Auto suppliers have gotten hammered and I still wouldn't touch them
Auto sales have been disastrous, but the shares of many companies like Autoliv (ALV) have rallied over the past several weeks in part because of the general rally in the markets and in part because of the expectation that auto sales will rebound in the second half of the year.
Auto industry suppliers get paid when manufacturers build vehicles...not when they are sold to the public. Even if auto sales pick up in the near future, there is a huge glut of excess inventory that has to be worked through.
The Japanese automakers are in better shape than the "Big 3" American companies and here is what their production figures were like for March:
Auto sales may begin to rebound some in the second half, particularly if the U.S. passes some sort of cash for clunkers program. If sales improve production would in turn ramp up some at the end of the year.
Even if auto sales do pick up, and there certainly is no guarantee that they will with the looming bankruptcy of GM and possibly Chrysler, the second quarter is going to be really ugly for suppliers.
Here's a story that illustrates that as bad as the production numbers are at the Japanese automakers things will probably actually be worse at the U.S. manufacturers.
Rumor has it that General Motors has decided to idle the majority of its plants for nine weeks this summer. That's seven weeks longer than the traditional two week shutdown that domestic automakers usually have. We're talking about a period of over two months, or the majority of a quarter where one of the largest automakers in the world will produce very few vehicles and in turn need very few parts from suppliers.
But the shutdown could be catastrophic to many auto parts suppliers that already are near bankruptcy due to previous production cuts. During the shutdown, suppliers couldn't ship parts to GM and would lose critical revenue.
"It's one of those things we've been dreading for a long time," said Jim Gillette, director of financial services at auto-industry consultant CSM Worldwide in Grand Rapids. "It's as bad as its ever been."
GM employees may get shutdown details this week
Autoliv is one of the better supplers in the industry and I wouldn't touch them. Imagine how painful things are going to be for some of the worse companies in the sector. I wouldn't even touch the bonds of many of these companies at this point.
Perhaps I am too close to things and I'm not seeing the forest through the trees. In my fourteen years in the industry I've never seen anything that was even half as bad as what we are experiencing right now. Even the immediate aftermath of September 11th pales in comparison. Things are likely to eventually get better. The current pace of 9.5 million vehicles per year in the United States is not sustainable over the long term, but it could be a while before sales rebound significantly. The days of 16 to 17 million vehicles per year are likely gone for a while. The new "normal" could end up being 11 to 12 million units, if that.