November 29, 2012
This is fourth in a series of reports on the health of the North American auto industry. Friday: Dealers.
Automotive component suppliers that survived the industry’s 2009 meltdown learned an important lesson: It’s better to have too little manufacturing capacity than too much.
As General Motors and Chrysler descended into bankruptcy that year and vehicle production volumes fell off a cliff, suppliers had no choice but to shutter plants and eliminate jobs. The great purge in the supply base actually began several years earlier but came to a head in 2009. Never before had so many top 100 North American auto suppliers gone through bankruptcy.
That was the bust side of the cycle, so the boom is right around the corner, right?
Not quite.
Three years later, the harsh memory of 2009 – and the years of trench warfare that preceded it – stings like a bitter breakup. Even as North American production levels gain momentum, supplier executives with strong stomachs for industry cyclicality understand the dangers of reinstalling capacity that was removed not long ago.
“The executives have that in their minds, and the boards of directors have that in mind, and certainly the private-equity owners have that in mind. So they’re not going to get ahead of the production curve,” Dave Andrea, senior vice president-industry analysis and economics at the Original Equipment Suppliers Assn., tells WardsAuto.
He says automotive capacity always has been added incrementally, in “stairstep” fashion. Today, he sees that term applying more broadly than to bricks and mortar.
“Certainly the steel guys won’t open new furnaces or even relight a furnace. Some of them haven’t even been relit because it takes so much capital to ramp up one of those lines, only to close it down again,” Andrea says.
“I guess the physical-capacity stairsteps have always been there, but now we’re also looking at the mental stairsteps that people have to clear before they sign off on new capacity or even adding a new shift or calling back a third shift.”
Since 2009, Andrea says suppliers have entered each new year with “higher expectations” to outperform what generally has been flat second-half performance. But this year is different.
“This time around, I think we’re entering the new year with greater caution than we’ve entered the last three years, without a doubt,” he says.
That sentiment comes through loud and clear on the OESA’s “Supplier Barometer,” a survey taken every other month that touches on everything from research and development spending and juggling production schedules to staffing levels and emergency preparedness.
More than 100 companies participated in the latest survey, conducted Nov. 5-7. OESA has 320 member companies.
The November survey finds suppliers are worried about stability in the European market and concerned that Democrats and Republicans in Washington will drive the U.S. off a fiscal cliff rather than come to agreement on financial and tax reforms.
In January, OESA’s “Supplier Sentiment Index” found suppliers generally positive in their outlook for the next 12 months. But with each successive month, that optimism has faded.
Most survey respondents expect recovery in Europe to be a long-term endeavor. As a result, many companies say they are curtailing investments in Europe. Some 35% of barometer respondents expect Europe to experience a “lost decade of slow or no growth,” with gross domestic product of 1% or less.
Several survey respondents say the European economic crisis is affecting their companies’ planning and investment strategies for North America.
“They have a long-term problem to deal with (in Europe), and it will impact the industry,” one supplier executive writes. “Ford took the lead in reducing capacity. It is only a start. More needs to follow from both the OEM and supply base.”
But the November barometer also finds plenty of reasons to be upbeat.
For instance, fewer than 10% of participating suppliers plan to reduce staff within the next six months, while 75% of companies plan to hire engineers and technicians and 58% expect to add production/skilled-trade workers within six months.
The survey also finds brimming optimism among midsize suppliers with annual revenues between $151 million and $500 million. “Orders continue to be higher than we have forecasted,” writes a barometer participant.
Another important yardstick is the number of active supplier bankruptcy cases moving through the courts: The number is so low and inquires have trailed off to the point the OESA no longer keeps a running tally, Andrea says.
And a number of suppliers actually have bold plans for expansion, especially in North America.
For example, German powertrain components specialist Mahle has expanded a technical center in Shanghai and next year will expand its North American technical center in Farmington Hills, MI, to accommodate staff moving in as part of the planned acquisition of Behr Industry, another German supplier specializing in climate control and thermal management.
Mahle already owns 37% of Behr and expects a 51% majority stake sometime in 2013, says Scott Ferriman, Mahle vice president-North American sales.
In 2007, while many suppliers were plodding through bankruptcy, Mahle acquired Siemens VDO’s air-intake module and air-filtration business and Dana’s engine-components business.
Meanwhile, Mahle maintains its position as the world’s No.1 piston producer and continues to operate 11 manufacturing facilities in the U.S., five in Mexico and two in Canada at a time when many major Tier 1 suppliers have closed or sold U.S. production facilities.
“For North America, we see some growth, maybe 5% in this market,” Ferriman says. A key growth product in the region is transmission coolers, which Mahle supplies to Nissan, its second-largest customer worldwide (behind Volkswagen).
In its home market, Mahle has 20 plants in Germany, as well as 33 others across the continent, many of them in economically challenged southern Europe.
Mahle closed a few piston plants in Germany several years ago, and an executive with the supplier says some operations have a questionable future. Ferriman tells WardsAuto there have been no discussions about additional plant closings in Europe, but he understands the region’s challenges.
“I think we’re looking at probably a flat market for 2013,” he says of Europe. “We actually show sales going up but primarily because of currency exchange that’s in our favor next year. In Eastern Europe, we see some pick-up there, but in southern Europe it’s down.”
Despite consternation about Europe, OESA’s Andrea says suppliers in North America have taken the appropriate steps to reduce capacity, even as production volumes improve. He points to the bleak output in 2009 of 8.6 million vehicles and its impact on parts producers.
“Many suppliers did talk about going into hibernation,” Andrea recalls. “Some did cut their workforce up to 40%. That was truly survival mode.”
At that time, the Federal Reserve found U.S. automotive component producers operating at an alarmingly low capacity utilization rate of 43.7%. Today, that figure is back up to 80%, with WardsAuto forecasting production of 15.3 million vehicles this year and 15.4 million in 2013.
Andrea refers to “pinch points” in the supply chain that are bound to cause disruptions for critical components such as electronics, forgings, castings and precision metal machined components. “These are also some of the highest capital-intensive components in the industry,” he says.
Meeting demand for components in a reasonably strong North American vehicle market will be a challenge in 2013, as it is every year, Andrea says.
“As we look at getting through 2011 with the Japanese earthquake and getting through 2012 with our weather disruptions here, it’s heroic what the industry goes through to meet the annual (production) numbers,” he says. “But it’s the pain and the process of getting to those annual numbers. Suppliers are getting good at crisis management.”
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