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Magna International Inc. (USA) (MGA), Autoliv Inc. (ALV): Automotive Suppliers: Performance Review, Part One

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Times are changing for automotive suppliers. Increased customer preferences for light passenger vehicles, especially in emerging markets, and new safety regulations are driving production modifications. On the other hand, the U.S. construction sector is showing signs of recovery, which means that more trucks and light trucks will be sold at least in America. However, stricter government regulation and higher demands from clients is putting a cap on margins and increasing costs.

Magna International Inc. (USA)

Let’s see how these three automotive suppliers are performing.

American Axle‘s new strategy

American Axle & Manufact. Holdings, Inc. (NYSE:AXL) engineers, designs, manufactures, and validates driveline and drivetrain systems and related components and chassis modules for vehicles.

The company’s earnings sank 62.3% to $0.23 per share for the first quarter. Revenues were almost flat and incorporate a $12.5 million impact of a labor strike that took place at a General Motors plant in Thailand. Not a very good quarter for American Axle.

Strategy-wise, the company is focused on its geographic expansion and diversification. American Axle has $1 billion in reserved 2010-2014 work for new and incremental business. Most of this will be for end-user markets overseas. Only 20% will be manufactured in North America.

American Axle & Manufact. Holdings, Inc. (NYSE:AXL) is applying a clever strategy of expanding a high-quality, cost-competitive and operationally flexible manufacturing footprint in developing markets. The main focus is put on Brazil, China, India, Mexico, Poland and Thailand. In addition, the company is making efforts to diversify its customer base and is under negotiations with Volkswagen, Renault, Nissan, Tata and others. Non-General Motors sales increased 11.6% reaching $792.6 million in 2012, which is a good sign.

However, weak SUV demand, high commodity costs and higher pressure by original equipment manufacturers (OEMs) remain big concerns. OEM customers’ constant demand for low prices affects the company. American Axle’s primary products are for RWD light trucks and SUV platforms in North America, which are decreasing in sales in favor of other light vehicles.

Reliant on Europe

Magna International Inc. (USA) (NYSE:MGA) designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to OEMs.

The company’s total sales grew 9% for the first quarter, reaching an all-time record of $8.36 billion, driven by sales increases in all regions and margin contribution from acquisitions. Magna International Inc. (USA) (NYSE:MGA) managed to increase 5% its European production sales despite the 9% European vehicle production decrease in year over year terms. Management expects higher revenues in 2013, ranging between $32 billion and $33.4 billion as new emission standards will boost demand for fuel efficient components.

Being one of the most diverse automotive parts suppliers, Magna International Inc. (USA) (NYSE:MGA) is flexible, but that does not guarantee success or great returns whatsoever. Diversification can cause management to lose focus and make sub-optimal capital allocations. In addition, the company relies heavily on domestic and German manufacturers and lacks strong commercial relations with Asian automakers, which are being developed by competitors.

Finally, Magna International Inc. (USA) (NYSE:MGA) is facing less demand because of increased customer preferences over light passenger vehicles. The company’s rising debt burden remains a concern as well. High pressure from clients to remain cost-efficient within an environment of increasing raw material costs is putting Magna in a hard situation.

Streamlining production

Autoliv Inc. (NYSE:ALV) is the worldwide leader of automotive safety systems, with a range of product offerings, including modules and components for passenger and driver-side airbags.

The company’s reported an operating margin of 8.5% in the first quarter, compared to the same quarter of 2012. Consolidated sales declined 2% to $2.13 billion. A good model mix and higher sales in China helped, but sales declines in Europe and South Korea brought the figures down. However,management expects consolidated and organic sales to grow 3% year over year.

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