Ford, GM To Sharply Cut 2nd Quarter Output, Small Auto Supplier Expected To Be Hurt Hardest.

General Motors and Ford Motor announced plans to curtail vehicle production in the second quarter, after sales of cars and light trucks slowed in February. That could push many of the smaller auto component suppliers to the brink. "It's survival of the fittest out there," said David Healy, an auto industry analyst with Burnham Securities. "The natural outcome is more consolidation."

Ford said it will cut production in the quarter by 17 percent. The company plans to produce 980,000 vehicles next quarter compares with the 1.176 million made a year ago. First-quarter production will be 1.035 million. Ford said nearly half of the planned production cuts is from not repeating last year's production increase aimed at boosting inventories. The remainder is the result of moves as part of Ford's revitalization plan and lower F-series production amid the summer launch of the redesigned F-150 pickup truck, America's best-selling vehicle.

As a result of growing inventories, General Motors Corp., whose sales fell 19 percent in February, said it would cut its second-quarter production in North America by 11 percent to 1.39 million vehicles.

The number of automotive suppliers has dwindled over the past decade to about 10,000 in 2000, a third of what it was in 1990. By the end of this decade, only 4,000 to 5,000 suppliers are expected to remain, the Original Equipment Suppliers Association (OESA) predicts.

Forecasts for slower auto sales and production in 2003, especially if consumer worries about a looming war with Iraq persist beyond the second quarter, will compound the pressure on suppliers, which are already receiving lower prices from automakers for their parts.

"The small and middle market players are going to truly feel the pinch. What they were making up on volume, they were giving away on price," said David Eberly, senior managing director of Beringea, a private equity and investment banking firm told Reuters. Companies with annual revenues of $10 million to $100 million are the most vulnerable, especially the hundreds of mom-and-pop operations specializing in metal stampings, injection-molded plastics and electrical parts, said Eberly and others. "You will see suppliers hit bank covenants. You will see some acceleration of the consolidation trend because of this," said J. Ferron, automotive partner for consulting firm PricewaterhouseCoopers.

At the same time, top suppliers stand to gain at the expense of their smaller competitors. Automakers have indicated a desire to work with fewer suppliers and incorporate larger modules and systems into their vehicles, a trend that has benefitted big suppliers.

"There are a number of very large, tier one and tier two suppliers that are expecting volume increases" as competitors go out of business, Eberly said. He noted that could put a strain on their production capacity, a situation that "we haven't seen in a while."

Suppliers said they are bracing for the production slowdowns, which are expected to be announced by the automakers on a weekly, plant-by-plant basis. "We're waiting to see how many units they are going to reduce," said Greg Gardner, spokesman for Visteon Corp., whose largest customer is former parent Ford.

American Axle & Manufacturing Holdings Inc., which derives about 84 percent of its sales from GM, said it foresees no major changes for the light trucks and sport utility vehicles it supplies.