rss icon

Sunday, 16 August 2015 22:00

‘We’re advocating a new business model’

Written by 
Rate this item
(0 votes)
As the automaker-supplier relationship continues to evolve as the industry recovers from the recession, analysts warn that suppliers will need to become more proactive in seeking business that fits with their long-term strategies. Above, Devier Bryant inspects roller lifters at General Motors Components Holdings LLC in Wyoming, Mich., where the automaker is investing $119 million to support future vehicle components. As the automaker-supplier relationship continues to evolve as the industry recovers from the recession, analysts warn that suppliers will need to become more proactive in seeking business that fits with their long-term strategies. Above, Devier Bryant inspects roller lifters at General Motors Components Holdings LLC in Wyoming, Mich., where the automaker is investing $119 million to support future vehicle components. COURTESY PHOTO

Auto supply chain must adapt to increasingly tech-fueled, regulation-driven cycle

ACME — While the automotive industry’s near-death experience shaped how it restructured to survive in the recession, its evolution during the recovery years is driving a different kind of change.

Despite strong forecasts and automakers’ pervasive optimism, industry watchers believe manufacturers in the supply chain need to change their business models now to better adapt to the shifts in the OEM-supplier relationship.

That was the message from industry analysts at the Center for Automotive Research’s 50th annual Management Briefing Seminars held earlier this month at the Grand Traverse Resort.

At MBS, industry experts noted that suppliers will need to cope with increasing margin pressures stemming from a variety of factors including production volume increases, geographical shifts and the influx of new technology.

“We’re advocating a new business model, one where you’re much more proactive in how you pick your business and how you interact with your customer,” said Michael Robinet, managing director at Southfield-based IHS Automotive Group.

“If you’re doing well as a supplier, you’re going to be under more intense margin pressure going forward. A lot of factors are going to impact the supply base from a margin perspective.”

One of the chief concerns among OEMs and industry analysts is whether the supply base is equipped to service a significant uptick in global new vehicle launches over the next five years.

“There’s been a lot of talk in the industry about a lot of suppliers not being ready for launches, and that is a major factor in the industry,” Robinet said.

Globally, automakers continue to ramp up the pace of new vehicle launches, with 169 new platforms planned for 2018 alone, according to IHS data. By comparison, that’s a 42-percent increase over the number of new products launched this year.

In the past, car models would last around seven years with only mild mid-cycle upgrades, but the new launch cadence is expected to shorten that cycle to every five years, Robinet said. That’s in part because automakers are integrating new technology to meet tightening government emissions regulations.

At the same time, OEMs benefit from the shorter cycle because their most profitable vehicle sales are at the beginning of the model run rather than toward the end, Robinet said.

“As a supplier, if you’re on a vehicle for two or three years and have been told by (your customer) that you’ve got the one after that, you’re probably thinking, ‘Well, I’ve got this for six or seven years,’” Robinet said. “(But) that’s not the case.

This new cadence is driving many new activities and a lot faster industry going forward.”

On top of the growing launch activity, West Michigan suppliers will need to accommodate a changing production landscape in North America that continues to shift to the south. By the end of the decade, approximately 42 percent of global new vehicle launches will be produced in Mexico, a shift driven by a combination of free trade agreements and cheaper labor costs, according to data from IHS.

“Do you have facilities, capabilities and personnel to support the launches coming from Mexico? I would hasten to say that most of you don’t,” Robinet said. “And it’s been a growing trend. It’s not a flash in the pan.”

In addition to Mexico, Robinet expects the Detroit Three’s share of North American production will slip to 50 percent or less as Asian and German automakers ramp up their manufacturing in the region.

SHIFTING TECHNOLOGY

Perhaps no other single regulatory factor comes close to rivaling Corporate Average Fuel Economy (CAFE) standards in driving industry change, ranging from lightweighting to new powertrain technology, Robinet said.

“Government is going to be a more active part of our business going forward,” Robinet said.

The CAFE standards call for a 5-percent increase in fuel economy standards per year. But with a shorter launch cycle, automakers will face difficulties in improving the fuel economy of their fleets by implementing mid-cycle upgrades, Robinet said.

That means that instead of taking small incremental steps toward CAFE standards, the automakers — and subsequently, their suppliers who provide the technology — will likely be forced to increase fuel economy by 25 percent with the launch of each new vehicle, he said.

“Obviously, that puts a lot of pressure on the supply base and on the vehicle manufacturers to bring that to the customer with as little impact on pricing as possible,” Robinet said. “It’s going to be more and more difficult going forward.”

While the government does not want to put the automotive industry out of business with tightening CAFE mandates, regulators are unlikely to ease those standards as part of a mid-term review scheduled for next year, CAR President and CEO Jay Baron told MiBiz.

As a result, both suppliers and automakers will need to keep their operations as flexible as possible, especially as they bring to market more multi-material components, such as those made with aluminum and composites, including carbon fiber. Even so, suppliers will need to choose strategically which customers — and therefore which technology — they align themselves with, sources said.

“There’s going to be pain because of this acceleration because some companies will have to make a decision to go one way or another way,” Baron said. “Is it going to be CVTs (continuously variable transmissions) or 10-speed transmissions? Is there going to be one winner or are they all going to make it?

“Be careful how you choose your customers because you’re going to align yourself with your customers. Don’t just take a job. You have to think strategically — much more so right now because the environment is going to change rapidly.”

INCREASING CAPACITY

The current business environment in the auto industry will likely ease suppliers’ reluctance to add capacity, whether through new bricks-and-mortar plants or by expanding their existing operations.

If they don’t, suppliers will risk losing business from their customers, according to Mustafa Mohatarem, the chief economist at General Motors who spoke during a panel discussion at MBS.

“I have a very simple message that if we can’t buy a component where we want to buy it, we’ll buy it somewhere else,” Mohatarem said. “There are suppliers outside the U.S. But once that business goes outside the country, it’s unlikely to come back. That’s the risk you’re taking by not being able to meet customer requirements now.”

That consideration of whether to add capacity and how to meet customers’ needs will be determined on a case-by-case basis depending on the supplier and their individual situations, Robinet said.

On one hand, analysts cited Johnson Controls Inc.’s decision to spin off its remaining automotive business earlier this year as an example of some large suppliers simply leaving the industry to pursue other business. But at the same time, Tier 1 suppliers such as ZF Friedrichshafen AG and Magna International Inc. have made substantial acquisitions of competitors, thereby increasing their capacity for the long-term.

Smaller suppliers also will likely continue to be pushed to localize their operations near their OEM or Tier 1 customers, a move that also merits considerable thought on the part of suppliers, Robinet said.

“The whole idea of co-locating and (building) brick and mortar next to your customer — that’s on a case-by-case basis,” he said. “You don’t want to locate next to a plant that’s not near another plant so therefore that OEM or Tier 1 has tremendous leverage over you.”

While there is no shortage of changes occurring in the automotive industry, the good news for automotive suppliers is that there is still plenty of room to grow if companies stay nimble and adapt to the changing industry.

“This is a wonderful time in our industry,” Baron said. “Good times don’t last forever. … The point being made is that if you’re not making money now, you better go find another business because it won’t get better. This has been a phenomenal, healthy couple of years.”

Read 3562 times Last modified on Tuesday, 18 August 2015 16:38

Breaking News

September 2018
S M T W T F S
26 27 28 29 30 31 1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 1 2 3 4 5 6

Follow MiBiz