Study projects 40% drop in tooling spend by automakers by 2020

Tooling vendors to the North American automotive industry will see increased spending by OEMs and Tier 1 suppliers in 2018, driven by a high level of vehicle launches projected (177) between 2018 and 2020, according to the results of an in-depth study by Harbour Results Inc. (HRI; Southfield, MI).

In a webcast on Nov. 7, Laurie Harbour, President and CEO of HRI, told reporters, “in 2017, we are estimating tooling spend to be approximately $9 billion, which has resulted in high-capacity utilization among tool shops—88% for die shops and 81% for mold shops,” Harbour said. “This created a new tooling model of outsourcing. In fact, $1 billion to $1.5 billion of tooling was outsourced this year to help manage the growing demand. We can only expect this trend to grow in 2018.”

However, HRI projects a drop of 40% in tooling spend from a high of $11 billion in 2018 to approximately $6.7 billion in 2020. Vehicle launches will grow significantly, from 38 in 2016 to 67 in 2020, as OEMs test the market to see which products survive. “Some may not stick as the fight for market share among OEMs continues,” said Harbour.

In 2000 there were 149 vehicle models; by 2020, 275 models are expected. Harbour said she does not anticipate to see it grow much higher than that. “We expect to see a lot of new tooling as a result of this but it will be challenging for tool shops with respect to costs,” said Harbour, which the automotive industry is looking to drive down.

“Our team looked at a number of factors and issues impacting the automotive industry in addition to vehicle launches—including the elimination of vehicle models, new foreign-owned plants and products, OEM profitability, the political and economic climate and changing consumer landscape—and we developed an automotive vendor tooling spend forecast of $50 billion from 2016 to 2021, with 2020 being the lowest spend year during that time.”

With capacity utilization at 81% in mold shops, Harbour said that these companies “tend to be strong.” Primary mold shops tend to be large, can take on large, multi-tool  programs and have the financial wherewithal to take on the financing challenges that the OEMs present. “Automotive OEMs and Tier 1s focus on doing business with the primary shops, and allow them to source to secondary shops, which are smaller. Many are at 60 to 70% utilization,” Harbour said. “The main challenge for these small shops is that as the market contracts they will lose work.”

Harbour addressed the question of a potential dip in the market and what might drive that dip.

First, the flurry of launches into 2020 will mean heavy tooling activity is planned for 2018 and 2019. The Detroit three had 23 launches in 2017; 32 launches are planned for 2018 and 15 are expected in 2019. The Asian four OEMs had 21 tool launches in 2017, with 14 launches planned for 2018 and 26 planned for 2019. The European three had nine launches in 2017, with six planned for 2018 and nine for 2019.

Second, new plants are coming on line in Mexico, as investment in that country increases to meet market demands and OEMs begin to build certain models in that country to take advantage of lower labor costs. Harbour noted, for example, that the Toyota Corolla will be made in Mexico. However, Harbour noted, “this will be a one-time event, with not much impact after 2020.”

A third potential cause for a dip in the market involves OEMs removing several models from the North American market, such as the Ford Focus and Taurus that are being moved to China. “That means no tooling for those vehicles in North America,” said Harbour.

Fourth is the fact that big tooling spends happen whenever OEMs launch a lot of products. The Detroit three source 80% of their tooling from North American manufacturers; the Asian four source 40 to 50% of their tooling from North American tool makers; and the European three source just 20 to 30% from North American tool makers. “The Europeans have a lack of trust in North American toolmakers,” Harbour commented. “In 2018, the Detroit three will dominate tooling spend.”

Fifth, Harbour said that OEM investment needs to stabilize. “Amortization of billions in tooling and other capital costs are making an increasingly large impact on net income,” she noted. “Declining profitability with increasing tool costs is an untenable combination. OEMs will need to adjust.”

HRI’s research also uncovered that there is a threshold for any given year of $9 billion to $10 billion in tooling spend. According to Harbour, the North American auto industry struggles to achieve spend beyond this threshold because of a number of factors primarily found among OEMs and Tier 1s.

“Although the predicted dip in 2020 is not nearly as significant as we experienced in the recession, it is important that tool shops continue to focus on improving operations and investing in technology during the good times to remain competitive during the dip.”