Dana Holding Corporation (NYSE:DAN) is a Tier 1 automotive supplier that sells to almost every major vehicle manufacturer in the world. Dana is best known for producing driveshafts and axels, but also manufactures thermal, sealing, and structural parts. Dana also produces aftermarket service parts. Headquartered in Maumee, Ohio, Dana is focused on expanding globally with 92 facilities in 26 countries . In 2010, Dana ranked 398 on The Fortune 500.  Dana holds trademarks on Spicer, Victor Reinz, Parish and Long.
The auto component industry has fallen on tough times recently as many of their major customers struggle. Many of the firms in the industry have filed for bankruptcy; Dana was one of the numerous auto suppliers to file in 2006. Two years later, in 2008, Dana emerged from Chapter 11 bankruptcy after reorganization. 2010 marked the first year that Dana recorded positive net income since 2004.
The light vehicle market makes up approximately 60% of Dana annual revenue.  Parts for this market are made for any passenger vehicles driven on the road. Dana provides driveshafts, light axle, sealing, and thermal products to this market. Dana also used to provide structures to this market, but divested that business in 2010.  The light vehicle market was hit especially hard by the recent economic downturn and rising fuel costs causing it to hit rock bottom in 2009. Since then, though, the market has seen a drastic improvement and, in 2010, Dana saw a production increase by over 40%.
Key customers in this market include Ford, GM, Toyota, Chrysler, Fiat, Nissan, and Hyundai. Ford is by far the largest customer, accounting for 19% of Dana's total annual revenues.
The commercial market is made up of medium and heavy duty trucks (class 5-8), buses as well as trailers, and other specialty vehicles. The commercial market generates about 22% of Dana's annual revenue. Products in this market include all parts from the light vehicle market as well as chassis, side rails, and ride controls. Dana's list of commercial customers includes Volvo, Navistar, Paccar, and Daimler.
60% of Dana's revenues from the commercial market come from North America. This market was plagued by the same poor market conditions that impacted the light vehicles. Much like its light vehicle counter part, though, 2010 showed signs of recovery as truck orders increased significantly and production was up 50% from 2009. The commercial market is considered the fastest growing vehicle market in the world; between 2009 & 2014 the global commercial market is projected to grow by 66.7%.
Most of Dana's business in this market is done overseas with two-thirds of revenue being generated in Europe. The weak global economy devastated this market in 2008 when demand fell by over 70%. Slowly, the off highway has began to recover and Dana expects demand to increase by 10% in 2011.
Revenue has been steadily decreasing for Dana over the past 10 years, including a 17% decrease from 2009 to 2010. Much of this change can be attributed to the decline in economic conditions as well as Dana divesting many parts of their business as part of their bankruptcy reorganization. Hopefully their recent efforts to downsize the firm and focus on their core business will lead to success in the future, even if the sales numbers are not quite as large. So far, the reorganization has helped as Dana has showed improvements in many areas of the business. $10 million in net income is not much to brag about, but 2010 did mark the first year since 2004 that Dana recorded a net income rather than a loss. Through reorganization Dana was able to cut many unnecessary costs, which is demonstrated by the much improved gross margin. In just three years, Dana was able to double their gross margin. The EBIT margin is at the highest it’s been in over 10 years showing that the firm has regained some much needed financial health. Adding to it’s renewed financial strength, Dana has also been able to almost double their current ratio in 10 years. The success here can be attributed as an effort to improve their cash conversion cycle.
The bankruptcy hit Dana’s WACC hard, doubling it in a few short years. Investor’s now demand a much higher return from Dana. Dana’s economic value added (EVA) leaves something to be desired, and has showed improvement over 2008 and 2009. Dana is not providing value to their shareholders above their investor's required return on investment. The low EVA is due to two factors: the very high WACC and the low ROIC. Dana should look to its inventory management and asset turnover to improve ROIC and drive shareholder's wealth.
Magna International is, by far, the market leader in terms of size and revenue. MGA sales were almost four times that of the company with the second largest sales. Dana ranks second among its main competitors in terms of market cap and revenue, but for Dana the revenue means very little when they rank last in operating margin. For Dana to become a leader among their competition, they must find ways to make the business leaner and more cost effective so they can get more out of each dollar of sales. American Axel is very effective at maximizing every dollar of their sales as they had an operating margin of over 9% in 2010. Having such a high operating margin allows a smaller company like AXL to compete with the much larger firms.
The industry is very asset intensive and does not allow very high return on assets, but Dana has the lowest ROA among the competition. Dana is not using their assets very efficiently, and it is costing their shareholders value. The low ROA indicates Dana still has some divesting to do to get rid of some of the less profitable parts of the business. Again, American Axel is the market leader in ROA and providing shareholder value.
Like Dana, most the companies in the industry have posted negative EVA’s in recent years. High required returns on the firms are the main source for the low EVA’s. As the industry as a whole recovers and the WACC’s decrease over time, most the players in the industry should see their EVA improve. American Axel’s excellence in other areas is displayed in their EVA as they were the only firm to add value to their shareholders. This is mainly a result of their impressive ROIC of 17.3%.
Dana has improved their cash conversion cycle significantly and is able to convert their raw inputs into cash much quicker now. The firm has shorted their cycle by over fifty days in the past ten years, although much of that improvement took place over 6 years ago. The improvement is mainly because they’ve been able to negotiate with their suppliers and acquire better lending terms. In 2001, Dana’s accounts payable accounted for only 10% of their sales, now payables account for 18.7% of their sales. On average, Dana can wait almost 77 days before they pay their suppliers. They could further improve their CCC by turning their inventory into sales faster and by collecting from their customers quicker. They have made some small improvements in those two areas recently, but if they could do a little better and push their CCC negative, they could effectively be receiving interest free loans from their suppliers. Also, improving their DSI would increase their ROIC, which would help drive shareholder value. Much of Dana’s success in the future is contingent on them further improving their CCC.
Although Dana has made strides in recent years to improve their CCC, they still lag behind the competition. This puts Dana at a disadvantage because they do have as much financial flexibility because their funds are tied up longer in their business cycle. Even though Dana is competitive in the days of payables outstanding, they still have the shortest amount of time to pay back their suppliers. They must pay back their suppliers almost a week faster than the industry leader. Also, the lengthy combination of their lackluster DSI & DSO put Dana far behind their top competition.
Magna and American Axel are leaders in the cash conversion cycle. AXL proves it is possible in the very tough auto component industry for a firm can have a negative CCC. This gives AXL a competitive advantage and is one of the main sources for their high ROIC. American Axel is very proficient in all three components of the CCC. They are able to move their inventory very quickly, on average about 23 days faster than Dana is able. They collect from their customers incredibly fast, over a month quicker than Dana. Also, they have secured solid lender terms from their suppliers. The good news for Dana is AXL’s competitive advantage through their CCC may not be sustainable. With hard work and a few creative ideas, Dana could potentially reduce their CCC to the level of American Axle.
In an effort to expand their global footprint in South America and Asia, Dana has recently joined in various strategic agreements with foreign firms. These agreements are used to enter foreign markets without the full risk of a wholly owned subsidiary. Some of the major strategic agreements that Dana has entered into recently include:
In 2005, Dana agreed to take part in a joint venture with the Dongfeng Axle Co. a former subsidiary of Dongfeng Motor Company. Dongfeng Dana Axle Company has become one of the largest, if not the largest, commercial vehicle axle companies in Asia. The commercial truck market in China is booming, and is larger than the rest of the world combined. DDAC is the only supplier of medium and heavy truck axles to the Dongfeng Motor Company, which is the second largest commercial truck maker in Asia. In 2011, Dana upped its stake in the joint venture to 50%. Projected revenues for 2010 from this joint venture were $1billion.
In February 2011, Dana agreed to a $150 million investment with SIFCO that would make them the leading driveline supplier for commercial vehicles in South America. In the agreement, Dana acquired SIFCO’s right to distribute commercial steer axles and is accountable for the relationships of all the customers. The agreement is expected to produce $350 million in annual revenue and bring Dana’s total annual revenue in South America to over $1 billion.
On April 18, 2011, Roger J. Wood replaced John Devine as CEO & President who chose to retire. Mr. Devine is schedule to retire from the board of directors in the summer of 2011 as well. When Mr. Devine retires, Roger Woods will replace him on the board and Keith Wendall will become the new Chairman of the board. Dana has undergone major management turnover since 2008 as all the major positions in the company have been replaced.
 This was also a factor in their decision to file for Chapter 11. Dana took on many cost cutting and revenue producing initiatives before it was able to emerge out of the bankruptcy in January 2008. Dana focused on downsizing the business and was able to cut their employee head count almost in half. When Dana filed for bankruptcy they had over 45,000 employees, now they about 22,500. Dana sold a few non-core business units including their engine hard parts business and their fluid products hose and tubing business. The sales of these two units netted Dana $174 million. They also closed and consolidated many of their manufacturing operations and moved some to Mexico. Dana’s largest cost cutting initiative came when they renegotiated their contracts with their hourly workers. Dana created agreements with the United Steel Workers and United Auto Workers that would create a two-tiered wage system as well as replace the company’s benefit plan with a Voluntary Employee Benefit Association (VEBA) trust. The $780 million VEBA was for health insurance and retirees. To help fund the VEBA, the private equity firm Centerbridge Capital Partners contributed $500 million in exchange for preferred common stock. The total expected annual cost savings and revenue improvements from the reorganization were projected at $450 for Dana.
Through their strategic transaction with foreign firms Dana has developed a strong global footprint that will help them survive during tough times and thrive during economic booms. Among it's main competitors, Dana is the most geographically diversified and has positioned itself as a leader in many emerging markets. Only 47% of Dana's revenues are generated in North America compare that with American Axle where North America accounts for 91% of their annual revenue. Magna International does 96% of their business in North America and Europe. Dana only does 74% of their business in those two markets. American Axle and Magna will find it more difficult to enter the emerging markets of Asia and South America now that Dana has taken a strong hold in those markets. DDAC and the SIFCO agreement have helped Dana create a strong global production network that will be key to their success into the future.
Dana also has the most diversified customers base and is less dependent on a few major customers than its competition. The big three only account for roughly one quarter of Dana's annual profits where they make up over 47% of Magna's revenue and 85% of American Axle's revenue. Having such a concentrated customer base has shown negative effects for these companies. In addition to their diversified customer base, Dana's broad product portfolio is a strength to their business. They provide the most wide-ranging product line of all their competition and the revenue streams from their products are fairly balanced.
Dana prides itself on its ability to produce innovate products that perform to the highest standard. They are able to do this by having a strong emphasis on research & development. They outspend their competition in R&D. In 2010 Dana's engineering and R&D total expenses were $132 million, compare that with American Axle and Meritor whose R&D costs were $82.5 million and $68 million respectively.
Dana has showed rather severe financial distress in the past ten years and has been a target of improper accounting practices. All these factors lead to the Bankruptcy in 2006. More recently, Dana has had significant revenue decreases including a decrease of 23% in 2009. Dana also has only had one profitable year since 2004. During those years, Dana has posted losses of $431 million (2009) & $691 million (2008). During that same time period, Magna International was profitable in 5 years including all years except 2008 & 2009. In those years where Magna was not profitable, their losses were not nearly as large as Dana's either. In 2008 MGA posted a loss of $39 million and in 2009 their loss was $493 million.
Dana's cash conversion cycle is also rather lengthy compared to its competitors, this puts them at a disadvantage at consistently providing a solid return. The high CCC also ties up funds in the business cycle causing Dana to have less financial flexibility than it competition. Also, even with all the cost cutting and reorganization, Dana still posts the worst operating margin among its main competition. It will be hard to survive unless they can strengthen that 3.21% margin.
Another problem plaguing Dana is that a large portion of their pension obligation is unfunded. Of the $2.2 billion pension fund, $645 million is left unfunded due to instability in the financial markets . Dana will have to make cash payments into the fund to balance pension assets and liabilities. This will further decrease their financial flexibility and liquidity.
The Indian vehicle market is the second fastest growing market in the world. Dana has positioned itself as a leader in the market which grew 31% in the first eleven months of 2010. On April 26, 2011 Dana agreed to purchase the commercial truck business from Axles India (AIL), one of Dana's many joint ventures. Dana will assume full control of manufacturing, sales, marketing, and engineering for the entire commercial market. Much like the SIFCO agreement for South America, this deal will provide Dana with a great opportunity to take control of a very lucrative market. The deal cost Dana $13 million, but is projected to provide $50 million in annual revenues.  In 2010, Dana also took steps to become a key player in the Indian market when they began building a $20 million call center in India.
There is significant growth expected in the light truck market, which is a much more profitable market then the car market. Annual growth of 10% is expected in the years 2009-2014. As of 2009, the market was worth $176.5 billion and by 2014 it is projected at a value of $280.9 billion. Dana is already positioned well in this market and should benefit greatly from it's growth.
Electronics in vehicles is a market that is booming and is expected to continue to grow into the future. By 2013, the market is projected to be worth $173.3 billion globally. Electronics on vehicles come in many forms including: safety systems, driver assistance, and entertainment. With Dana's emphasis on R&D and creating new products and processes, they should be able to capitalize on this expanding market.
When Dana emerged from bankruptcy, they received approximately $2 billion in an exit finance facility. As part of the exit facility Dana is require to meet certain financial metrics and ratios. Should Dana not meet these requirements the debt will become immediately payable. The requirements of these loan covenant may restrict Dana from performing certain business actions that would be beneficial to the company.
In 2010, Dana generated 56% of their revenue from outside of the United States. While this provides Dana some valuable financial and geographical diversity, it does introduce new threats to the firm. If the US dollar does increase in value compared to other currencies, it could dramatically reduce revenues in the foreign markets. Tariffs and trade barriers could also dig into company profits. Additionally, Dana faces the possibility of political instability and expropriation in the 23 countries where they conduct business operations.
There are also many threats that apply to the industry. Labor strikes are always a threat when the labor force is unionized and about half of Dana's labor force is unionized.  Also, it does not have to be Dana's employee who strike to pose major problems for the firm. If one of Dana's key suppliers has a strike, it could cause major repercussions for Dana. Another hot topic for the industry is government regulation of fuel standards and greenhouse gas emissions. The Energy Independence & Security Act of 2007 forced dramatic increases in Corporate Average Fuel Economy (CAFE) requirement beginning with all 2011 models. This turned the industry upside down and forced innovation upon many of the products. There is always the threat that the government will pass new laws.
American Axel (NYSE:AXL) is a fairly new competitor in the industry having been founded in 1994 as a spin off of GM. Headquartered in Detroit, Michigan AAM manufactures drivetrain, driveline, and chassis systems for the light vehicle division. Over three quarters of their business is from GM and Chrysler. In 2009 those two companies accounted for over 85% of revenues. 2010 revenues totaled $2.28 billion . AAM has 32 manufacturing facilities throughout the globe.  AXL also ran into tough times in 2009, but was able to avoid bankruptcy when GM gave them $210 million for the right to buy 20% of their stock.
AXL is one of the smallest of Dana's major competitors, but performed the best in 2010. AXL was the only firm among the four competitors to post a positive economic value added (EVA) as well as posting the highest ROA and operating margin. Much of their success come from their negative cash conversion cycle which effectively allows them interest free loans from their suppliers. Also, fast inventory turnover (as seen through their very low DSI) helps maximize ROIC.
Magna (NASDAQ:MGA) is the largest Canadian auto parts supplier; they operate 256 facilities also in 26 countries. Magna’s 2010 revenue of $24.1 billion was among the industry leaders.  Magna produces many parts including systems for the body and chassis, powertrain, exterior, interior, seating, vision, closure, roof, and electric systems. The firm also takes part in complete vehicle engineering and assembly as well as hybrid & electric vehicles and systems. The majority (70%) of Magna’s revenues come from the Big 3. MGA is the least risky investment among the main competition with a Beta at 1.21. In 2010, Magna ranked in at 925 on the Forbes Global 2000. Magna is famous for its various political connections, quite a few Premiers of Ontario have worked for the company as well as served on the board.
Formally ArvinMeritor (ARM), Meritor Inc.(NASDAQ:MTOR) is an automotive supplier headquartered in Troy , Michigan. Meritor is a spinoff of Rockwell International that manufactures axles, brakes, drivelines, and suspensions. Meritor recently shifted their focuses from the light vehicle divisions primarily to the medium/heavy vehicle market where 75% of their revenues now come from.  Meritor does business in three segments including commercial truck, aftermarket and trailer, and industrial. Meritor's brands include: Meritor, Euclid, Gabriel, Trucktechnic, Mascot, and Meritor WABCO. Similar to Dana, Meritor strives to have a strong global footprint and now has 65 locations in 19 countries. In 2003, Meritor attempted and failed a hostile take over of Dana.  Meritor recently announced that due to poor economic conditions, they plan to close their trailer axel business in Europe.  Meritor's 2010 revenue was $3.76 billion. 
Ford Motor Company (F)'s previous captive supplier, formed in 1997 and spun off as a separate entity in 2000. Emerged from Chapter 11 Bankruptcy on October 1, 2010.
General Motors (GM) 's previous captive supplier. Generated $940 million of operating income on $13.8 billion of revenues in 2010.
The auto component industry has seen an onslaught of bankruptcies in the last six years. The bankruptcies have been brought on by cut backs from the major auto makers who have faced struggles of their own. Many analysts feel that the failure of the suppliers was hastened by the pressure from the Big Three to continually reduce prices in an effort to drive their own shareholder value. 
As the Big Three began to incur huge losses the dominoes began to fall. Late 2005 and early 2006 was when the troubles first surfaced as five auto component suppliers filed for bankruptcy including Dana, Delphi Corp., Tower Automotive Inc., and Collins & Aikman Corp. In 2008, 23 auto related companies filed for bankruptcy. 2009 saw 27 more auto suppliers file for bankruptcy, which included: Visteon Corporation (VC) and Lear Corporation. In an effort to stop the bleeding, the U.S. government gave out $5 billion to auto suppliers with their Troubled Assets Relief Program. Michigan senator Carl Levin was quoted as saying, the auto component industry was, "Critical to maintaining our domestic auto industry which, in turn, is a critical component of our economic recovery." 
The automotive industry crisis of 2008-2009 hit the U.S. automakers especially hard. The crisis was brought on by many factors including the global financial downturn, low profitability, overcapacity, and high inventory. Since the late 1990's SUV's and light trucks have been the biggest source of profit for the Big Three and offered the largest profit margins. As gasoline began to sky rocket, consumer demand for these vehicles fell as people began to desire more fuel efficient vehicles. The automakers were unprepared for the quick shift in demand and began to suffer. The emergence of foreign competition also hurt the Big Three as their market share fell by 17% down to 53% from 1998 to 2008. 
The overall financial meltdown led to much less discretionary consumer spending, adding to the decline in sales. The average annual capacity for the industry is 17 million vehicles, but in 2008 that fell down to 10 million vehicles. It has been said that it takes at least 15 million units sold in a year for the Big Three to be profitable. 
In 2009, both GM and Chrysler filed for Bankruptcy, and were bailed out by the U.S. government. Ford was able to avoid being bailed out because they took out a $23 billion loan in 2006 right before the crisis hit.  The companies have since looked for ways to cut cost and have pressured these cost cutting initiatives onto their suppliers. The auto component manufacturers are very dependent on success of the auto manufacturers, so as the automakers began to hurt so did the auto component industry.
2010 marked a turn around for the industry as GM posted its first profit since 2004 and Ford posted its largest profit in ten years.  As the automakers begin to see success again, the auto component industry should find profitability much easier.
Steel is a key input for the auto industry and basic flat-rolled steel prices have risen 6 times since November 2010. Prices were up about 25% in that time.  For 2011, the price of steel is expected to increase by 66%.  The price inflation is mainly due to steel production projected to hit record highs in 2011. These increases are going to impact the bottom line of all auto suppliers and makers. Dana estimates that it purchases one million tons of steel or steel products every year.  Consumers have yet to feel the brunt of the prices increases as there has not been much pass-through to the consumer, but if prices to continue to increase as expected consumers will bear some of the costs.
The value of the dollar is near its record low compared to many foreign currencies. Since Dana now does the majority of its business outside of the United States, a weak U.S. dollar does have some benefits. A weak dollar helps boost exports as well as increase the value of international sales. As of April 2011, the euro was worth $1.47 and the dollar was worth 6.50 Chinese Yuan . A weak dollar isn't all good for Dana though, as it does lead to the increased gasoline prices that have factored in the decline in vehicle sales in recent years.
The market is extremely fragmented with numerous auto part suppliers both large and small all fighting over contracts from a handful of powerful automotive manufacturers. There are over 5,000 auto suppliers in the United States alone.  As mentioned earlier the market is very fragmented, the top three global auto suppliers only make up 4% of the annual revenue within the industry. The suppliers attempt to differentiate their products through performance, product design, contract terms and customer service, but it can be very difficult and expensive to differentiate auto parts. Most often firms best chance to differentiate their product is through price. Switching costs are very low also; couple that with the limited U.S. sales growth over that past few years and the result is very tough rivalries among competitors. Although things began to turn around in 2010, 2008 and 2009 plagued all vehicles manufactures with drastic sales decline. In April 2009, U.S. vehicle sales fell to a 30 year low.  The shrinking of the market fueled the already spirited rivalries.
In recent years, Dana has tried to move manufacturing facilities into regions that are convenient and cost effective for their customers in an effort to differentiate themselves from their competition. Dana also offers a very wide-ranging product portfolio which allows them to provide cost synergies to their customer who purchase many types of parts from them. This also helps Dana stand out among their competition.
Although the industry has some barriers to entry such as the high fixed costs, there are not enough to deter new companies from joining in the fight. The biggest barrier to entry is probably the strong brand reputations of the top companies that have a good track record of consistently delivering quality products that perform. Economies of scale can play a part in keeping new entrants out, but often companies can get around that barrier with innovative products. The need for large amounts of R&D expenditures to keep up with the competition may also prevent firms from joining the industry.
These barriers may stop some firms from entering the market, but the industry's threat of new entrants has increased significantly due to the integration of the world economy. Globalization has opened the door for many foreign firms to step in and provide parts at prices cheaper than domestic competition. In 2011, Chinese automotive component exports to the U.S. is projected to grow to $30 billion.  India too is becoming a prime source for auto parts because of the abundance cheap skilled labor and various developing markets there. These foreign firms now provide the largest threat to the incumbent firms.
The recent surge of foreign competition has caused many U.S. auto component suppliers to move their production abroad in an effort to compete on costs. Dana has focused on moving many of their operations out of the Midwest down to Mexico, where millions of dollars can be saved on labor costs alone.
The automobile manufacturers have lots of power because they tend to be very big and often buy from suppliers that are quite small. There are 13 automotive manufacturers with annual revenues over $50 billion and 225 firms with revenues between $1-$50 billion. This gives the buyers the financial muscle to make large orders and drive prices down. Low switching costs and difficult to differentiate products force the suppliers to compete on price; the buyers are then able to seek out the best price or contract that fits them. There are numerous auto suppliers to choose from, furthering the buyer's power. Many of the auto suppliers are very dependent on the large manufacturers because they are their main revenue source and losing such a large contract could cripple the business. Buyers also have power because they pose the threat to vertically integrate and produce the parts themselves. The buyer's power is limited some due to the fact that there are so many vehicle manufacturers in the world, but overall their power is quite high. Since the buyers have so much power, the auto component industry is under constant pressure to reduce costs and prices.
Dana has been able to reduce the power of their buyers more than their competition because they have a very well diversified group of customers. Other than Ford, no customer makes up more than 5% of Dana's annual revenues. Compare that with American Axle where 80% of revenues come from General Motors. Since Dana is less dependent on a small group of customers, Dana is able to limit the power of most of their buyers.
Suppliers for the auto component industry also provide for many other industry and do not depend on the revenues of the auto industry. The suppliers are usually quite large and supply a specific part or raw material. Often there are only a few firms that provide such materials which are vital to the production of vehicles. This gives the suppliers moderate power. One factor that could limit the power of the suppliers is that the auto component manufacturers could pose the threat to vertically integrate and make the product themselves. The cost of raw materials, such as steel, copper, aluminum, plastics, and rubber have increased dramatically recently. These price increases have shrunk profit margins for both the auto component industry and their suppliers.
Until there are major leaps in technology, there are very few threats from substitutes for automotive component suppliers. The only possible substitute would be if the consumer decided to purchase a new vehicle instead of buying replacement parts.