Brandon Stallard
Brandon Stallard.

Industry Better Prepared to Adapt in Downturn

Like the occasional discordant pop of a misfiring cylinder, there are some signs that the purring engine of economic success may be starting to sputter: Growth is slowing, inventories are climbing and vehicle discounts are up.

The national economy not only is continuing its sustained growth but also is close to setting a record. Previously, the longest period of continuous economic growth in American history was in the 1990s, when uninterrupted prosperity lasted for a full 120 months.

The current stretch of growth is on pace to eclipse that mark by the middle of next year, which would elevate it from impressive to truly historic.

The automotive industry has been one of the prime beneficiaries of that strong economic performance. North American car sales have set records in recent years, and automakers and suppliers have reported consistently and impressively strong earnings.

Good news, right?

There are some early indications, however, that the good times may be coming to an end in the not-too-distant future. Like the occasional discordant pop of a misfiring cylinder, there are some signs that the purring engine of economic success may be starting to sputter.

It’s not uncommon to see early economic trends foreshadowed by fluctuations in the transportation sector. Numbers have inched down in many industries. Auto parts, specifically, are down 8%. Across the board, we see similarly modest signs that the pace of growth is slowing and inventories are climbing.

There is more discounting of vehicles, and premium transportation is moving away (specifically air freight and ground expedite) – evidence that the manufacturing sector has caught up with themselves in the automotive space.

Builds are down – in some cases precipitously – and while the truck and SUV sectors continue to do well (aside from the well-documented Ford F-150 supplier issue), we are starting to see volumes reduced.

This hasn’t significantly affected full truckload (FTL) or even less than truckload (LTL), at least as far as the overall number of shipments, but total tonnage is starting to decline after being flat for some time.

While these all are signs this extended period of growth might be coming to an end, they don’t necessarily indicate a looming recession. Even if we aren’t headed off a cliff, it does seem clear we are due for somewhat of a slowdown. The encouraging silver lining of that darkening cloud is that the automotive industry is more prepared than ever before for a downturn. 

Automotive Adaptation

Automakers and OEMs are managing their inventory turns by moving their supply base to local sources and lower-cost countries, considerably shortening their supply chains.

We’re seeing a few more North American-based links in the supply chain in lieu of Asian, Eastern European and other traditional low-cost regions. With shipping costs up and differentiation diminishing, the trade-off of a longer supply chain is less desirable.

They also are watching their builds and avoiding high levels of inventory. This is obviously anecdotal, but I live in the Detroit area and haven’t seen the parking lots of automakers nearly as full as they were during and prior to the last recession.

It seems clear automakers are doing a better job structuring and coordinating with their supply base so they can react to economic fluctuations much better than I can recall in the past few decades.

Workforce Flexibility

Automakers and suppliers also are smarter and more proactive negotiating with unions to become more flexible with their workforce. The result is generally leaner, more nimble organizations that look to be better able to adapt and survive when the next inevitable downturn begins in earnest.

Automakers also have become more sophisticated with their forecasting, running powerful algorithms and achieving better integration along all links in the supply chain.

As a transportation logistics provider, we’re now tying into their 13-week forecasts, allowing us to optimize transportation from their supply base. Today’s communication and integration is much more sophisticated than it was pre-recession – and that’s important.

 The Wild Card: Politics

As recent events have shown, the threat of a trade war could be more significant than some may have previously thought, and it could have very real implications for the auto industry.

To date, very little of the talk from the White House has had a major impact on automotive operations (and I haven’t seen much of a sign that automakers have fundamentally changed their business philosophies and practices as a result). Nevertheless, rising trade tensions with countries such as Mexico, Canada and China could change that equation very quickly – and it’s most definitely worth keeping a close eye on going forward. 

Brandon Stallard is CEO at Troy, MI-based Argus Logistics, a third-party logistics management provider with operations across the globe. Email address: [email protected]

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