Automotive steers back from the brink

In March of that year, an A.T. Kearney survey of 60 top North American auto parts suppliers found that more than half could file for bankruptcy protection that year, resulting in at least 1 million job losses. Then, on April 30, Chrysler declared bankruptcy, and was followed almost exactly one month later by fellow "Big Three" OEM, General Motors, which filed on June 1.  

By the time 2009 was over, 27 automotive suppliers had gone bankrupt, as light vehicle production in North America registered just 8.5 million units, freefalling from 2008 figures by 4.1 million units or 32.4%. Today after driving to the very brink of the abyss, the industry has reversed out and on the road to growth once again.

"We see some really great things coming out of automotive," Mark Sankovitch, president of injection molding machine and automation supplier, Engel North America (York, PA), said. "It's amazing, automotive being as dead as it was in 2009 and the first half of 2010, how strong it's come back for us. That has been a very big surprise, as fast as it's come back and the money that's being spent. We're excited about automotive in 2011."

In 2010, light-vehicle production in North America shot back up to 11.942 million units, according to industry analyst, CSM Worldwide, which is forecasting growth in every year for the industry through 2017, when it believes 16.265 million vehicles will be made, nearly doubling 2009's anemic output.

Larry Alvey, Engel's midwest regional sales manager, who's based in Ohio and generates the bulk of his business within automotive, said that thus far in 2011, the industry, led largely by bigger Tier One suppliers, has been on an upswing. "I would say the most encouraging sign for us has been we're starting to see some replacement programs kick in," Alvey said. "I would say it's been five or six years since we've seen true replacement programs where companies are budgeting long-term replacement machines."

Alvey said the larger Tier Ones that he's spoken to are planning on growth through 2014 and accounting for the sudden backlog at companies like his. "If you look at where we're at on machine deliveries, if they buy a machine today, it's probably not even going to get online until the end of this year," Alvey said, "so they're really already focusing on 2012, 2013, 2014 programs."

Larry Doyle, VP global sales and marketing at auxiliaries supplier, Conair (Cranberry Township, PA), said growth last year in packaging and medical was anticipated, with the sudden expansion in automotive less expected. "In the second half of [2010], Conair saw an uptick in automotive, which was a real nice surprise," Doyle said, adding that in addition to equipment replacement, there was purchasing of new machinery. "There was some new greenfield opportunities as well, which was probably the most surprising, that U.S. automotive companies were actually building new plants."

Gregg McDonald, global marketing director for automotive at specialty compounder and distributor, PolyOne Corp. (Avon Lake, OH), said his company is forecasting for 12.7 million vehicles in 2011, up 11% over 2010. McDonald said that North American automotive/light truck sales remained relatively strong coming out of the recession, with year-to-date sales up 13.2%.

On a global basis, McDonald noted that year-to-date production was 36% higher in January 2011 compared to January 2010. The lion's share of that global number comes from Asia, which McDonald said represented 43% of global sales and 48% of global production.

"Asian automotive/light truck year-to-date sales are up 32.9% versus 2010," McDonald said. "Automakers in China sold a record 18.1 million passenger and commercial vehicles in 2010, after reaching a record 13.7 million units in 2009. It's predicted that China's auto sales will grow 13-15% each year over the next 15 years.

Suppliers as partners or piggy banks

Prior to the industry's collapse in 2009, the North American automotive sector had steadily weakened itself from within due to acrimonious supplier/OEM relations. As the market returns, suppliers to those suppliers are asking if the zero-sum negotiation model previously favored by OEMs will be back as well.

"You have to let your Tier Ones and your Tier Twos, and their suppliers, you've got to let them make money," Engel's Sankovitch said, "because if they can make money, they can take that net income and turn it into R&D dollars that become innovative and creative and separate us. We'll see. We'll see if we don't fall back into the bad habits of where we were. That's kind of where you keep your fingers crossed and hopefully they've learned that lesson."

For his part, Alvey believes there has been a change in OEM/supplier dynamics. "There's definitely a stronger relationship and a partnership where, in the past, I think the Big Three would dictate terms and pricing," Alvey said, "and I don't think they have that luxury anymore. They got burned; they put a lot of work in low-cost shops and then those shops went out of business and they had difficulty retrieving molds and getting their parts back so I think they're a little smarter about their supplier base."

Gregg McDonald, global marketingg director for automotive, PolyOne Corp. (Avon Lake, OH) offered his insights into the automotive market with these six key trends that are "currently shaping the market and are expected to create profitable growth opportunities."

1.  "Green" Automobiles

Pushed by an increasingly eco-conscious buying public and consistent with the "green" trends sweeping across other industries (packaging, consumer, building & construction), the automotive industry is rapidly improving the environmental impact of their products. Plastics are playing a key role in the development of alternative powered vehicles, fuel economy improvements and other sustainability efforts.

Alternate Powered Vehicles (hybrid and electric)-All major OEMs are working to launch hybrid and electric vehicles over the next few years. These platforms are designed to reduce the production of greenhouse emissions from autos by 50-100%. These vehicles give PolyOne an opportunity to provide colorants and wire and cable compounds that can withstand the higher heat and voltage requirements, and to supply engineered materials to lithium-ion battery makers.

Fuel Economy (small cars, lightweight materials, metal replacement) -The run-up in oil and gasoline prices in 2008 triggered a renewed interest in fuel economy, and has resulted in a newly accelerated U.S. CAFE (Corporate Average Fuel Economy) standard of 35.5 miles per gallon by 2016. Smaller and lighter cars are more fuel efficient, with a 10% drop in vehicle weight worth 6-8% in fuel savings. OEMs are working quickly to find lighter materials and replacing heavy steel with plastic. While the average car today contains 360 lb of plastic, or 14% of total weight, experts predict that plastics use in automobiles will increase two to three times by 2015. PolyOne stands to benefit through a range of specialized technologies that can help OEMs meet their weight reduction targets, including chemical foaming agents to reduce the density of plastic, long-fiber technology for structural large parts such as front-end modules and running boards, and glass bead-filled vinyl dispersion resins for interior applications such as instrument panels.

Sustainability-OEMs are investigating the use of renewable materials such as biopolymers, working to avoid the use of hazardous ingredients or processing steps (paint VOCs), and promoting recycling. PolyOne is well positioned to offer PLA biopolymer blends for higher heat applications, molded-in color and special effects to reduce or eliminate painting, and PlanetPak recyclable containers.

2.  Growth in Developing Markets

A major shift is taking place in the global automotive industry. In 1997, only 17% of light vehicle production occurred in developing nations. By 2015, it is projected that 45% of the production will occur in these developing nations, led by Asia. From 2009 to 2015, 50% of the world's economic growth in light vehicles will come from developing markets. PolyOne should continue to expand its global reach into these developing regions, particularly China, India, Brazil and Eastern Europe, and translate application successes to local resources and production sites.

3.  Market Share Loss for Detroit "3"

In 2000, the Detroit "3" (GM, Ford, Chrysler) produced 77% of the North American vehicle build. By 2015, it is estimated that the Detroit "3" will only account for 45% of the production. The benefactors are the Asian "4" (Toyota, Honda, Nissan/Renault and Hyundai/Kia), which are now projected to equal the output of the Detroit "3" in N. America by 2015, and the European OEMs. Today, over 50% of PolyOne's global automotive sales are to the Detroit "3" and their supply tiers. This must change, and PolyOne should invest resources now to call on key Asian and European decision makers. This is a slow process that demands patience and commitment, especially when it comes to forging relationships in Japan and Korea.

4.  Government Stimulus Programs

The automotive industry is one of the leading employers in most countries. As such, governments have decided they can not allow the OEMs to fail, and are contributing financial aid in a variety of ways, including bailout loans, consumer tax relief and scrapping incentives. PolyOne needs to be ready to handle the demand spikes that will be created. For example, when Germany introduced a €2,500 scrapping incentive for cars older than 9 years, new small car sales jumped 21% the next month.

5.  OEM Cost-Out Programs

To save cost, OEMs are utilizing shared platforms across car brands, common components across platforms (e.g. window switches), modular components to consolidate parts and simplify the manufacturing process, and developing world car platforms. PolyOne will benefit as plastics are playing an increasing role in these programs. Also, PolyOne can offer a range of cost saving solutions and document the savings via EVE tools, including liquid colorants for taillights, TPE seals for windows and doors, and small lot, JIT resin deliveries.

6.  Consumer Customization

Today's consumers are used to having it their way. From "build-your-own" customized personal computers to a rainbow of iPod colors, consumers are defining themselves through their purchases. This trend has invaded the automotive industry and is accelerating from two perspectives: informatics and aesthetics.

Informatics-Informatics is the application of information technology to the automobile. It includes standard services such as emission control and air-bag systems, to custom entertainment and communication electronics in the dashboard. PolyOne can leverage this trend through specialized electrically shielding compounds and LSF0H compounds for electronic and electrical components.

Aesthetics-Consumers fret over the choice of exterior colors, interior colors, fabrics and other design options. OEMs today are enabling more choices to allow the consumer to express their individualism. The Smart car from Mercedes-Benz is an example of this, with car owners trading different color body panels over the internet to customize their vehicle. PolyOne's color concentrates and precolored compounds for body panels can help OEMs meet their customer needs.