Like soldiers hunkered down in foxholes, North American automotive suppliers that survived the economic firestorm of 2008 and 2009 have spent much of 2011 trying to peek outside, climb into the open, survey the damage and get on with life.
Suppliers are investing again in new product development, facility improvements and, in some cases, additional workers. Banks are more willing than two years ago to lend the necessary cash to pursue these strategies, although suppliers rightfully are cautious in considering the risks of taking on additional debt.
In late April, optimism about a recovery was running high as several suppliers posted earnings that exceeded expectations, including American Axle, Lear, BorgWarner, Federal-Mogul, Dana and Goodyear.
But every encouraging economic sign for suppliers this year seemed to be offset by the Europe debt crisis, middling consumer confidence in the U.S. and natural disasters, including a tsunami and earthquake in Japan, a tornado in the southern U.S. and prolonged flooding in Thailand.
All three deadly catastrophes illustrate the down side of an industry increasingly reliant on the shipment of parts and vehicles from global sources.
As recently as July, most auto suppliers participating in a survey by the Original Equipment Suppliers Assn. espoused a slightly upbeat “wait and see” attitude with regard to the industry’s overall prospects.
But by September that glimmer of optimism had faded.
“Current supplier sentiment is only slightly higher than the level recorded just before the General Motors and Chrysler bankruptcies were settled,” OESA says in its September “Supplier Barometer.” Respondents cited global economic conditions and financial turmoil in Europe as key reasons for the negative outlook.
Bosch’s Peter Marks.
One survey participant sums up the malaise: “All automotive analysts have already cut their sales and production forecast for the next few years, and when the reality of the macroeconomic changes that are soon to hit this country become apparent, then more cuts are certain.”
OESA President and CEO Neil DeKoker shares the concern about the European debt crisis and says to diffuse it will minimize the chance of a douple-dip recession in the U.S.
“Michigan is showing strong signs of recovery, which is being led by the auto industry,” DeKoker tells WardsAuto. His key concern centers on the jobless rate.
“Until there is a marked improvement in unemployment numbers, any recovery will be very slow and possibly short-lived,” he says. “There are simply too many people out of work for me to have any long-term belief in the growth numbers.”
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State of Industry: North America
Certain suppliers decided 2011 was a good year to move ahead with long-postponed capital investments.
Nexteer Automotive is pumping $150 million into its massive manufacturing complex in Saginaw, MI, to facilitate the North American industry’s migration from hydraulic to electric power steering.
The oldest of seven Nexteer plants, which had been part of General Motors and then Delphi, is being retooled to produce EPS for fullsize pickup trucks in a move that will save 1,000 jobs, the supplier says.
China-based Pacific Century Motors acquired Nexteer in July 2010 from GM after Delphi gave the operations back to the auto maker as part of its 4-year bankruptcy case.
Inteva Products dedicated its new engineering center in Vandalia, OH, in the spring to support development of world-class vehicle interiors, and the supplier hopes to grow its engineering ranks at the facility from 110 to 130 in the coming years.
ConwayMacKenzie’s Fred Hubacker.
Inteva was part of Delphi until its interiors business was sold to private-equity investors Renco Group in 2008.
During the dark days of 2009, when GM, Chrysler and more than 60 U.S. suppliers landed in bankruptcy, it was understandable why parts producers would forego such bold moves and assume a bunker mentality.
Of 62 suppliers that were bankrupt in 2009, a third has since exited reorganization, a third has been acquired by other companies and a third continues to struggle, says Charles Chandler, a partner at Amherst Partners, at a recent meeting of the Society of Automotive Analysts.
Chandler says private-equity investments in parts producers have played a major role in stabilizing the supply chain.
“I know it’s a mixed bag in terms of how people feel about private equity,” he says. “But where would our industry be without private equity? I would argue that private equity is a viable alternative to figure out how you want to do your growth strategies.”
Indeed, the Inteva and Nexteer investments were driven by private-equity owners, as was construction of a new plant for TI Automotive to manufacture plastic fuel tanks in Mexico. Production at the plant ramped up throughout 2011.
Private equity also has paid off for Delphi since its bankruptcy case ended in 2009. The supplier’s owners, led by Elliott Management and Silverpoint Capital, have pledged to set aside 11% of revenues for product research and development each year.
OESA’s Neil DeKoker.
In addition, the owners invested in a new power electronics plant for Delphi in Kokomo, IN.
These strategic steps helped set up Delphi’s return to the New York Stock Exchange with an initial public offering Nov. 17 at $22 per share.
OESA’s most recent “Supplier Barometer” identifies a bifurcation between strong performers, which are humming along at 85% capacity-utilization rates, and weak players stumbling along at 55%.
Between July and September, 65% of suppliers participating in the survey dialed back their 2011 North American planning volumes, while 13% increased their forecasts.
Fred Hubacker, executive director of consulting firm ConwayMacKenzie in Birmingham, MI, says rapid increases in vehicle production, which appear unlikely for now, would catch many suppliers flat-footed.
“It would cause some consternation for the lower-tier suppliers, because they restructured so significantly in the 2008-2009 time period,” says Hubacker, former president and CEO of drivetrain producer New Venture Gear.
“Another real risk for suppliers is if the OEMs decide to chase share as they have in the past. That involves higher incentives, which usually translates into price-cut demands for suppliers.”
Hubacker urges suppliers to align themselves with high-volume global vehicle platforms and to diversify their customer portfolios, especially to include the key developing markets of Brazil, Russia, India and China.
Further, he says suppliers need to drive cost out of their organizations. “They’ve done a great job in general taking cost out – both OEMs and suppliers – but there’s more work to be done,” Hubacker says. “It’s that constant pressure that will keep suppliers competitive.”
Executives at Germany’s Robert Bosch, the world’s largest auto supplier, remain optimistic as 2011 draws to a close.
“This has definitely been a year when we’ve grown even beyond our target, which was about 8% a year,” Peter Marks, president, chairman and CEO of Bosch’s North American operations, tells WardsAuto.
“I’m very surprised how strong 2011 continues to be for Bosch,” he says. “Everybody was concerned the second half would not be as strong as the first half, but so far we don’t see any reduction in our customers’ orders.”
While leaders in his home country try to prevent a Greek default on debt, which would destabilize the euro across the continent, Marks says his mission with Bosch in North America has been to remain focused on customer orders and produce domestically a greater proportion of its auto parts sold here.
“So 2012 actually will be for Bosch a year with a lot of new startups of new production in our facilities in Toluca (Mexico), Charleston (SC) and Anderson (SC),” he says.
The Charleston plant will produce components for gasoline direct-injection and electronic stability-control systems; Anderson will supply EPS components as part of Bosch’s ZFLS steering joint venture; and the Toluca facility will deliver starter motors and expand production for wiper motors.
Marks is grateful to have avoided the bunker mentality that has hindered a number of suppliers the past few years. When he exits his position with Bosch on Dec. 31, he can leave with his head held high.
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