The automotive industry rapidly approaches a convergence point.
Uncertainty over the next downturn in the cycle, federal regulations and a tumultuous global economy along with the growth of disruptive technologies have created a unique environment for automotive suppliers.
While balancing those headwinds, automotive parts manufacturers must also continue to make investments to keep abreast of growing production — particularly in the Southern U.S. and Mexico — while cutting costs to satisfy automakers pricing demands.
Despite the challenges, auto suppliers in West Michigan remain optimistic about the industry and believe the lessons learned in the past economic downturn will help them weather any incoming storm.
MiBiz gathered a group of West Michigan automotive supplier executives to talk about their outlook for the industry and how they’re preparing to deal with the trends that will drive the sector for years to come. Joining this reporter in the conversation were:
- Chris Hall, vice president of corporate strategy for Motus Integrated Technologies, a Holland-based manufacturer of interior components including visors, headliners and arm rests. Motus acquired the former Johnson Controls unit in June 2014.
- Scott Hill, a partner leading the corporate practice team at Grand Rapids-based Varnum LLP, which sponsored this roundtable discussion
- Bob Roth, president of RoMan Manufacturing Inc., a Wyoming-based manufacturer of transformers for resistance welding and automation equipment
- Mark White, incoming president of Shape Corp., a Grand Haven-based manufacturer of energy impact systems and vehicle structural components.
Here are some highlights from the conversation:
What is one main trend you see driving the automotive industry as it pertains to your business in the short-term?
WHITE: For us, one of the big trends in the industry that we follow is the CAFE (corporate average fuel economy) requirement — that 54.5 mpg target is something that really plays a big role in our company. Everything we work on is how to balance mass reduction in our parts, and we’re putting a lot more effort into lighter-weight bumper systems (and) side-impact systems to address that. That’s a huge deal for us.
HALL: We really see a trend toward more upscale interiors. Automotive companies are trying to differentiate themselves on the interiors side of the business, whether it’s stitching, lighting, different fabrics — those types of things. We’re really trying to keep our eye on that and make sure our innovation is focused on providing those types of products from an interiors perspective.
HILL: One concern and an opportunity that we see is diversification in the supply base. Some of our suppliers are still sole-source supply. It’s a concern (but) it also presents an opportunity for those downstream from a pricing standpoint, so it’s something we continue to watch.
ROTH: On that macro level, it really relates to CAFE. How it’s affecting us is what’s happening with materials. To date, the predominant way that an automobile body is put together is resistance welding. But the challenges that come from the materials side are the ultra-high-strength steels and the weldability of those, the metal coatings, more and more aluminum and, of course, competing technologies. I’m not producing our product if they’re going to self-piercing rivets, so we need to watch adhesives, composites and other joining technologies that could displace resistance welding.
Is the general stress that CAFE is causing automakers something that’s concerning to the supply base?
WHITE: What it means for our business is diversifying. Our core business, traditionally, has been roll-forming ultra-high-strength steel for bumper systems, as an example. Today, we provide (a variety of higher grades of steel), so that makes the manufacturing operation, the tooling, everything much more complex. We’re also now supplying aluminum systems and working on carbon fiber composites. Our portfolio is expanded and we’re putting more into the advanced R&D for things outside of our core and how we started the business, which is a good thing for us. So we’re trying to address it through having a wider toolbox.
HALL: I would agree with that. I think it drives more of a technology push. The cost-pressures are there regardless of the CAFE standards. (OEMs) want to see you do things differently to help them meet that standard.
M&A activity cooled in the first half of 2016 compared to the banner year in 2015. What are you seeing for the rest of the year and beyond? What’s your appetite for deals going forward?
HALL: We’re always searching, but one of the things that we’re seeing is there’s a lot of volume headwind right now. There’s (currency translation) headwinds, so if there are organizations out there for sale, they’re all seeing those tailwinds and they all want to benefit from those tailwinds. So the prices in the market aren’t what they were two or three years ago. They’re higher and the expectation is higher, the multiples are higher. So you have to be more selective in where you purchase and where you look. There isn’t a lot of low-hanging fruit that used to be there.
HILL: But that opportunity will come back if we don’t go to a full cliff. I would anticipate the end of this year, like most calendar year cycles, will pick up.
What’s a new strategy you’ve implemented in the last year to attract or retain talent?
WHITE: We put a promotional package together that’s not just selling our company but promoting Western Michigan as a destination for potential employees. There’s a lot to sell. … We now have our own staffing company that supports our global operation, Shape Staffing. We’ve formed partnerships with universities, like here locally with Grand Valley where we have co-ops and exchanges with the engineering school.
HALL: Lakeshore Advantage (an economic development firm that covers the Holland-Zeeland area) has an intern program. We’ve tied into that and … it really introduces people into West Michigan. The goal is they come here, work for the summer and get attracted to the area and stay.
WHITE: We have a group called the Shape Young Professionals. We’re taking young folks who have joined the company recently and they get together on a regular basis and do socials. We have guest speakers come in. But it’s really a support network for the young professionals in our company. For a guy like me, it’s also a chance to understand, listen and hear the pulse of what their needs are, what they like, what they want more of, so we understand how the experience is going inside our company and what we can do to continue to promote a strong company environment.
ROTH: For us, it’s probably been less change on the recruitment side and more change on the development side. We’ve been blessed with a history of really long seniority at our company, but the weakness to that strength is if all you know is what you know from working 20 years at RoMan Manufacturing, there’s probably other things that have been happening in the world that you need to be aware of.
Most automotive analysts are predicting a period of stagnation in the industry. What are your forecasts?
HALL: I don’t think we’re going to see a cliff, if you will, like we saw in 2009. I do think there is going to be a peak and a plateau. It’s going to happen — it’s just a matter of when. I think what’s most important, and we’re starting to do it, is you need to look forward and put some type of plan in place. I think that’s what hurt a lot of folks back in 2009. There was just no plan. So we’re trying to do some forecasting and do some what-if analysis and based on that, here’s the action list we’d implement given those scenarios. A company can thrive in a downturn if you’re prepared for it. I think the key message is prepare for it.
WHITE: I would agree. Last year was a record year. I don’t think that’s going to continue. I think it is going to plateau but still from a historical perspective be still relatively strong and very robust. We have to take a conservative view and we have to have contingency plans.
How does that uncertainty impact your decisions to make capital expenditures?
WHITE: (There’s) lots of debate. … We look at our capital investments very closely and the business that is tied to that and make sure we understand what the risks are. Shape, historically, has and will continue to take a conservative view. When we start a new factory, for example, we have business commitments behind it. Our view is: We’re still going to see growth, but we think that growth rate is going to slow.
HALL: Question, question, question. When someone comes to you to spend money, you ask two or three times, debate and question it. Can we buy used equipment? Can we use what we have? Can we refurbish the equipment we have? Just don’t go spend money on brand-new stuff.
WHITE: I think the other big part of that is really getting close to the customer and the decision makers at the customer and having those conversations so they understand your business dynamic. If they understand your business dynamic and you can have open dialogue with them about volume commitments and program lives and things like that, they’ll help.
HALL: Along with that, I think it’s understanding who you’re aligning with from a customer perspective. They all act differently in a downturn. Some of them treat you better than others and allow you to be successful. And then, (it’s understanding) what platforms are you going after. Different platforms are going to get hit different ways.
ROTH: We don’t really have contracts where if we get this bumper support or visor, unless we screw it up monumentally, we have it for the life cycle. Ours is literally job to job to job. So the thing we have to start with is where are all the platforms and understanding when that platform is set to renew. Then you look at which (platforms) are funded. Which ones are planned but unfunded? Then anything past that, you just have to keep watching and watching. Once we have the target list of platforms that we know are funded, then it’s just a matter of getting our product specs.
Is capital still readily available?
HALL: We haven’t had any issues, but I will say they ask a lot of questions about the inevitable downturn and what are your plans for it and what do the what-ifs look like. They all want to understand what happens to your business if that happens, but I think they’re still willing to invest.
A recent report by the Center for Automotive Research showed suppliers invested $48 billion in North America over the last decade, much of which has occurred in the last five years in the southern U.S. and Mexico. With a downturn or plateau coming, is this investment too late in the cycle? Will suppliers be left out to dry if the market turns?
HALL: I think left out to dry is probably dependent on how the supplier invested and where. If you’re going to invest in Mexico and you’re dedicated to a specific client, you probably run a risk. If I just go to a specific location and serve one vehicle, the risk is much higher than trying to say ‘OK, I can expand, I can grow, I can diversify.’
WHITE: Absolutely. I think in our case, when we made those investments in Mexico, it’s allowed us to diversify. We’ve added some new customers — BMW, for example — to our portfolio. When we look at those investments, we try to look at where we can add value because maybe the competition isn’t able to do that in such a way. Can we bring in all of our technology into our plant? Can we service multiple customers? It’s all about hedging your risk. That’s how we go about it.
HALL: Even that diversification — you have German OEMs and Asian OEMs and they act differently, they react differently to a downturn. They’re effective differently with the Yen versus stuff going on in Europe. So just to diversify that customer base is huge.
How do you see autonomous driving, even in this early stage, impacting your organizations?
WHITE: Our opinion on it is that the technology is there today. Obviously, Tesla has a level of autonomous driving. I think our view is that it’s a matter of time. What has to happen is that the technology has to continue to refine and the legislation has to marry with the technology. How long that takes, I don’t think anybody really knows. If you have fully autonomous vehicles that are on the road, now there’s discussion of do you have to have that checked and serviced every year by an agency that has to verify whether or not your system is up to snuff.
HILL: We’re not just talking about oil changes anymore.
WHITE: Yeah. Sometimes people don’t even change their oil. How are you going to get people to come in and service their autopilot?
ROTH: So what a private pilot goes through today is almost what you’re talking about.
WHITE: Imagine what that would mean for the average consumer. All these things have to work out. So I think it’s going to take a long time.
Do you see autonomous driving being pulled by consumers or pushed by automakers?
HALL: I don’t see a lot of people parading in the street saying, ‘I don’t want to drive my car anymore.’ There’s always this push-pull, and it almost feels like there’s this momentum to get there. (But) I don’t see a lot of articles saying, ‘I have to have it and I have to have it now.’
Do you think companies like Google and Apple can just snap their fingers and become an automotive firm?
WHITE: One thing I find interesting is when they describe their long-term strategy, they define themselves as not car companies anymore. They’re defining themselves as being in the mobility business, which broadens their scope. There’s many OEMs that you’re hearing this strategy from — Ford and Toyota, as examples. I think a big impact on that has been Silicon Valley, the Alphabets (Google’s parent company) and what’s happening with Uber has been having an influence on the traditional OEMs and how they view their business.
With that long-term view of automakers shifting to mobility companies, do you view yourselves as auto suppliers or mobility suppliers?
HALL: Automotive supplier.
On the topic of disruptive technology, where do you see the market for electric vehicles and hybrids in the era of $2 per gallon gasoline?
WHITE: Based on the investment that’s being put into EVs, (they’re) going to be here to stay. We have many products on EV vehicles today. Tesla, for example, is a customer of ours. We’re viewing it as opportunity. We’re looking at how we can use our core competency around engineering, impact energy management that we might have in a bumper or side impact system and how do you apply that now for battery and powertrain protection. We’re trying to see it as opportunity, and we have a lot of effort going in that area.
HALL: It’s just like autonomous vehicles: The focus is there, the push is there and the investment is there. It’s just a matter of time before some level of that becomes standard. It’s $2 gas, but everyone knows it’s not going to be $2 forever, so they’re trying to get ahead of that curve.
ROTH: Even as innovative as Tesla is, it went from being nothing to a car company. They still structured themselves as an automobile company and the basic structure of the vehicle is no different than what GM or Toyota builds. It’s still a metal body structure, it’s largely resistance welded. And as a matter of fact, (while) on the Model S it’s all aluminum, for the new Model 3 series, they’re going back to steel. … Quite frankly, I’m more concerned about their ability to pay their bills than I am around what their technology is.