West Michigan automotive suppliers have a lot on their plates as they prepare their businesses to be competitive in the coming years.
In a time when suppliers are fielding calls from their customers to invest in new technology and add capacity, they’re also having to consider decisions about capital expenditures against a backdrop of uncertainty and stagnating light vehicle sales — even as production is expected to increase through 2020.
Analysts predict escalating vehicle prices to weigh on sales over the coming decade, as costs increase as a result of stricter regulatory standards, more technology and a host of other factors. Most industry sources predict OEMs to ratchet up pricing pressure on the supply chain as a result, but they also expect some savvy components suppliers to capitalize on opportunities if they play their cards right.
“It’s really incumbent on suppliers to look out and say to themselves: What’s critical for me? How do I find my groove? How do I maintain profitability and reduce risk in this new environment?” said Michael Robinet, managing director of IHS Automotive.
Robinet spoke during the annual Management Briefing Seminars, hosted by the Center for Automotive Research (CAR) in Acme, Mich. earlier this month.
While stable North American production values should alleviate some of the concern over the current business cycle, automotive suppliers still must carefully weigh the push to invest in capacity.
“Thinking about the investment but then also the uncertainty of the economy, can it get to a point where it catches suppliers by surprise — the investments they’re making versus the payback on those investments?” said Jeff Smith, president of Grand Haven-based GHSP. “It’s really kind of a difficult time right now because you need to make the investment to be able to keep up with the technology.”
GHSP, a business unit of Grand Haven-based JSJ Corp., manufactures electronic vehicle shifting systems and pumps for the automotive industry and expects to generate $365 million in sales this year, Smith said. The company should grow to $400 million in annual sales next year.
The manufacturer employs 1,700 people across its global footprint, which includes locations in Grand Haven, Hart and Troy in Michigan, as well as plants in Mexico and China.
To hedge against the stagnating cycle, Mike Wall, director of automotive analysis at IHS Automotive in Grand Rapids, suggests suppliers do their best to diversify their operations across a number of customers, even more so than they have in the years following the recession.
“You’re going to be scraping for share a lot more,” Wall said. “As a supplier, it’s not going to be enough to rest on the same customer contacts, the same customer relationships you might have had before. They may still give you a really good base of business, but you have to be looking at some of the other players.”
GHSP has done just that: The company makes it a point to diversify across multiple vehicle platforms, customers, technologies and locations, according to Smith.
“I think the diversification has really positioned us to be able to manage through some of these cycles of a downturn,” he said.
MIX MATTERS
While most automotive analysts don’t see a major recession on the horizon, most agree that the industry will plateau in the near-term, if not contract.
U.S. light vehicle sales are projected to reach 17.5 million units this year before peaking at 17.8 million units in 2017, according to the latest data from IHS Markit. Sales are expected to shrink following 2017, fueled by a mixture of increased vehicle costs and other cyclical factors.
Suppliers should take note that unlike previous cycles, the contraction is not expected to affect North American light vehicle production, where levels are expected to climb to approximately 18.7 million units in 2017 and hold steady through 2022, according to the IHS Markit data.
Amid stable production volumes, the OEM mix will likely change through the end of the decade, according to Robinet. Production growth among Detroit automakers is expected to wane after topping out at 9 million units in 2020. During the same time, Japanese and German automakers are expected to drive the majority of new North American production.
Much of that growth will come from Mexico, where output is expected to climb to approximately 5.5 million units by 2021, up from 3.5 million units in 2015, according to a July report from CAR. Auto suppliers have invested approximately $3.4 billion in Mexico over the past decade, according to the report.
“The continued ring from our organization is it’s always going to be about mix,” Robinet said. “Where are you? If you’re with the Detroit Three, this is the year and then it’s going to start to plateau and start to level out for the next number of years until some new capacity is added and/or there are some mix changes.”
THE LOCATION CONSIDERATION
As the mix of OEMs changes and shifts to new regions, automotive suppliers must also determine how best to support that new capacity with new production facilities of their own in the Southern U.S. and Mexico.
When making international investments, Portage-based Mann+Hummel USA Inc. uses partnerships with other suppliers to spread out the risks of entering a new region, said Vice President Kurk Wilks.
The Tier-1 manufacturer of air-induction components recently reached full capacity at its 220,000-square-foot “South Campus” facility in Portage, which it completed in 2014.
Mann+Hummel has started the process of looking for its next location, which it plans to launch sometime in the 2018 timeframe, Wilks told MiBiz.
“We’re founded in the North American market, but what makes sense for the next footprint expansion — whether it’s Michigan or maybe even our factory in Tennessee or south of the border — this is the question that the leadership team talks about quite often,” Wilks said. “Where does the next incremental capacity need to be placed to maintain that competitive footprint?”
At Grand Rapids-based Pridgeon & Clay Inc., the Tier-1 metal stamper for exhaust systems is positioned in the sweet spot to react to the shifting production trends, said Kevin Clay, the manufacturer’s global director of sales.
Clay said the activity by German and Japanese automakers in the southern U.S. and Mexico will continue to drive business for Pridgeon & Clay. The supplier operates facilities in northern and southern Mexico. Clay maintains confidence in the business even though he echoes the expectations that sales and production volumes are likely at or near their peak.
“From a manufacturing standpoint, the stagnation really is covered up by the fact that we’re going to be building more vehicles in areas where we are pretty strategically positioned,” Clay said.
TOO EXPENSIVE FOR CONSUMERS?
Adding another layer of uncertainty for the supply chain is a headwind posed by what some have started calling a cost cliff, where the prices for new vehicles — whether because of regulations, added technologies or warranty costs — climb too high for consumers to bear. Effectively, the industry could price itself out of reach for many consumers over the next decade, leading to a drawdown in new vehicle sales, according to Robinet.
Vehicle prices have already inched up by as much as $6,000 per car in recent years, and Robinet sees those costs continuing to rise.
“A lot of this cost is starting to creep into the vehicle,” Robinet said. “It’s coming in spits and spurts, but it’s here. You look out to 2020 and it starts to really gain legs.”
While consumers will feel the pain in their wallets, it’s also likely that OEMs will use the situation to put pressure on the supply chain over pricing.
“All these factors have to be paid for somehow in a vehicle,” Robinet said. “With that, we’re imploring the supply base to please continue to be proactive and look out into the future where your market is and make sure you’re navigating properly.”
When it comes to dealing with pricing pressures, not all suppliers will feel it equally, according to Wall from IHS. In particular, manufacturers of highly engineered products will be more insulated from downstream pricing pressures and be in a better position to negotiate with automakers, especially for companies that can help OEMs meet ever-increasing standards for fuel efficiency.
“If I’m a supplier that has a really good slate of powertrain technology or has been knocking the ball out of the park with removing weight out of their components, they have a little more negotiation space,” Wall said.
Supplier executives say dealing with pricing pressures represents business as usual in their companies. In echoing Wall’s sentiments, Clay said his firm must focus on engineered solutions to make sure it has a more even playing field in those discussions.
“The way we survive in this market is by making sure we’re ahead of the curve when it comes to engineered solutions,” Clay said. “We need to make sure that we’re providing an innovative solution that’s better than a current commodity. … That’s the spirit of our research and development efforts.”
REGS BREED OPPORTUNITY
To that end, while many executives rail against industry mandates like the Corporate Average Fuel Economy (CAFE) Standards — which they argue contributes to the so-called cost cliff — other suppliers see it as an opportunity to provide value to their customers.
“It’s a pain point, (but) it can also be an opportunity for suppliers,” Wall said. “I firmly believe if you look at a lot of the opportunities for suppliers over the years, (they’ve) been created around things like government regulations and at times have been the biggest boom for suppliers. At the same time, it does breed some uncertainty and breeds a little volatility, too.”
Mann+Hummel embraced that opportunity by developing lighter plastic air-induction components for customers. The new products should launch next year, according to Wilks.
“On the powertrain side, we’re seeing a lot of new opportunities for applications with intake manifolds as it relates to developing new engines to meet the new legislative requirements,” he said.
For Pridgeon & Clay, the shifting landscape led the supplier to invest in producing components for lithium-ion batteries for a number of electric vehicles and to support the commercialization of fuel cell technology. Clay said the company was willing to make the bet on fuel cells since it views battery-powered vehicles as largely a “transitional species.”
Regardless of which technology the industry ultimately embraces, Pridgeon & Clay intends to remain nimble enough to evolve with it, Clay said.
“In these cases, there are so many things that could be a boon to the market or that could ruin the market that you just can’t bet all your chips either way,” he said. “We try to make sure we keep an eye on all these markets.”
