GM SUVs could carry big profits to suppliers

by Robert Sherefkin, Automotive News

Detroit, Michigan - General Motors' new full-sized trucks and SUVs are coming with something extra for its most favoured suppliers: higher profit margins.

The GMT900 program, deemed crucial to GM's future, could yield profit margins ranging from 5 percent to more than 10 percent for the top 20 suppliers on that programme, according to GM officials, supplier executives and documents reviewed by Automotive News.

But here's the rub: GM suppliers invested heavily in the programme and are counting on the sheer volume of North America's largest platform. If the volume falls short, suppliers will be hurt.

"Any supplier that cannot make a 5 percent (net after-tax) profit should get out of the business," says a GM executive involved in the programme.

Rewarding favoured suppliers is a departure for a Big 3 automaker. US automakers' recent history of leaning on their suppliers has sparked a growing wave of falling profits and Chapter 11 reorganisations.

But not all suppliers think they'll make the profits GM says they can expect.

Credit to GM

Craig Fitzgerald, a consultant to auto suppliers, says the average GM supplier won't earn double-digit profits. "GM's purchasing practices are simply too good to allow that to happen. Beside, GM is counting on those profits," says the partner with the firm Plante & Moran PLLC in Southfield, Michigan.

Credit rating company Fitch Ratings,of New York, last week said the distress among parts makers is so great that it will limit the ability of Ford Motor Co. - and by extension GM - to reap price cuts and reduce supplier costs.

Typically, suppliers rarely discuss profits expected from any one contract. But one supplier chief who is looking at fatter profits from the GMT900 is Chain Sandhu, the soft-spoken CEO of interior trim supplier NYX Inc."We will make a 5 percent profit," Sandhu, the founder of the suburban Detroit plastic parts maker, said in a recent interview granted with GM's blessing.

Bo Andersson, GM vice president for global purchasing, sets supplier profit margins based on assumed volumes, which vary from supplier to supplier. Sandhu has a lot riding on that calculation because he supplies $75 worth of parts on each vehicle - $70 million annually at peak production. If volume falters, so do Sandhu's margins.

GM appears to be using the GMT900 programme to reward its best suppliers. In one case, a top supplier's profit margin is more than 10 percent, according to documents obtained by Automotive News.

To be sure, parts makers face risks despite annual planned volumes of 1.7 million at peak production, or 7500 per day, according to GM. While the automaker launches the SUVs, anxiety over fuel prices could reduce those volumes and hurt supplier revenue. The full-size pickups launch late this year.

So far, preliminary sales figures indicate sales of the new Chevrolet Tahoe appear strong. The Tahoe, which has been on sale since early January, is up nearly 50 percent through February compared with the same two months of 2005.

More important, GM says it is not discounting the vehicles. Incentives on the older model are as high as $6,000, according to GM (see story, Page 1).

GM begins production this week of the new Chevrolet Suburban at its Silao, Mexico, plant.

GM's most important launch

The GMT900 is GM's single more important launch this decade, says Merrill Lynch analyst John Murphy. The previous large-truck programme, GMT800, accounted for about 32 percent of GM's North American production last year. Its successor will be equally important to GM and its large-truck business.

GMT900 is so important, says analyst Murphy, that even if GM sought Chapter 11 bankruptcy protection, the leadership - CEO Rick Wagoner or a creditors committee - "would have to push the program as hard as they can." GM has said repeatedly it has no plans to seek reorganisation.

Supplier executive Phillip Fioravante is one of those budgeting for big volumes. The executive vice president of Automotive Lighting Corp. of North America in Farmington Hills, Michigan, expects to supply 870,000 headlamps annually on the trucks and SUVs.

GM's SUVs need to succeed soon after their launch for suppliers such as American Axle & Manufacturing Holdings Inc. and Magna International Inc. Each has $1200 or more of content on each platform. They have invested heavily, so if GM cannot deliver the promised volume they could be left holding the bag.

GM suppliers will not realise the programme's full gains until 2007-2008.

But Merrill Lynch forecast GMT900 production of 1.6 million annually during 2007-2008, below the GMT800 peak of 1.85 million in 2003.

"If it's not a winner in the beginning," says an executive at one of the top GMT900 suppliers, "it could be bad news. If you do not have good margins, you could be part of the supply base in bankruptcy court."

GM suppliers have become dependent on its trucks. In the 1990s, GM's full-sized truck program known as the CK accounted for less than 25 percent of GM's total North American production. That percentage grew to 33.6 percent of GM's North American production by 2004 with the improved GMT800 trucks, which launched in 1998. The GMT800 quality improvements were attributed to stiffer frames supplied by Magna and better drivelines from American Axle.

From Automotive News (A Crain publication)