IN THE DRIVER'S SEAT: (FOR NOW)

AUTO INDUSTRY REPORTER

The glittering corporate spectacle at Toronto's Roy Thomson Hall that is the Magna International Inc. annual meeting will be a toned-down affair this year. In fact, it won't even be held at that venue, but instead will occur at a suburban hotel.

Renting a hotel ballroom instead of one of the finest concert halls in the land will save only about $10,000, barely even a rounding error for a company with $24-billion (U.S.) in annual sales, but cash is king as the global auto industry melts down.

"Anywhere we can save cash, we will," says co-chief executive officer Don Walker. "What's the expenditure? If we can reduce it, we'll reduce it. We're going to bare bones on everything."

Magna's customers are reeling. Chrysler LLC and General Motors Corp. are subsisting on life support from the U.S. government. Parts makers around the world are perched on the edge of the financial abyss.

By rights, that should mean Magna is also in desperate shape, but it's an island of financial strength amid an industry that's bleeding red ink. That strength represents a significant opportunity for a company that has grown exponentially since it began life in 1957 stamping metal brackets for GM, to become even more dominant. "We are looking at maintaining our health as best as possible through the downturn, but positioning ourselves to grow and be a stronger company when things turn around," Mr. Walker says in an interview in a conference room at Magna's chateau-like headquarters in Aurora, Ont.

Such a strategy makes sense, says Craig Fitzgerald, a partner at consulting firm Plante & Morin in Southfield, Mich.

"Companies like Magna that have strong cash positions, low debt levels, [a strong]management team and very strong technical capabilities are going to be the consolidators that will realize the greatest wealth creation over the next couple of years," Mr. Fitzgerald says.

Still, the largest parts company in North America is hardly immune to the tremors of the financial crisis that have helped send sales plunging to levels last seen in the recession of the early 1980s. That sales collapse has caused auto makers around the world to slash vehicle production, choking off the lifeblood of the companies that provide the seats, bumpers, radiator supports and thousands of other components that go into a typical automobile.

The sound and fury roiling the industry came into sharp focus this week as Chrysler threatened to shut down its Canadian operations and GM reached a cost-cutting deal with the Canadian Auto Workers, events that underlined the crisis Magna hopes to escape.

It lost money in the third and fourth quarters of 2008 and will probably do so again in the first and second quarters of 2009. It cut its dividend in half in the third quarter last year.

When the cash crunch at GM and Chrysler LLC appeared to hit its peak late last year and bankruptcy protection seemed imminent for one or both of them, Magna drew down about $900-million from a $2-billion line of credit.

It has closed some plants, reduced the workweek at others, slashed discretionary spending and capital spending, and will further trim the costs of the annual meeting by reducing the number of employees attending and eliminating the displays of its own products and customer vehicles that have decorated past gatherings.

"The good news is that the company looks well placed to weather the current downturn due to its robust balance sheet and strong competitive position," Fadi Chamoun, who follows the company for UBS Securities Canada Inc., says in a research note.

Mr. Chamoun is one of several analysts who believe the short-term outlook for the company is dreary but longer-term prospects are healthy.

The words "robust balance sheet" from his statement are critical in any discussion of Magna and how it plans to weather the storm.

Robust in this case means net cash of $1.5-billion, a pile built up carefully over almost 20 years after the company nearly collapsed when a debt-fuelled expansion binge left it vulnerable during the recession that coincided with the first Gulf War. "Magna's in a fortunate position because we planned for it," Mr. Walker says.

That's a stark contrast from 1990, when debt ballooned to about $1-billion (Canadian) and the crisis was so severe that bankers insisted founder Frank Stronach stay away from restructuring negotiations that were conducted as the company came close to bankruptcy protection.

Mr. Walker, 52, was executive vice-president of operations at the time, after joining Magna from GM in 1987. He was appointed chief executive officer in 1994 and later headed the company's Intier Automotive Inc. operations when it was taken public in 2001.

He returned to Magna as co-chief executive officer when Intier was taken private again four years later and now shares the job with Siegfried Wolf.

That makes him one of the longest-running chieftains in the auto parts company, which has had a history of musical chairs in the executive suite. One of the people who rotated through is Belinda Stronach, daughter of Mr. Stronach and at one time, Mr. Walker's wife.

Since the brush with disaster in 1990, debt has been a dirty word at the auto parts giant - although not elsewhere in Mr. Stronach's empire. His racetrack and gambling company Magna Entertainment Corp. was granted Chapter 11 bankruptcy protection last week in a Delaware court.

Because the auto parts company shunned debt, growth came through a series of small and medium-sized acquisitions made during the 1990s and 2000s, many of them companies in bankruptcy protection or pieces of conglomerates exiting the auto parts business because the margins - even then - were pretty lousy.

So job one in the current crisis is to husband that cash - assuming that Mr. Walker is correct in his belief that governments around the world will keep Magna's customers alive.

If they don't, he faces what many describe as a cascading collapse of the industry. That would be a bankruptcy or failure by GM that causes it to cease production and in turn sends its suppliers into bankruptcy court. So they, in turn, would also cease production, cutting off the flow of parts to other auto makers and causing Chrysler LLC and Ford Motor Co. to collapse as well.

The auto industry would grind to a halt, probably crushing even such cash-rich companies as Magna.

Mr. Walker notes that the consequences of such a cataclysm would be dire and says governments on both sides of the border appear to be preparing to support the industry.

Job two is to allocate the company's resources judiciously. Research and development, one critical piece of Magna's operations that uses cash, will not get knifed.

"The best growth and the best profitability is from successful results from R&D, so we don't want to cut back on R&D," Mr. Walker says.

He points to such successful Magna products as cameras that show drivers what's behind them when they're backing up and engine cradles that are a hybrid of cast aluminum and stamped parts that reduce weight, thus making vehicles more fuel efficient.

Magna is also devoting resources to benefit from another aspect of the crisis afflicting suppliers.

Many auto parts companies have already fallen into bankruptcy protection and key Magna rivals such as interiors giant Lear Corp., chassis manufacturer American Axle Corp. and suspension components maker ArvinMeritor Corp. are in grim financial shape.

Suppliers in financial difficulty represent a nightmare for auto makers at the best of times but even more so now when the car companies themselves have few financial resources to help out their suppliers.

That presents an opportunity for Magna to grab what is known as "takeover business" as auto makers worried about fragile suppliers shift business to healthier parts companies so their assembly plants don't screech to a halt if fragile parts makers collapse.

Mr. Walker won't discuss the companies that are in trouble, although he ticks off the handful of global suppliers that are well positioned. "If I was going to give you a list of people who are on the edge, that would be a much longer list," he says.

Bankruptcies are expected to mushroom during the next few months because of vehicle production cuts in North America that virtually shut down the entire industry and all but eliminated revenue for parts makers.

Car makers are reluctant to award new business to parts companies in bankruptcy, says Mr. Fitzgerald of Plante & Moran, "so those companies that have capacity, working capital and management and engineering talent are going to be the companies that will be rewarded with new work."

Magna has already been the recipient of business taken away from troubled suppliers. It may also buy companies because the state of the industry is such that valuations are exceptionally low.

"If there are opportunities to grow - especially if we can get business to put in our existing plants to support our employees, then those are things we're aggressively going after," Mr. Walker says.

The focus for longer-term growth lies in two areas - the growth of environmental technologies and the return to health of such emerging markets as China and Russia, where Magna considers itself well positioned once the market turns around.

The company had pinned its hopes in Russia on an alliance with oligarch Oleg Deripaska, who controls one of that country's auto makers, GAZ Group. But the financial collapse forced Mr. Deripaska to sell his $1.5-billion (U.S.) worth of shares in Magna and although the alliance is still in place, there's not much immediate activity in Russia.

The drive toward green technologies is expected to be a major source of growth during the next few years for well-capitalized auto parts makers that can afford to do research and development. Magna sees a big opportunity in providing components for hybrids and battery-powered vehicles such as the battery-driven Focus compact it developed for Ford Motor Co. and showed off in Detroit in January.

Mr. Walker is cautious, though, about how big the market for green vehicles is going to be by the middle of the next decade and notes that it will depend on the industry's ability to bring down the costs of such components as the batteries, how much money governments will put up to subsidize consumers and what kind of premium consumers are willing to pay.

The market for hybrid and electric vehicles is expected to be about 1.5 million units by the middle of the next decade out of a total of 60 million vehicles sold annually.

Consumers are probably willing to pay $5,000 more for such vehicles than a traditional car, Mr. Walker figures. If the cost is $10,000 higher and governments offer a $5,000 rebate, then consumers are also likely to step forward. But if these vehicles cost $15,000 more and there's no government incentives, the vehicles aren't likely to catch on.

The growing movement throughout society to adopt more environmentally friendly technologies is another temptation for Magna.

Among those are contracts for two auto parts plants in St. Thomas, Ont.

Mr. Walker won't talk about who the customers are, but the company has won deals to manufacture wind-turbine poles at one of its plants in that city and frames for solar panels at another plant. "As the automotive market turns down," he says, "we are looking to see what other alternatives there are out there for utilizing our assets and our talents."

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MAGNA'S GREATEST HITS

New technologies

In the late 1980s, Magna bought a German company offering a new technology to assemble automotive seats. The technology helped it win a contract with then Chrysler Corp. to manufacture seats for the auto maker's minivans. This is often called the contract that saved Magna because the revenue boost in the early 1990s helped it bounce back from the brink of bankruptcy.

High-pressure

hydro-forming

Another high-tech manufacturing technique purchased in Germany. This allows interior body parts such as engine cradles and parts of truck frames to be assembled with fewer pieces by "flowing" the metal in a steel tube. It cuts weight by reducing welding and provides greater precision for the parts. The technology enabled Magna's metal-bashing Cosma International division to grab one of the biggest contracts available - making frames for General Motors Corp. trucks and full-sized sport utility vehicles.

Purchase of Steyr-

Daimler-Puch

This late 1990s deal was underrated at the time because it came when investors were focused on Frank Stronach's potential forays into a theme park in his native Austria and a potential transatlantic luxury airline. But the purchase of the Austrian vehicle manufacturer gave Magna capability to assemble complete vehicles and a massive group of engineers. It now makes vehicles for Mercedes-Benz, BMW AG, Chrysler LLC and Saab and is a key research and development centre for Magna in Europe.

Greg Keenan

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Weathering the storm

After a brush with financial disaster in the early 1990s,

Magna has amassed about $1.5-billion in cash.

THE 90'S DOWNTURN

THE CURRENT DOWNTURN

*for the fiscal year **forecast

TRISH McALASTER / THE GLOBE AND MAIL

SOURCES: DESROSIERS AUTOMOTIVE CONSULTANTS, CSM WORLDWIDE INC., MAGNA ANNUAL REPORTS