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Old 08-18-2006, 10:06 PM   #1
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2006 TRAVERSE CITY AUTO CONFERENCE

2006 TRAVERSE CITY AUTO CONFERENCE

Auto reality: Adapt or die

Competition, higher labor costs and rising raw material prices create big challenges.

Bryce G. Hoffman and David Shepardson / The Detroit News

Wagoner says world and auto business are changing fast. See full image

TRAVERSE CITY -- Amid anticipation for the upcoming Woodward Dream Cruise -- Metro Detroit's nostalgic celebration of Detroit-made metal -- auto executives gathered in Traverse City this week and acknowledged a painful truth: The good-old days are over and they're not coming back.

The challenges that automakers and their parts suppliers have been grappling with in recent years are not cyclical, but sweeping and structural. The industry is global now, the competition unrelenting. Low-cost rules. Every company must adapt to this new reality or die trying.

That was the message delivered by speaker after speaker at the Management Briefing Seminars, an annual auto industry conference organized by the Center for Automotive Research, an Ann Arbor think tank.

The official theme of the event was "The Auto World Future: Round or Flat?" General Motors Corp. Chairman and CEO Rick Wagoner spoke for many when he said he didn't know the answer.

"I do know the world is changing," he said, "and fast."

In recent years, the conference has focused on what organizers dubbed "the perfect storm" -- the convergence of increasing competition, rising raw material prices and growing labor costs.

This combination has helped erode the dominance of Detroit automakers in the U.S. auto industry -- Toyota Motor Corp. surpassed Ford Motor Co. for the first time in July auto sales and continues to gain ground on No. 1 GM -- and has sunk more than one supplier.

Conversations in Traverse City used to center on ways to survive the tempest more or less intact. This year, most speakers talked about the need to embrace this chaos as the new business reality.

"The automotive world's been turned upside down," said Richard Dauch, chairman and CEO of Detroit-based American Axle & Manufacturing Inc. He urged companies to set up manufacturing in India and China, which have labor costs as low as one-fiftieth of those in this country.

"If you don't, you're gone," Dauch said. "If you can't handle the medicine, go ahead and die."

He said there are just 10,000 suppliers in the United States today, compared with 30,000 in 1990. He predicted that number will fall to about 4,000 by 2010.

David Cole, chairman of the Center for Automotive Research, pointed to the traumatic restructurings under way at GM and Ford as proof the industry has reached a watershed moment. Both companies are closing factories and slashing tens of thousands of jobs to restore profits.

"The entire domestic industry is fighting for its life -- and I would include Chrysler in that," he told The Detroit News. This crisis was necessary to spur the turnaround efforts in Detroit today, Cole said. "They had to be scared."

It seems to be working.

"Our industry will continue to go through enormous transformations in the next decade as we determine the future of personal transportation," predicted Mark Fields, president of Ford's Americas group.

"Listening to our customers has never been more important. We as an industry can't sit back and complain about these changes. We have to act on them and quickly. The old saying, 'If you build it, they will buy it' needs to be put to rest."

Bruce Coventry, president of DaimlerChrysler AG's global engine manufacturing alliance, said other countries are doing more to embrace the new realities. While the United States faces a looming shortage of engineers, China is graduating 600,000 a year.

"If you want one year of prosperity, grow seeds," Coventry said, quoting a Chinese proverb. "If you want 10 years of prosperity, grow trees. If you want 100 years of prosperity, grow people."

Companies also must do more to adapt to the new market conditions.

"If you're not committed to this industry, it's going to be very tough," said Bo Andersson, GM's vice president of purchasing. "This is an industry that doesn't forgive mistakes easily and will leave you behind."

Driving this harsh reality home were the venture capitalists and hedge fund managers in Traverse City shopping for investment targets in the form of struggling auto parts makers. They included Barclays Capital, Deloitte & Touche Investment Banking and Bain Capital, among others.

The worst case scenario, said Brad Coulter of Amherst Partners LLC, a Michigan investment banking and consulting firm, is the loss of 50 percent of North America's suppliers within five years.

Of those that go missing, 65 percent are expected to go out of business entirely. The rest likely will be bought by private equity firms or other suppliers.

There have been 681-auto related mergers and acquisitions in the last 12 months, Coulter said. Four of the top 10 buyers, in dollar terms, are private equity firms. Indian and Chinese interests also are starting to shop, he said, adding that small and midsize suppliers are most at risk of failing, including many minority auto suppliers.

During a conference session Friday, one Michigan supplier submitted a written question asking how it should go about attracting a buyout from China. Analysts even talked about whether Chinese firms might buy Ford's British Jaguar brand or perhaps a majority interest in all of Ford's luxury Premier Auto Group, which includes Sweden's Volvo and Britain's Land Rover.

A Chinese firm bought MG Rover last year.

"To be a survivor, we must pay attention to competitiveness," said Linda Hasenfratz, CEO of supplier Linamar Corp. "You can be on the right track, but you will still get run over if you just sit there.

"There will be fewer OEMs and certainly fewer suppliers."

You can reach Bryce Hoffman at (313) 222-2443 or bhoffman@detnews.com.
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Old 09-17-2010, 06:21 PM   #2
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Old 09-18-2010, 09:45 AM   #3
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