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The Road Ahead for Auto Suppliers

We expect optimism to improve in the auto sector as 2011 unfolds.

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Auto parts suppliers continue to recover from the great recession but there is more hope of higher production volumes than the last time we looked at the sector. We continue to see an environment where the strong suppliers will get stronger while weak firms will eventually exit the industry or be acquired. For this article, we look at the current state of the industry, briefly discuss our favorite suppliers and then discuss the trend of automakers consolidating their supply bases.

We think the best place to get a snapshot of current supplier conditions is by looking at the Automotive Supplier Barometer of the Original Equipment Suppliers Association (OESA). The last survey, published in November, surveyed both small and large firms for current sentiment and other items such as capital investment and hiring. The sentiment index increased to 61 from 52 in September and posted its highest level since 70 in March. A reading above 50 indicates positive sentiment. The index declined from November 2009's level of 69, which is not surprising. The second half of 2009 was the first period since 2007 that the industry did not have to think about sales declining further. Cash for clunkers also gave suppliers reason to be optimistic in summer 2009. We found it interesting that the recent increase in optimism is coming from firms with revenue under $1 billion while larger firms remain pessimistic to neutral in their outlooks. This development is good news because the smaller firms are likely Tier-2 and Tier-3 suppliers whose health is critical to the automotive supply chain. If Tier-2 and Tier-3 firms are distressed, then the Tier-1 firms have to spend time and money more closely monitoring the health of their own suppliers and in some cases even acquire them to prevent supply chain disruptions. We expect Tier-1 optimism to improve in 2011 barometer results.

David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.