As the automotive supply chain prepares for a rapid increase in new model launches, manufacturers must also contend with several other trends in the industry ranging from production scheduling to the ripple effects of last year’s mega deals.
In particular, an increasing number of automotive suppliers are concerned about their ability to adjust to production scheduling, a trend that the Original Equipment Supplier Association (OESA) noted as a top concern for suppliers in its January supplier barometer report.
“Week to week changes can be hard to manage for suppliers and that’s a priority,” said Julie Fream, president and CEO of OESA.
The frequency of changes has caused uncertainty for many manufacturers, including in how they deal with their suppliers, she said.
Fream sees the challenges around production scheduling stemming, in part, from an uptick in capacity utilization rates at a time when many suppliers are already running at near full capacity.
The median capacity utilization rate among automotive suppliers increased 5 percent to 85 percent compared to the same period in 2015, with those in the upper quartile reporting an increase from 86 percent to 90 percent capacity utilization, according to the OESA report.
“I think when you’re operating so close to your capacity limits, it’s much more challenging to manage than when you have a little flexibility in your schedule,” Fream said. “That all flows downhill, so that flows to the next tier and the tier below, too.”
In addition to production scheduling issues, Dave Andrea, executive vice president of research at Ann Arbor-based Center for Automotive Research, expects last year’s mega deals among large suppliers to impact the West Michigan supply chain as those companies start to integrate their operations.
“Last year, we had a lot of deals and most closed by the end of the year,” Andrea said. “Now suppliers are dealing with restructuring and what that means for the competitive landscape now that these companies are starting to work together as single entities.”
In 2015, the automotive industry saw several high-profile deals among large automotive suppliers. Among the major deals last year, Auburn Hills-based BorgWarner, a manufacturer of turbochargers and transmissions, completed a $951 million acquisition of Remy International Inc. in November.
Additionally, Magna International Inc. purchased German transmission manufacturer Getrag for $1.9 billion in July. Magna was already the second largest automotive supplier in the world, according to a 2014 Automotive News survey.
But the largest acquisition came earlier in the year with ZF Friedrichshafen AG of Germany cutting a $12.4 billion deal for TRW Automotive Holdings Corp., according to a report in Automotive News.
As a result of these so-called “mega deals,” smaller automotive suppliers downstream should be prepared for some increased price competition, Andrea said. The newly merged companies will likely examine each of their supply chains to determine what they have in common and take a look at the dollars spent per supplier, he added.
“They may come back and try to negotiate better pricing because, as an example, if a supplier supplied Remy and Borg Warner, now Borg might have more leverage over that supplier,” Andrea said. “So there’s more price competition. But on the flip side, there are more opportunities if that West Michigan supplier was supplying Remy. Now they have an in with supplying Borg Warner.”
“You can never tell how that supply base consolidation will play out,” Andrea added.
Experts predict that consolidation in the automotive industry will maintain its pace in the coming year. Analysts at PricewaterhouseCoopers LLP (PwC) said global deal values are expected to outdo 2015 figures, which eclipsed $48 billion, a 340-percent increase over the previous year, according to January’s M&A in the Global Automotive Supply Industry study.
“In our view, the M&A explosion in the automotive supplier sector is just beginning to heat up” as suppliers continue to serve automakers over a global footprint and increase their margins, the report said.
TALENT CONCERNS REMAIN
Despite advances in internal training programs and assistance from outside talent development firms, automotive suppliers are still struggling to find adequate talent to support their operations.
The OESA report notes that the talent shortage is “the primary internal supplier challenge,” with 64 percent of survey participants citing a lack of qualified engineering talent and 60 percent citing shortages of skilled labor.
To respond to the lack of talent, manufacturers are investing more dollars into developing their own internal training and apprenticeship programs.
While companies are dedicating more resources to growing their workforce from the external talent pool, Andrea also sees suppliers investing in upskilling their existing workforce.
“We’ve seen an increase in training dollars, which tells me that if you’re not finding people on the outside with skills, you’re trying to upskill your current workforce,” he said.