Still in OEM sales? Run for your lives!

New car manufacture around the world is at historic lows. It is no wonder that about 40 percent of China's auto part companies face severe liquidity problems this year, as an annual study by business advisory firm AlixPartners says. Some may fail in the next 12 months to 18 months. The AlixPartners study is not known for its doomsday announcements. A similar survey last year had predicted more than 30 percent revenue growth between 2008 and 2010, and healthy margins. We know how that played out.

The study is based on interviews with 40 senior executives from foreign and domestic players in China's auto supplier sector. All the study says is this: While last year many executives had refused to see the writing on the wall, this year, most face the stark reality now: It's ugly out there. And it will get worse.

A bit belatedly, the study realizes what I had learned in more than 30 years of working as an advisor to one of the world's largest auto manufacturers: The real money for a parts manufacturer is not in OEM sales. The real money is in the aftermarket. The aftermarket is a goldmine, you just need to know where to dig and how to set your stakes right.

This led to the founding of my company that connects Chinese parts manufacturers with overseas aftermarket wholesalers. It also has been the mantra in these columns since day one: Aftermarket, aftermarket, aftermarket.

The AlixPartners study now agrees that the aftermarket is more profitable for suppliers than direct sales to auto makers. But, so the study says, "this requires auto suppliers to shift the business model to one focusing on a very different set of skills, new distribution channels and sales tactics. This, however, might prove a challenge to many firms."

Why?

For readers of this column, this challenge will be much easier to master. From its beginning, we have been talking about the skills, distribution channels, and sales tactics the aftermarket needs. They are not "new" in the aftermarket trade. Some of them are as ancient as the trading skills on a market place. The skills may be new to a manufacturer. But they can be quickly learned. Especially in a nation that looks back on the longest history of trading known to mankind.

The state of the auto industry may give additional incentive to refresh the know-how necessary to enter the aftersales market.

Last week, Chrysler went bankrupt. Here is a list of Chrysler's 50 largest unsecured creditors. If you have business with these, you have reason to worry. There are more worries ahead:

Insiders see this as a trial-run for GM. General Motors most likely will go bankrupt in a month. Both companies will continue to operate under bankruptcy protection. Whether the parts suppliers will survive is a totally different question. Chrysler has closed all of its 30 plants, and will keep them closed for at least 60 days until the bankruptcy proceedings are over.

Says Reuters: "Suppliers will not have any parts to deliver, after Chrysler shut down all of its production. There is no assurance the company will exit bankruptcy in less than two months."

The courts may take longer than 60 days. By the end of last week, a mob of 63 lawyers, representing interests the UAW to the Mesothilioma Victims Association to Magna, swamped Judge Arthur Gonzalez with motions for their clients. Next week, it could be hundreds more lawyers in the judge's courtroom 523 in the Southern District of New York. The wheels of justice grind slow, and with too much strain on the gears, they may spring some sprockets: It is not clear yet whether Chrysler will survive or have to close down altogether.

Even if and when Chrysler's Chapter 11 plan is approved, at least 8 plants will never be reopened.

Chrysler's closure will be followed by an extensive shutdown scheduled by General Motors. GM is idling 13 assembly plants in North America for as long as nine weeks starting mid-May. If GM goes Chapter 11 on June 1st - and most indicators say they will, extensive production stops will follow.

"Prior to this, 30 to 40 percent of [American] auto parts companies were in some form of distress financially, and I would guess all of these shutdowns are going to pump that up to maybe 50 percent suppliers being in a real financial distress situation," said Anthony Faria, an analyst at the auto research center of the University of Windsor in Ontario, Canada.

Standard & Poor's Ratings warned of "systemic risks" from "the interconnectedness of the North American supply base." S&P warned it may cut ratings on six large North American auto suppliers, including Harman International Industries Inc, Johnson Controls and TRW Automotive. This in addition to about 500 parts suppliers that had been pronounced at "high risk" of failure weeks ago by the accounting and consulting firm Grant Thornton.

In Japan, to which the Chinese parts industry has high exposure, new car sales are at their lowest level in the last 41 years of recorded history. The Nipponese bought only 284,035 units in April, a drop of 23 percent on the year, the Nikkei reports.

As far as new car sales in North America go, there is no end in sight. Reuters just announced that "U.S. auto sales fell 34.4 percent in April as the industry held near the lowest levels in nearly 30 years." U.S. auto sales came in at a 9.32 million seasonally adjusted annual rate in April, according to Autodata Corp, way below the 9.8 million rate that analysts had expected. The annualized rate of U.S. auto sales is a closely watched indicator of economic activity. Last year, it was in excess of 16 million.

Hopes of a turn-around are wishful thinking. "I don't think it's anything that can be characterized as a recovery until a bit down the road," Frost & Sullivan auto analyst Stephen Spivey said. "The people I've talked to really aren't looking for a rebound until next year."

In times of crisis, competition is fierce. As any hunter will tell you, a wounded animal is probably the most dangerous thing in the world. It will turn on its hunters and cause as much damage as possible before giving up to or escaping.

The 40 percent (or more) of China's auto part companies that face severe liquidity problems this year are mostly companies that focus on OEM sales or are contract manufacturers to large OEM suppliers in trouble. Competition between them will be murderous, abetted by auto manufacturers which are with their back to the wall and which have to save at all costs.

China's auto part companies that early on focused on the after sales markets report steady, if not rising demand. If you are not in the after sales business, you want to re-orient quickly before it's too late. If you are in the after sales business, you want to hone your skills, sharpen your tactics, and look for a better penetration of your distribution channels.

Next time, we will return to these skills and tactics. We will talk about Placement (presence in the channel) and Promotion (let your customers know about your great product and your great price.) We will also talk about Positioning: What sets your product apart from the competition, what gives your customer a compelling reason to buy?

See Chinese version: http://auto.gasgoo.com/News/2009/05/061000090969036805.shtml

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.