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NINETY EIGHT REGENCY

Suppliers made deep cuts to R&D budgets

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Suppliers made deep cuts to R&D budgets

Parts firms' budgets thin, study shows

BY JEWEL GOPWANI

FREE PRESS BUSINESS WRITER

After auto suppliers made deep cost cuts to survive the industry's downturn, research and development budgets are looking thin, according to a study by accounting firm Grant Thornton.

Grant Thornton analyzed 20 publicly traded parts makers that supply directly to the automakers.

The study shows that in 2009, those suppliers cut their R&D budgets by a total of $3.3 billion, or an average of 29%, compared with 2008.

Many suppliers were left with no choice and cut their budgets to survive as auto sales plummeted and automakers deferred programs, said Paul Mellville, principal at Grant Thornton.

"There's going to be some element of catch-up in the course of the next two or three years," he said.

The need to catch up comes when automakers are racing to bring new technology to their vehicles to meet new fuel economy standards and compete for growing demand for hybrid and electric vehicles.

Suppliers need cash and investment to make up for the gap in their development budgets. It helps that the auto industry has stabilized, Mellville said.

Credit is loosening for larger suppliers. Credit scores are on the rise, and private equity is again considering investment in automotive businesses.

Large public suppliers have been posting profits thanks to higher production paired with low costs.

But those costs, Grant Thornton argues, have been artificially low.

As production ramps up even higher, suppliers will need to invest in plants and add staff.

"There's going to be close scrutiny where any hires are made, particularly on the salaried side," said Dave Andrea, senior vice president of industry analysis and economics at the Original Equipment Suppliers Association.

Suppliers have added staff at their plants to meet production needs.

But hiring for research and development, typically salaried positions, appears to be happening at a slower pace.

An OESA study of suppliers in May shows that 26% of suppliers surveyed expect to make no net gains in headcount for salaried personnel, while 9% of suppliers said they would make no net gains in hourly personnel.

The outlook for smaller parts makers down the supply chain isn't as upbeat. Their research and development budgets have seen similar cuts.

"They don't have access to the capital markets that" direct suppliers have, Mellville said. "They've been squeezed even tighter."

link:

http://www.freep.com/article/20100728/BUSINESS01/7280367/1210/Suppliers-made-deep-cuts-to-R&D-budgets

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