Bye bye Autos

It is May 12, 2008 and I realize I have not posted in a long time. Well, I bid adieu to the Global Auto/Industrial sector a long time ago and have been back in the field I started, interest rate derivatives. Will write more as time permits.

A scene from an Indian office

I saw this picture online somewhere. Reminded me of an old government office in New Delhi when I was growing up there. I understand that some government offices still look the same! India does have a tendancy to shock your senses both good, bad and ugly.

What drives a banker?

I have been a banker for the last 11 years and have always felt that bankers in general are more driven than people in a lot of other professions. I know, I know the non-bankers will pounce on me as if I have committed a grave sin here by making this statement. Here, I am not talking about bankers you see in a retail shop. I am talking about guys that sit on the trading desk, that call on large corporate clients as part of DCM, corporate banking and other parts of financial markets. Let me know what you think.

God save the autos

There were serious rumours in the market that GM is headed for bankruptcy tomorrow. The CDS shot up to 710 range may be higher towards the end of the day. DPH was in the 900 range and trading as if it is going to file in the near term. Ford is hovering around 550/600 range. Despite this the asset-backed market continues to price deals at pretty attrctive levels. DCX priced a 2.97 average life deal at 6 over 1ML. Life as an auto banker has been rather interesting lately, with everyone trying to figure out what happens if GM goes to junk about 3 weeks ago to what happens if GM were to file in the next 6 months. People are making a killing in the CDS market. This feels like the old dotcom era when even a monkey could pick a winner. The same is happening in the auto CDS market. People buy GM, DPH, ARM, and F CDS today and three days later their positions are significantly in the money. I have heard so many boastful know-it-all portfolio traders talk about their trades. I used to laugh earlier but I have now stopped laughing at their stupidity. The sector is not going anywhere! Not with $20 billion plus in cash on the OEMs' balance sheets. Must keep writing my memoirs so I can look at them 6 months down the road and laugh.

China's Auto Sector Facing An Increasing Car Inventory

China's Auto Sector Facing An Increasing Car Inventory

BEIJING, Dec 13 Asia Pulse - China's automotive industry is facing a big pressure from increasing inventory of cars, betokening the coming of a more fierce market in the coming year.

According to statistics from 70 major auto dealers in China, by the end of October of this year, vehicle inventory reached 306,700 units. The inventory increased 6.9 per cent in October as compared with the previous month and 60 per cent over the beginning of this year.

Thanks to the efforts in reducing inventory and production, Octobers inventory of car dropped 8.74 per cent from the previous month.

For different models of cars, inventory of medium, ordinary and mini cars declined 3.27 per cent, 19.82 and 12.98 per cent month on month, respectively in October. The reduction was mainly in the inventory of cars with displacement below 1.6 liters.

Auto dealers in China are now in a difficult situation facing many problems such as overcapacity of production, increasing inventory, profits dropping, launching of new vehicles, lowering of tariff rate and weakening consumption. The competition on auto market is forecast to be even fiercer in 2005.

Chinas sales of motor vehicles reached 3,440,600 units in the first ten months of this year, according to statistics from the 70 major auto dealers. Of this, 1,169,200 were trucks, accounting for 33.98 per cent of the total; 558,100 were buses, 16.22 per cent of the total; and 1,621,200 units, 47.12 per cent of the total.

Sales of medium-high grade cars accounted 4.63 per cent of the total sales of cars; medium-grade cars, 47.58 per cent of the total; ordinary type, 38.38 per cent of the total; and compact cars, 9.41 per cent.

For consumption structure, 22.22 per cent were sold for commercial use; 11.27 per cent for taxi service, and 65.51 per cent for personal use.

The top four brands in sales of medium-high grade cars were Teana, Regal, Mondel and Accord.

The top five brands in sales of medium cars with displacement between 1.6.2.5 liters were Santana, Accord, Family, corolla and Excelle.

The top five brands in sales of ordinary type of cars were Jetta, Fit, Xiali (Charade), Haoqing and Sail.

The top four brands in sales of minicars were Alto, Flyer, Beidouxing and Xinfu Shizhe.

GM: Not Conceding U.S. Market Share

GM: Not Conceding U.S. Market Share

DETROIT December 4, 2004; Michael Ellis writing for Reuters reported that General Motors Corp. will have a tough time posting stronger U.S. sales in December, a top GM executive said on Friday, but the automaker is determined to stop any further loss of U.S. market share.

"I would say the goal for us is to maintain and gain market share -- that is the strategy and that is the goal," Gary Cowger, president of GM North America, told reporters at a news conference on Friday.

GM officials have conceded it will be difficult for the world's No. 1 automaker to match last year's U.S. market share of about 28.2 percent, down from an annual market share of more than 30 percent as recently as 1997 and a peak of more than 50 percent annually in 1962.

Following GM's 13 percent drop in November sales, double the fall that many on Wall Street had forecast, analysts said they expect GM -- which has led Detroit's price war for years now -- to boost consumer incentives further.

But GM may wait until later in the month, when most car sales are made, to make the move and create more of a sense of urgency among buyers, analysts said.

"Car companies will likely ratchet up incentives in December to slash inventories and end the year on a strong note," said Joseph Barker, manager of North American sales analysis with CSM Worldwide.

Asian automakers, particularly Toyota Motor Corp. and Nissan Motor Co. Ltd., continued to gain market share in November.

Cowger declined to comment on GM's incentive strategy this month, but said it will be difficult to match the strong sales levels the company saw late last year.

DECEMBER SALES

"December will be tough because we had a huge December last year," Cowger said. GM's market share hit about 31 percent last December, far above its rate of about 27.3 percent so far this year.

GM's incentives fell by an average of $339 per vehicle from October to $3,519 in November, said Jesse Toprak, senior analyst with the automotive Web site Edmunds.com.

It still led the industry in spending on discounts for car buyers, however. And much of the decline in that spending was due to the fact that GM had fewer of its 2004 models in stock, which carried higher incentives, analysts said.

GM was also surprised by the low take rate on its "Lock 'n Roll" incentives program, which offered consumers the chance to lock in a low financing rate on both a new vehicle bought in November, and a second GM vehicle in a few years.

Since launching its interest-free financing offer shortly after the Sept. 11 attacks more than three years ago, GM has aggressively battled for market share with its sales incentives.

The strategy helped GM maintain its U.S. market share until this year, when it fell nearly a full point from last year.

The launch next year of 13 all-new vehicles, many in large volume segments such as the new Chevrolet HHR wagon, will help bring incentives lower, Cowger said.

"As you get more and more new product in the market, you'll see a mitigation of incentives," Cowger said.

India wants to lure U.S. auto supply jobs

Sunday, December 5, 2004


India wants to lure U.S. auto supply jobs

Its bid to become a major global player in parts manufacturing poses a challenge to Michigan companies.

By Louis Aguilar / The Detroit News

Clarence Tabb, Jr. / The Detroit News

After nabbing scores of software engineering and call-center jobs from America, India now wants to become a powerhouse in the $1.1 trillion automotive supply industry.

The Indian government recently served notice it plans to compete globally in the auto industry, beginning with the design and production of automotive components. The country's goal is to grow its fledgling $7 billion auto parts sector by $5 billion a year over the next decade.

Such an expansion could create as many as 3 million jobs and attract nearly $50 billion in investment, according to a study by the consulting group McKinsey & Co. for India's Automotive Component Manufacturers Association.

It would also establish India as a serious competitor to Michigan, which remains the nerve center of the automotive parts industry despite losing 53,000 jobs in the sector since 1999.

For now, India is attracting auto parts jobs on a small scale. In April, for example, Livonia-based Acro Service Corp. helped build a small facility in Pune, India, where a small group of Indian engineers handle design work for a Michigan auto parts supplier.

The Indian engineers perform basic computer-aided design testing and send the results back to their Michigan counterparts, who make 60 percent higher salaries.

Similar work is performed by 25 Indian engineers at General Motors Corp.'s India Science Laboratory in Bangalore, which opened three years ago. They corroborate electronically with GM engineers and designers based in Warren and Europe. Troy-based auto parts maker Delphi Corp. opened a similar facility in Bangalore two years ago.

The Indian government, which successfully targeted information technology and computer programming in the 1990s, now believes auto parts could be its next big opportunity.

Other countries -- including China, Brazil, Slovakia and Vietnam -- have similar ambitions to tap into the emerging Asian and Eastern European auto markets, as well as making headway in North America.

More than half of the $5 billion-a-year projected growth in India's auto parts industry will come at the expense of global competitors, including Michigan-based firms, according to the McKinsey & Co. study.

"You should get used to this because you are going to hear these kinds of goals from China to Eastern Europe," said Sean McAlinden, chief economist and vice president of research for the Center for Automotive Research in Ann Arbor.

Michigan and Midwest auto suppliers are still reeling from the first wave of foreign rivals that began to nab jobs and investment two decades ago. Last year, Mexico, Canada, Japan and Germany accounted for 55 percent of auto parts imported into the United States.

Because of the shift, Michigan has lost 21 percent of its auto supply jobs since 1999, according to the Center for Automotive Research. About 172,000 auto supply jobs remain in Michigan.

About 1 in 5 U.S. auto supply jobs, around 127,000, will vanish by the end of the decade as North American firms close plants and move production to lower-cost regions, according to a study this year by Roland Berger Strategy Consultants in Troy.

India, like many countries, wants to cash in on Eastern European and Far East countries opening their gates to foreign investment. India's auto parts industry currently isn't much of a player in Asia or the United States.

But buoyed by its success in attracting American information technology jobs such as call centers and software design, as well as its proximity to China and other growing auto markets, India believes it's ready to tackle manufacturing.

India also is signaling it will aggressively seek high-skill jobs in the auto industry -- the kinds of jobs Michigan government officials have said they need to retain. India has a population of more than 1 billion people. Every year, Indian universities produce more than 350,000 engineers and nearly 5,000 doctorates.

Analysts remain skeptical that India can become a major player in the global auto industry in just a few years.

"No question, India will be a formidable opponent, but the question is, to who and what market?" said Antonio Benecchi, an auto analyst for Roland Berger Strategy consulting firm.

"The initial expansion will eventually serve the expanding market in India and Asia, which may not mean much job dislocation for American workers. But they can cause more immediate problems for Latin America and other Asian competitors," Benecchi said.

When RV Rao recently heard of India's ambitions, the Indian-American shook his head and smiled as he sat in the Livonia offices of Acro.

"The Indian industry can be quite boastful in their predictions," Rao said. "But there is no question there is going to be significant growth. Will there be dislocation of American workers? Unfortunately, yes. How much dislocation? No one can accurately say."

Rao is head of a new Acro subsidiary that is setting up Indian engineering facilities for automakers and suppliers. He helped establish the Puneshop that opened in April and plans to hire another dozen Indian engineers soon. Next month, Acro plans to open another engineering center in Chennai, India, for a Michigan supplier. All of the work once was performed by American workers.

For more than two decades, Acro concentrated on providing automakers and their suppliers with IT staffing and engineers in the United States. About five years ago, automakers and suppliers began to approach the firm about setting up facilities in India.

Acro intends to serve smaller firms that perform contract work for larger auto supply firms.

It hopes that 25 percent of its business will come from low-level design and engineer work currently done by companies and employees of automakers based in the United States and Europe.

"We are not the trendsetters here," Rao said. "But that is the direction the auto industry and the supply industry have taken, and we are responding."

Acro isn't the only one setting up engineering and design outposts in India.

Major companies such as Sundram Fasteners, Bharat Forge, Sona Koyo Steering and Toyota Kirloskar Auto Parts have either secured contracts or are already supplying to vehicle manufacturers abroad.

DaimlerChrysler AG's Detroit Diesel Corp. subsidiary recently announced it would build an Indian plant to manufacture valves for engines.

Amtek Auto Ltd., an Indian auto supplier that builds connecting rods for GM and Ford Motor Co., raised $69 million selling shares to fund acquisitions and expansion plans.

Amtek Auto last year bought U.K.-based GWK Group, which supplies parts to GM and Ford.

In September, a 30-member delegation from India's Automotive Component Manufacturers Association traveled to Detroit to hold talks with Ford, GM, and Delphi officials. Similar talks are now being held with European automakers and suppliers.

Analysts say India's grandiose ambitions are typical of emerging countries that are rushing to take advantage of globalization.

"The biggest threat may be that India steals so much work from Mexico and China that those countries retool and go after other segments of the American market," McAlinden said.

Analysts contend India and other new competitors have many obstacles to overcome. They must significantly upgrade roads and infrastructure, and guarantee top-notch quality and delivery. And they must liberalize trade policies.

"And there is no small amount of bureaucracy and corruption to deal with in the Indian government," McAlinden said.

Still, no one doubts that Michigan must adapt to new competition from India.

"The 21st-century manufacturing economy in Michigan will be far different than the last century," Gov. Jennifer Granholm said in a recent interview. "I am aware that many analysts say that we will lose more jobs to India and other emerging countries. But we can and will continue to remain essential in the global economy."

You can reach Louis Aguilar at (313) 222-2760 or laguilar@detnews.com.

For Rivals U.S. Steel and Alcoa The Battle of Detroit Heats Up

As Car Makers Face Squeeze,
New Alloys Let Steelmaker
Regain Edge on Aluminum
Mr. McGuire's Favorite Toys
By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL
October 19, 2004; Page A1

DETROIT -- J.P. McGuire is a secret weapon for U.S. Steel Corp. in one of its most important battles: the struggle with the aluminum industry for the hoods, doors and bumpers of American cars.

Mr. McGuire, a 30-year-old engineer who used to work for the aluminum side, sniffs out when Detroit auto makers are designing new cars. He then swoops in to try to hold onto or win back ground in a fight that pits stronger, cheaper steel against lighter, more costly aluminum.

For years, aluminum makers made steady inroads, pitching their product as the fuel-efficient metal of the future. But lately, steelmakers have been battling back with lighter new alloys and a continuing price advantage despite this year's big run-up in steel prices. Mr. McGuire points to a spreadsheet showing that since his arrival in 2001 U.S. Steel has reclaimed 56 parts on eight vehicles that had switched to aluminum. That represents 51,000 tons of steel annually, with a value of about $35 million a year.

Cars are the biggest market for steel and a growing one for aluminum. That means Pittsburgh rivals U.S. Steel and Alcoa Inc. are battling for nearly every wheel, lift gate and drive shaft coming out of Detroit. It's a battle that has broad consequences for the rival metals, the auto industry and the environment.

Facing increasingly intense competition around the world, car makers are pinching pennies as never before, forcing them to seek not just the most fuel-efficient materials but also the cheapest. The tension sets up intense competition between U.S. Steel and Alcoa, which are both counting on the car industry for their long-term profits.


Led by Alcoa, aluminum has gained auto-market share every year in the past decade, going from 140 pounds to nearly 300 pounds per car and generating about $5 billion in sales for North American aluminum makers.

But the auto makers' financial squeeze has helped the steel industry regain momentum. General Motors Corp. recently said it will be using aluminum hoods or lift gates on only six of its 87 vehicles next year, down from nine this year. "It's a cost issue," says Jody Hall, an engineering-group manager at GM. Ford Motor Co. said half of the eight aluminum hoods it had been using have returned to steel in the past three years.

The more than 100% rise in spot steel prices this year has done little to change that. Aluminum, whose more-elaborate processing gobbles up huge amounts of energy, still costs about twice as much as steel. About 1,840 pounds of steel still go into every car, generating about $15 billion in sales for the domestic steel industry. (Other automotive suppliers who use steel have been harder hit by the rising prices. See related article1.)

U.S. Steel and Alcoa have dueling research centers dedicated to auto makers in Detroit. U.S. Steel's five-year-old facility is the size of a football field. Not to be outdone, Alcoa's center, opened this month, is nearly twice as big.

The two rivals snap up each other's engineers and snoop on each other's plans. In presentations to auto makers, they provide tit-for-tat comparisons. Steel offers algebraic formulas showing aluminum is only a third as dense as steel and runs simulated crashes in a computer lab to show how steel's greater density helps bumpers withstand impact.

Alcoa points to similar equations showing the weight advantage of its material -- an aluminum hood weighs 20% to 50% less than one made of steel -- and says its engineers are trying to close the gap on material strength with new designs.

The two companies compete most fiercely in the roughly $5 billion market for so-called closure panels, such as doors, engine hoods, trunks and lift gates. Aluminum makers claim a 10% to 50% weight advantage for those parts; steel claims it is 20% to 50% cheaper.

Those comparisons are hugely important for auto makers. "It's all about reducing weight and lowering costs," says Ron Traficante, senior manager of body materials at DaimlerChrysler AG. The prime equation for each individual part is the ratio of cost savings to weight savings. Most of the time, steel wins the equation. But sometimes a more expensive but lighter aluminum panel is adopted to keep the overall vehicle weight below certain limits.

The stakes are high for both companies. U.S. Steel survived brutal market conditions and a wave of consolidation in its domestic industry, securing its position as the largest U.S. steel company. Rising steel prices -- fueled by surging global demand, especially in fast-growing China -- have returned the company to profitability in recent quarters, but it still faces high pension and other costs. It is streamlining operations to focus on key markets, including sales to Detroit, which represents about 20% to 30% of the company's $9.4 billion in sales last year.

Alcoa, whose headquarters sit on the opposite side of the Allegheny River from U.S. Steel's in downtown Pittsburgh, has solidified its place as the largest aluminum company in the world with a $28 billion market capitalization. Alcoa is focusing on premium markets where it can add engineering value to its basic material. The auto industry accounted for about $2.8 billion of its $21.5 billion in sales last year, a figure it hopes to double by 2010.

Although aluminum was on the body of some early cars such as Henry Ford's Model T, steel replaced aluminum on that model and has dominated most other car bodies since.

Shifting Emphasis

That started to change in the early 1980s, when energy concerns and stronger fuel-economy rules shifted car makers' emphasis from strength to weight. Once-complacent steelmakers blanched when GM rolled out the Pontiac Fiero in 1984, the first mass-produced vehicle with a plastic composite body. Many engineers at Detroit's Big Three auto makers said their future was in plastics.

"We looked at plastic as the antichrist if you will," says Pete Peterson, who retired this month as head of automotive marketing at U.S. Steel and is regarded by many as the "godfather" of the steel industry's efforts to beat back competition from other materials.


Within months of the Fiero's debut, Mr. Peterson, now 67, helped mobilize a task force of 40 steelmakers from around the world. Industry trade groups, the International Iron and Steel Institute and the American Iron and Steel Institute, helped steel companies pool research and development to come up with lighter, more competitive steels and marketing efforts to promote them.

As it turned out, the real threat wasn't plastic but aluminum. "When plastic died and aluminum came on," says Mr. Peterson. "We just swung our guns around and started shooting in a different direction."

He knew what a formidable opponent aluminum could be. As a young executive marketing tin products for U.S. Steel in the 1970s, Mr. Peterson watched the aluminum industry steal the beverage can business away from the steel industry. After that, he says he dedicated his life to not letting that happen in the auto business.

Mr. Peterson recalls a flight from Pittsburgh to Detroit in the mid-'90s. His seatmate was an Alcoa engineer, who was engrossed in a list of parts his company was planning to supply Chrysler for a retro new hot rod.

"He was looking at the Plymouth Prowler papers," says Mr. Peterson, who leaned back in his seat to get a better look. "I sat there reading everything that was on his lap." When he arrived in Detroit, Mr. Peterson told U.S. Steel engineers what he learned.

The engineers were thankful for the tip but concluded that the low-production Prowler wasn't as important as bigger-selling vehicle models, where aluminum was making gains, part by part.

Much Lighter

First came the engine blocks, then transmission-related components and suspension components, all of which can be made much lighter from aluminum than from cast iron on most models coming out of Detroit. Aluminum soon started making pitches on steel's realm -- body panels and parts that formed the body's structure.

High-end vehicles such as Audis, BMWs and Jaguars began using more aluminum components to improve performance. Meanwhile, stylized aluminum wheels on high-priced SUVs caught on with rap stars and soccer moms. Light-weight aluminum also had a starring role in the Clinton administration-backed "super car" project, an effort to design a vehicle that would get 80 miles per gallon.

Steel is an alloy of iron and up to 2% of carbon. The traditional method of making steel involves melting combinations of iron ore, scrap steel, limestone and other materials in a furnace. Aluminum is a silvery metal that is made by melting alumina, a powdery white substance that is made by refining a mined ore called bauxite.

At U.S. Steel, engineers and metallurgists continued to ratchet up research efforts in chemistry and steel-making processes to produce new varieties of "advanced high-strength steels." These include esoteric new products that are up to three times as strong as regular carbon steel. That means less steel is needed for the strength required on an automobile body part, reducing weight and bulk -- and often improving performance in crashes as well.

Auto makers have been impressed with the results. "Competition in the industry is causing us to look at affordable solutions for weight containment and reduction. That is driving us back to steel as an alternative," says Paul Geck, a steel architecture specialist who has been with Ford for 40 years.

Five years ago, U.S. Steel opened an automotive center in a high-tech area of Detroit known as Automation Alley. The new facility in Troy has several labs, including the computer lab that simulates crashes and a metallography lab to study steel types with high-powered microscopes. In a "dent testing" room, a machine resembling a swing set with a robot-like arm slams a rubber mallet onto a vehicle door, simulating golf-ball, hail-storm and shopping-cart assaults on different body panels. On weekends, the team's engineers are working on a pet project to redesign the runners and supply the steel for the U.S. luge team.

The center is partly what persuaded Mr. McGuire, a self-described motorhead who fixes up cars in his spare time, to join the company. With a background in metallurgy and auto engineering, Mr. McGuire had been working in the Detroit office of Montreal-based aluminum giant Alcan Inc.

After Alcan laid off his group in Detroit in 2001, he received offers from U.S. Steel and Alcoa. Although Alcoa's offer was 10% higher, he went with U.S. Steel. The company "had all the toys to play with for someone like me," he says.

When he arrived at U.S. Steel, Mr. McGuire told his new employers about Alcan's intentions to make aluminum for two upcoming Ford models, including the Freestyle, an aluminum-packed design Ford planned to push as a supplement to the aging Taurus model.

Since he hadn't signed a noncompete agreement when he left Alcan, Mr. McGuire's first project at U.S. Steel was to persuade Ford engineers to buy steel designs for the Freestyle instead of the aluminum he had been selling them while at Alcan. Armed with a calculator, engineering studies and color graphics, he showed how steel was more formable, cheaper and not much heavier than aluminum.

Those cars are hitting showroom floors this fall with steel fenders, trunk lids, engine hoods and lift gates.

Meanwhile, in recent years Alcoa has sharpened its focus and broadened its reach. Rather than simply pushing its weight advantage, Alcoa is developing aluminum-based systems in wiring, wheels, closures and "space frames," the supporting skeletal structures of cars. It's also developing partnerships with European car makers and Japanese aluminum producers to make stronger and lighter hoods. They are using engineering solutions such as spider-web designs, metal-shaping technologies and new materials such as aluminum foam to make other parts stronger.

Alcoa has 900 employees at its research lab in New Kensington, Pa., and hundreds more at five other facilities around the world, dwarfing U.S. Steel's research and development resources. U.S. Steel's sprawling research campus in Monroeville, Pa., has about 150 employees, down from about 2,000 workers during its heyday. Alcoa is developing new technologies to join aluminum with lasers, to develop "dura-brite" wheels that are easy to clean, and to create extra-large aluminum castings to make large auto parts more quickly and easily. They are patenting systems such as "thin-door technology," which they claim makes for lighter sliding doors in minivans and give four extra inches to interior space inside the van.

Write to Paul Glader at paul.glader@wsj.com5

Auto Sector Woes Squeeze Suppliers

Prices for Raw Materials
Are Rising, but Car Makers
Won't Pay More for Parts
By PAUL GLADER and NEAL E. BOUDETTE
Staff Reporters of THE WALL STREET JOURNAL
October 19, 2004; Page A2

Just as the economy is supposed to be picking up steam, the auto sector is facing a new round of weak earnings and job cuts in part because of a new twist on an old demon: inflation.

Prices of steel and petroleum-based plastics have soared, squeezing suppliers unable to pass along the cost increases to auto makers, which are in the midst of their own price war. The result is a crisis among the auto suppliers employing tens of thousands of people across the Midwest.

Yesterday, Delphi Corp., once part of General Motors Corp., reported a third-quarter net loss of $114 million. Visteon Corp., which was previously part of Ford Motor Co., is expected to report a substantial loss on Thursday. More bad financial news is due next week from Tower Automotive Inc. and Dura Automotive Systems Inc. Some smaller suppliers are shutting down, moving abroad or seeking bankruptcy protection, a route Citation Corp. and Intermet Corp. took last month.

For the past few years, U.S. auto suppliers have had to contend with fierce competition from low-cost Chinese competitors and constant demands for price cuts from auto makers. This year, suppliers are being whacked by a spike in raw-material costs, with spot-market steel prices for hot-rolled coil, a benchmark product, more than doubling in the past 12 months to about $750 a ton in September, before falling back to about $675 a ton in recent weeks. Commodity prices have declined in the past week on a variety of materials, including copper, nickel and lead, partly because of worries of a slowdown in China. Still, many small and midsize auto-parts makers said the relief isn't significant enough to reverse their fortunes.

"You can't absorb all the raw-material costs and continue to provide the huge price reductions" required by the auto makers, John Barth, chief executive at Johnson Controls Inc., said this month in a conference call. Johnson Controls' automotive unit, which makes seats and interiors, is profitable and faring much better than many suppliers, but nevertheless announced last week that it was cutting 350 jobs at several Michigan locations to keep its costs down.

GM confirmed that some of its suppliers have asked the company to help shoulder the rise in steel prices. It has begun selling scrap metal to some suppliers at below-market prices, but so far hasn't been willing to consider paying more for parts. "We want our suppliers to honor the contracts we have with them," a spokesman said.

For some U.S. parts makers, the rise in material costs is biting particularly hard now because GM and Ford are loaded with unsold cars in their dealer networks and are scaling back production. That means there probably are more lean months ahead.

"Clearly, there's an inventory bubble, and the production cuts won't be complete by the end of the quarter," Delphi Chief Financial Officer Alan Dawes said. "Our plans for next year are going to have to take that into account." Delphi plans to close three plants in the fourth quarter.

The hardest hit of all are companies that make simple metal assemblies, for whom steel can account for half of their costs, said William Gaskin, president of the Precision Metalforming Association, based in Independence, Ohio. "If you are not getting relief from your customers, you get stuck."

At AMI Reichert Stamping Co. in Toledo, Ohio, workers are producing the last runs of auto parts such as window channels, brackets and shift gates for larger auto suppliers like Delphi and Visteon.

Reichert is selling off its stamping presses, giving back its tool-and-die equipment and closing its doors Oct. 29, leaving about 65 workers without jobs and a 225,000-square-foot plant vacant in a town already hard hit by manufacturing layoffs.

During boom times, the plant employed about 250 workers and brought in about $30 million annually.

"We have been working to turn it around and were starting to. But the main difficulty was getting our customers to accept material surcharges," said Dennis "Pete" Peterson, president of the company. "That's the reason we are shutting it down."

Foreign companies accepted the 50% surcharge, he said. But some U.S. customers threatened to sue the small metal-stamping company if it tried to pass along surcharges on parts, as steel prices jumped 100% to 200% on some key products this year.

The plant closing is another blow to the Toledo area. Alcoa Inc.'s nine-year-old plant in Northwood, Ohio, which employed 140 people to make electrical components of automobiles, is closing by the end of the year. Production has shifted to Mexico. And the 73-year-old Gerity-Schultz Inc. plant that makes carburetor bodies closed Thursday, putting 34 people out of work. "We had a good run at it," said President James Murtagh, 80.

Mr. Peterson of AMI's Reichert Stamping said that after 38 years in the auto business, with GM first and later as a manager of auto-manufacturing plants, he wants to find work in a different industry.

"Times have changed now. The trust level between customers and suppliers is just not there anymore," he said. "They preach there is a team concept. There really isn't. There is a lack of trust between customers and suppliers in this country right now."

Write to Paul Glader at paul.glader@wsj.com2 and Neal E. Boudette at neal.boudette@wsj.com3

Ford and GM Get SEC Request On Pension Accounting Practices

By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL
October 20, 2004; Page A1

The Securities and Exchange Commission has asked two of the country's biggest companies how they used pension and health-benefits funds to adjust their earnings in recent years, raising the heat on a long-simmering debate over such practices.

Ford Motor Co. and General Motors Corp. said yesterday that the SEC has requested documents and information relating to pension and retiree-benefits accounting.

Ford and GM said that they are cooperating with the SEC and that they adhere to proper accounting. The companies aren't charged with wrongdoing.

The SEC request comes a day after Delphi Corp., the big Troy, Mich., auto-parts and electronic maker, received a similar demand from the agency. The request has major implications, especially in a union-heavy industry such as autos that carries huge pension and retiree-benefits obligations. It could ultimately mean wilder swings in earnings for these manufacturing giants and less reliance on pensions and benefits funds to ease those swings.

"People are starting to wake up now," says Jack Ciesielski, a Baltimore-based expert on pension accounting who provides research to institutional investors. Mr. Ciesielski has warned for a decade that shareholders are unaware of how pensions have enhanced earnings. "There are some big fish to fry," he said.

The impact on companies could be significant. Ford's shares fell 3.4% yesterday, closing at $12.93 in 4 p.m. composite trading on the New York Stock Exchange; GM's shares fell 2.3%, to $38 (see Ford earnings on page A2).

With less flexibility to do accounting tricks with their pensions, these and other companies may find it harder to use the plans to smooth over earnings. Already this year, the Financial Accounting Standards Board has begun to require companies to make clearer disclosures -- and is pushing for others, which companies have been resisting. But this probe by the SEC might lend the FASB renewed clout.

For more than a decade, companies have taken advantage of the flexibility within the arcane accounting provisions to treat benefits plans as corporate-finance tools. Employers make dozens of assumptions that affect their income and IOUs: mortality, marriage rates, salary increases, investment returns on pension plans, health-care inflation, and others.

Thanks to this flexibility, and poor disclosure requirements, companies have been able to come within a few cents of quarterly earnings targets by changing assumptions within its benefits plans, by cutting benefits, or both.

The rules even make it possible for companies to mint income. Raising liabilities (by changing assumptions and by offering enhanced benefits, perhaps in conjunction with an early-retirement offer), then cutting liabilities (by adjusting the assumptions and cutting benefits), generates gains that boost income.

If nothing else, greater disclosure and tougher scrutiny of accounting practices would make it easier for shareholders and analysts to strip out the role the retiree plans have played in a company's results. Companies that cut benefits to boost income in order to meet earnings targets would be less able to hide the fact from employees and retirees, as well.

However, none of the actions that have emerged so far would do much to prevent companies from tapping pension assets, or change the amount companies contribute to pension plans. (Companies use different assumptions under pension law to calculate what they must contribute to pensions.)

When pension plans were pumping hundreds of billions of dollars into income in the 1990s, most analysts were oblivious to the boost to earnings the pensions were providing. But when pension plans lost money, and falling interest rates boosted liabilities, analysts began pumping out reports complaining that companies were masking their obligations, and using overly optimistic assumptions on the returns they could expect from their pension plans.

Retiree and shareholder groups mounted campaigns to require companies to exclude pension income from earnings. They said the desire for pension income tempts companies to cut benefits to boost executive pay, which is typically based on meeting earnings targets.

The SEC says its pension probe is part of a "risk-based" initiative to identify new areas of accounting abuse. The SEC said last week it had asked six companies to produce memos, e-mails and other documents that detail how they select various assumptions for retiree liabilities and costs. The names of the three other companies haven't been made public.

Many companies are complying with guidelines the SEC has issued in recent years about how to select discount rates and expected returns, so that there are fewer using obviously odd assumptions.

Still, the SEC is known to be examining several areas of pension accounting and how different accounting assumptions affected companies.

Analysts have complained that some companies have used unrealistically high hypothetical -- or "expected" -- rates of return for pension investments to enhance earnings. (Under standard accounting practices, to smooth the impact of a pension plan on earnings, companies use expected, rather than actual returns.)

For example, in 2002, GM assumed its pension assets would return 10%, while they actually lost 5.2%. On the other hand, in 2003 GM lowered its expected return to 9% from 10%, which produced expected returns of $6.4 billion, while the actual returns were $13.5 billion. These assumptions helped lower the expense of the pension plan, mitigating its drag on earnings.

Similarly, Ford used an expected return of 8.75% for its U.S. pension plans in 2003, which produced "expected returns" of $3.2 billion. The pensions actually returned more than twice that: $7.7 billion. The prior year, Ford used the same expected return, which generated $3.6 billion in income, even though the pension plan actually lost $3.3 billion.

If the investments exceed their "expected" return, the company can stockpile the gains to use later, which is what happened commonly throughout the 1990s. But if the investments do worse than expected, which was typically the case in 2001 and 2002, the losses can be postponed. Whether a company has abused the assumption is impossible to tell from a glance at its filings.

Another concern is that companies can raise and lower their projected retiree liabilities at will by making small adjustments in their discount rates. Employers generally use rates based on high-grade corporate bonds. According to its filings, Ford's discount rate for its U.S. pension plans fell to 6.25% in 2003 from 6.75% in 2002; GM lowered its discount rate even more, to 6% in 2003 from 6.75% in 2002. The decline in the discount rate boosted the liabilities of the auto makers by billions of dollars.

It's impossible to conclude looking at filings whether a company is using an inappropriate rate. Only the company knows when the expected payments will go out, which depends on tenure and age.

Companies also make assumptions about future salary increases, mortality and marital status -- all of which can affect liabilities.

The SEC is also examining assumptions about health-care inflation that companies use to calculate liabilities in retiree health plans. Employers have enormous latitude to come up with this figure, which, combined with changes in the discount rate, enables them to raise or lower liabilities by hundreds of millions of dollars.

Some analysts have criticized the auto makers for using what they say are unrealistically low inflation assumptions. Ford, for example, lowered its health-care inflation rate to 9% in 2003 from 11% in 2002; according to its filings a one-percentage-point decrease would reduce liabilities by $3.8 billion.

By comparison, GM raised its health-care inflation assumption to 8.5% from 7.2% Still, on a conference call to discuss third-quarter results last week, GM said it will increase its cost assumption for post-retirement health benefits to the "double digits" percentage rate. According to its filings, a one percentage point increase will boost liabilities by $7.6 billion.

Write to Ellen E. Schultz at ellen.schultz@wsj.com4