Germany’s car parts industry under threat

Publication date: 25 February 2009

Germany’s car parts industry under threat

Germany’s car parts industry is threatened with insolvencies that could damage a pillar of the country’s industrial base and disrupt carmakers’ supply chains. Several medium-sized suppliers have filed for insolvency in recent months. Industry executives and consultants warn that a second, much larger wave of bankruptcies will soon follow. “A slew of suppliers will no longer be able to finance themselves and stay solvent in the first quarter,” Franz Fehrenbach, chief executive of Bosch, the world’s largest car parts supplier, told the Financial Times. Don Walker, joint chief executive at Canadian supplier Magna International, said: “We’ll start seeing a lot more failures in Europe.” In the past three months, 22 small and medium-sized German suppliers – often owned by financial investors – have filed for insolvency. The most prominent has been Edscha, which has a fifth of the market for convertibles and door hinges. Edscha is one of the world’s 100 largest suppliers and is owned by private equity group Carlyle.

March is seen as a crucial period for the German car parts industry, which is Europe’s largest, as suppliers start to feel the full effect of greatly reduced car production. In January alone, European car sales dropped 25 per cent year on year. Lutz Jäde, a partner at Oliver Wyman, a consultancy, said: “The peak of the insolvency wave will be reached in March. At that point, the longer Christmas breaks and shorter working hours of carmakers will fully hit the suppliers’ liquidity.” By the end of the year, another 50 to 80 suppliers employing up to 100,000 could be forced to seek creditor protection, Mr Jäde warned. “There is a huge number of living dead among German car parts suppliers,” another restructuring expert said.

For carmakers, the consequence could be that the crisis is exacerbated as their supply chain breaks down. “We are thinking about what we can do to avoid disruptions of our supply chains,” Dieter Zetsche, chief executive of premium carmaker Daimler, said recently. The German motor industry directly employs 750,000 people. However, that number rises to one in seven of private sector jobs when indirect employment is included. Deutsche Bundesbank, Germany’s central bank, has warned that the crisis in the car industry could damage other sectors. The slump in orders expected in the second half of 2008 could drag down gross domestic product by €22bn ($28bn), or almost 1 per cent, the Bundesbank said in its latest monthly report. The car parts sector had been suffering from overcapacity and low profit margins even before the downturn began. “For many years, virtually no equity has been injected into the sector,” Ken Fritz, head of German and Austrian mergers and acquisitions at Credit Suisse, said. Mr Fritz estimated that “20 per cent of the European suppliers will have to disappear” to bring capacity back to prudent levels. Even insolvency would not be enough to reduce capacity sufficiently. “You will solve the problem only if they cease to exist,” Mr Fritz said. With even the largest car parts suppliers reeling from the crisis, acquisitions are unlikely to pick up. In a rare sign of consolidation, Magna this month bought the European operations of Cadence Innovation, a US plastic components maker that filed for bankruptcy protection in August.

Source: Financial Times