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Sunday, 07 June 2015 22:00

Capacity Glut? Experts see no sign of capacity bubble despite rapidly expanding capital investment

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General Motors Components Holdings will invest $119 million in tooling and equipment at its Wyoming, Mich. plant and add 300 new jobs. The plant makes valve train components for GM vehicles. General Motors Components Holdings will invest $119 million in tooling and equipment at its Wyoming, Mich. plant and add 300 new jobs. The plant makes valve train components for GM vehicles. COURTESY PHOTO: GENERAL MOTORS

As new car sales continue to grow, automakers and their suppliers have shifted into investment mode to meet increasing production schedules, lifting their self-imposed moratorium on increasing capacity in the post-recession era.

This year alone, at least half a dozen automakers have committed billions of dollars to build and expand component production and vehicle assembly facilities across North America.

In West Michigan, for example, General Motors said earlier this month that it planned to invest $119 million at its Wyoming, Mich. valve train components plant as part of the $5.4 billion facilities investment program. Nationally, Volvo chose South Carolina for a new $500 million production facility while Aston Martin has set its sights on Alabama for its first U.S. manufacturing plant to build its new luxury DBX crossover.

In reaction to automakers’ expansions, the industry’s supply base has been forced to rapidly follow suit to meet increased production demands. That has suppliers in West Michigan investing capital into expanded facilities, acquisitions or new equipment, sources said.

However, some national auto industry watchers see this trajectory as a cautionary tale that may be indicative of a looming capacity bubble, especially since North American light vehicle sales are projected to plateau at 17.5 million units in 2017, according to a forecast from IHS Automotive Group.

Yet West Michigan-based executives and automotive experts don’t share the concern that an industry bubble could be about to burst. The reason: The automotive industry has evolved into a much different environment compared to the pre-recession years, and suppliers have grown much more savvy about when and how to add back capacity, said Mike Wall, an automotive analyst at IHS based in Grand Rapids.

“It’s a generalization, but suppliers are very pragmatic about adding this capacity back,” Wall said. “They want to make sure there are jobs to be quoted, and it’s not just willy-nilly.”

Pragmatism is a philosophy that Sheridan-based Wright Plastic Products Co. LLC shares in assessing the new automotive climate, said President Bob Luce.

“We’re constrained more by our willingness to invest than the lack of opportunities,” Luce said. “I choose not to take advantage of all the opportunities because of leveraging issues — and I don’t think I’m alone.”

While Wright Plastic Products has actively invested in adding capacity since the recession, the company doesn’t see any indication that the automotive industry is headed for a bubble, Luce said.

“I’m looking today — six years from the bottom of the recession — at what the future looks like, and I don’t tend to see any of the excesses that tend to end (boom cycles),” Luce said.

The manufacturer of custom plastic injection-molded products acquired Madisonville, Tenn.-based molder Hope Industries Inc. in March 2015 to accommodate the incoming capacity requirements from its customers, Luce said.

Between 2010 and 2015, Wright Plastic Products invested a little less than $7 million in capital equipment, with the company’s largest investments happening over the last two years.

Wright’s case for capital expansion is similar to countless other suppliers across the region.

The U.S. supply chain is running at approximately 83 percent capacity, forcing suppliers to either add new capacity or rework existing capacity to meet demands, said Dave Andrea, senior vice president of industry analysis and economics at the Original Equipment Suppliers Association (OESA).

If the industry accounts for the capacity required for general maintenance and additional buffers companies use to meet spikes in customer demand, the supply chain is nearly maxed out, Andrea said.

MANAGING DEMAND FOR GROWTH

Companies in the automotive supply chain have adopted a variety of methods for managing the requirement to grow with their concerns of being left with excess and unused capacity if another downturn hits.

For Wright Plastic Products, the company has begun to prioritize its customer base and take a pass on less profitable work to free up the capacity to go deeper with other key customers, Luce said.

“A lot of us are in a position (with) our existing customer base (where I) have some that are more important to me than the others,” Luce said. “One way of handling the growth from desired customers is to ask the ones that are less priority to move out. … It’s not like we’re turning down huge chunks. It’s a matter of keeping everything in balance.”

The company has incorporated a customer attractiveness scale that it uses to determine the potential risks and rewards of bringing on new business and adding new capacity, Luce said.

Wright’s solution for capacity management illustrates a larger strategy of suppliers and automakers employing flexible capacity, or capacity that can be easily adapted to suit a manufacturer’s different needs as they arise in the post-recession years, said Wall of IHS.

Grand Rapids-based Cascade Engineering Inc. incorporated flexible capacity throughout the company’s operations, including in its automotive division, so much so that the company hasn’t seen the need to invest in additional capital expenditures to accommodate growth over last six months, said Scott Zylstra, general manager of the company’s automotive and commercial product lines.

Since Cascade services a large variety of industries, the company has set up its current capacity to allow it to scale up depending on which of its customers take priority, Zylstra said.

“We have some business like automotive where you’re contractually obligated to supply a company for X number of years, but we have other business where we can grow or contract as needed,” Zylstra said. “That gives us a huge advantage for managing capital assets.”

Other suppliers such as Grand Rapids-based ADAC Automotive have found ways to bump up capacity without committing to brick-and-mortar building. Through the third and fourth quarters of 2013, ADAC invested approximately $26 million in two new paint lines at its Muskegon facilities, which the company leases to maintain maximum flexibility, said President Jim Teets. However, the company may be forced to make a more permanent expansion in the near future, he added.

“If production keeps going the way it is, we will be faced with a brick-and-mortar question in the next two to three years,” Teets said. “I really do think most of the supply base and the OEMs have the capacity question under control.”

EVOLVING INDUSTRY

Despite the present growth the automotive industry is experiencing, industry experts agree a downturn could occur in the future. However, it’s likely that the effects would be far less volatile than in the past because of new developments in the automotive industry.

In part, with less capacity for automakers to choose from, suppliers have faced less stringent pricing pressures from customers than in the years prior to the recession. Creating an excess bubble in capacity would give automakers more power over the supply base and yield increased price-reduction pressures — a climate that manufacturers are not eager to revisit, Wall said.

“In general, my customer base is much more concerned (about) my long-term viability than ever before,” Luce said.

Suppliers have also benefited from the sheer increase in production efficiency in their plants, allowing them to raise production levels with less capacity than in the past via automation and other lean manufacturing principles, sources said.

“One of the key things was that a lot of capacity died in 2009,” Luce said. “The companies that are left are by and large in better control of their costs and can react more effectively.”

On the supplier side, companies will likely continue their trajectory of modest capacity upgrades while keeping the lessons of the recession at top of mind.

“I know for me and my peers that 2009 is not such a distant memory that we’ve forgotten it,” Luce said.

Read 2215 times Last modified on Sunday, 07 June 2015 23:24

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