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Auto Suppliers on Collision Course

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Cruising into new sectors -- with mixed results.

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The pummeling of the US auto industry is forcing suppliers to become creative to avoid complete destruction.

Auto suppliers are moving into new, more attractive markets, but sometimes with mixed results.

Abbott Workholding Products of Manhattan, Kansas, long active in producing tools for the auto industry, now makes tools used in the manufacture of artificial knees and bone reinforcements.

Immediate prospects also look good for WJG Enterprise of Charlotte, Michigan. The company had made parts for cars' air conditioners, decorative trim for car doors, and speaker housings. It now produces plastics for X-ray machines and magnetic resonance imaging equipment.

Delphi (DPHIQ), which turned its electronics expertise to energy-efficient, industrial light bulbs, quickly discovered a hangup with its workflow, rather than the new technology.

Delphi was set up for long-term contracts calling for high volume production, but the Wall Street Journal reports that its light bulb business depended on producing smaller volumes based on short-term contracts . Delphi soon abandoned the light bulb business, but is exploring the possibility of using its electric car batteries in residential energy systems.

These early forays by auto parts suppliers into new sectors suggest that the transition will be uneven and, at times, difficult. Delphi was a strong IPO when it spun off from General Motors in 1999, but its shares recently changed hands at $.08 each.

Naturally, some companies are sticking with what they know. Pittsburgh Glass Works, a maker of auto glass, plans to reduce production to meet lower demand from General Motors (GM), Ford (F) and Chrysler.

Not all auto parts suppliers will be able to make the jump to new sectors. Some analysts predict that about 20% of the industry's 1,700 suppliers could go bankrupt this year. The ripple effect could be profound since that estimate doesn't necessarily include smaller companies low on the supply chain.

Overall, the auto parts suppliers' switch to new industries is worth the risk. It sure beats doing nothing.
No positions in stocks mentioned.
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