Bailout of GM and Chrysler relief to local suppliers
Even though auto sales dropped dramatically worldwide in 2008, one West Michigan auto parts manufacturing executive believes there is a strong, long-term future in global auto production, and he plans to make sure his company is part of it.
Patrick J. Thompson, president of Trans-Matic in Holland, said his company is constantly trying to diversify into other markets. Fifty-five percent of its production goes into automobiles, while the remaining 45 percent is in 30 non-automotive industrial markets.
However, Thompson does not believe diversification into other industrial markets is the ultimate solution for the success of Trans-Matic. Thompson said he emphatically believes that "the long-term trend for auto manufacturing globally is strong."
He said he spends an average of eight to 10 weeks each year in China on business — Trans-Matic has a small operation in China — and another two to four weeks in Europe, and he has seen the growing market for cars in other parts of the world.
"I highly applaud the GM success in China and Ford's success internationally. This gives me great hope for these companies," he said.
"I'm not only very optimistic; I am very committed (to automotive parts production)," said Thompson. "I have my skin in this: It's not something I do as a hobby."
"I don't have a plan B," he added.
The near future for the auto industry does not look rosy. GM sales plunged 31 percent in December, a 49-year low for that company, and Ford was down 32 percent. The Japanese automakers are hurting, too. Toyota sales in the U.S. were down 37 percent in December; Honda was down 35 percent, and Nissan 31 percent.
Thompson said Trans-Matic had $56 million in sales in 2008, down from $68 million in 2006 and 2007.
The company, which produces deep-drawn metal components and assemblies, was started by Thompson's father in 1968 in a candy warehouse in Holland. Today it has about 215 employees there and another 50 in Sanford, N.C., and Mesa, Ariz., plus 25 in China. Trans-Matic customers are Tier One and Tier Two suppliers to the auto companies.
Others are not so confident about the future of the U.S. auto industry and are urging auto suppliers to diversify into new markets.
Rich Antonini, a partner at Plante & Moran in Grand Rapids, has more than 20 years of experience working with management of manufacturing companies, including many auto industry suppliers.
The federal bailout of GM and Chrysler is going to mean a couple of things, said Antonini. "It's going to create both challenges and opportunities."
"The challenge is sales volume (of automobiles) will be low this year — probably 30 to 40 percent off where they were a year or two ago," which will create inevitable challenges for the industry, he said.
"Clearly, by this time next year, there will be some fallout in the supplier base. That's more than likely inevitable. We believe that the ones that survive will be stronger and will have sustainable business models in place."
Those that do survive, he added, will be in a position to benefit from "some of the uptick in (vehicle sales) volume that will hopefully begin taking place in 2010."
Antonini said he would characterize a strong automotive supplier as a company that has "really maximized their niche and their expertise in the marketplace. They are probably active in the design and engineering of the parts they produce. What that means is they really have partnered to some level with their customer; they really work on trying to help solve problems (for the customer), as much as just running parts."
Those problems normally focus mainly on quality issues, but suppliers can be in a position to see opportunities for innovative new uses of technology, or ideas for changes in the way parts are made or designed. Meanwhile, in 2009, the suppliers must position themselves to manage lower volumes, Antonini said.
He said there are opportunities for suppliers with a high level of expertise to expand into other markets, although it may mean forcing themselves "to get outside the box — their comfort zone."
"I don't believe they have to abandon automotive. But we believe there are going to be some opportunities" to diversify their markets, said Antonini.
Sharp companies that have a special niche or expertise might want to consider marketing that ability, he said.
"If they are going to spend a few bucks anywhere, we think it's money well spent in the marketing and sales arena — to really broaden their opportunities in the marketplace," said Antonini.
With the bailout in the works, auto suppliers have been granted a little time to plan for a rough year ahead.
When asked what might have happened had no bailout loans been forthcoming, Thompson said it would have been "a U.S. calamity and a global spectacle" of a visibly weaker America on the world stage.
Thompson said the obvious pressure on GM and Chrysler now is to "bring their total cost base down to globally competitive levels." From there, the automakers need to become more innovative in anticipating what the consumer's needs and desires will be next, instead of offering the same old things ad infinitum. He pointed to the electronics industry as a model of constantly developing better and more innovative products to replace products that are selling well right now.
In the drive for cost reduction, however, Thompson said the auto companies "can't just take it out of the supply chain." Suppliers have been squeezed enough, he said. In particular, the automakers cannot expect its suppliers to extend them credit through delayed payment.
"At the end of the day, we all need to protect our cash flow," said Thompson.
"The other big issue with guys like me are trade policies and the whole free trade/fair trade debate," said Thompson.
Although the government had good intentions at the time, the Section 201 steel tariff enacted briefly several years ago to protect the U.S. steel industry ended up hurting American manufacturers like him, he said, through higher steel prices.
A "comprehensive industrial policy" by the U.S. government is essential, he said, developed with input from the academic community and key industry leaders. Failing that, he said, the World Trade Organization can help level the playing field if all countries go along with those agreements.