Published in Manufacturing
Illustration by Rachel Harper Illustration by Rachel Harper

A balancing act: Automotive suppliers in West Michigan brace for cyclical changes, emergence of new tech

BY Sunday, August 20, 2017 10:26am

ACME — A decade into the economic recovery, West Michigan-based automotive suppliers are having to look ahead and prepare for a period of declining new vehicle sales.

While most suppliers in the region have adopted a wait-and-see approach to the years ahead, many contend that their ability to strike a balance between automakers’ needs, product changes and market nuances will allow them to weather any upcoming shifts in sales.

Executives say the same philosophy holds true when it comes to investing in new technologies such as electrification and autonomous driving. Suppliers need to make smart investments to position their companies for those emerging technologies, but not do so to the extent that they forget about their core products.

That sentiment came out during presentations at this year’s Management Briefing Seminars hosted by the Center for Automotive Research in Acme, Mich., as well as in recent conversations with supplier executives.

While many in the automotive industry have turned bearish on the sector based on declining light vehicle sales, some West Michigan-based suppliers are taking comfort in looking at the industry from a global perspective.

“I think there’s a lot of concern within the industry right now that things are starting to soften, but I think that you really have to look at the opportunity from a global perspective,” said Jeff Smith, president of Grand Haven-based GHSP, a division of JSJ Corp. “Those suppliers that are supplying only North American content, they’re looking at vehicle sales getting below 17 million and are growing concerned. But if you look globally, growth is still happening. Our strategy of looking at global opportunities is critical for our business.”

GHSP manufactures a variety of electronic shifting and pump products for the global market and has manufacturing operations in the U.S., Mexico and China.

The company plans to generate sales of approximately $400 million this year, a 15-percent year-over-year increase, largely because of the rising popularity globally of its shift-by-wire and electric pump technology, Smith said. The company grew roughly 32 percent from 2015 to 2016.

While U.S. light vehicle sales are projected to decline over the next five years, the trend remains positive from a global perspective.

Economists at IHS Markit expect global light vehicle sales to reach 93.5 million units in 2017 and grow steadily to 103.7 million units in 2022. Analysts project the majority of these gains to come from markets in China and South Asia, according to data from IHS Markit provided to MiBiz.

Meanwhile, U.S. light vehicles sales are projected to reach 17.1 million units in 2017, peak at 17.3 million units in 2018 and steadily decline to 16.7 million units through 2022.

Production figures in North America show a slightly more positive story, with automakers on pace to make 17.4 million units this year and grow steadily before peaking at 18.3 million units in 2021. Globally, light vehicle production is slated to reach nearly 95 million units this year, and grow to 105.7 million units by 2022.

For suppliers, their long-term outlook is determined largely by which markets and vehicle segments they serve, said Michael Robinet, managing director of advisory services for IHS Markit.

“The world is not falling,” Robinet said of the state of the automotive industry during the Management Briefing Seminars. “The overall volume from a North American production perspective hasn’t really changed from the top line too much, but it’s really what’s going on underneath. I know suppliers that are feeling nothing right now. I know others that are crying. It depends on your mix, your cadence and your opportunity.”

CHOOSING WISELY

Automotive suppliers must also contend with shifting consumer demand among vehicle segments. As compact SUVs have become more popular among car shoppers, sales of sedans and other passenger cars have diminished, changing a long-held pattern in the industry.

Between 2016 and 2024, passenger car sales are expected to decline by 30 percent, the equivalent of just over 2 million units, according to data from the Original Equipment Manufacturers Association (OESA).

“This means that we’re seeing a deterioration in terms of the book of business for the supply base and this represents some real concern and threat in terms of the outlook going forward,”  Mike Jackson, executive director of strategy and research at OESA, said during a presentation at the CAR event.

Jackson cited the disparity among the number of passenger car programs that automakers are producing and the demand for these vehicles in the market as one trend that could affect suppliers in the long run.

In 2016, passenger cars constituted roughly 39 percent of the market, yet many automakers dedicated far more of their portfolio to that segment. For example, 98 percent of Volkswagen vehicles were passenger cars, while Hyundai dedicated 66 percent of its output to the segment, according to Jackson.

“That’s something that obviously needs a massive course correction,” he said.

MANAGING DISRUPTIVE TECHNOLOGY

In addition to sales cycle and product mix concerns, suppliers need to position their businesses to capitalize on emerging technologies without getting ahead of their capabilities or losing focus on their core processes.

For example, many automotive suppliers are debating how much to invest in the electrification of vehicles as the technology starts to proliferate throughout the industry.

Electrification — including start-stop technology, hybrid-electric vehicles and full electric vehicles — is expected to affect 20 percent of vehicles produced in North America by 2025, according to IHS Markit.

Still, it’s unwise for companies to throw all of their focus behind these disruptive technologies, said Robinet, pointing to the continued reliance on internal combustion engines as evidence of the importance of serving traditional markets. By 2025, only 5 percent of vehicles will lack some traditional form of engine, according to IHS Markit data.

Automakers expect to ramp up the cadence of new engine launches through 2020, with 14 new models being released in 2019 and 10 models being released in 2020, Robinet said.

“You look and 95 percent of the vehicles by 2025 are still going to have an engine,” he said. “That’s good to know. Our world is not going away. It’s going to be here for quite some time.”

However, suppliers should be prepared for a sharp decrease in new engine launches after 2020 as automakers shift more resources to electric vehicles, according to Robinet.

“Level-five electrification with the OEMs is the shiny thing and not so much what you’ve done for me over the last two decades,” Robinet told the supplier-heavy audience.

For GHSP, investing in key technologies such as electrification has become a key part of the supplier’s growth trajectory, according to Smith, who declined to share specifics on how the company will support the electric vehicle market.

“I think you have to run parallel to the technology,” Smith said of GHSP’s philosophy for investing in disruptive technologies. “In our case, some of the products that we’re developing are only going to enhance the EV performance. That’s how we’re looking at our opportunity is how we can continue to develop new technologies that are going to enhance the performance of EVs.”

For his part, Robinet stresses that suppliers need to think critically now about which vehicle segments and markets they produce parts for as they focus on being positioned well for the markets of the future.

“Where you are in the system is going to be very important in terms of your strategy for the next five, 10, 15 years,” he said. “The changes over the next five years are going to be tremendous and that’s going to set you up for the decade after that as you start to move toward (greater) electrification.”

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