Capital adapts to core industry characteristics: the domestic auto industry is searching for ways to revive--and even flourish. New money meets old, familiar problems as restructuring consultants bring two parties together for mutual benefit.

• Author: Gordy, Thomas
• Position: Restructuring

When it comes to the restructuring market, the automotive industry and its domestic-headquartered supplier chain, and to a certain extent the airlines industry, are hot. And, notably, the automotive industry has been through more frequent and intense cycles of restructuring than most other economic sectors. Long-standing structural issues like capacity, labor costs and legacy costs continue to be serious issues that must be confronted, while balance sheets are further stressed by shorter-term issues.

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These latter issues for automotive suppliers include contract conditions imposed by original equipment manufacturers (OEM) and Tier One customers, such as pricing give-backs, assignment of greater and greater responsibility for research and design, sharing in warranty costs or spikes in the prices of raw materials. Competitive targets keep moving faster and farther. The urgency of the challenges facing the domestic automotive industry and the overall level of activity make the domestic automotive supplier chain a cauldron for the lessons of restructuring.

The biggest change (discussed in more detail below) has been the attraction to the industry of new sources of funding, such as hedge funds, forms of "distressed" capital and other sources seeking greater returns. These sources comprise a market flush with capital from both traditional and non-traditional sources and the thick wallets of private-equity firms--padded with monies from pension funds, state retirement plans or high net-worth individuals, all seeking greater returns. In many cases, the growing array of capital providers are bypassing the safer, performing-company transactions and focusing on higher-risk "value" investments.

As new money meets old--or at least familiar--problems, restructuring consultants have worked at bringing these two parties together in a productive fashion. The goal: meshing a "meat and potatoes" manufacturing sector, still subject to traditional industrial economic dynamics, to an aggressive, high-yield-seeking form of capital that is less inclined to admire the old ways of doing business.

In bringing these two worlds together for mutual benefit, the domestic automotive industry is searching for new ways to survive and, perhaps, flourish, while capital finds new fields of exercise. Indeed, some of the most recent restructurings are showing signs of learning from the pitfalls of the past. The keys are in solving the real and definable...