Focus and Manufacturing

Auto suppliers expecting another good year

But how long will this slow and steady growth pace last?

December 19, 2014
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Most automotive suppliers experienced a very good year and can expect at least a few more good ones on the horizon. Courtesy Thinkstock

West Michigan auto suppliers can look forward to another good year.

“The auto industry is pretty steady right now and the auto suppliers are booming,” said Bill Small, vice president of technical services for The Right Place and regional manager for the Michigan Manufacturing Technology Center-West.

Bob Pekrul, partner with Plante Moran and member of the firm’s Auto Supplier Leadership Team, said he also expects to see his clients, who are middle-market, closely held auto suppliers in the $50 million to $500 million sales range, continue the positive growth started in 2014.

“What we’ve seen in that segment is a tremendous year from a financial results point,” Pekrul said. “(It’s) driven by a number of different things but I think the biggest factor being a slow and steady growth phase the industry is in right now.”

Richard Lacks Jr., president and CEO of Lacks Enterprises, said he also expects 2015 to be a robust year.

One reason for the current positive situation has a lot to do with suppliers’ ties to the Japanese and Korean automobile manufacturers.

“Over the last five years or so, most of our auto parts suppliers that have their act together have figured out how to get some of the Japanese and Korean transplant business that is available out there,” said Brian Long, director of supply chain management research in the Seidman College of Business at Grand Valley State University. “That has made a huge difference from several standpoints.”

Lacks confirmed the impact of Japanese business on his company, saying it has provided leverage Lacks Enterprises didn’t have previously.

“Before, we had no presence whatsoever with the Japanese OEMs — Toyota, Honda and Nissan — and we do a significant business with all of them today,” he said. “Customer diversification is key. When I first started, the guys in Detroit had 85 percent of market share; today, they sit somewhere in the mid-40s. They lost half of the market share.”

Lacks said no business would be in good standing today without diversifying its customer base outside of Detroit.

According to Long, Japanese and Korean manufacturers also have had a significant impact on the quality of parts being produced in West Michigan because of their extremely high standards.

“The important thing I have noted is that our local suppliers have become, in my opinion, world competitive with a lot of the products they are making,” Long said. “World competitive in terms of price and quality, and that is why we have some of these local companies that continue to expand right now.”

Long said another reason West Michigan companies are doing so well is because they’re tapped into the trucking market.

“Because of the lower price of gas, trucks and SUVs and other less fuel-efficient vehicles have been selling a lot better,” Long said. “The auto companies like this because these are higher margin vehicles. That, of course, offsets the costs of producing the more fuel-efficient vehicles.”

Long said even while consumers are returning to less fuel-efficient vehicles, fuel economy is still a driving force in the industry.

“Those need to be available when the price of gas gets to $5 a gallon, which it will again someday,” he said.

With good years on the horizon, at least for the next few years, one of the biggest challenges auto suppliers are dealing with is a labor shortage. Small said he is seeing companies struggle to fill second shifts needed to meet OEM demand.

“There are two options if they can’t fill a second shift,” Small said, “(They can) go on overtime, which seriously cuts into their margin — the supply world for automotive has pretty tight margins. The other is to try and outsource, which has its own complications, because then the quality guarantee comes from the supplier even though they are outsourcing it, so there is even more scrutiny there they have to pay attention to.”

He said the national approach to the labor shortage has been to partner with local high schools and colleges to try to create a pipeline of workers. Small expects that approach will continue.

“The West Michigan Manufacturers Council has a workforce group that has been together for many years, and that is one of the major topics we are focused on,” he said. “How do we get our young, up-and-coming (talent) to see the value and opportunities in auto manufacturing, or any kind of manufacturing?”

Small said along with figuring out how to get the workers they need, companies are realizing the need to focus on management training as part of a workforce strategy.

“Now that we’ve gotten out of the recession and are in growth mode, a lot of companies are back to looking at efficiencies and how their continuous improvement programs help to eliminate the waste and make the work people do more productive and more rewarding,” he said.

“They are also focusing on their supervision because when you get people, you want to keep them. Companies came out of the recession and they promoted their best people, but the people skills, the supervisor skills, were not necessarily part of that promotion.”

He said he’s even seen suppliers focus on amenities to help attract and retain workers, which he expects will continue as manufacturing employers realize employees are seeking a work-life balance, not just a paycheck.

“They probably have a more passionate goal of work-family life balance than I know I did coming out of college,” he said. “Employers are making the cafeterias more conducive, some are putting in fitness areas and allowing families to come in — those are the fringe benefits that I think are helping to maybe tip that edge when they are trying to hire someone.”

In addition to labor challenges, auto suppliers are evaluating what to do with their profits.

“The profitability and return has been very good,” Pekrul said. “What do you do with the cash that is being generated by the business?”

One option is to invest overseas or in Mexico.

Pekrul said auto suppliers are under a lot of pressure from OEMs to locate in Mexico, and he said future growth would have a lot to do with whether a company decides to open a facility or enter into a joint partnership in Mexico.

“The OEMs are making huge investments down there to increase capacity in assembly,” he said. “The OEMs are really pressuring the suppliers to be down there in Mexico, whether it’s through a joint venture or through a wholly owned subsidiary, producing parts down in Mexico in order to be near the OEMs. We are seeing that big time.

“It’s a whole different ballgame setting up shop down there and being able to successfully oversee operations down there,” Pekrul added.

But, he noted, the payoff is likely to make it worthwhile.

“Even though the North American production forecast shows growth over the next few years, there is a much larger percentage growth down in Mexico than in the United States,” Pekrul said. “Really that is where the growth in North America is going to be.”

Pekrul said now is a great time to sell an auto supply business. Mergers and acquisitions have already seen substantial growth in the industry, which will continue in the coming year.

“You can get a fair price, as opposed to the last few years where it would have been pretty difficult to exit the business and get a fair price,” he said.

Recalls will continue to gain attention and place scrutiny on suppliers. Long said even though quality is improving, there is a strong focus on any recall involving safety, and the rate of recalls is higher than it’s ever been.

“It will probably continue largely because of our sensitivity, and the level at which we recall has grown tremendously,” Long said. “Fifty years ago there weren’t a lot of these issues because it was accepted that the cars would fall apart. Tons of quality mistakes were made and nobody thought too much of it, but today these are much bigger news and especially if they have anything to do with safety.”

He noted auto manufacturers are starting to realize they have to think more about the end user and how people’s use of the vehicle might impact the function of the parts, and that could filter down to suppliers.

Long expects increased quality to eventually have a dampening effect on car sales. He noted, similar to what Maytag experienced when it started producing better appliances, people are able to drive cars much longer than ever before without having to replace parts and with much less maintenance.

“I’m not overly optimistic that we can maintain this current level of sales,” he said. “In my opinion, right now we are selling more cars than the market will be able to absorb over the long term.”

He gave a couple of examples of how quality improvements have extended the life of a vehicle.

“We’ve got one company that just does powder coating for piston rings; that powder coating is extremely important,” he said. “Fifty years ago they were still using a type of chrome plating on piston rings. The piston rings, even if you kept your oil changed and all of that, they were good for about 70,000 to 80,000 miles. The powder coating that this company makes in Grand Rapids, when it’s put on properly the piston rings will last longer than the usefulness of the engine. They are good for 300,000 to 400,000 miles.”

He also noted from 1948 up until the recent recession, miles driven increased by 2 percent each year, but that is no longer the case. People are now driving less.

Returning to the topic of fuel efficiency, Long does not expect fuel-efficient vehicles to sell as well while gas prices remain low, but he does see the industry continuing to focus on fuel-efficient vehicles in the long term.

“(Today) you cannot justify buying a Prius because your savings in gas for the amount of premium you pay for that Prius — the two won’t balance out for eight or nine years,” he said.

“The low price of gasoline almost guarantees less interest in fuel-efficient vehicles, hence the reason SUVs and less efficient vehicles are selling so well right now. But even they get much better mileage than they did just a few years ago.”

Small noted auto manufacturers are continuing to focus on materials and lighter weights.

“Companies that have been producing steel assemblies are now going into aluminum,” Small said. “Aluminum is much more precise to weld. Welding aluminum is much harder than welding steel.

“Even with carbon composites, there is different material content, so it takes different technologies and means to connect them and join them. As the OEMs trickle down the new designs with the lighter-weight material technology, there is a learning curve for the supply base.”

Lacks said his company is paying attention to the why behind what OEMs are doing.

“We look more at the trending of what they are doing,” he said. “The only way we look at what Ford is doing with the aluminum body is, what is their reason behind it?

“We look at it and say, they want to take weight out, what can we do in our organization with products we provide and the penetration we have with our customers, what can we do that mirrors taking weight out?”

Long said in 2015 one of the Japanese manufacturers will introduce a fuel-cell-powered vehicle, which could impact the direction of the fuel-efficient vehicle industry.

“It will be interesting to see whether it catches on here in the United States, whether we use fuel-cell technology,” he said.

For auto suppliers, being able to see into the future will make all the difference, as competition remains fierce.

Lacks said his organization has already put 2015 in its rearview mirror and is concentrating on 2017-2020.

“We lay the ground work today for five years out,” he said. “What we look at is, what are we going to provide? What vehicle segments are we going to provide it (to)? And, what products are we going to be able to sell to the industry, which are going to provide profit for this organization?”

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