As a prolonged shortage of semiconductors hampers automotive production, West Michigan-based suppliers have been forced to change the way they do business.
And it hasn’t been for the better.
“It’s not sustainable — it’s flat out not sustainable for us,” said Jeff Dolbee, president of Cascade Township-based Tier 1 supplier ADAC Automotive Inc., which manufactures door handles and vehicle entry systems. “We cannot carry the overhead. In fact, we’re in conversations with all of our customers, most significantly Ford, around the fact that it is not sustainable.”
However, 2022 may offer some relief as state and federal officials make moves to ramp up domestic chip production and automobile production slowly increases.
Odd one out
While automakers might be producing fewer vehicles, they are doing so in profitable fashion. Similarly, auto retailers might be grappling with low inventories, but high consumer demand remains firmly in place and many buyers are willing to pay market value.
Suppliers, however, lack those same levers to pull. Many are shifting to meet the needs of a volatile market in which temporary plant and production shutdowns often crop up with minimal notice.
Suppliers like ADAC may amass a workforce and materials to facilitate an order only to see that order slashed, leaving them sitting on excessive inventory.
Dolbee recently attended a suppliers conference and said morale is quite low among companies, comparing it to the Great Recession in 2008 and 2009.
“Our vendors are giving us price increases and we have to deal with supply shortages,” Dolbee said. “On the other side, our OEM customers are doing what they’re doing to us on the order side and not acknowledging the fact that we have cost increases that have to translate to price increases for them. We do feel squeezed and I don’t think ADAC is alone in that fact.”
Dolbee has also found that suppliers have little leverage when it comes to dealing with their customers.
“Our leverage has to be softly worked, to be honest,” he said. “Hand-over-hand-over-hand negotiations with our customers. I’m going to two meetings before the end of the year with the highest levels of purchasing at both GM and Ford to have direct face-to-face conversations about price increases that we have to have.”
Slow climb to normal
Auto production throughout 2020 and 2021 has been abysmal. According to IHS Markit’s December report, North American automakers produced 13 million light vehicles in 2020. That number is poised to hold at 12.9 million as the industry finishes 2021. Typical pre-COVID production volume is in the neighborhood of 17 million vehicles.
“One big lever that works to a supplier’s benefit, and where they’ve shown their expertise, is driving volume,” said Mike Wall, director of automotive analysis at IHS Markit. “These are suppliers that can drive productivity improvements and work costs out of the (production) line. But what are we missing in all this? We’re missing volume, and we’re missing volume in spades.”
Still, IHS forecasts improvement in the coming year, projecting 15.2 million units in North American light vehicle production. While the incremental growth is reason for optimism, it’s also tempered by the fact that the industry should be producing north of 17 million to start replenishing low inventories.
For 2023, North American production is currently projected at around 17.1 million vehicles. Wall didn’t have an answer on when he expects to restore inventory, only that it is a multi-year proposition.
“Last year, we had the PPP loans that I think went a long way in helping suppliers weather the storm and navigate this,” Wall said. “This year, they haven’t really had that kind of backstop. I think you’ve got more pain this year. I think there is a bit more stress in the system — more distressed suppliers out there.”
“The good news is, next year, we’re seeing some incremental volume,” Wall added. “The question is, will it be enough for some suppliers or will we have a bit more pain to go through? I think the reality is, there will be a bit more pain on that front. I think we need to see more consolidation, but consolidation is like turning a battleship with an oar in this business.”
Retooling for 2022
Aside from volatile production volumes, suppliers like Metal Flow Corp. have had to contend with a cornucopia of issues hampering manufacturers, such as rising costs and scarcity of raw materials and workforce shortages.
Kelly Springer, CEO of the Holland-based manufacturer of high-volume, technical parts for components like air bags, decorative trim, fuel systems and sensors, said that maintaining the companys skilled workforce is a high priority.
“Where we feel like we’ve done well is retaining the strong team we’ve had,” Springer said. “We’ve retained a majority of our technical talent and we’ve done that through wage adjustments and really being transparent in our communication on what’s going on in the business and what’s going on in the automotive space.”
Springer and her team at Metal Flow have also learned lessons along the way, especially in the metal space where availability and pricing of steel created headaches throughout the pandemic. While these pressures have led to longer lead times and price increases for Metal Flow’s clients, Springer said the company has been proactive and intentional in communicating about those issues and setting expectations.
“We certainly have learned how to be athletic in responding to the volatility that exists outside of our control,” Springer said. “I think we’ve developed processes internally that have helped us respond to that volatility much quicker than we had prior to the pandemic. I also think we’ve been more creative in navigating supply chain challenges.”
Pat Greene took a similar approach in his role as CEO of Cascade Die Casting Group Inc., a Cutlerville-based Tier 2 auto supplier that provides a range of die casting services to Tier 1 clients.
Greene kept his 400-employee workforce and used the slowdown of 2020 and 2021 to train and develop it.
“Volumes are down, but we still need a well-trained, nimble workforce that can react to changes in schedule,” he said.
Greene said he sees the litany of market pressures slowly softening in the new year — one that he hopes is a year of redemption.
“After what has proven to be a very difficult 2020 and equally difficult 2021, it’s a crucial year to get back on track to begin to see a return on the investments we’ve made to help us improve,” Greene said.