SOUTHFIELD – Lower industry volumes and

the massive decline in truck and SUV sales have put as many as one-third of

automotive suppliers in North America at risk of bankruptcy, according to

the Summer 2008 Automotive Industry Review prepared by Grant Thornton

Corporate Advisory and Restructuring Services. At the same time, bankruptcy

concerns for the Detroit Three domestic automakers are overblown, despite

recent credit downgrades by the major debt rating agencies.

“The magnitude of the decline in truck and SUV sales can be captured in

two key events likely to unfold this year: the Toyota Camry ending the Ford

F-Series’ 26-year run as the best-selling vehicle line and Honda vaulting

past truck-dependent Chrysler to become the number three automaker by

annual U.S. sales,” said Kimberly Rodriguez, principal of Grant Thornton

Advisory Services Automotive Platform.

The report said at-risk suppliers feature one or more of the following

qualities:

Heavily reliant on large SUV and truck volumes

Located only in North America

Concentrated on domestic OEM sales

Have a significantly large SUV and truck platform part sourcing – Exposed to increases in raw materials costs without ability to pass

on to customer.

“The decline in industry volumes and the shift to more fuel-efficient

vehicles is creating a massive ripple effect in the supply chain,” said

Rodriguez. “The full impact of very low truck and SUV production in the

second half of the year and any new production cutbacks this fall —

something we believe is likely — will only make supplier cash flow

problems more difficult to manage.

“It’s not just the suppliers producing lift gates, transfer cases and

other truck-only parts that are at risk, but also all those relying on

truck volumes for survival, including companies producing chassis systems,

NVH systems, driveline and drivetrain components, stampings, and a host of

others,” she said.

Chapter 11 Risk Low for OEMs

While bankruptcy is a real possibility for many suppliers, Rodriguez

believes the risk of an OEM filing for bankruptcy is remote, especially for

General Motors and Ford, despite asset impairments, growing losses from

continuing operations in the United States and massive restructuring

charges.

“Ford and GM are not going to file for bankruptcy,” said Rodriguez. “It

would start a domino effect of bankruptcies throughout the supply base and

it would tank consumer confidence in their brands, even in markets like

Asia, Europe and South America where they are profitable and growing. The

bankruptcy process carries too many risks, so they’re going to have to look

at all financing options available, including government loans, joint

ventures, foreign investment and other financing in capital markets. The

target will be to have enough cash to get them to 2010, when their product

lines will be more in line with customer demands.”

Chrysler also is an unlikely candidate for bankruptcy, but for

different reasons: the value of its assets like assembly plants, its parts

and service business and its retail network.

“It’s the appropriate time for companies like SAIC (Shanghai Automotive

Industry Corp.), Tata, Renault and others who have been holding back on

capital, to establish footholds on U.S. soil, either through acquisitions

or greenfield investments.”

Double-digit Declines in Dealer Ranks Possible

At the local level, the auto industry crisis will play out at thousands

of dealerships across the country, according to the Automotive Industry

Review.

Lower throughput, higher expenses and declining margins have plagued

many dealerships over the last several years, especially those selling

domestic brands. Now, with annual industry volumes plummeting from the 16-

to 17-million unit range of to about 14.5 million units in 2008,

many stores are no longer viable.

According to Grant Thornton’s analysis, 2,736 dealerships would need to

close just to maintain sales per dealer at last year’s level of 747 units.

“The total number of U.S. light vehicle dealerships has been declining

since 2003, but for the domestics, the declines have not kept pace with

their sales and share declines,” said Rodriquez. “Without consolidation,

the average dealership will sell 81 fewer units this year than the 10-year

average. Stores already struggling may not make it and operators should be

open to consolidation opportunities.”

The full Automotive Industry Review can be viewed at GrantThornton.Com/Automotive

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