Collins & Aikman Deals Amid Auto Turmoil

Restructuring of the auto parts industry has bolted into a new phase with acquisitions and divestitures being heavily used to further thin the ranks of suppliers to the big car and truck assemblers. In the first leg, players across the entire components spectrum acquired and merged in response to Detroit’s two-pronged directive that automakers would outsource more of their parts needs while cutting the number of suppliers they would buy from. More recently, the shakeup has been spurred by a handoff of supply chain responsibility from the automakers to their Tier 1 suppliers, the largest and most diversified vendors to the assemblers. Instead of buying directly from all types of suppliers, the automakers have pressured the Tier 1 players to become middlemen – to assemble and sell them systems composed of parts from the smaller, more focused Tier 2 and Tier 3 suppliers. Tier 1 players call more shots The supply line shift has raised the stakes and multiplied the reasons for doing m&a. As buying and coordinating agents for Detroit, the Tier 1 suppliers themselves are slimming down the number of firms they will deal with. In addition, the intensity of the latest restructuring phase, experts say, has caused such dislocation and imbalance that staying alive requires acquisitions to boost competitive power. The results are acquisitions by the firms that want to be the last ones standing when the restructuring smoke clears and departures by firms having trouble taking the heat. The turmoil is underscored by recent acquisitions of automotive interiors producer Collins & Aikman Corp. aimed at strengthening its position as a mega Tier 2 supplier. The most significant was the $1.3 billion purchase of Textron Inc.’s automotive trim business, a producer of auto instrument panels and other interior parts. Collins & Aikman also bought the automotive fabric operations of Joan Fabrics and paid $141 million for Becker Group, a manufacturer of plastic automotive components. C&A has been leveraging its deals to strengthen both its traditional position in interior fabrics for floors and sides while expanding its offerings of plastic interior products. Textron, by contrast, exemplifies a diversified firm that has chosen to cut its ties to the auto industry so it can concentrate on other businesses where it enjoys greater share and power. Joseph Martha, vice president and head of the supply chain practice at Mercer Management Consulting, says that C&A’s moves demonstrate that “there is clearly a shakeup in the market.” “The whole value chain is totally restructuring itself in a really big way,” he says, and acquisitions such as those executed by C&A are not only designed to add size but to “take overhead out and achieve more leverage.” “The Tier 1 suppliers are taking on a different set of responsibilities,” Martha adds. “They are doing more of the fabrication and the assembly of the major components of the automobile. So they are having to coordinate the activities of the Tier 2s and Tier 3s.” Under that kind of pressure, the Tier 1s are cutting down on the number of suppliers, forcing lower-tier firms to expand via acquisition so they can sell more product and promote their own survival. As suppliers of entire systems, Martha notes, “the Tier 1s have to do one of two things. They have to deal with the Tier 2 and Tier 3 firms to put the system together, or they’re going to acquire those companies.” More acquisitions and divestitures on a number of levels are almost a given as the realignment roars on. Randy Barba, a vice president and automotive industry expert at Accenture, says that the shock waves touched off by Detroit have caused “dislocation” across the parts business, sapped competitive power from many suppliers, and caused sub-par performance at most companies so that returns are below cost of capital. The cure, he says, is for larger and fewer competitors, perhaps as few as two or three in each major space. Collins & Aikman, he notes, has acquired its way into becoming a big player in injection-molded parts, an example of how suppliers are expanding their wares to meet the demands of the new Tier 1 titans. While Barba says he would not be surprised to see C&A do additional acquisitions of interior parts makers, he is not quite sure what products would be added to the mix. Thinning the ranks of suppliers “I think there will be two or three survivors in interiors,” he says. “They will go as far as they can to leverage their scale, core position, and supplier power around those parts. I think they will continue to do it until they run out of parts. The returns aren’t there yet. Theoretically, they will expand until their returns get up to acceptable levels.” A Collins & Aikman spokesman did not return a phone call seeking comment. Besides Textron, the caravan of firms exiting auto parts includes Rockwell International Inc. and Cooper Industries Inc., while TRW Inc. is mulling the future of its automotive products business.