, would be when production started to ramp up again and weaker suppliers would be unable to get access to credit to support the upturn. We were definitely going to see a second and bigger wave of bankruptcies. So what happened?
These analysts were wrong again! As the Cash for Clunkers program kicked in during the 3rd quarter and production levels rose dramatically in the 4th quarter, suppliers across the board experienced something they had not seen in a long time. They were highly profitable. Things have only gotten better in the first two quarters of 2010.
Supplier profitability is the direct result of two major issues:
• Most suppliers reduced their breakeven points by between 20-40% in the first half of 2009;
• Most suppliers based their 2010 forecast on ridiculously low production numbers (i.e. they did not believe IRN’s forecast of at least 11 million units in 2010). With many suppliers planning on 8.5-9 million units of production, profitability improved dramatically as the industry consistently produced at a 11.5-12 million unit rate.
The result? Most suppliers were able to fund their re-start out of their own cashflow vs. having to get access to traditional credit. This has been a huge surprise to the financial community and has allowed many marginal suppliers to survive and begin repairing their decimated balance sheets.
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