GRAND RAPIDS — While the automotive sector may be nearing the end of a strong sales cycle, West Michigan-based suppliers remain bullish on the industry.
Despite concerns over regulations and global economic forces, most supplier executives say their companies are pushing ahead and deciding how to properly invest in disruptive technologies while remaining true to their current operations.
Aside from their executives’ general optimism, suppliers are struggling to adapt to the increasing demand for even more flexible manufacturing operations and customized products. As well, they’re challenged when it comes to planning for what appears to be a period of long-term regulatory uncertainty.
MiBiz gathered a variety of automotive supplier executives and industry advisers to discuss the outlook for the industry, the effect of disruptive technologies, shifts in consumer preferences and other trends. Participating in the roundtable discussion were:
- Scott Hill, partner at Varnum LLP, a Grand Rapids-based lawfirm that sponsored the roundtable
- Nick Kassanos, president of LG Chem Michigan Inc., adivision of South Korea-based LG Corp. that produceslithium-ion batteries in Holland
- Clarence Martin, president of Coastal Automotive LLC, aHolland-based manufacturer of acoustic and crashprotection products
- Jeff Piper, vice president of strategy and innovation at GrandHaven-based Shape Corp., a manufacturer of automotivebody structural components
- Mike Wall, director of automotive analysis based inGrand Rapids for IHS Markit, a global consulting firm
- Scott Zylstra, general manager of automotive at CascadeEngineering Inc., a Grand Rapids-based manufacturer ofacoustical components and a range of other parts
Here are some highlights from the conversation.
From the 30,000-foot view, what’s your take on the state of the automotive industry?
MARTIN: Our industry is dynamic, it’s resilient, and we’ve really recovered significantly since 2008. Right now, we’re going through a lot of changes, we’re going through electrification. We’re going through global product development (and) we’re going through safety. So there’s a lot of new initiatives that are happening that give us a lot of reason to be excited. It’s still a strong dynamic industry.
KASSANOS: From my perspective, with the electrification of the automotive industry, we just seem to see a tremendous amount of growth. We really play in three fields in the automotive industry: the full electric like the Chevrolet Bolt or the Leaf; the hybrid area, which would be a combination of an internal combustion engine with battery power like the Volt; and then the stop-start technology. … Talent is something that we really strive to obtain the best that’s out there. We’re trying to brand ourselves to look for somebody that wants to build their career, not just find a job, and grow with the industry. And it’s been a challenge in the Holland area with the unemployment rate as low as it is.
ZYLSTRA: It’s a very strong industry, in spite of what you maybe read about the impending doom in the auto industry. The consumer market seems to be quite strong, so from a choice perspective, this is probably what we’re keeping an eye on. How do the OEMs react to consumer choice — this idea that maybe the best way to look at it is moving toward mass customization. We see our customers as well struggling with how to please all the customers all the time.
PIPER: We’re trying to sort out … the autonomous vehicles and the impact that has. What we’re trying to do is say, ‘OK, where does it create opportunities for us?’ Some of the traditional core processes that we’ve been good at and the products that we’ve been good at, some of those may go away. If autonomous vehicles (prevent accidents) then crash management goes away. That’s the staple of our company. But then there are other areas in the vehicles where now you can take the engineering expertise and apply it, like in battery protection systems. That’s some of the things we’re trying to do to stay in front of the trends.
HILL: My thoughts for the automotive 30,000-foot view would be consolidation. We’re seeing a lot of the buy-side acquisitions that are in the firm right now are smaller acquisitions that are just add-ons.
WALL: By and large, what we’ve seen is the industry is still very, very healthy. It’s a little bit weird right now because of investor sentiment on Wall Street. Investor sentiment is in the tank right now because everybody is talking about the cycle and ‘oh is it a peak’ and ‘we’re going to fall off the cliff.’ We’re not in that camp. I’m going to be in New York for the JP Morgan conference, and I know I’m going to be girding myself for those questions.
Last year, the automotive industry seemed to adopt a ‘wait-and-see’ attitude with the new presidential administration. How has that changed?
KASSANOS: For LG Chem, I don’t know that we’re being reactive to the local administration and the U.S. as much as looking at the trends of the global markets. … I don’t see us overreacting to what’s happening here, if you will, in the short term. Maybe next year that will be different.
PIPER: (With CAFE standards), we took the same approach. It’s like, we’re one piece of this massive industry and the ship is sailing to lightweighting and stronger requirements. Whatever happens here is probably short term and temporary and it’s not going to stop this massive train from going, so let’s keep going with our strategy really.
WALL: There really seemed to be shift mobilization, though, when there was talk about border taxes. It seems like that’s died down. The whole NAFTA discussion is still going on, so we’re cautious on that. That was the first thing where we’re doing a lot of work even internally in our shop to figure out, ‘OK, if we really are going to be tagged 20 percent every time we come across the border at Mexico, what does that mean?’ Nobody in government I think has a full understanding of how much cross-border activity is going on in this industry.
MARTIN: I think if you ask anybody in January versus today, you’d get a very different answer. You know, everything seemed like it was on the table in January, that NAFTA was going to be done in 30 days and the border adjustment tax would already be in place. I think now reality has begun to set in, but there are still some unknowns. And the unfortunate part is, the things that we do need like health care reform — our health care cost is affecting all of our businesses — we don’t have a solution in place yet.
How have those concerns over NAFTA affected suppliers’ operations?
WALL: By and large, we are still seeing investment and development going on in Mexico, but it’s a different tone and tenor. There’s a pause. I’m working with suppliers in West Michigan that were looking at deploying equipment down there and they’re like, ‘We’re going to hold up on that and kind of see how everything goes.’
MARTIN: You have to pause a little bit. We were anticipating to open up our first plant in Mexico about this time a year ago. Right now, our plants are on hold. The amount of uncertainty is still causing us to pause at least.
TECHNOLOGY
Of all the disruptive technologies out there, mass-electrification seems to be the one that most suppliers and consumers will be exposed to first. How does that filter through the supply base and affect your organizations?
ZYLSTRA: A big part of our product portfolio is to manage engine noise. So, if you don’t have an (internal combustion engine), you don’t need that noise managed. Now, it creates other noise. You take the engine out and now other noises start to dilate. This is what we’re evaluating in an electric vehicle. What happens to the acoustical pattern in a vehicle? What does the customer need managed and how do we solve that problem for them?
MARTIN: We have a very educated consumer and I guess iPhones have spoiled us now. They want their cars to be as customized as their phones. Part of our business is acoustical management as well. When you take away the internal combustion engine, every sound you hear — your blinker, every bit of road noise or wind noise — has impact.
KASSANOS: From an LG Chem perspective, we’re just looking at building our capability and our talent base, our employees. You know, it’s a Korean-based company, we have foreign service employees here training the plant employees and we know they cannot be here forever. So we want to build our talent base up to build that capability, to build that technician, and that’s why we’ve gone out to say we’re not looking for people that just want a job. We want you to be able to grow your career with us.
PIPER: It’s not just what you do to protect the battery today, but the battery companies themselves are changing the technology. It’s trying to stay in front of where they’re going … (and) what’s going to be three to five years down the road. The other thing is the interior changing on the autonomous side. You don’t need a steering wheel and seat structure anymore. It’s more of the entertainment inside the space. We do a lot with seat components today and it’s working on what that’s going to look like next generation. A lot of our customers are like, ‘We don’t need this structure in today’s environment. We need it to be like where you can flip the seat around and interact with a person and give you that flexibility or modularity.’
OPERATIONS
On the shop floor, how are manufacturers navigating the demands for increased flexibility?
ZYLSTRA: The last platform we won, we had to create seven versions of an invisible product just because there are subtle differences in what the consumer wants and how they want it and when they want it. It’s becoming a bigger and bigger engineering and manufacturing challenge for us to overcome and figure out how to support our customer, stay ahead of our customer, and know what their customer is going to want.
PIPER: Our process lends itself fairly well. With some of our processes such as roll forming, you can get a lot of flexibility and have quick changeovers where you need it. But the tougher parts of it you can create standardization in the product. We can get parts — 10,000 runs, 30,000, 100,000 — and create that variability fairly efficiently in our process.
ZYLSTRA: Lean (manufacturing) and changeover is key. That’s where you win or lose. Can you change over fast, because if you cannot, you’re going to end up with a lot of inventory, going to add even more complexity to your business. So it’s critical to figure, to learn how to do that and do it simply and in a standardized fashion.
Does that change the type of equipment you’re investing in, how you ship parts and how you train your people?
ZYLSTRA: Yes, yes and yes.
How are you approaching R&D spending in this era of disruptive technology?
KASSANOS: From an LG Chem perspective, the energy solutions division of LG, we’re looking at generating maybe 28 percent of (the company’s overall) revenue, but we put 40 percent, almost 50 percent, of the R&D into this area of the business. So we’re actually investing more than what our revenue is.
ZYLSTRA: I would definitely say we’re increasing our R&D spending. We’re doing some business model shifts, related not only to automotive but to some of the other industries that we’re in as consumers. We are highlighting more areas to invest in R&D and be more focused about both internal development but also leveraging suppliers or partners. There’s definitely a doubling of R&D focus right now and knowing there’s a need for that to continue to grow if we want to grow our business.
PIPER: I would say it’s healthy R&D (spending), but it’s healthier debates around where you should be putting your chips and you’re really asking a lot more questions about the short, medium and long term. You sit there and you ponder those thoughts as you’re making those investments but you also leverage your engineering pool as best you can, and so we’re trying to create a more formal way to do that.
How are you working with your engineers to do that?
PIPER: Bringing in more of our engineers that maybe have passion for EV vehicles where today they’re on projects that have nothing to do with EV vehicles. All of the sudden they can come to a four-hour session and brainstorm with the guys that are in that space. That’s where we’re trying to leverage the R&D budget but also the engineering team to use them in a different way.
Are these developments in technology changing the type of talent you need?
HILL: From a talent standpoint, you have individuals that are more and more specialized. You have to have highly-trained, technical people, who also know how to do a lot of different things.
KASSANOS: We’re getting a technician today, not just an operator. When it comes to recruitment and getting kids in high schools and the colleges into our plant, (we want) to show these kids manufacturing can be cool. We’re really trying to energize their interest. Instead of going and doing this when they get out of school, they want to come and do something with their hands because it is challenging. It’s that expertise we’re looking for, that technical person that wants that challenge.
What strategies have you used to attract workers?
PIPER: We started our own recruiting company. For our hourly workforce, we used to go outside. About three years ago, we decided to do our own company. And that’s helped us a lot to retain those hourly associates. We bring them in and we make them feel a part of the company as opposed to temps. They are Shape temps now. Some of those strategies have helped us a lot but it’s a battle to keep talent across (the company) and all the way up.
KASSANOS: Our branding strategy is we want someone’s career to grow with the electrification of the auto industry. … I think LG always has felt that it was a black box and there was a mystery inside the buildings. We’re trying to be transparent, to let people know that this is a great place to work.
HILL: Something I’m hearing from our youth and our kids are, ‘I want to work in a cool office.’ It doesn’t have to be my cube or my office, but ‘I want a co-locating space.’
MARTIN: I went to Palo Alto to Google’s headquarters and I was there at 3 in the afternoon and there was a volleyball game going on, the cafeteria was packed. And I said, ‘When do people work?’ And they work from 8 p.m. to 2 a.m. In our industry, in the major centers in the Midwest, we only feel that work can happen between 8 a.m. and 5 p.m. There are a lot of things that we can still do to accommodate a different kind of employee. You know, we have to be more flexible. We have to create that environment.
Google leverages its culture to attract young workers, but how does that translate to your work as suppliers, or on the production floor? At the end of the day, you still need to make parts on a deadline.
KASSANOS: I think it’s a matter of letting them know what our expectations are, what the requirements are, what we need to do every day and then ask them for feedback.
ZYLSTRA: Speed (to market) is becoming more and more important. How are you going to get there if you’ve got the old cubicle environment? It’s not going to work. We’re not going to build an office like Google, but we know we need to find something in the middle.
That’s on the corporate side. What about on the production floor where that kind of open office collaboration is more challenging?
WALL: Some of the supplier plants I’ve toured (have) more autonomy at the worker level. One person is going to be in charge of maybe two or three lines. He or she has both responsibility but also authority, and it’s so much different than the old days. You have to have a line staffed and it has to be punching parts out. But I think we’ve seen a lot of suppliers doing a much better job trying to create engagement for the worker. I think some of that’s by design because they don’t want to lose the good ones, and you want to attract even better ones. And in order to do that, you’ve got to pull it out from the ’60s, ’70s, ’80s mentality of manufacturing.
ZYLSTRA: One of our facilities has been running for several years now with self-directed work teams. We don’t have the traditional hierarchy. The teams manage themselves, and we’re trying to see how that drives behavior. Does it create more engagement? Does it create a draw when they talk to other people about how their work life is? Do people want to come in? We’re trying to find those experiences that create that environment where people want to come to work and be there and enjoy it and look at it in a whole different way.
CONSUMER TRENDS
A lot of emerging technology today has brought about a discussion of the driver experience. How relevant will actual driving be to consumers going forward?
WALL: It’s becoming less and less about driving, it feels like. But it doesn’t matter because it’s the reality that the consumer wants. The iPhone changed the game, even for automotive. On the good side or the opportunistic side, it’s creating the (mentality of) ‘I want it my way’ and ‘I want it this way’ and ‘I want it tomorrow or today.’
ZYLSTRA: We’re looking at some of what’s going on in other industries with this mass customization and saying, ‘OK, what are we learning there that we could potentially bring to the automotive industry?’ There are other markets we’re in that seem to be moving quicker toward this individualism than even automotive. We talk about how bad it is now, but it’s likely to get even more complex. Our R&D efforts are what are we doing in this market that we can offer to our customers and say, ‘Here’s another feature that you can differentiate yourself from your competition.’
How far will this trend toward mass customization go?
ZYLSTRA: Look at what Nike does. Eventually, everybody is turning into Amazon. I want it my way and I want it now. So you go to Nike and take any one of their shoes and basically order it with any color, any patterns you want, for basically the same price. Just go online, click your changes and boom, it’s done. So it’s only a matter of time until customers start expecting that in their vehicles as well. And the question will be: Which OEM gets there first and best?
MARTIN: At the GM earnings report, Mary Barra said that GM is going to do over-the-air updates to their vehicles. And that’s what consumers expect. Everyone remembers their first cell phone, and you probably had it for four, five years. You’re bored after six months now. The manufacturers have to do as much as they can to keep you excited about their product. Automakers, they face the same challenges. They have updates, they put Easter eggs in their software. They do so many things to keep the consumer focused on their technology because Tesla is going to change the game. They already have, not on the electrification, but on the driving experience, the experience with the consumer. You have displays you can customize to your particular needs, you have a car that knows it’s you and not your wife that’s driving it, so it’s going to tailor its driving dynamics to you. This is what consumers expect.
WALL: I think we’re all going to be wrestling with it. And it’s so much different than the model that we’re used to. It used to be — and kind of still is — you could pick from 100 pickup trucks of any shape and size and any color and don’t worry if (your dealership doesn’t) have it, the guy down the street can get it. Now, it’s how is that automaker going to make sure to get that vehicle to you in exactly the spec you want so you’re not making any sacrifices on it because they’re more likely to get the sale. We’ll get a lot of opportunity there, but there is still some risk.
What’s one thing keeping you up at night looking ahead to the next year?
WALL: Just the stuff you don’t expect. Brexit was not going to happen. It happened. Trump’s never going to win. Well, he won. There are, and there are going to be, more cases of that. If I take it back to the industry, I’m heartened by the fact that the industry from the automakers down to the suppliers, to a great extent, are doing a lot of the right things. But as we progress, (the questions that remain are) what are we missing — is there something we’re missing? I’m always looking over my shoulder. I’m covering the industry trying to think about what aren’t we picking up.
KASSANOS: I’m always worried about making sure that we have workplace safety being maintained, that people are doing standardized work. We’ve got to have discipline to (our) process. And the other area would be retention of people and good recruiting of talented people.
MARTIN: I think our rate of growth, at least from our company but not for most suppliers, can still increase. I’ve seen more push to globalization in the last year — honestly, more than I’ve seen in the last 10 years — and that continues to happen. It comes back to our talent issue. If we have the growth, the potential is that if our growth rate increases, do we have the talent to sustain it?
ZYLSTRA: Same one for us. We have a very solid strategic plan for the next seven years. The money I’m not worried about; the opportunity I’m not worried about. But the talent to execute? That’s what I’m most concerned about. Where will we find it and when?
HILL: On the supply chain side, I see more and more sole-source agreements that I deal with. You don’t know what’s going to happen, but you can plan for the future inside your own house. When you get outside of that and you’re dealing with sole-source suppliers, what’s going to happen when the next generation comes around? I see those issues creeping up.
PIPER: Will the new opportunities outpace the risk of lost opportunities that we see in the current product portfolio? There is a big shift for lightweighting (and) extra-high-strength steels have a limit. At some point, you just keep working your way up to thinner gauge and then you’ve moved to aluminum and composites. We’re moving that way, but we’re very capitalized on the steel-forming side. You want to make sure you’re balancing, keeping your current capital base filled up, but you’re also capitalizing for your future and your long term.
