ACME — After an extended period of growth, vehicle sales have started to cool at a time when industry-wide uncertainty is hampering manufacturers’ optimism.
Some industry insiders think auto suppliers’ worries are overblown given the lessons they’ve learned and the business adjustments they’ve made in the years since the Great Recession. Still, many executives cite concerns about international trade agreements, President Trump’s steel and aluminum tariffs, technological disruptions, and the plateauing sales environment as key headwinds.
“Given where we are in the cycle, we’re keeping our eyes open for that next downturn,” said Mike Wall, director of automotive analysis at IHS Markit in Grand Rapids.
In talking to suppliers, Wall said he recommends they start “what-if” planning for a downturn in which industry sales slip to 14 million or 15 million units. Auto suppliers should be thinking about their customer mix, what segments they’re on, and how they’re exposed from a geopolitical standpoint, he said.
“I guarantee you the automakers are doing that — they’re gaming that out,” Wall said.
Wall told MiBiz that he doesn’t think West Michigan auto suppliers are making any “rash decisions,” but instead are “keeping their powder dry and seeing where this is all going,” particularly because they lack long-term market visibility.
“But then when we do get some sense, if you’ve got an action plan at least thought out and gamed out to then build upon, I think you’ll be better for it,” he said.
Jack Endres, vice president of operations at Portage-based Mann + Hummel USA Inc., remains optimistic about his company’s future, despite steel and aluminum tariffs that have forced the company to swallow unexpected additional costs.
“We’re still growing,” Endres told MiBiz earlier this month at the Center for Automotive Research (CAR) Management Briefing Seminars. “We have opportunity to continue to grow. So the outlook is very favorable. What we don’t know is what the impact is on the growth of the economy based on the inflation driven by this. We have no idea what that’s going to look like.”
At seating supplier Adient plc, executives think it would be unwise for supply chain manufacturers to change their production strategies because of the recent tariffs.
“We’re more observing the longer-term trends on where we see the markets,” said Detlef Juerss, vice president of engineering and the chief technology officer for Plymouth-based Adient, which has plants in Battle Creek and Holland. “We have the manufacturing footprint globally … so we can be very flexible.”
The headwinds have industry experts mulling new ways to gauge the current condition of the automotive sector.
It’s a tough proposition since the automotive industry “could all get thrown off by one trade policy this way, another retaliatory one that way,” said Bernard Swiecki, director of the Automotive Communities Partnership and senior automotive analyst at CAR.
“We find ourselves on the top of the cycle, and it’s been a lovely cycle both in terms of volume and in giving us a gift in terms of a very favorable mix of profitable vehicles for us to sell as an industry,” Swiecki said during a presentation at MBS. “The automotive industry is extremely capital-intensive, and we are also an industry that relies on long-term return on investment. When you have an uncertain business case that could change on you next week, next month or next year, it’s hard to make these decisions.”
Other economists echo Swiecki’s sentiments.
According to IHS Markit Managing Director Michael Robinet, light vehicle sales will dip to 16.6 million units by 2020. By comparison, North American sales hit 17.2 million units last year.
As a result of the plateau in the sales forecast, suppliers must take a “proactive stance” to reduce risks, Robinet said.
“It’s been a very interesting couple of quarters,” Robinet said at MBS. “The markets plateaued, we are in a conquesting environment, especially if I am speaking to the supplier audience, and the costs in economics are going to become more and more important.”
Robinet also remains concerned about the auto price index, which is up almost 3 percent from 2017. Add in the effects of the steel and aluminum tariffs, and customers are paying about $1,800 more for domestically built vehicles, he said.
“It’s a tremendous impact and a substantial drag on our industry,” Robinet said of the duties. “We’re in the 17 (million unit range) now. To go back down into the 14s or the 13s, it’s a substantial change for a lot of us, and it’s not going to be spread out like peanut butter over all of the different segments.”
According to Robinet, the industry’s expansion is slowing down to a pace three times less than its growth between 2009 and 2017.
However, he said suppliers still have reason to be optimistic about the future, as the average age of vehicles — which is approaching 12 years old — “means a strong replacement cycle” should come in the near future.
“The industry is slowing down. You can feel it, and you have already seen it in North America to an extent. But even still, growing at a 2 percent compound annual growth pace is still a strong growth base going forward,” Robinet said.