Published in Manufacturing

Writing on the Wall? West Michigan auto suppliers react to expected slowdown

BY Sunday, November 25, 2018 09:19pm

With 2018 shaping up as slower than expected for the automotive supply chain, West Michigan-based tool and die makers are embracing diversification to counter the cyclical industry.

At Middleville Tool & Die Co., President and CEO Bill Blanton said he’s “always looking for ways to expand into different markets.” 

“Because we are an engineered product, automotive offers us great opportunity to leverage our value in different applications,” Blanton told MiBiz. “Our (diversification) efforts are more related to different products within the vehicle. Even though we face demand fall off in the next few years in automotive, we believe by diversifying our technology to different areas of the vehicle we will expand our product offerings and incrementally grow our business with margins that we deem acceptable for the risk profile of parts we provide.”

West Michigan-based automotive suppliers must prepare now for an impending industry slowdown, lower tooling expenditures and a decline in the share of production for the Detroit Three automakers, said Laurie Harbour, president and CEO of the Southfield-based firm Harbour Results Inc.

She advocates that companies invest in diversification efforts and in driving operational efficiencies to weather the uncertain market in the years ahead. 

“I think people have to be active (in investing) at an appropriate, strategic level,” Harbour told MiBiz. “What I mean by that is if we just stop investment, it’ll bite us later. If we continue at a good, strategic level — meaning not buying something for the sake of buying, but buying something that improves my efficiency … and makes me more profitable — those are things we want to keep doing.”

Previous projections for a record $11.7 billion in expenditures on tooling this year have failed to materialize. Harbour Results now expects tooling expenditures to decline from $10.3 billion last year to $9.2 billion in 2018. 

The poor performance stems from a number of factors, including delays in new vehicle launches and heightened industry uncertainty, according to the firm’s latest survey. Spending on tooling is expected to shrink further to $8 billion in 2019.

Harbour said the tooling and molding shops in West Michigan must “plan and develop strategies” to drive efficiencies in their businesses to weather the upcoming period and prepare for what she describes as “a huge drop” in planned launch activity. 

According to findings of Harbour Results’ latest survey, the number of North American vehicle launches will dip to 155 vehicles from 2019 to 2021, down from the 183 launches between 2016 and 2018. The Detroit Three automakers — Ford Motor Co., Fiat Chrysler Automobiles and General Motors Co., which play key roles for many West Michigan suppliers — planned 31 launches this year, but that activity will scale back significantly to about nine launches in 2019.

Grand Rapids-based Classic Die Holdings Inc., a Tier II plastic injection molding supplier, is weighing a range of options as an automotive industry slowdown seems imminent, said General Manager D.L. Winell. 

“We are looking at other (foreign) markets,” he said. “We do offshore tooling with partners (in Asia), but tariffs are putting that on the fringe right now.”

He added that dropped product launches have become another challenge in the industry and have already cost the company “a lot of money” in 2018.

“In the millions (of dollars) from different programs that got shelved or push back,” Winell said of the hit the company took related to the delayed launches. “I am sure this is affecting all types of tooling shops, too.”

Between January and the end of September, 14 vehicles that were supposed to launch were “either cancelled completely or pushed back” to later in the year, Harbour said, noting she expects some launches now will get moved to 2019.

The delays translated into a $2 billion decline in projected spending on tooling through the first three quarters of 2018, according to Harbour Results. 

Another cause for concern for many West Michigan manufacturers: The Detroit Three, which “dominate” tooling revenues for suppliers of all sizes, are projected to give up market share and lose about 1 million units of production share between 2017 and 2025. 

That’s an important shift, Harbour said, paraphrasing the old automotive industry adage that when the Detroit Three automakers catch “a cold,” the entire automotive supply chain suffers “a flu.”

“The time to diversify is here,” she said. “It’s time to find new OEMs.” 

That shift has some companies trying to identify new customers outside of the automotive industry as a result of the projected uncertainty in the years ahead.

“There is a lot of activity currently going on in markets like aerospace and appliance,” Harbour said. “We’re seeing some companies look at and quote and even win some of those types of programs, where they can either make tools for aerospace or do some machining for aerospace. Also, the appliance industry is pretty active right now.”

Bad payment terms 

Because 2018 was soft, Harbour said there “was a lot more supply available than we had demand” in the tooling sector.

For suppliers, this meant “accepting less-than-good payment terms,” as well as later payments. 

According to Harbour Results’ tooling report, suppliers reported their on-time accounts receivables payments plunged to 52 percent in the third quarter — down from 71 percent on-time payments at the start of 2017. 

When suppliers’ cash flow takes a hit, so does their ability to invest in future expansion or equipment, Harbour said. 

“When terms are good, and we are getting paid in progressive terms and on time, then that means my cash flow continues to drive the business,” she said. “When terms go the wrong direction, it makes my cash flow very tight, it makes balance sheets very tight, and puts (suppliers) in a precarious position to either invest in new equipment or some of those programs that they want to get.”

When small businesses become “cash constrained,” they often delay implementing programs that could help them diversify and even out the ebbs and flows of the automotive market, Harbour said.

“These are small business; they are not sitting on a bunch of cash,” she said. “That’s part of the problem we have to fix.” 

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