by Maureen Flanagan
Plastech Engineered Products, Inc., formed in 1988, is one of the country's largest minority-owned Tier One automotive suppliers. Serving customers such as Ford, General Motors, DaimlerChrysler and Toyota, the Dearborn, MI-based company is a leader in the design and manufacture of interior and exterior automotive plastic components and systems. Plastech is known for its low-cost manufacturing capabilities, outstanding quality and its full-service engineering capability. The company's competitive position was enhanced in 1997 by an acquisition that doubled its size, strengthened its management team and broadened its manufacturing capabilities.
Now Plastech is ready to move forward to an even higher level.
In October 5, 2001, the company signed a component sourcing agreement with Johnson Controls, Inc., (NYSE: JCI) that will fuel a rapid growth of sales and production. To support this agreement, American Capital Strategies, Ltd. (Nasdaq: ACAS) provided $30 million of senior subordinated debt financing.
"Plastech's agreement with Johnson Controls is a strategically significant opportunity that will increase the company's revenues and profitability, enable production efficiencies and diversify our customer base," said COO Jim Brown. "The agreement capitalizes on two critical industry trends -- the increased use of plastic parts in vehicles and the increased outsourcing by automotive Tier 1 suppliers responsible for the total integration of the vehicle interiors."
Facing competitive pressure to reduce costs and government regulations to improve fuel economy, OEMs are expanding the use of plastic components in their vehicles at a rapid rate. Plastic components are replacing steel in body panels, door panels, front and rear bumper beams, tailgates and pickup boxes. The average plastic content per passenger vehicle has increased by 67%, from 150 pounds in 1988 to 250 pounds in 1997, and is projected to grow another 20% to 300 pounds by 2007.
Further driving Plastech's growth, OEMs and large Tier 1 suppliers such as Lear and Johnson Controls have been increasing their outsourcing to concentrate on core competencies, optimize infrastructure and take advantage of the lower labor and overhead cost structures of their Tier One and Tier Two suppliers. OEMs currently outsource approximately $50 billion out of the estimated $140 billion global interiors market. In addition, OEMs and large Tier 1 suppliers are limiting their supplier base to fewer, more highly qualified manufacturers, many of which operate under long-tem sole source contracts.
Expanding the relationship with Johnson Controls gives Plastech an enormous opportunity. A top supplier to the automotive market, Johnson Controls has 35% of the global automotive seating market and 23% of the global interiors markets. The company has a strong position on leading automotive platforms, supplying the seat systems on 62% of the top 25 light trucks and on 37% of the top 25 cars. Since 1994, Johnson Controls has dramatically outperformed the automotive suppliers' index on total annualized return (19% versus 2%).
The sourcing agreement between the two companies further solidifies a fruitful relationship. Johnson Controls is a joint venture partner with Plastech in the manufacture of an automotive system to an OEM, and has been a valuable customer for the past eight years. In June 2001, Johnson Controls moved $21 million in revenues from a failing supplier to Plastech. The success of this transfer encouraged Johnson Controls to increase its commitment to Plastech.
An additional benefit is the diversification of Plastech's customer base. Johnson Controls sells to all automotive OEMs and will provide a broader, more balanced customer portfolio. Since Johnson Controls has an estimated 45% to 60% market share with foreign transplants, the agreement will also open up this growing segment of the U.S. market.
"Plastech has already shown it can successfully transfer and integrate new business into its operations. The synergies resulting from the Johnson Controls agreement enhance Plastech's solid position as tier one and Tier 2 supplier," said Roland Cline, American Capital Principal.
In the November transaction, American Capital provided $30 million of senior subordinated debt alongside senior financing provided by Bank of America. American Capital invests senior and subordinated debt in middle-market companies in need of capital for growth, acquisitions, employee and management buyouts, liquidity and recapitalizations. Since 1997, ACAS has invested more than $900 million in 57 companies in a wide range of industries.
In 2000, the automotive components market was a $225 billion industry, with the plastic components segment accounting for $10.9 billion, or 4.8%. To serve the market most cost effectively, OEMs are increasingly turning toward outsourcing. OEMs now outsource $50 billion out of the $140 billion global interiors market and this is expected to increase. General Motors, for example, is expected to outsource production of all interior components by 2005. In addition, OEMs are limiting their supplier base to fewer, more highly qualified manufacturers, many of which operate under long-tem sole source contracts.
As one of the lowest cost producers of plastic auto components, Plastech is well positioned in the growing market. The company's management team has demonstrated a relentless focus on cost cutting and improving quality.
Plastech's commitment to ensuring cost-effective production serves its customers well. The company builds its plants in locations that minimize shipping costs and promote customer relationships.
Plastech's minority status further enhances its market position. Since the early 1990s, Ford, General Motors, and Chrysler have increased minority sourcing at a double-digit compounded annual growth rate. These companies are committed to significantly increasing minority business in the next several years.With the outsourcing agreement with Johnson Controls, Plastech significantly expands its manufacturing business. Without a doubt, Plastech is on the road to a bright future.
