A Roadmap for Auto Suppliers Experiencing or at Risk of Distress 

Steve Katz  00:00

Hi everybody, and thanks for listening in on our Hilco global smarter perspective podcast. I’m your host, Steve Katz. And if this is your first time with us, well, then welcome. We’re glad you could tune in. Today we’ll be discussing the many challenges that are facing the auto suppliers right now, given all the changes that are taking place in the industry. And we’ll talk about where suppliers can focus their attention and actions to help prevent distress from developing, or at least further developing if it’s already a situation. So with us for that conversation is Tom Boniface, Senior Vice President at Hilco commercial industrial Tom, welcome to the podcast.

Tom Boniface  00:52

Thanks for having me on, Steve. Excited to do this.

Steve Katz  00:54

Yeah. Well, we’re really glad to have you with us today and lots to talk about. But to get us started, can you give us a little bit of a top line on some of the pressing challenges that are confronting the automotive suppliers in the current economic and industrial landscape? I know, we’re just coming right now off the union strike, which appears to have been at least initially resolved, given that they’re tentative agreements with all three manufacturers, but maybe you can talk a little bit about that. And then just give us some of the landscape of what’s going on with suppliers and why it’s such a difficult time overall.

Tom Boniface  01:31

Yeah, glad to. Yeah, as of this recording, it’s Halloween 2023 and all three OEMs have struck deals with the UAW to get back to work. It was about a 40 ish day strike. It was pretty unprecedented across all three suppliers too. The OEM loss was about billions of dollars, anywhere from you know, around a billion to about three and a half each over that 40 day period. Kind of remains to be seen the long term financial impact on the OEMs and supplier base, but sense in the market is that it will be most troubling in the long run for some of the lower tier suppliers. Most interesting development out of the strike and the announcement of the the agreement was the UAW has promised to start to go after unionizing the European automakers facilities stateside, particularly in the southeast and into Texas, and also promised to go after pureplay EV manufacturers ie Tesla, who employs about 20,000 people in their Fremont, California facility. All this is a meeting in the long run. In addition to financial distress that’s felt already there’s most likely going to be more financial professionals across all suppliers from labor in the coming years. On top of the UAW strike, this is an industry that in a supply chain that was really already managing a myriad of issues between surging material costs, fluctuating demand and another pandemic, as there were supply chain issues. This an industry with pre existing tight margins to begin with. So the ability to absorb blips on the broader economic environment is difficult for many of these folks. On top of all that, retooling for a purely EV line of products come in sometime in the next 10 to 20 years, depending on who you ask. Apparently, across the board, interestingly, we’re seeing demand for EVs softening, pick up your latest Automotive News, The Wall Street Journal, and you’ll read all about that. And OEMs are even starting to push back some spending on EVs right now, not necessarily canceling product, but some of the production targets will not be published in the short term, and even some of the co-investment plans been cancelled. So this is, again, broadly an industry where the OEMs call the shots and the suppliers are largely along for the ride. And even with the developments, and the push to EVs. Even some of those had been pulled back prior prior to the rollout. And after some of the investment, significant amount of investment has been made.

Steve Katz  01:34

It’s interesting in complex situation for suppliers, right, because you had a lot of these suppliers who, you know, their number one worry was, well, you know, there’s no longer going to be internal combustion engines made I make catalytic converters, I’m going to be out of business because now they’ve basically you know, manufacture access said they’re going to be out of the ice business by 2031. And now all of a sudden you start to wonder and there’s so many factors that are coming into play with that. Not the least of which is I think the charging infrastructure and just the general lag and, you know, consumers are concerned about the range of these vehicles and where they’re going to charge them. So putting suppliers in precarious situation, I think, and I know, I was, you know, we do a lot of work with other divisions of Hilco, and one of the recent automotive updates pointed out that the SAR is up over last year, and that the OEM margins are significantly improved. But I guess the question is, why aren’t suppliers sharing in the wealth along with the OEMs? Right now?

Tom Boniface  05:34

It’s a tricky question, to provide a concise answer, as best I can. So historically, and legally, there’s no real reason for the OEMs to share profits with suppliers if they don’t have to do and these are situations where the negotiations are more often than not contentious. OEs have historically called the shots but their suppliers, proverbially saying jump and the suppliers say how high or you’re going to use a little brother or big brother little brother metaphor to describe the relationship. But overall, it’s been it’s been contentious. The suppliers are largely just along for the ride, the OEMs and all the pricing power. And the suppliers again, as I said before, they they operate on razor thin margins. And that’s all dictated the top for a time shortly after and during the pandemic, the historical paradigm where the OEMs had all the pricing power shifted to the suppliers. The OVAs is needed the supplier product they needed to step up now and quickly after thinking okay, nobody’s gonna buy cars during COVID. Well, actually, everybody wanted to a car during COVID and they needed more of them. The smartest, I’d say suppliers, those who are strategic and say as for price increases when the OEs needed product and a lot of them got them. The OEs were very willing to pass along those price increases to suppliers if they were making more and more on each vehicle that was going out. There were others though that failed to ask for price increases in a timely manner. And by the time they got around to asking a) the supply chain issue could have flooded out, b) demand for cars had not fallen off a cliff but softened significantly to the point where the paradigm has shifted back to the power paradigm shift back to the OEs versus the suppliers. And those concessions motivated right now the OEMs are pushing forwards in the new EV universe. And it’s most likely that will this shift will leave many traditional ICE suppliers in precarious positions conservatively over the next 10 years. IE if you’re making exhaust systems, or any sort of transmission parts it’s just a it’s not a question of if it’s more a question of when and when many scenarios.

Steve Katz  08:05

So are there certain areas of focus or best practices right now that suppliers can follow that would help ensure their success moving in

08:15

I can’t say like hey execute display book and everything will be fine in the next few years. But working on many of these companies, internally Hilco and being a part of a lot of the help that we provide to these suppliers, I can tell you the healthiest ones and those that are able to weather the storm successfully ask to receive those price increases that I mentioned early and often throughout the pandemic. Others have proactively retooled for the new EV products and or diversified their customer base outside of the auto sector. If you’re only tied to the OE side of things and you’re making a plastic injection molded part while you can make a lot of those parts for any automotive specific mod plastic injection molder is a plastic injection molder a lot of ways but with a little retooling it can do other things. So diversifying the customer base was something we saw a lot of healthy suppliers do. We saw a lot of folks refinance their debt that was set to mature in the 2023 to 2025 range in anticipation of increased interest rates that we all know eventually came and are now kind of, we’ll say wreaking havoc on the economy, but putting a lot of pressures on the economy. We also saw others take advantage of federal grants for investing in battery technology and production. So it’s really like who saw the coming wave and didn’t ignore it, but just ran into it and said, Okay, we’re gonna figure this out, and we’re going to embrace it as opposed to push it away.

Steve Katz  09:44

And I would imagine sort of the classic balance sheet remaining flexible in terms of your balance sheet and cash management practices, liquidity, those are critical. Moving ahead as well. Yeah.

Tom Boniface  09:58

Yeah. I mean, well, looking at your entire footprint and having an honest conversation with yourself, these companies, you really have to assess what’s necessary, what’s excessive, you have to think about other avenues for increasing your liquidity. And that’s a that’s an area where Hilco has been helping these companies for 40 years. The 08-09 timeframe, were integral to the automotive sector coming out of that difficult time in as in as healthy way as possible, between helping close down GM and Chrysler plants that were excessive to working closely with Delphi to understand their assets and what can be sold off what can be wouldn’t need to be liquidated, what can be repurposed. And even look at some of the brand side of things too. Hilco was valuable for that and over 40 years, we’ve been helping companies in the automotive sector. I think more than any one out there.

Steve Katz  10:59

Yeah clearly across the across the company. And I know that having had a bunch of, of your counterparts on the podcast also. Alright, listen, we’re unfortunately just about out of time. Is there anything you haven’t touched on that you also wanted to mention today? Are we covered? Yeah,

Tom Boniface  11:19

Yeah, I’d be remiss if I didn’t at least talk about some of my business Hilco Commercial Industrial’s work in the auto sector. So as I mentioned, we’ve been working with the supply chain for over 40 years. We help companies understand, maximize and monetize the value of their business and the assets especially amid changing landscapes, like the auto sector is seemingly always under. Our work frequently includes divestiture of excess divisions, excess operations, excess equipment, more solution for those kinds of situations as folks look to create greater liquidity, enable reallocation of capital to EV and battery EV products, technology and other growth areas, Hilco’s an institution, as I’m sure all listeners here, regularly listen to this podcast, we’re institutionally well capitalized and they will make strategic investments and asset rich businesses, which is largely the automotive sector through and through at our priority is to invest in continue operations for these for these businesses facing headwinds and if needed, carry any long term exit burden. One thing Hilco’s throughline is carrying extra burdens for companies. It’s what got us our start 40 years ago, and it still makes us a powerful player in the space right now. We’re confident from our knowledge of praising, operating and monetizing this sector, that we’re getting uniquely positioned to help companies of any and all sizes through the changing economic landscape.

Steve Katz  12:58

All right, well, great credentials there to be sure. And I’m guessing you’re gonna get some follow up calls. Because the reason we’re doing this podcast is because there are a lot of suppliers in a tough situation right now. So if anybody does want to reach out what’s the best way to get in touch with you?

Tom Boniface  13:15

Yeah, email and phone is probably best. My job is to be available. A wise man once said the best ability is availability. So call email anytime. Email is T Boniface at Hilco global.com. T- B-O-N-I-F-A-C-E at Hilco global.com. My phone number is 330010964.

Steve Katz  13:39

All right. Thanks again, great information. Really appreciate you joining us today and listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to make them that much more successful and moving forward. And remember that you can always check out more great podcasts and articles featuring timely insights from Hilco experts like Tom, and he’ll go global.com forward slash smarter dash perspectives. Until next time for Hilco global I’m Steve Katz.