Twenty two percent of some of the largest global automotive suppliers are in jeopardy of becoming significantly distressed financially within the next 12 months, according to a study by BBK, an international business advisory firm. BBK CEO William G. Diehl announced today the results of the study in a speech at the Automotive News Manufacturing Conference in Nashville.
“It is absolutely critical for OEMs and Tier 1 suppliers to take a comprehensive proactive approach to carefully monitor both the operational and financial health of their suppliers,” said Diehl. “If these companies are not proactively monitoring the health of their suppliers, they risk suffering a significant and costly disruption to their supply chain.”
BBK conducted its study on 80 of the top 150 global automotive suppliers, based on 2006 revenues, using its proprietary BBK Ratings model, a tool that is used to evaluate both public company and private company financial data to determine the overall financial strength of a company. BBK Ratings assigns a grade from “A” to “F” depending on the potential for distress over the next 12 months. A company is considered distressed if it earns a “C,” “D” or “F” rating.
Approximately 33 percent of North American suppliers in the study were at various levels of financial distress including 11 companies that received an “F” rating. Asian suppliers were the healthiest with zero companies in distress while 14 percent of European suppliers were distressed. The average rating for Asian suppliers was “A,” followed by European suppliers at “B+” and North American suppliers at “B-.”
Since BBK’s first Ratings study for fiscal year 2002, the number of “A” and “F” ratings have increased, indicating that there is little “middle ground” in the industry – suppliers are either healthy or severely distressed.
“Over the next few years, consolidation of the supply base will allow suppliers to leverage economies of scale and drive costs down,” said Diehl. “The suppliers who find the right balance between outsourcing to lower-cost countries and looking for cost-effective ways to improve efficiency will be well poised for a healthy and sustainable future.”
The study also revealed how highly leveraged North American suppliers when compared with their Asian and European counterparts, which makes them vulnerable to financial distress during adverse economic conditions. The average leverage ratio for North American suppliers was 3.46, which is 10 times higher than Asia’s (0.32) and six times higher than Europe’s (0.6).
“Although North American suppliers had a high leverage ratio in 2006, they made great strides to improve it by 31 percent from 2005 when their average was 5.03,” said Diehl.
In addition, 55 percent of the North American suppliers in the study had revenues that were at least 80 percent automotive-based compared to 43 percent for European suppliers and 41 percent for Asian suppliers. The average rating for suppliers that had revenues that were at least 80 percent automotive-based was “B-” while the average rating for a supplier that had revenues that were 50 percent or less automotive-based was “A-.”
“BBK Ratings provides our clients with a complete picture of their suppliers’ health,” said Diehl. “An auto manufacturer may be receiving quality components on time from a particular supplier, but that manufacturer may not be aware that the supplier is failing to meet its deliverables for another customer, which could eventually have a negative impact on all of its customers.
“That’s why OEMs and Tier 1 suppliers need to have a proactive monitoring process to find those hidden weaknesses and take corrective actions before it’s too late,” said Diehl.