• Shifting Vehicle Parts Sourcing Reveals
  Opportunity for North American Suppliers (by Joseph Langley)
• Steel Companies Have Become
  Darlings of the Stock Market (by Peter M. Fish)

Shifting Vehicle Parts Sourcing Reveals
Opportunity for North American Suppliers
Data from the National Highway Traffic Safety Administration under the American Automobile Labeling Act shows a shift in vehicle content sourcing that is good news for domestic metals suppliers.

Enacted in 1994, the AALA was designed to provide consumers with information about a vehicle’s content and sourcing to determine the origin of a vehicle and its parts. The AALA specifies the percentage value of U.S. and Canadian parts, the country of assembly and the origin countries of the engine and transmission. While the AALA data defines only U.S. and Canadian content as being domestic, the data is useful in determining trends in sourcing at the manufacturer level.

By applying the AALA percentage content data to CSM Worldwide’s production data, we calculated the volume weighted average domestic content for each manufacturer in North America. The provided data table compares 1997 content sourcing to 2005 and illustrates a clear trend showing that the traditional Big 3 manufacturers—General Motors, Ford and

DaimlerChrysler—have moved away from localized parts sourcing. GM’s percentage value of U.S. and Canadian parts dropped from a volume-weighted average of 91.5 percent in 1997 to 80 percent
in 2005.

Conversely, the table demonstrates that the New Domestics, primarily Toyota, Honda and Nissan, increased their local content sourcing considerably from 1997 to 2005. During that period, the New Domestics brought their suppliers over to North America and increased business opportunities with existing North American operations. The most notable example is the shift of Toyota sourcing, which grew from 52 percent to 70 percent localized content.

As an example of the difficulty consumers face [in evaluating domestic vs. “foreign” cars], the Ford Mustang now has only 65 percent domestic content as defined by the AALA, while the Toyota Sienna has 90 percent local content.

While the AALA data does not include Mexican sourcing, anecdotal evidence points to the Big 3 increasing Mexican sourcing to leverage cost benefits associated with that country. To lower their costs, the Big 3 made the push to Mexico, a move made easier under NAFTA. With rising costs in Mexico, the Big 3 are now seeking to further overcome their legacy costs and have their eyes on cheaper countries such as China, Korea and India for content sourcing. At the same time, Japanese, European and Korean manufacturers continue to bring their supply base to the [North American] region while the Big 3 continue to outsource content, development and vehicle production.

The overriding message is that if you do significant business with the Big 3, they will push for their supply base to set up operations in those low-cost countries or develop new alliances with companies already up and running in those countries. Conversely, many opportunities exist for suppliers to gain a foothold with the New Domestics as they increase their local sourcing.

Joseph Langley is a consultant with CSM Worldwide. He can be reached by e-mail at josephlangley@csmauto.com.

Steel Companies Have Become
Darlings of the Stock Market
The recent bidding to buy Canadian steel producer Dofasco has highlighted the extraordinary turnaround in the value of steel company assets in the last couple of years.

Aside from privatizations, where special circumstances apply, it is hard to recall the last time that a steel company was the subject of a bidding battle between rivals anxious to grab its business and assets. During the decades when steelmakers struggled to provide investors with a return on their capital, such takeover wars were rare.

Most recent steel company fusions—going back to the mergers that formed Corus, JFE and Arcelor, and the Mittal acquisition of International Steel Group—have been agreed deals, not contested takeovers.

Steel company amalgamations like these were usually based on finding cost cuts and synergies. Industry executives were looking for ways to rationalize in order to reduce inefficiencies. Such mergers often led to plant closures, capacity reductions and serious job losses.

Now things have changed. Dofasco is part of other companies’ expansion plans. ThyssenKrupp and Arcelor are both increasing their production of slabs at low-cost locations in Brazil, and they need Dofasco as a captive consumer. At press time, the outcome of their takeover battle for Dofasco was undecided.

Many of Dofasco’s assets are good quality. It is an important supplier of high-value sheet and processed products, such as tailor-welded blanks and tubes for hydroforming, to the North American automotive industry. The company also has important shares of markets such as packaging steels, which fit with the strategic objectives of both ThyssenKrupp and Arcelor.

Just as important, Dofasco has iron ore. Its subsidiary QCM produces more than 13 million metric tons per year of ore and pellets. Dofasco also owns nearly 30 percent of Wabush Mines. With iron ore prices likely to rise again in 2006, such mining assets are valuable.

If Dofasco does end up going to ThyssenKrupp, will the disappointed suitors look elsewhere in North America for steelmaking assets to buy? In the immediate aftermath of the bid for Dofasco, other regional mills began to look like takeover targets. Consequently, U.S. Steel’s share price climbed by almost 40 percent and Nucor’s by 17 percent. Even AK Steel, which has high legacy costs and made a loss in the third quarter of this year, saw its shares rise by 24 percent.

Steel companies the darlings of the stock markets—who would have thought it?
Peter M. Fish is managing director of MEPS International Ltd., Sheffield, England, a global steel consultancy. This commentary is reprinted from MEPS’ Dec. 22 International Steel Review. Fish can be reached via the MEPS Web site at www.meps.co.uk.