The auto industry has always been a cyclical business. But that wasn’t the case for much of the past 20 years, when growth and record sales volumes were the norm. The recession in 2009 was a surprise to a generation of managers that had little experience with significance sales slumps.
The global financial crisis that followed left suppliers with a toxic combination of extremely low sales, an extraordinarily tight credit market and no other source of revenue. Consolidation was very difficult because owners couldn’t sell their companies. Hundreds of suppliers simply closed their doors or moved into other industries.
Now the auto industry’s survivors are running at capacity and enjoying strong profits. Their new challenge: managing growth, maintaining profitability and enhancing their competitiveness. Neil De Koker, president and CEO of the Original Equipment Suppliers Association, comments.
What good came out of the crisis?
For one thing, the American auto industry took a tremendous amount of cost out. In May 2007, annual light vehicle production in North America was running at about 16.5 million units, and our members said they could break even with production at 14 million units. By May 2009, output had dropped to 8.6 million, and the breakeven among our members was 9.5 million. Now production is around 13 million, and the breakeven is 10.5 million. We’re going to be a very profitable industry over the next three or four years.
What will happen as production increases?
Right now, many suppliers are running at capacity. They are reluctant to hire people and reopen plants, but this will become necessary to meet vehicle production requirements by the end of 2011. This will force their breakeven points up. The challenge will be to maintain control over costs and avoid getting into money-losing supply agreements.
What can suppliers do to thrive in today’s environment?
Being competitive is a global matter; it’s not just about your traditional competitors down the road. Ford has told its suppliers they must be able to supply the company anywhere in the world. And if they can’t in a given region, they must be willing to sign over their technology to a local supplier—or form a joint venture. So, suppliers today must think globally. Part of the challenge, as highlighted by supply disruptions caused by the earthquake in Japan in March, is to prepare for this kind of problem. You can almost see the emergence of new operating requirements that require sole-source suppliers to set up multiple production locations.
Today’s suppliers also have to be really smart about innovation to differentiate themselves. For tier one suppliers, that often means developing products based on new technologies. For sub-tier suppliers, innovation may be more about process than product. There are always ways to improve the manufacturing system, and there are opportunities for all suppliers to innovate.
These and such topics as pricing pressures and the balance of power between OEMs and suppliers will be examined in Industry Vision 2020, a comprehensive study being conducted by OESA and McKinsey & Co. We will present the findings during a special conference on July 28.
How much more consolidation will occur?
We were surprised how slow the pace was in 2009 and 2010, until we realized the problem was a lack of credit that enabled one company to buy another. Now money is more available. Investors can see the profitability in the industry, and there will be more mergers and acquisitions.
In North America, this is being driven in part by the desire of the domestic OEMs to reduce their supply bases and improve economies of scale. General Motors, Ford and Chrysler all have dropped brands and nameplates, which reduces their parts lists. Ford has nearly 1,700 suppliers today but is awarding new business to only about 850 companies. Eventually they will reduce to 750 suppliers. Other OEMs also are consolidating their supply base as they move toward more long-term partnerships with their remaining suppliers.
Are suppliers able to find the type of employees they need?
It’s a big challenge for the automobile industry in generally. There are about four people for every unskilled job, but the ratio is exactly the opposite for engineers and technicians. And yet the number of automotive engineers coming out of our colleges and universities is declining. We have to change the perception of our industry. When OESA asks its members what it should do for them, the number one response is, enhance the image of the industry.
What is happening to relations between suppliers and the car companies?
The recent financial crisis actually helped it to improve. The inability of suppliers to get financing last year forced many of the OEMs to pay suppliers up front for product development and to make progress payments for tooling. Everyone recognized they had to work together to get through the crisis, so the situation forced a better relationship between suppliers and OEMs. This year’s annual supplier relations survey by Planning Perspectives Inc. found that the gap between the best and worst OEM was one-third what it was just a few years earlier, which illustrates the trend.
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