OESA’s DeKoker: Unemployment Holds Back ‘Recovery’

Special Coverage

State of Industry: North America

The Original Equipment Suppliers Assn. came into being in 1998, announced at a press conference at the University of Michigan’s annual Management Briefing Seminars automotive conference in Traverse City, MI.

The not-for-profit organization’s mission is the same today as it was then: to provide a forum for manufacturers of automotive parts, to represent their interests in legislative matters and to speak collectively about problems and issues that face the automotive supply chain as a whole.

This last objective arguably is its most important because individual suppliers, no matter how large, take tremendous risks by speaking out about delicate topics, such as an auto maker’s heavy-handed purchasing policies.

OESA has 400 member companies with global automotive sales of more than $300 billion, so it has established the political clout to speak out when necessary, while maintaining a positive working relationship with auto makers.

The driving force behind OESA all along has been Neil DeKoker, the group’s founding president and CEO, whose 48 years in the industry include 23 with General Motors and stints with Magna, Woodbridge Group and MascoTech.

He responded via email to questions about the industry in general and auto suppliers in particular.

WardsAuto: Has the economic recovery taken hold, or do you fear the U.S. is headed for a double-dip recession?

DeKoker: The major issue that could throw the world into a recession is the economic situation in Europe. If this gets managed, then there will not be a double-dip recession.

Michigan is showing strong signs of recovery, which is being led by the auto industry. Automotive profits are generally good to strong, with most companies trying to minimize capital expenditures and hiring of permanent employees to keep overhead under tight control – pending a better understanding of the global economic situation.

Neil DeKoker helped found OESA in 1998.

The U.S. economy is expected to grow in 2012, but it will still be well below normal historic growth rates. In my opinion, until there is a marked improvement in unemployment numbers, any “recovery” will be very slow and possibly short-lived. There are simply too many people out of work for me to have any long-term belief in the growth numbers.

That said, if Europe cannot get its house in order, a double-dip recession might seem like a trip to Disney World, comparatively.

WardsAuto: What do you expect to be the next game-changer in vehicle technology?

DeKoker: Light-weighting and smaller engines with power-boosting technologies such as turbochargers and more efficient burn technologies will be the continued trend for vehicles and internal-combustion engines.

The next major breakthrough in battery power-density technology and weight reduction will be a major game-changer, but a time line is not clearly in sight.

WardsAuto: Other than the economy, what is the biggest single threat to suppliers? In other words, what keeps you awake at night?

DeKoker: “It’s the economy, stupid” is an old line that still very much applies today. There are a multitude of challenges facing suppliers.

However, I believe that energy and raw-materials pricing and availability is the most pervasive challenge suppliers will face in the years ahead as the demand for materials grows faster than can be readily made available, causing major uncertainty in the predictability of energy and materials costs.

WardsAuto: How do you see the vehicle-segment mix changing in the U.S. in 2012? How will suppliers be impacted?

DeKoker: I believe the years of fuel prices dropping below $3 per gallon in the U.S. are over forever. Hence, we will see a steady growth in sales of smaller vehicles, while sales of larger vehicles and light trucks will continue to decline.

We will see smaller vehicles that will be loaded with more options previously only found in large luxury vehicles, much like in Europe today.

The impact on suppliers will differ significantly based on their product areas and their adaptability to these changes in mix. However, one thing is certainly clear: Suppliers will continue to play a leading role in developing technology that drives vehicle sales.

WardsAuto: Care to venture a guess at light-vehicle sales for 2012? Are market conditions forcing most suppliers to lower their 2012 forecasts? Do suppliers generally think 2012 will be better or worse than 2011?

DeKoker: While forecasters have predicted North American production of 13.8 million vehicles for 2012, OESA members have indicated they are planning for volumes in the 13.2 million to 13.5 million range. This is an increase over 2011, but the size of the increase continues to be below normal trend-line growth.

WardsAuto: We wrote earlier this year that auto makers appear more willing to swallow raw-material price increases. Is that still the case?

DeKoker: Auto makers understand suppliers simply cannot absorb the major price volatility occurring in most materials today, and that some system to share this risk is necessary to assure the survivability of the supplier industry and to maintain a strong supply base. The degree of sharing varies by OEM, just as the relationship of suppliers with OEMs varies.

WardsAuto: OESA has been trying for years to establish a more equitable model for coping with dramatic swings in raw-material price increases. How is that effort progressing?

DeKoker: As noted, there is more cooperation with OEMs and suppliers for many materials. Steel, aluminum, copper, etc. are generally not a major issue today.

There are still significant challenges with such things as rare-earth elements and for petroleum-based materials, which do not have a readily available experience-based independent index that can be used to develop price adjustment mechanisms.

WardsAuto: Are you keeping tabs on the number of supplier bankruptcies currently in process in the U.S.? Has anxiety about suppliers in bankruptcy diminished from a few years ago?

DeKoker: Bankruptcies in the major-tier suppliers is virtually non-existent today. There may still be some limited bankruptcies in smaller, lower-tiered suppliers, but it is not a major issue like in 2008 and 2009. In fact, the OEMs have stated they have very few suppliers on their watch list today compared to two years ago.

WardsAuto: Are suppliers finding it easier than a few years ago to borrow money for capital improvements? Are they willing to take on that additional debt, perhaps concerned about a double-dip recession?

DeKoker: As several CFOs and CEOs have indicated in recent months, two years ago I could not get an appointment with my banker. Today, they are calling to ask me out to lunch. So, yes, money is more available today.

However, suppliers are very careful to avoid adding capital investments and permanent staff because of the continued uncertainty in the global economy. They want to make sure they will not face a situation like we had in 2008 and 2009 before committing to additional capacity that adds to overhead.

WardsAuto: OESA Chairman Bill Kozyra said earlier this year that suppliers are paying premium freight costs to airlift parts around the world and paying overtime to keep up with demand. Is that still the case?

DeKoker: Of course, that was based on customer demand vs. the ability to produce and ship parts after having reduced capacity considerably to survive the great recession of 2008-09.

Yes, there are still shipments with premium freight costs, but it is not as widely spread as it was at the beginning of the year.

There are exceptions. Korean suppliers are shipping by air to keep up with unprecedented demand from Hyundai and Kia. But I don’t believe it is as widespread as it was earlier in the year.

WardsAuto: How will most suppliers remember 2011, as a year that was a far cry better than 2009, but still fraught with pitfalls?

DeKoker: I think suppliers will see 2011 as having been a year of great learning about supply-chain viability.

The lessons from the Japanese earthquake crisis in March and the floods in Thailand in October and November have made us all painfully aware how interdependent the industry is and what we need to do in the future to reduce the risk of disruptions from any of our suppliers or our own facilities.

Sourcing from a single location is likely something that will be greatly reduced, if not totally eliminated, even within companies. The risk of shutting down a customer is simply too costly for the savings gained from producing 100% of your product from one location, unless you have ways to mitigate the risk.

WardsAuto: There was a lot of discussion earlier this year about conflict minerals and their impact on auto parts producers. In April, the Automotive Industry Action Group sent a letter encouraging suppliers to be aware of the new federal law. How is implementation going?

DeKoker: To date, the final requirements have not been published by the Securities Exchange Commission. Suppliers have been actively engaged in the dialogue around how to best manage the reporting requirements that will be issued by the SEC, and have had an active role in the AIAG activities, as well as with cross-industry groups.

There are major ambiguities that suppliers face in this reporting scheme. First, conflict minerals come from regions where the “conflict” boundaries are ever-shifting; second, smelters tend to comingle materials as a matter of course. So what’s to say that a product containing Tungsten does not contain material from a conflict and a non-conflict region?

Lastly, for many companies, gaining visibility into the supply chain this far down is very difficult. Suppliers remain committed, however, to finding the best collaborative solution possible to meet the requirements of the Dodd Frank Act on conflict minerals.

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