Core competencies are name of the game for automotive

Someone in the injection molding business once told me that automotive is one market you never "dabble" in. If you're going to supply the automotive industry, you're either all in or not in it at all. That was probably 20 years ago that I was told this, but it's truer today than ever.

The topic of "core competencies" and what suppliers need to do to successfully play in the automotive game comes up frequently. Strategy consultants for industry talk about it nearly every time I attend a conference. Determining your core competency and then learning how to be profitable by sticking to it, can be a long road but one that is necessary in today's global manufacturing industry.

Earlier this month, Johnson Controls (JCI; Milwaukee, WI) announced that it is "exploring strategic options" as it considers selling its automotive business. Wow! JCI has been playing in the automotive arena for a long time, and many Tier 2 and 3 molders and moldmakers have done a lot of work for JCI's automotive business. So what's this all about?

According to an editorial in IHS SupplierBusiness, JCI's chairman and CEO, Alex Molinari, said, "Today's announcement continues our strategy of proactive portfolio management to drive focus on strategic product-oriented businesses where we can be a global market leader, drive more profitable growth and deliver maximum long-term value for our customers and shareholders."

That statement says a lot. The automotive industry is a tough one in which to be profitable. IHS said that "JCI has been steadily reducing its exposure to the auto industry over the last couple of years," with the company reporting that its "net income had more than doubled year over year in the second quarter of 2015, though automotive revenue was down."

JCI recently sold its 50% equity stake in Johnson Controls Pricol Pvt Ltd., a manufacturer of instrument clusters, displays and body electronics to its JV partner. Last year, said IHS SupplierBusiness, JCI sold its headliner and sun-visor business to private equity firm Atlas Holding, and its automotive electronics business to Visteon.

The company's exit from the automotive business represents a U-turn for JCI, noted IHS SupplierBusiness. "Just five years ago, Johnson Controls was involved in an aggressive takeover attempt of Visteon's interiors and electronics business, offering $1.25 billion for the combined units. Now both have diversified away from the struggling interiors part of the business."

That's the way it goes when supplying the automotive industry. You are either all in and can own an entire segment or you have to get out. IHS calls this move "a trend across the automotive industry to sell off businesses that are either underperforming, or that don't represent part of a core product portfolio for the company."

This comes at a time when automotive OEMs are looking to their suppliers for new technologies and materials, new processes and ways to reduce costs. The big question is, will suppliers invest in the R&D that it will take to develop these new technologies and processes if they can't make a profit at the end of the day?

IHS SupplierBusiness notes that because of the increasing trend of offloading R&D responsibilities onto suppliers, "the size of R&D budgets for the suppliers has been expanding to around 5% of sales over the last few years."

That is going to make it increasingly more difficult for the smaller Tier 2 and Tier 3 suppliers—mold manufacturers and sub-contract molders—to be profitable. For most of these sub-tier suppliers further down the supply chain, the automotive industry is a fraction of their overall business. And that's not the most profitable position in which to be.