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By Erik Kobayashi-Solomon | 10-01-2010 12:10 PM

An Autoparts Firm With Some Shock Absorption

A close-knit, integrated relationship with the automakers gives exhaust and ride-control manufacturer Tenneco some traction in a tough industry.

Erik Kobayashi-Solomon: Hi. I'm Erik Kobayashi-Solomon, co-editor of Morningstar's OptionInvestor. Today it's my great pleasure to welcome Richard Hilgert, who is covering the automotive space here at Morningstar.

Rich, thanks for coming.

Richard Hilgert: Thanks for having me, Erik.

Kobayashi-Solomon: So, just within the last couple of days, I published a report on Tenneco. Tenneco is not the gas station that I remember using as a little kid, but an auto parts company that you deal with. Can you first, just at a 30,000-foot level, explain what products Tenneco produces and who their customers are?

Hilgert: Sure, the parts that they manufacture are for exhaust systems and for ride control. In particular, they have Monroe exhaust systems and mufflers, and they also have the brand name for their shock absorbers.

Kobayashi-Solomon: And just thinking about, let's say, exhaust system or shock absorbers, I understand that some of these products are more integral to the automaker platform than others. Which of their products do you think are relatively more, let's say, well integrated and which are kind of more snap-on?

Hilgert: Both are very crucial to vehicle manufacturers' platform. Both determine the characteristics of the vehicle, both the dynamics of ride and handling, as far as the vehicle is concerned to the driver and to the passenger for comfort – for ride comfort, and the type of sound that the vehicle makes. Obviously, you wouldn't want a Camaro to sound like a –

Kobayashi-Solomon: Like a Hyundai or something...

Hilgert: ...a small vehicle, from Hyundai or any other manufacturer of small vehicles. But for that matter, these are very important and require Tenneco to be very upfront and early in the development stage of these vehicles.

Kobayashi-Solomon: See, this is what I wanted to ask you about because you had made the point when we talked before that there really is a dynamic that these parts have to be designed into the platform. Can you go into more detail on that?

Hilgert: Exactly, they do need to be designed upfront. Again, very close knit relationship between the supplier and the manufacturer of the vehicle when developing a new vehicle for the market.

Kobayashi-Solomon: So, basically the supplier engineers are working with the OEM engineers to kind of design a sub-system within the autos, is that right?

Hilgert: Correct. And this needs to be done at a very early stage. Vehicle manufacturers typically take anywhere from 18 to 36 months to develop a vehicle. Once the vehicle is developed and in production, that production might last anywhere from five to 10 years. If a supplier is on that particular platform, once the vehicle comes up for redesign or a new program, that supplier is then the incumbent for the next program.

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