Despite business uncertainty, automotive suppliers invest for the future

Automotive suppliers aren’t exactly excited about the business climate and the uncertainty surrounding the industry, including the recent Brexit vote and a slowing U.S. economy. OEMs reported a mixed July for vehicle sales: GM (Detroit) sold 236,235 vehicles to individuals or retail customers in July, up 5% year over year across the board, reporting the “best July” in retail sales since 2007. However, Ford’s profit warning jolted industry, as the company spent more than anticipated on incentives as vehicle demand softened. Ford (Dearborn, MI) reported a 9% decline in Q2 net income and cited pressure throughout the industry. The company expects Q3 will be “much weaker than normal.”

Toyota Motor Sales U.S.A. Inc. (TMS; Torrance, CA) reported June 2016 sales of 198,257 units, a decrease of 5.6% from June 2015 on a volume basis. For the first half of the year, TMS reported sales of 1,197,800 units, down 2.7% versus the same period in 2015. “The auto industry had its best first half since 2000,” said Bill Fay, Group Vice President and General Manager. “Toyota remains the number one retail brand for the first half, and anticipates record sales for the year for our light trucks, as availability continues to strengthen.”

In spite of that strong news, the July Supplier Barometer from the Original Equipment Suppliers Association (Southfield, MI) fell to its lowest level in four years. “Decline was led by smaller suppliers: Seven percent of respondents from companies with less than $50 million in revenue were “significantly more pessimistic.” At least 30% of respondents from companies with $50 million to 150 million in revenue were “somewhat more pessimistic” as were 33% of respondents from companies with revenue of $151 million to 500 million. Larger suppliers—those with revenue of $501 million to more than 1 billion—were less pessimistic or unchanged since Q2.

For those respondents who are more optimistic, some of the reasons included an increase in volumes as well as quote activity; new opportunities in lightweighting; new programs that fit the product line; forecasts that are aligning better with industry results; and a softening on standards that has opened the door on new opportunities.

Respondents who said there was no change in their sentiment credit Brexit anxiety offset by Mexico’s growth and solid North American demand. Those with a more pessimistic outlook credit a flattening of volumes; OEMs and Tier 1s reverting back to “price only, cost down;” OEMs becoming more cautious about spending and investments; a slowing economy; and concerns about the impact of rising interest rates.

Other findings in the OESA Supplier Barometer show that the “Brexit vote is having a negative impact on suppliers’ outlook with 27% of respondents at least moderately concerned about the potential impact on the industry. However, only 6% are at least moderately concerned about the impact on their own company.”

The supply base appears to be in better shape for the next downturn, with 76% of respondents stating their company is at least “somewhat more prepared to make the adjustments necessary for the next downturn,” with 36% stating their company is “much more prepared.”

Over the past few years, OEMs have been pressuring their Tier suppliers to invest in greater capacity to offset a backlog that might occur with an increase in vehicle production. While there was some response to that from suppliers, many tip-toed cautiously into those waters, fearing overcapacity if production levels dropped. However, a new study conducted by the Center for Automotive Research in Ann Arbor, MI, for the Southern Automotive Research Alliance, consisting of Alabama, Tennessee, Kentucky, Louisiana, Mississippi and South Carolina, shows that suppliers have invested $48.4 billion in the decade between 2006 and 2015 to expand or build new factories in North America and Mexico. This is a boon for European automakers such as BMW and Volvo, as well as the Japanese OEMs such as Nissan, which is big in Mississippi, and Toyota, which has a number of plants and Tier 1 suppliers in Kentucky.

South Carolina is a recipient of a new injection molding facility as Engineered Plastic Components (EPC) Inc. chose Anderson County for its next plant. EPC plans to invest $5.3 million in the plant and create 43 new jobs, according to the South Carolina Department of Commerce. “EPC Inc. is a 22-year-old plastic injection molded products manufacturer with 15 facilities across the United States and Mexico that offers an average salary of $17.93 an hour,” said Tommy Dunn, Anderson County Council Chairman. EPC selected Anderson County as its newest venture with a $53 million investment in its first facility in South Carolina.” EPC also recently expanded its Leeds, AL plant.

EPC is one of several plastics companies siting new plants in South Carolina. One other company of note is Baxter Enterprises and Hi-Tech Mold & Engineering, ful- service suppliers in molding and mold manufacturing. They announced in March that the company will invest $20.7 million to establish an 87,000-square-foot facility in Oconee County, creating 87 jobs over the next five years. According to the South Carolina Department of Commerce, Hi-Tech Mold & Engineering will occupy 17,500-sf of that space. Baxter Enterprises molds door panels and instrument panels for their automotive customers in the region.

It appears that the larger automotive suppliers have reason to be optimistic, and hopefully the smaller Tier suppliers can ride those coattails. However, we know that the automotive industry can turn on a dime and expectations can often be disappointing. Let’s hope this latest recovery is a long-term venture.