Leather-maker GST files for bankruptcy
GST now has production facilities, such as this one, in Europe and Asia.
DETROIT — One of Detroit’s oldest suppliers of luxury has hit a financial wall despite a global market that is calling for premium materials.
GST AutoLeather Inc., a global producer of automotive leather for seats and interiors, filed for Chapter 11 bankruptcy protection this month in U.S. District Court in Delaware, claiming $196 million worth of debt to more than 750 creditors and assets of between $100 million and $500 million.
Details laid out in its court documents paint a picture of a North America-focused Detroit company that was acquired in 2008 by a Japanese private investment group, was rapidly expanded to global markets and has been facing down numerous operating challenges in locations from Europe to China.
Among them: A European automaker who pushed back one-fifth of its GST leather-related product last year, claiming the goods had not been correctly validated in accordance with the customer’s supply chain rules.
GST leather is used in Audi, BMW, Ford, Toyota and Volkswagen vehicles, among other brands. According to court documents, the company, which started in 1933 as Garden State Tanning, has secured $40 million in debtor-in-possession financing to continue operating.
The company’s owners, Advantage Partners of Tokyo, have been trying to sell GST over the last two years, according to the filings. In recent months, three potential buyers have dropped out of potential purchases.
Advantage Partners bought GST in 2008 for $310 million from Citibank Venture Capital and its affiliate SILLC Holdings.
A spokeswoman for the bankruptcy case declined to answer questions about the bankruptcy or make company executives available to discuss the situation, instead referring Automotive News to the documents.
Not contained in the documents is a market report published this year by the research firm Future Market Insights, which forecasts a 5 percent annual growth rate for automotive leather revenues worldwide through 2026 and a steady outlook specifically for the North American automotive leather market. The forecast refers to GST as one of the leather suppliers that are “recognized as industry leaders in the global market.”
As recently as the 1980s, the supplier embraced Toyota Motor Corp.’s example in improving its U.S.-centric manufacturing operations in a bid to expand its customer base to non-Detroit 3 vehicle programs.
GST now has 5,600 employees worldwide, posted net global sales of $540 million in 2016 and has operations in China, South Korea, Germany, Mexico, Hungary and South Africa. Six years ago, GST acquired one of its major leather competitors, the century-old Seton Co. of Detroit.
But the company’s global growth has resulted in financial and quality headaches, court documents indicate.
GST alleges in its filing that in another incident of product rejections, an auto customer changed its standards of product acceptance after previously granting approval. Product rejections had a negative impact of $8 million on cash flow over a yearlong period, court documents say.
In another problem, a partnership for leather retanning and finishing services with an unnamed Chinese supplier turned sour in 2015 when the partner requested additional, above-contract payments, the court documents say.
GST then began building inventories of leather hides in Mexico and Germany, with the goal of becoming independent from outside suppliers. But GST began to unwind the inventory surplus plan in July because of financial constraints.
The above-contract requests, combined with the investment in the protective inventory reserve, totaled $24 million in unprojected cash outlays, according to the documents.
Last year, GST and partners moved to begin building a leather-finishing facility in China that it hoped would “eliminate its dependence” from its Chinese supplier, the documents say.
That project is unfinished, but GST projects it to be operational in early 2018, according to the filing.
Apart from its specific challenges with operations, as outlined in the filings, GST and other leather suppliers face some headwinds as the auto industry evolves. The Future Market Insights forecast states that leather-makers are seeing growth in the use of synthetic faux leather.
In August, while speaking at an industry conference in China, Stephen Jeske, GST vice president of sales and marketing, took aim at the trend toward synthetic leather materials.
“We feel that boundaries between what is genuine leather and synthetic substitutes is becoming a grey area in the automotive market,” he said in an article on the company’s LinkedIn page. “Therefore, GST is taking the approach of promoting the naturalness of leather to its customers to distinguish it against other materials.”