Automakers’ desire to quicken the pace of new vehicle launches has sent shock waves through the industry’s supply chain.
Driven by emerging technologies, government regulation and heightened competition, automakers have shortened new model cycles and increased the frequency of mid-cycle refreshes. The impact of those changes has started to shake up the industry’s suppliers, including manufacturers in West Michigan that are being forced to amortize capital equipment over a shorter time frame, deal with more frequent changeovers, and balance the shifting relationships with their customers.
“We are seeing shorter life cycles on the programs we supply,” said Jeff Smith, president of Grand Haven-based GHSP. “We may have a program originally released for five years but then they come back in two and want to do a refresh. Depending on what components you’re supplying, it affects all suppliers a bit differently. We’re seeing a lot of mid-cycle change action, which is driving some engineering changes or it could be a complete refresh of our product.”
GHSP, a business unit of JSJ Corp. also of Grand Haven, manufactures electronic vehicle shifting systems and pumps for the automotive industry.
The company is not alone in seeing increased launch pressure. The cadence for vehicles launches has increased approximately 25 percent over the immediate pre-recession years, said Mike Wall, director of automotive analysis at IHS Automotive in Grand Rapids. And there’s little evidence of that pressure abating any time soon with the number of North American model launches growing steadily through 2019.
IHS predicts new model launches will ramp up from 35 in 2016 to 47 in 2019, increasing in number every year.
These days, experts say the automotive industry has started to move at a pace that more resembles Silicon Valley than Detroit, as automakers scramble to meet consumer demand for the latest technology in their vehicles.
“Here you have the stingy car industry that makes a new vehicle every eight years or so and it’s having to keep up with the pace of the electronics world, which makes a new product every year or two,” said Jay Baron, president and CEO of the Center for Automotive Research (CAR) in Ann Arbor.
The increased launch activity is also being driven by federal regulations, such as the Corporate Average Fuel Economy (CAFE) standard that ramps up to 54.5 mpg in 2025, Baron said. Since the standard increases roughly 4.8 percent per year, automakers cannot afford to put off implementing new technology.
“We can’t wait until the next model rollout,” Baron said. “We have to implement it now, otherwise we’re going to fall behind on the regulations and have to pay fines. The pressure to meet regulations is forcing a shortening of the product development process because we have to implement technologies as fast as possible.”
Another potential factor driving the pace of new vehicle launches: Automakers want to hoard cash as sales are projected to plateau from now to the end of the decade, according to Kevin Clay, global director of sales for Grand Rapids-based Pridgeon & Clay Inc., a manufacturer of stampings for automotive exhaust systems.
“Automakers are facing a market that is not going to grow or that’s only going to grow a small amount, so cash becomes more important,” Clay said. “OEMs are compressing lead times to hold on to their cash as much as possible.”
Clay said that automakers are increasingly stretching the length of repayment terms for tooling and assembly costs, which is putting more of a financial burden on suppliers.
“We end up looking like the bank,” Clay said. “We’re constantly having to beat back bad terms. They want to use our money as much as possible.”
Automotive suppliers in West Michigan are already feeling a pinch financially from the increased pace of vehicle launches.
Manufacturers say they have less certainty when it comes to capital investments given automakers’ reliance on rapidly changing technology. If the automaker doesn’t know what next year’s technology will bring, then it’s challenging for suppliers to make those up-front investments, said Smith of GHSP.
“We’re taking a look at our product design and seeing how we can leverage that design over multiple products and model years,” he said. “How do you try to drive design standardization into your products so you have something that carries over model to model without regards to the life of that award.”
For Holland-based BuhlerPrince Inc., the shortened launch cadence has led the manufacturer of large aluminum die-casting machines to invest in inventory to reduce delivery times, said President and CEO Mark Los.
“The old 12-month order-to-ship (model) works in our businesses, but with shorter and more rapid launches, it means looking at ways of shortening delivery, whether that’s stocking more machines in house or at other places,” Los said.
While companies such as GHSP and BuhlerPrince have the capability to make these investments, that won’t be the case for every supplier, especially smaller, less sophisticated manufacturers, Los said.
“I think it’s going to put pressure on smaller companies that are either going outside for their financing or doing it internally,” Los said. “It’s going to be really tough for them to come up with the investment.”
Baron of CAR predicts that the pace of launches will create more “stranded capital” as suppliers have less time to amortize all of their up-front investment costs, all of which will “cause financial hardship on small suppliers.”
RESHUFFLING THE DECK
Industry analysts predict that automakers’ focus on keeping their vehicles stocked with the latest technology may drive a reorganization of the supply chain, primarily through an increase in strategic acquisitions and divestitures.
“It’s sort of a reshuffling of the deck,” said Wall of IHS.
On one hand, large manufacturers are more likely to divest of less sophisticated segments of their businesses in favor of focusing their investments on potential high-growth, technology-heavy sectors such as electrification and autonomous vehicles, Wall said.
For example, German auto supplier giant ZF TRW sold its fastener business unit for $450 million to Chicago-based Illinois Tool Works in late January to focus on automated driving and other advanced technology, according to a statement.
At the same time, manufacturers may find themselves being pushed down the supplier tier structure as automakers integrate more technology into their vehicles, while others may be forced out of the supply chain entirely if they cannot provide the technology needed by the automaker, Wall said.
While that may cause some concern among suppliers, it also creates opportunities for manufacturers of lower-tech components to carve a niche for themselves. That’s especially true if those companies use technology to increase their speed to market and remain flexible enough to supply automakers overseas, according to Wall.
“You can certainly make a lot of money in the tech sector, but give me some gas-in-the-veins, old-school production and that can also be very lucrative as well,” Wall said.
The increased pace of new model launches has also influenced the relationship between automakers and their suppliers, spurring more collaboration throughout the supply chain, sources said.
“We’re seeing more cooperation and teamwork than we’ve experienced before,” said Los of BuhlerPrince. “The automaker used to flip it up over the wall and say, ‘Give us one of these.’ Now it’s more collaborative.”
Since the Great Recession, automakers increasingly are relying on their supply base to drive innovations for next-generation vehicles. That’s especially true as the amount of technology inside vehicles grows “exponentially,” Baron said.
“OEMs need suppliers to help them move fast and stay abreast with a lot of this technology,” Baron said. “They’re going to be demanding the technology from their suppliers more than they ever have before. That will build collaborations, and whether or not the OEMs purchase them or become parent companies — or simply look at them as partners — remains to be seen.”
That gives suppliers some added pull when it comes to negotiating with their OEM customers. In particular, suppliers are using that influence to request multi-generational contracts to hedge against the shorter production cycles — a trend that will increase as more launches are announced, Baron said.
Nissan, which recently decreased its target model launch cycle from 12 weeks to six weeks, is considering adopting multi-generational contracts with its supply base, according to a report last month in Automotive News.
While the pace of new model launches will affect companies in different ways depending on their place in the supplier hierarchy, industry sources are convinced that every company along the supply chain will be impacted by this trend.
“If it isn’t a complete platform redesign, there’s going to be more and more mid-model changes taking place,” said Smith of GHSP. “We’re all going to be faced with that as the OEMs are trying to keep their vehicles fresh and have that competitive edge.”