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Mike Wall, Director of Automotive Analysis at IHS Markit Mike Wall, Director of Automotive Analysis at IHS Markit Courtesy Photo

Backed by years of strong profitability, auto suppliers poised to weather any blip, analyst says

BY Sunday, December 24, 2017 03:37pm

North American light vehicle sales should dip this year to around 17.1 million units, breaking a streak of seven consecutive year-over-year gains, according to Mike Wall of IHS Markit. But while he expects the market to contract further to around 16.9 million units next year, Wall believes the automotive supply chain is positioned to thrive.

What’s your outlook for car sales in 2018? 

The recovery days of the last several years are largely behind us. Next year, we’re looking at 16.9 million units in terms of light vehicle sales. Now, I say all that and I’ll tell you: Sales of 16-17 million units in production is a good time. That’s good news for the industry. It’s all relative, of course, if you compare it to the last peak and what have you. But it’s still good, still very positive for the industry. 

Does the production forecast look any different? 

Next year we’re looking at 17.5 million units. So growth in production, but yet a little bit of a contraction in sales. That looks a little weird. 

What’s driving the disparity between production and sales? 

We expect to see more exports out of North America next year, so there’s a tailwind there to the tune of about 220,000 units or so. The other (reason) is just contingent investment in plants and ramping up activity on the part of the automakers. Some of that (recent) Mexico plant activity — we’ll see a full year of production out of that. Some of it’s import substitution too, or vehicles produced here rather than being imported. 

Given that the market is favoring larger trucks, SUVs and crossovers instead of sedans, are suppliers more protected from fluctuations because those are higher margin vehicles?

Yeah, absolutely. That’s been subtle. Not everybody picks up on that. It’s anecdotal. I don’t have a study I can pull out of my pocket here, but in my conversations with suppliers, that’s exactly the vibe I’m getting. … Where we’ve seen strength in the market is crossovers, utility vehicles, trucks, light trucks, pickup trucks. Those tend to be higher margin components and tend to be higher margin business. So it’s higher content, larger parts, more margin. 

Is there an upside to a plateauing sales environment?

(If I’m a supplier), I actually have some opportunity to do some maintenance on equipment now and to draw down some of my overtime. Would they like (more business)? I think all suppliers are looking over their shoulder. They don’t want to be missing out on business, but at the same time there’s something to be said for training and maintenance and all that sort of thing. 

If you’re supplying light trucks, SUVs and crossovers, are you generally pretty bullish right now? 

I say bullish with an asterisk. So, it’s positive in that it’s fitting with customer demands, customer taste and trends right now. We do think there’s still some legs to that. And it’s not that we expect it to collapse or anything like that, but I do think you’re going to start to see some slowing of the growth in this segment, just owing to how far we’ve come and how many offerings are out there. Some of this growth has been predicated on the fact that some of the segments didn’t exist five, six, or seven years ago. We’re now more proliferated in those segments and that’s where the asterisk comes in. 

How does that model proliferation and competition affect the product cycle? 

It’s going to be a case of the freshest product is going to catch the eye of the consumer in this type of environment. It’s going to be a little more challenging on the part of both automakers and suppliers. It’s opportunity for suppliers, frankly. As those automakers may be looking at more robust redesigns, more intrinsic updates to the vehicle, to the extent that those start changing components, sheet metal and steel, that certainly is another opportunity for suppliers.

Given the importance of technology, is the auto industry cycle going to start looking more like the life cycle of consumer electronics? 

In the auto industry, it’s not practical necessarily to operate on a single-year consumer electronics timing, but to the extent you can pick your battles, you can really drive the needle here and there. You see it on that telematics and infotainment space, the center stack of the vehicle. You also see it on some of the advanced driver-assist systems. You’re seeing more deployment on that and those are happening even kind of mid-cycle, where you’re getting more adoption and also driving it further down in the trim levels, too. You’re deploying more of that technology to more consumers. 

How do you see the discussions over NAFTA playing out next year? 

Our best-case scenario, we’re still expecting NAFTA to be in the mix. We’re not expecting the nuclear option, if you will, where NAFTA goes away. I can definitely see some tinkering. To the extent, say, it does … get ugly, it is tough to predict the overarching impact. 

Does that cause any worry about the viability of some automotive suppliers? 

This is not an optimal scenario at all, and it will add costs in some way, shape or form. But at the same time, on the supply chain side in particular, there does tend to be a bit more resiliency, a bit more flexibility, a bit more ability to navigate that. … So I’m not necessarily in the doom camp even if something were to get really ugly.  It wouldn’t be positive at all, but at the same time, it would be one of those things we’d overcome. We’d persevere. And on the supply chain side, they’d find a way. 

What other issues are you monitoring for 2018? 

The Fed: What do they do on the interest rate side? Some of this becomes a conversation around the macroeconomic dynamics because we’re looking for GDP to line up reasonably well next year. This year will be 2.3 or 2.4 percent. We’re looking for a bit higher growth … next year. How does the Fed look? If they continue to tighten, how many interest rate increases are they going to do? To what extent does that potentially impact demand (and) also credit availability?

When we do have another cyclical economic downturn, how well is the supply chain positioned to weather it? 

When you have this kind of profitability and really being able to right-size your business, it puts you in a better position to navigate any sort of downturn that may occur.  The good suppliers I know of, they’re always looking over their shoulder for that next competitor or that downturn, and trying to protect for that. Ten years ago, we were entering the downturn and they weren’t in that same position. They may not have been optimally positioned … from a profitability standpoint. Frankly, the industry was sort of upside-down from a cost profile perspective. And then you flash forward, it’s much healthier than it used to be. And that, I think, helps to navigate some of those waters, too. 

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