Supplier barometer leaning towards pessimism, though cap utilization rate still high

Who could blame them? In the space of a few short weeks they've chugged a noxious cocktail containing the Japanese earthquake / tsunami / nuclear crisis, continuing commodity and material pricing pressures, higher oil prices and sales mix changes and more. It is little wonder that automotive OEMs and their suppliers have a hangover as they struggle to balance production and the supply chain.

As a result of all of those negative events, the May Supplier Sentiment Index from the Original Equipment Suppliers Association (OESA) fell to a neutral level of 50 from the March Barometer level of 66, as suppliers are confronting the realities of a challenging and "tenuous two months." The drop breaks a streak of strong Index findings stretching back to the middle of last year.

The sentiment change comes from the fact that 60% of respondents in March reported they viewed the industry as "above neutral" but in May people with increasing optimism feel to 37%, said the OESA's report. Persons reporting a pessimistic outlook increased from 1% in March to 10% in May.

However, the most dramatic shift, said the OESA, occurred in the "somewhat more pessimistic" group - going from 10% in March to 38% in May. The bigger the company, the greater the pessimism, with respondents from companies of $1 billion or more in revenue indicating a greater level of pessimism. "One explanation could be the global nature of their business and the impact to the operations from the difficult issues identified above," noted the OESA report.

Sixty-nine of the 104 respondents indicated a decrease in the second quarter North American revenue projections compared to their pre-Japan crisis targets. The median decline is expected to be three percent in Q2, returning to the budgeted annual revenue level in the Q3/A4 timeframe. However, noted the OESA report, suppliers are still uncertain about the full impact of the Japan crisis as indicated by one of the supplier respondents: "The full impact of the Japan crisis is still unknown. The Japanese automakers have been communicating their reductions, but the U.S.-based Detroit Three are not showing signs of a slowdown. For the same U.S.-based platforms, we are seeing a slowdown at the tier levels. Bottom line, conflicting information leads to conservatism."

The level of supply chain force majeure filings due to supplier facility damage increased from 19% in March to 28% in May. Force majeure due to lack of supply from Japan sub-tier sources increased from 14% in March to 23% in May.  One respondent commented: "Shortage of components from Japan and from current suppliers are hurting our sales."

Capacity utilization rates however, are still high, with the outlook for the 2011 production year up to 85%, from 75% for the 2010 production year. OESA expects that 2011 level to remain near 85% for 2012.


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