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Wednesday, November 01, 2006

Auto Suppliers Call For Help

There are two ways to go out of business. One is to go bankrupt. The other is to fire all of your employees.

Auto parts supplier is already in Chapter 11, so their options have narrowed by half. Visteon let 900 people go as its sales fell and it felt the pressure of the need of the Big Three to cut costs. Visteon cut is forecast from positive free cash flow to negative for 2006.

There are two schools of thought about the car parts makers. The first is that they are doomed to face the same problems that the US car makers now have. Falling sales means falling need for components.

But, it may not be that simple. Private equity and hedge funds have begun to move into the parts stocks. The risk is considerable. It relies on the parts companyies' abilities to move jobs off-shore and drive down prices faster and more than Detroit cuts demand. It may work, but the parts companies are in Chapter 11 for a reason.

Private equity firms may be willing to gamble where the public markets are not.

Caveat emptor.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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