Hard road ahead for auto suppliers

The shaky future of the auto industry’s supply chain means more insolvencies could be on the cards.

Insolvency practitioners are expecting a string of auto component makers to come under mounting financial pressure and even go under if the Abbott Government skimps on cash support for Ford and Holden.

KordaMentha partner Craig Shepard said suppliers have tried to diversify to respond to pressure but operate on skinny margins, which stymies them from raising fresh capital.

Suppliers are also continually getting “priced down” by carmarkers, who pass on the bulk of risk and research costs. Attempts to enter new markets are often futile in the face of Australia’s high labour costs.

“Depending on the decision by (Industry Minister Ian) Macfarlane, you are likely to see a string of casualties,” he said.

Macfarlane visited Toyota in Melbourne on Wednesday, following talks with Holden last week. He said the Productivity Commission will release interim findings by Christmas on whether the auto industry can remain viable.

The car industry accounts for about seven per cent of Australia’s total manufacturing turnover and five per cent of value-added manufacturing, according to a recent KordaMentha report.

Shepard said the most vulnerable suppliers were Australian-owned, particularly those over-exposed to the auto sector, who were getting their margins squeezed and have no access to capital.

If one supplier in a particular parts area goes under, it is likely to increase the chance of other suppliers in that sector becoming insolvent.

The Australian operations of global players are afforded more protection by virtue of capital backing and diversification. International players would likely look to restructure their local operations to reduce exposure, or sell up and take what they could get for plants and equipment.

“The businesses are not likely to have any value, particularly if their contracts are at risk,” Shepard said.

Who the interested buyers would be is anyone’s guess.  

Banks are running the ruler over the struggling supplier sector and would try to give companies a soft landing, but it would depend on how much of their revenues derive from the auto industry, one auto industry source said. 

“Local suppliers, that are mum and dad or privately-owned quite often have their equity in the property they occupy, so its value is clearly linked to the ability of the tenant to pay the lease,” the person said.

“If the tenant is under pressure it is hard to extract value from the property.” 

Generous employee entitlements in the sector are adding to pressure on the country’s auto manufacturers.

Australian Bureau of Statistics figures show that total employment in auto and components manufacturing had dwindled to 45,000 in August, down from 50,300 in February (manufacturing as a whole employs 921,000). While exact figures are hard to come by, around 70 per cent of those auto sector jobs are in the supply chain.

The automotive industry has been given until October 2016 before Ford dumps its Falcon large car and Territory SUV, which will be a blow to about 200 Australian auto parts makers.

Shepard declined to name the companies most at risk, noting that a lot of KordaMentha’s work went into preventing insolvencies.