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Automotive supplier sentiment drops, pushed downward by markets in China

Automotive suppliers are pretty optimistic about vehicle production in the United States and Europe, but China's market is giving them the jitters. The September Supplier Sentiment Index (SSI) produced by the Original Equipment Suppliers Association with the support of Deloitte LLP, came in at 50, a drop of seven points from July's SSI. Of the 79 barometer respondents, a significant percentage of companies (52%) show an "unchanged" outlook over the past two months.

Optimism momentum declined across all revenue groups, with those in the $501 million and below categories registering the largest survey-over-survey declines. "Markets in China" was the most often mentioned issue for respondents changing their outlook to "more pessimistic." "There is a continued, though softening, positive outlook within the automotive supplier community," said the survey.

Increasing capacity to handle vehicle volumes is the big issue among suppliers, the survey revealed. With 2015 North American production running at 17.5 million units, and 2016-2017 production levels expected to increase by some 700,000 units, suppliers report they are looking at all major options to increase capacity: "Replacing equipment beyond normal replacement cycles and increasing plant floor space at existing and new facilities. Incremental demand plus new vehicle launches and an evolving customer base will continue to incentivize suppliers to increase capital expenditure budgets."

While none of the respondents in the "more optimistic" category provided comments, respondents in the "somewhat more optimistic" category seemed to express their hopes, as well as their doubts, about the future. "Volumes have gained more than expectations in the NA market. Brazil is still a drain," commented one respondent.

"Have more confidence that sales opportunities will help more fully utilize our facilities and labor," said another.

"U.S. recovery is on track, pushing beyond expectations and expected to remain strong for more than 36 months," another respondent commented.

"NAFTA is strong, and now EU is improving; now have concern with China," said another respondent.

And one respondent had some serious doubts in spite of his "somewhat more optimistic" sentiment: "Still have concerns with the economy; very shaky on both a U.S. and global basis."

Those respondents whose sentiments are "unchanged" from July's barometer, expressed "uncertainty in the marketplace," interest rate uncertainty, and "sluggish wage and capital expansion growth."

While new materials are high on the wish-list of OEMs, suppliers aren't so sure. One supplier to Ford commented that "future of Ford F-150 aluminum truck market acceptance is to be determined."

The "somewhat more pessimistic" respondents have concerns about China and the European immigration problem. Others mentioned conditions in South American countries such as Brazil and Argentina. A tooling supplier noted: "Tooling releases continue to be delayed." Another supplier noted: "Many order reductions in July and August with Tier 1 customers," but getting better in September.

Interestingly, one respondent seems to be more pessimistic about whether the customers have truly changed their ways in dealing with suppliers: "With flattening volumes, customers are reverting to ‘old-school cost-reduction threats' and going back on the partnership/trust that had been built over the past five years."

No comments were made in the "significantly more pessimistic" category, which could be read as either "don't want to talk about it" or "things are okay so I won't jinx it."

Advanced material development remains the highest priority across the entire respondent base, noted the survey. Powertrain technologies and sustainable manufacturing technologies are equally weighted as the second major priority for suppliers.

Over the past couple of years, it's been obvious that OEMs want their supplier base to increase capacity and capital expenditures, but there are numerous roadblocks that may hinder or delay their investment plans. The top roadblock is "customer sourcing/launches/scheduling," with 15 responses. Suppliers mentioned "the future of FCA" (Fiat Chrysler Automotive): "How viable is the OEM? Is the OEM a ‘good' partner?"

Some questioned the firmness of customer commitment as a problem that might hinder or delay investment plans. Another cited "OEM terms and conditions that allow for business to be moved to other suppliers." Several others had concerns about volume planning such as "over-stated program volumes," "volume levels meeting quote commitments" and "long-term OEM sourcing commitments."

The economy might stand in the way of some suppliers making investments in capacity, with 12 responses reflecting doubt that things are really coming back.

"Market demands" garnered 10 responses, reflecting continued doubt about volumes and whether they can sustain the level of business that required the investment.

"Financial performance/funding" are concerns for five respondents, with one citing "the allowable profit of the OEMs" and "customer cost pressures."

It's evident by the September survey that many suppliers won't be quick to add capacity and make heavy investments in capital equipment, as most have long memories and are running at or near full capacity with a reluctance to jump quickly. The survey summary noted that fact: "Given the supplier sector continues to run in the 80%-plus capacity utilization range with even the lower quartile running in the 60-70% range indicates that the supply base is limiting the risk of adding capacity too quickly in front of demand."

TAGS: Materials
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