More West Michigan manufacturers in the automotive supply chain could be adding new facilities and equipment over the next few years.
The reason: While suppliers have largely avoided adding capacity in the years after the recession, the move will soon become a necessity to keep up with OEMs’ higher production numbers and new vehicle launches.
Although the push has already been felt by large Tier-1 manufacturers, downward pressures will likely drive sub-tier suppliers to expand as well.
“The entire supply chain is really running at full capacity,” said Dave Andrea, senior vice president of industry analysis and economics at the Original Equipment Suppliers Association (OESA). “We’re going to see capital and plant expansions in order to keep up with what’s being forecasted in North America.”
Currently, the supply chain is operating at an average of 82 percent capacity, with even the smallest suppliers running at nearly 75 percent capacity utilization, Andrea said.
As a result, more companies are adding space across West Michigan. For example, Grand Rapids-based Monroe LLC and Livonia-based Key Plastics LLC recently announced expansions at the former ConAgra Foods Inc. building in the AeroTech Industrial Park. The facility is located near the Gerald R. Ford International Airport.
For Monroe, the expansion allows the company to consolidate its operations from four separate facilities along 44th Street into a single larger location, said Steve Klotz, CEO of the Huizenga Group, the Grand Rapids-based private investment firm that owns Monroe.
“It worked, but it wasn’t the most conducive to our operations,” Klotz said of spreading the company over several facilities. “We had people moving parts from one facility to another and now everything will be under one roof. We’ll be far more efficient.”
The new space will expand the company’s total operation to 85,000 square feet, an increase of 30,000 square feet from its current facilities. That extra space will allow the manufacturer of plastic instrument cluster needles to accommodate the additional product demand from customers, including platforms from the majority of automotive OEMs, Klotz said. The added production space will also allow the company to diversify beyond its current product portfolio and into other precision interior components.
Monroe invested approximately $1.5 million in the move and expects to begin operating in the new facility by the end of June 2015, Klotz said.
Grand Rapids-based Robert Grooters Development Co. developed the AeroTech site.
A manufacturer of plastic injection-molded interior, exterior and underhood components, Key Plastics plans to use its new 42,500-square-foot space for warehousing, said Todd John, sales consultant at Robert Grooters Development.
Key Plastics, which maintains a facility in Grand Rapids, was not available for comment for this report.
The current wave of expansions across West Michigan stand in contrast to suppliers shedding excess capacity during the recession. Throughout the recovery, the fear of overextending operations prompted most suppliers to maximize the space they had available, rather than invest in expansions, said Bernard Swiecki, senior project manager for sustainability and economic development strategies at the Ann Arbor-based Center for Automotive Research (CAR).
“Overcapacity became a very dirty word during the recession,” Swiecki said. “Quite often, it was the company that cut first and deepest that survived the recession. Now we have the opposite problem.”
As the economic recovery has tempered the majority of the uncertainty, suppliers are increasingly adding new capacity. In 2014, 97 percent of suppliers surveyed via CAR’s Book of Deals database were expanding or moving into a new facility, an increase from the 75 percent of companies expanding between 2010 and 2013, Swiecki said.
“We are finally at the point where companies are starting to build out and expand,” he said.
Capacity expansions are largely being driven by the growing production volumes in North America that are expected to reach 17.4 million units in 2015 and top 19 million units by 2022, according to data from IHS Automotive.
Suppliers are also tooling up for the increases in new vehicle launch activity coming over the the next five years in the North American market, sources said. Automakers are projected to launch 35, 44 and 38 new programs in 2017, 2018 and 2019, respectively, according to data from IHS.
“There’s no question that the vehicle launches will help this business,” Klotz said. “I personally believe that a few launches (will) get delayed and roll into future years so the drop off in 2019 and 2020 won’t be as bad.”
Expansions among sub-tier suppliers are also being influenced by increasing inventories compared to immediate post-recession levels.
While the downturn taught automotive suppliers to minimize inventory for same-day or next-day delivery, global events have begun to change that perception, Swiecki said. Events such as the 2011 tsunami in Japan and the recent longshoreman strike along the West Coast that drastically slowed shipping for nine months have prompted suppliers to hold more inventory.
“We’ve had quite a few of these black swan events that’s created awareness of bottleneck tracking and inventory,” Swiecki said. “All of a sudden, inventory was scarce and opened people’s eyes to carry more inventory.”
A growing number of manufacturers have expressed concern over the impact that global events can have on the supply chain, according to the March 2015 Automotive Supplier Barometer survey from OESA. To mitigate those risks, 66 percent of suppliers surveyed noted they planned to increase inventory or buffer stocks, compared to the 49 percent that did the same in 2014.
Holding additional inventory is just one strategy that OEMs are pushing down to their supply base, Swiecki said. In light of the recent wave of product recalls related to General Motors ignition switches and Takata airbags, automakers are focusing on increased transparency throughout the supply chain to avoid unexpected expenses and warranty costs.
While some suppliers may still be averse to adding capacity for production or inventory, the relatively low cost of debt and stable production forecasts should make the step easier, sources said.
“It’s a good environment to invest in new capacity and inventory because if the forecasts are right, no one is projecting a dip in production,” Swiecki said.