Published in Manufacturing

Auto suppliers prepare for more slow growth, challenges, as forecast begins to brighten

BY Sunday, December 18, 2022 08:35pm

While automotive suppliers in West Michigan may hope to finally emerge from the “dark winter” of the last three years, the vehicle production outlook for 2023 portends more challenges ahead, although some bright spots are beginning to dot the mid-term forecast.

That’s according to Mike Wall, executive director of automotive analysis at S&P Global Mobility in Grand Rapids, who said the state of the supply chain remains a “paramount” concern heading into the new year.

“2023 is emerging as still very much a transitional year, better than this year, but still wrestling with twin challenges of working on the supply chain and also navigating the health of the consumer,” Wall told MiBiz.

S&P Global Mobility is forecasting U.S. light vehicle production to edge upward from its nadir around 13 million units in 2020 and 2021 to end this year at an estimated 14.3 million units. For next year, the progression continues, with S&P forecasting production to
reach 15.1 million units, which is “still a far cry” from normalized or even prepandemic levels.

Suppliers that have been buffeted by production volatility related to persistent semiconductor shortages over the last three years are now adding inflationary pressures to their growing list of hurdles, which also include navigating a fundamental industry shift to electric vehicles.

“The health of the supply chain is going to be paramount. Frankly, it’s incumbent on everybody in the auto industry to be focused on that, whether you’re an automaker or the Tier 1 supplier,” Wall said. “Believe me, that is one thing that will definitely roll uphill. If you start to see increasing distress on the supply chain at the Tier 2 and Tier 3 level, it only moves up the chain because more vulnerabilities emerge at that front.”

However, compared to previous challenging periods for suppliers, the OEMs and Tier 1s have a “growing sensitivity” to what lower tier suppliers are going through, he said. As well, Wall notes that banks aren’t fleeing from the industry like they did in the depths of the 2008-2009 recession.

“I’m not seeing that this time around. I’m seeing an engaged banking sector still ready to lend to the automotive sector,” he said. “It doesn’t mean the questions aren’t asked, and it doesn’t mean that there’s not a pragmatism around it. But I’m not seeing a flight away from the sector itself, which is great news I think for both automakers and suppliers alike.”

Wall and S&P Global Mobility expect similar gains to U.S. light vehicle sales, which they forecast to remain at “recessionary levels” this year at 13.8 million units and then inch up to 14.8 million units in 2023. That’s still well off a normalized sales volume of around 16 million units, which the industry could approach in 2024 at the earliest.

In addition to the well-publicized supply chain challenges, the industry also is facing a “reckoning” in terms of pricing, according to Wall. Prior to the pandemic, the average price of a new vehicle was around $36,000, with consumers shelling out about $555 a month for a loan.

Those prices have ballooned over the last three years. New vehicles are selling for an average of $48,000 while average monthly payments have spiked north of $700.

“Automakers, being faced with the fact that they haven’t had as much inventory, they’ve priced accordingly. That’s about to change a little bit as we start to see inventory rebuilding,” Wall said. “The big question is: How quickly will automakers get back into the incentive game and what will that look like? And: What will the state of the consumer be?”

While the industry is banking on pent-up demand in the market to make up for the recent inventory shortages, Wall cautions the industry not to overstate the effect it could have on sales. To that end, S&P Global Mobility estimates pent-up demand at 2 million to 2.5 million units, which is less than half of the 6 million unit gap between 2019 sales volumes and the current outlook. Wall attributed the gap to some buyers moving to the used vehicle market, while others have exited the market altogether and held onto their cars longer.

Signs of life ahead

While the industry shift to electric vehicles raises questions for suppliers about which models and automakers to align with to get the best volume, the emergence of new EV nameplates also promises to help lead a recovery of the supply chain in the years ahead.

Southfield-based automotive consulting firm Harbour Results Inc. estimates vehicle nameplates to expand 18 percent from next year through 2029 when EVs will comprise 46 percent of the market, up from 20 percent today.

When coupled with upcoming redesigns of high-volume pickups and SUVs for the Detroit automakers, Harbour Results expects the automotive industry’s expenditures on tooling to grow 13.4 percent year over year, reaching $8.3 billion in 2025.

“It is thousands and thousands, tens of thousands of tools,” said Laurie Harbour, president and CEO of Harbour Results. “It starts to grow pretty dramatically because we’re at sort of that eight-year cycle. 2017 was the last really big year when we launched a bunch of trucks and new models.”

To that end, S&P Global Mobility forecasts 192 new or redesigned vehicle launches will hit the market from 2023 through 2027, a “staggering” figure that poses “a huge opportunity” for parts producers and tool and die shops, Wall said.

However, to capitalize on that opportunity, tool and die shops need to make it through another challenging 18 months, according to Harbour, who notes that many suppliers are struggling financially.

“We just have to get through that period in order to get to some of that tremendous growth and demand,” she said. “People need to be smart, they need to invest appropriately. In other words, don’t stop investing because this year is slow. They need to be anticipating growth, but they have to be smart. You can’t just spend money like you’re loaded. You’ve got to conserve cash and lead effectively.”

Another bright spot for the tooling sector and the supply chain in general comes by way of increased onshoring of production, which has only accelerated because of the supply chain bottlenecks that emerged during the pandemic.

“China’s having a hard time getting tools out of China, so we’re seeing more stuff built here, which is good. So we’re seeing more quote activity and more options for work,” Harbour said.

Jeff Korzenik, chief investment strategist at Fifth Third Bank, also points to data from investment banking firm Piper Sandler & Co. showing record numbers of U.S. domiciled companies in automotive and other sectors bringing manufacturing jobs back or growing manufacturing facilities in the U.S.

“This trend is really working for us, and it’s not going to change,” Korzenik said during an annual economic outlook this month sponsored by The Right Place Inc. “There is no China on the horizon to suck away all those jobs. This is a great opportunity and West Michigan is particularly well-positioned.”

Office furniture outlook

Meanwhile, the region will gain some insight into the office furniture industry this week when Grand Rapids-based Steelcase Inc. reports its quarterly results on Dec. 20, followed a day later by Zeeland-based MillerKnoll Inc.

Analysts estimate Steelcase will report sales growth of about 13.3 percent for the quarter and end the current 2023 fiscal year with sales of $3.22 billion to $3.27 billion, up about 16.5 percent from the previous year. Revenue growth for MillerKnoll will be much lower at 1.3 percent for the quarter, according to analysts, who forecast overall fiscal year 2023 sales of $4.13 billion to $4.26 billion, growth of around 6.6 percent.

In their most recent earnings reports, both companies reported a fall-off in orders as customers remain hesitant to make big bets on their work environments given the ongoing adjustments in the hybrid office model, as MiBiz previously reported. Citing the weaker orders, Steelcase also announced plans to cut up to 180 salaried positions.

Economists think the challenging sales environment will likely continue, even as both companies post short-term revenue growth.

“Although business conditions for our local office furniture firms remain soft, there is still no sign that any sort of industry retrenchment is pending,” Brian Long, director of supply chain management research at the Grand Valley State University Seidman School of Business, wrote in his recent monthly report. “Although more people will do more work from home, the traditional business office is not going away anytime soon.

Read 3477 times Last modified on Tuesday, 10 January 2023 13:19