Suppliers: diversification key strategy

February 22, 2009
| By Pete Daly |
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There are other things Michigan manufacturers can do, besides making parts and supplies for the automobile industry. But for the growth industries such as renewable energy, medical devices and aerospace, the manufacturing approach is different and so are the mindsets.

Hundreds of representatives of West Michigan companies attended the first Automotive Manufacturing Diversification event put on in West Michigan last week by The Right Place at the GVSU Eberhard Center. After listening to experts on renewable energy, medical devices and aerospace, it became evident that those OEMs are not seeking suppliers capable of huge production runs — a requirement that has shaped so many auto suppliers.

On the other hand, the margin of profit on each piece is much better and the suppliers are being offered contracts that can last for years, rather than being handed a purchase order when the automaker needs the part.

Utility-size wind turbines, for example, are not produced by the millions, as are cars and light trucks. Vestas, a Danish company that is the world's largest manufacturer of utility-grade wind turbines, will soon be opening its first U.S. manufacturing plant in Windsor, Colo., with production of about 1,000 turbines per year starting in 2010.

For manufacturing companies that want to supply the Vestas plant, it will mean "low volume, high margin," according to Dan Radomski of NextEnergy, a Detroit-based nonprofit organization that supports the commercialization of renewable energy technologies.

One thousand turbines a year may sound like small change compared to 10 million or 12 million automobiles, but commercial grade wind turbines are much larger than they appear from the ground. A Vestas V90 3-megawatt turbine’s nacelle — the housing containing the generator, gears, cooler and other apparatus — weighs 70 metric tons. Inside are hundreds of small parts and some very large ones.

Radomski said 12,000 new large turbines were installed around the world in 2007, and right now the fastest growth is in the United States. In the U.S. there are 120 plants manufacturing turbines or parts for turbines, yet the biggest issue in the large turbine manufacturing industry here is the lack of parts; 50 percent of them needed here are imported into the U.S.

Radomski said there is a two-to-four year wait for some of the critical components needed in large turbines, which "spells an incredible opportunity for Michigan manufacturers." He said the quality of the parts — and the ability to produce and deliver them quickly — are more important to OEMs like Vestas than the cost factor.

Medical device manufacturing is another arena attracting the interest of automotive industry suppliers, although Christophe Sevrain said it would be "a mistake" for an auto supplier to attempt to replace its existing production completely with medical device manufacturing. Rather, it should be a strategy to increase revenue for the firm.

Sevrain is a principal at CJPS Enterprises, a Troy consulting firm. He said he helped Delphi Medical Systems grow from no revenue to approximately 400 employees and "nine-figure" sales in only 18 months. He was also a vice president of the IV Systems and Medical Products Division of Baxter International.

Sevrain explained many of the advantages of medical device manufacturing — so much so that he got a laugh from the audience when he finally said, "I'm not sure of the downside. I've been thinking about it," and then remained silent, apparently lost in thought.

Sevrain said there are 20,000 companies in the U.S. involved in some form of medical device manufacturing, a $220 billion industry. From 33 to 44 percent of the world medical device production is in the U.S. The contract medical device market was worth about $18 billion in 2007, but is expected to grow to about $32 billion by 2011.

Sevrain said he once spoke to a manufacturer who didn't know much about the medical device industry. When he told the manufacturer what the margins of profit were, the other man was surprised and said, "Cool! Two digits."

He said that "high volume" in medical device manufacturing doesn't refer so much to a huge number of parts produced as to a focus on revenues and the related profit margin.

Production of non-disposable medical device parts is low volume, he said — but it won't go overseas because there is a preference for local oversight by the U.S. Food and Drug Administration. And though fewer parts are produced, they still command a good price.

Sevrain cautioned the auto suppliers: "You don't know the medical market as well as automotive," and they would "have to sell (to medical device companies) like they don't know you."

Aerospace manufacturing might sound like a close cousin to automotive, but Craig Wolff of the Michigan Aerospace Manufacturing Association noted that there are some huge differences. The aerospace OEMs, which are called "primes" and include the likes of Boeing, Airbus and Lockheed Martin, "want their suppliers to be profitable," said Wolff, and they treat them respectfully, as "partners." The automotive industry, on the other hand, is rife with acrimony between the OEMs and the various levels of suppliers below them.

The aerospace primes are desperate for parts because new aircraft are being planned and are in demand — including aircraft that are much more fuel efficient — making this "the golden age of aerospace," said Wolff. He said the much-anticipated Boeing Dreamliner has been delayed due to lack of parts.

He said profit margins are "substantially higher than in automotive," but he cautioned that automotive manufacturers that are geared for maximum efficiency with production runs of 500,000 pieces or more will have to adjust: aerospace production runs are generally limited to thousands or tens of thousands of pieces.

On the other hand, the aerospace industry — which is still growing, albeit slower now in the recession — thinks in terms of long-term contracts of three to seven years, or even as much as 10 years.

Wolff said there is "no available capacity" in aerospace now, unlike the auto industry, and North American automotive manufacturers have an advantage because the quality level is high: "Aerospace is totally about quality."

He said there isn't much risk of aerospace outsourcing manufacturing to Asia except possibly "very basic" parts. And there was a push a few years ago to expand aerospace manufacturing in Mexico, but that country's internal drug wars have made it unstable and not as conducive to business, according to Wolff.

"We just don't compete against other countries a lot," said Wolff, but he added that there is aerospace competition state versus state. Michigan now has 7,420 aerospace jobs and $434 million in revenue compared to California with 119,000 employed in aerospace for a total of $7 billion. Ohio far exceeds Michigan with 18,000 employed and revenue of $3.5 billion, as do Florida (33,000 jobs), Texas, Washington and Kansas.

Although aerospace has a different quality system that auto suppliers would have to learn, the auto industry precision and quality is just as high as the requirements in aerospace. And despite the "death and destruction" about the auto industry reported in the news media, Wolff said the suppliers' plants are as sophisticated, clean and efficient as those of the aerospace industry.

"You're just in the wrong industry," he said.

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