Auto suppliers pessimistic as winds of change blow from several directions

Survey imageBig changes appear to be in store for suppliers to the automotive industry. Ford Motor Co. recently announced a continued shift to high-margin SUVs and pickup trucks, along with $1 billion net income and a revenue increase of 3% year-over-year.

After a headline announced in the Nov. 1, 2018, edition of the Wall Street Journal that “GM Posts Robust Profit, Offers Buyouts,” that automaker must have decided to take a lesson from Ford. Despite a 25% jump in its third-quarter operating profit to $3.2 billion, “handily beating analysts’ forecasts,” and continued strong U.S. demand for its lucrative pickup trucks and sport-utility vehicles, GM announced on Nov. 26 plant closings and the layoff of 8,000 employees.

People aren’t buying cars—something that both Ford and GM are acknowledging with the elimination of various car models—and prefer instead pickup trucks and SUVs. That is something that should have suppliers feeling a bit more pessimistic. And they are!

The Original Equipment Suppliers Association (OESA; Southfield, MI) noted in the Q3 survey of its members that the Supplier Barometer “dropped sharply” into “pessimistic territory,” with 48% of respondents saying they are “somewhat more pessimistic” in their 12-month outlook compared to 22% in Q2.

Fifty-three percent of respondents say changes in government trade policy is the “greatest” (30%) or “second-greatest” (23%) threat to the industry. Implementation of new government regulations is also causing some consternation among suppliers, with 7% saying it represents the “greatest” threat and 15% saying it’s the “second-greatest” threat to their business.

I thought it was odd that “poor sales of vehicles in programs supplied” was a “concern” but wasn’t at the top of the list. I’m guessing that Ford’s decisions hadn’t been announced prior to the OESA survey. GM’s announcement is sure to rattle suppliers, causing even greater pessimism.

Another headwind that might be coming is blowing in from Mexico. According to the OESA report, more products are being produced in the United States in 2018 (70%) than in 2017 (66%). Parts being produced in Mexico fell to 24% in 2018 versus 27% in 2017. Parts being produced in Canada fell 1% from 7% in 2017 to 6% in 2018, with the majority of respondents saying that’s not likely to change. As more parts manufacturing and assembly moves to the United States from Mexico, some respondents said that shift will impact their Mexico manufacturing operations.

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