North American parts makers appear generally prepared to meet supply demands from automakers potentially ramping up toward production of 18 million light vehicles over the next few years, a level that would mark a stunning and perhaps seam-busting 9.4 million-unit expansion since 2009.
But capacity constraints, the lure of emerging markets and a scramble for qualified workers remain industry headwinds.
In a new era of cautiousness following a U.S. recession still reverberating in global markets, many parts makers continue to tread lightly when it comes to expanding manufacturing capacity, despite solidly rebuilt balance sheets.
“Everyone is still being cautious and, frankly, trying to be responsible about investments so we don’t get into a position where we have a bunch of overcapacity,” says Grace Lieblein, vice president-Global Purchasing and Supply Chain at GM.
“And it depends on the supplier, in terms of how much flexibility they have, but I know everybody is looking forward and taking it one step at a time rather than jumping in like they may have done in the past,” Lieblein tells WardsAuto.
That is not to say, however, that all suppliers are sitting tight. A number of parts-making heavyweights now are doubling down in the region by adding manufacturing brick-and-mortar and bolstering R&D and sales operations.
Among the recent activity, French interiors specialist Faurecia opened in July a new $30 million headquarters outside Detroit, joining Japanese giant Aisin Seiki, which in the same week cut the ribbon on a $13 million sales and technical center near the city.
“I would not be surprised if there was another (Aisin) plant coming into North America at some point in the future,” says John Koenig, president-sales & marketing, Aisin World Corp. of America. Koenig’s group is riding a wave of business from Toyota, GM and Chrysler.
Faurecia CEO Yann Delabriere says the supplier has enough capacity to meet demand, which includes new work from Chrysler, for the next 18 months.
But after that, he adds, “we will resume more active growth in North America.”
Other actions this year include Cooper Tire & Rubber investing $35.5 million in a global technical center at its Findlay, OH, headquarters aimed at advancing tire technology; component maker Toyoda Gosei North America will put $7.9 million into its suburban Detroit operations; and vehicle-trim-specialist SRG Global will double the size of its Central Mexico facility to accommodate new-product offerings.
The growth comes on the heels of companies such as Continental, Kiekert, Denso, Durr and Halla spending millions of dollars in North America to expand their capabilities.
The actions underpin a capacity utilization push by automakers, already capable of building 17.8 million LVs in North American this year if they choose. WardsAuto forecasts output of 16.7 million units this year.
But many analysts predict “18-by-18,” or an outlook for automakers to eclipse 18 million units in the 2018 timeframe. The uptick is fueled by new plants coming online or expansions at existing assembly facilities by a host of OEMs, including Honda, Mazda, BMW, Chrysler, Ford and GM.
“It’s possible,” Jim Lentz, CEO of Toyota North America, says of 18 million units. “Demand will sustain at least 17 million. Whether we get to 18 million or not, it’s in the ballpark.
“A lot of suppliers are stressed doing what we’re doing today and they are basically at maximum capacity in many cases,” he adds. “So that next step, as long as they have a similar view as the OEMs, (17.0 million to 18.0 million) is possible.”
Capital Investment on Rise
The next step is a big question mark. A newly released study of supplier confidence by the Original Equipment Supplier’s Assn. reflects equal doses of optimism and prudence among its 450 members.
Suppliers are drawing confidence from automaker forecasts and are focused on incremental capacity and production increases to meet 2015 and 2016 OEM demand levels, the report says.
“Suppliers are finally willing to add capacity,” says Sean McAlinden, chief economist and executive vice president-research at the Center for Automotive Research in Ann Arbor, MI. “(OEM) purchasing departments have had to fight for three years to get them to expand.”
Capital investment and outlays to fund innovation will increase for upwards of 19% of OESA members, while some have adjusted their budgets downward the organization says.
More than 40% see merger and acquisition as a route to increase resources.
However, it also appears suppliers are being pulled in a number of directions, citing North America, Asia and Europe as places where M&A activity will be most brisk as they follow their customers to high-growth regions.
The biggest deal currently in the works would see German steering system giant ZF Friedrichshafen acquire U.S. electronics and safety systems expert TRW to gain access to the booming connected and autonomous driving markets in the States. The $13 billion bid by ZF could spur additional activity in the space in the U.S.
However, Asia, as well as Africa and the Middle East, by far are the most attractive regions to expand, according to the report.
Asia’s crown jewel, China, took over as the world’s No.1 automotive market in 2010, and analysts expect its dominance to continue. According to IHS, automaker production in the country will surge 26% to 28.8 million units in 2018 from 22.8 million this year. IHS expects China output to hit 30.5 million vehicles in 2020.
For Visteon CEO Tim Leuliette, the lure of Asian markets is so strong North America might take a backseat.
“Don’t get too focused on another million or two units (of production) in the U.S.,” warns Leuliette, who has guided a number of Tier One suppliers over the last 14 years. “Around the world, the growth dynamics are going to be much greater and we’ll easily handle the U.S. We’ll handle the other countries, as well.
“The future is predicated on the next 10 or 15 million units occurring around the world and specifically in Asia,” he adds.
Not everyone enjoys such riches, however. For smaller suppliers keeping pace in North America alone will depend on continued strong balance sheets, a packed pipeline of talent and winning new business.
Financial Outlook Rosey
Strong financials appear almost certain. According to the OESA survey, 43% expect revenue growth next year and 83% anticipate higher year-over-year earnings in 2015.
“The industry is in good shape. We’re not over our skis,” Leuliette says. “Not just Visteon, but as an industry we are all running pretty good balance sheets and being very conservative. Our borrowing costs are very low, and our ability to get access to capital is good.”
Hau Thai-Tang, group vice president-Global Purchasing at Ford, agrees.
“Balance sheets are much healthier” following the industry restructuring of 2009 and 2010, he says. “Many (suppliers) have consolidated and rationalized their product portfolio to allow them to really be able to invest in new technologies and focus on two or three core categories where they can be among the leaders.”
In the last several years a host of Tier Ones have done just that, led by heavyweights such as Delphi and Bosch divesting their braking businesses to focus on electronics.
Visteon unloaded its plastics and glass business to put its full attention on climate-control systems and the human-machine interface, while both Johnson Controls and Lear dumped the idea of being a one-stop-shop for entire interior systems to concentrate almost solely on seating systems.
Restructurings complete, suppliers now desperately need people.
“A big holdup is labor,” CAR’s McAlinden says. “Every supplier we talk to is having trouble attracting talent.”
North American suppliers for years have battled each other for top talent, and employees would jump from one parts maker to another seeking the highest dollar. But last year in Michigan automakers Ford, GM and Chrysler saw a majority of their payrolls shift for the first time to mostly salaried positions after years of hourly wages dominating. That will make it even more difficult for suppliers to obtain, and hold onto, the brightest minds in engineering, marketing, sales and accounting.
“That could be the real capacity constraint – people,” McAlinden says.
State Governments Play New Role
State governments are stepping in to help for the first time.
The Michigan Economic Development Corp., for example, recently launched MAT2, a 3-year program for high school seniors giving them hands-on technical training with industrial companies while they work towards a degree.
Suppliers are invited to hand-pick prospects and the program reduces the investment necessary to train new employees, an historically risky investment because those newly trained workers could jump to another supplier or another downturn could lead to layoffs. In either case, suppliers would lose money.
“The concern we see is lack of talent, skilled trades in particular, and engineering talent that we need to keep growth going” Michigan Gov. Rick Snyder tells WardsAuto on the sidelines of a recent industry event in Detroit. “We need to work on that pipeline.”
In Middle Tennessee, the AutoXLR8R program helps entrepreneurs connect with automakers in the state, where car making now accounts for more than 25% of its economy and will only grow in the coming years.
In Spring Hill, for example, GM plans to get one of its largest manufacturing complexes in the U.S. back up to speed after bringing it to a near halt during the recession, while Volkswagen will add capacity to its new Chattanooga assembly there to accommodate a second product.
“We’re putting entrepreneurs in front of the auto industry,” says Jack Sisk, program manager for AutoXLR8R and former purchasing executive with GM. “If we can help find the of idea of tomorrow, the smart people of tomorrow, it will help suppliers meet the needs of their customers.”
Michigan also has taken the step of connecting suppliers with automakers in an effort to bolster the customer sheets of expansion-minded part makers, as well as those looking to commercialize innovations. At a recent “Match Maker” event in Detroit, buyers from the Detroit Three joined 45 Tier One suppliers and 400 Michigan vendors to talk about business opportunities in a one-on-one environment.
A similar event last year saw 30 Tier One suppliers connect with Ford. More than 400 meetings were conducted in a single day resulting in $11 million in new contracts for those suppliers over the following 12 months.
“It’s not rocket science, but we are getting rocket scientists in the room to talk and that does not happen every day,” says Trevor Pawl, managing director-Pure Michigan Business Connect at the Michigan Economic Development Corp.
If the last five years are any indication, the supply sector appears poised to meet future automaker demands. Parts makers have already taken on 7.5 million units of production since 2009.
Asked to grade his suppliers over that period, Mark Reuss, executive vice president-Global Product Development, Purchasing and Supply Chain at GM says, “I’d give ’em an A.”