WHO IS WORKING THEIR ASSETS THE HARDEST?

This is the toughest industry in the world and America is the toughest place to compete.

That's the opinion of John F. Hoffecker, VP at A.T. Kearney. He has support for his opinion. As in:

1. It is truly a global industry: Products can [and do] flow around the world.

2. Many countries provide their auto companies with quasi- or direct government support [more so than in the U.S.]

3. American automakers and suppliers are competing with companies From countries where shareholder return is not required in the same way it is in the U.S. [Speaking of companies outside the U.S., he says, "Even though they may not be covering their cost of capital, people are still investing in capacity. In most industries that would be considered an irrational competitor," he observes. In auto, given the amount of excess capacity, that seems to be a way of business, not aberrant behavior.]

4. The dealer structure is based on various state laws.

5. Workers at the domestic automakers are unionized.

Hoffecker observes, "Put all of those factors together, then ask yourself what other industry do American companies compete in that is as demanding?"

Despite all of these difficulties, data that Hoffecker and his colleagues have developed indicate that purely from the point of view of financial performance, Ford and General Motors "out execute everyone" [except For Porsche]. Does he mean better than Toyota and Honda and VW? In a word: Yes.

Although many U.S. suppliers say their margins are getting too tight, Hoffecker believes that the DEMs will continue to look for reductions from their suppliers if for no other reason than the supply base makes up at least 50% of what goes into making a given vehicle. Things are likely to become even tougher.

One of the advantages that the Big Two are able to parlay is the fact that of all of the automotive markets on the planet, the Kearney data show that only one is where any money is being made: North American light trucks. Simply put: "This makes the money." He amplifies, "The rest of the world has no other market like this." Which goes to explain why both European and Asian vehicle manufacturers are bringing in or building light trucks in an aggressive manner. Hoffecker warns that as there are more entries in a segment, two things typically Follow: a given company loses margin or marketshare [or both). Which could have serious repercussions for all involved.

Looking at how well certain suppliers are doing in terms of their cash flow return on investment, a metric that was developed by Holt Value Associates, Hoffecker observes that Lear, Dura, and Johnson Controls are making the most of their assets, which he says is a whole lot more important than looking at margins. Working the assets well is a differentiator between success and failure. When asked what he'd do if he was running a supplier company and wanted to be successful, Hoffecker answers that he'd do two things: Improve internal asset productivity [focus on doing something core and then working the equipment as much as possible in that particular endeavor] and work on trying to make--or keep--suppliers as lean as possible.