The collective outlook among automotive suppliers is moving deep into negative territory as trade tensions, declining volumes and weakness in the U.S. economy weigh on the minds of manufacturers.
That’s according to a recent report from the Southfield-based Original Equipment Suppliers Association (OESA). The report analyzes the 12-month business sentiments of top executives in the automotive supply chain.
Respondents rated their sentiments 13 points below the neutral threshold of 50. This index marks the sixth straight quarter of net pessimism and is two points lower than a year ago — nearly the lowest levels since 2009.
“We’re late in the cycle and we know that the industry is inherently cyclical,” Mike Jackson, executive director of strategy and research at OESA, told MiBiz. “It doesn’t mean that we’re on the verge of some type of significant contraction. It means that we’ve benefited from a long period of economic expansion.”
Executives cited trade policy as the greatest industry threat, closely followed by poor sales of vehicles in the programs they supply, according to the data.
“Any time you have an organization that is looking to take advantage of opportunities and allocate investments, whether that’s in brick and mortar or to invest in any given project area, it’s difficult to do that not knowing how those investments will be impacted by pending regulation,” Jackson said.
Size affects perspective
The largest companies — firms with more than $500 million in revenue — were the most pessimistic, partially because manufacturers in that subset are the most affected by global tensions, according to Jackson. Executives from the smallest companies were the most optimistic.
“The smaller firms simply may not be facing the same level of exposure to the tariff issues,” he said. “If you are insulated or removed from some of these challenges, or if your supply chain resides in the U.S., then you’re not dealing with some of the uncertainties.”
The buffer between unit production and manufacturers’ estimated breakeven points is growing tighter, reflecting lower production volumes as well as higher levels of investment, according to Jackson. Suppliers estimated this year’s breakeven production volume at 14.7 million units, a gap of about 2 million units from actual projected production. Still, the gap between the breakeven point and projected production volumes is about half of what it was in 2013, when it reached 4.3 million units.
“The robust gap in the 2013 timeframe effectively protected suppliers from any kind of volatility,” Jackson said. “Now we’ve seen that contract a bit.”
In addition, one in seven respondents to the survey said they have a direct supply base that is too large. Given that, companies plan a 13-percent average reduction in the number of their direct suppliers.
Margin growth is reflected only in electrical and electronic systems that support SUV and truck programs, according to the OESA data. Margins for products that support car programs show the greatest level of decline.
The tool and die industry is a particularly hard hit sector of the automotive supply chain, and those hits are expected to keep coming, according to a recent report from Southfield-based Harbour Results Inc.
Spending on tooling in North America is projected to drop to $6.8 billion, well below the estimated $8.7 billion for 2019, according to Harbour Results.
The key factor driving reduced spending is a decrease to 45 total vehicles in North America that will be sourced for production in 2020, according to Laurie Harbour, president and CEO of Harbour Results.
“(Automakers) launched a lot of new vehicles in the last five years and now they’re turning their focus to designing for new mobility,” Harbour told MiBiz. “In doing that, the industry is in a tough time now that volumes are not growing at double-digit rates anymore.”
Furthermore, the Detroit Three automakers, who source most of their tools from within the region, are forecasted to source only 13 new vehicles in 2020, representing approximately $3.1 billion in spending on tooling, or more than 45 percent of the total estimated tooling expenditures in North American. Harbour Results estimates total North American tooling spending to increase to $7.3 billion in 2021.
This ongoing marketplace shift in addition to competition from low-cost countries — specifically China — has already affected tool and die makers, according to Harbour.
“In the effort to reduce costs, (automakers) will source tools to China, even if it’s $5,000 or $10,000 cheaper. They source thousands of tools a year, so if they can save a couple of thousand dollars on a couple of thousand tools, that’s millions of dollars,” Harbour said. “It’s about squeezing it everywhere they can squeeze it to get cost savings, and so we’re seeing a lot more sourcing in China, which I don’t love, but it’s fact.”
More pain ahead?
As a result of reduced tooling spending and economic instability, Harbour Results predicts that up to 75 mold and die shops in the region will close in the next three to five years. In 2019 alone, at least 10 tool and die shops closed and more than 2,000 workers were laid off, according to the firm.
“I hate to make the prediction, but I think we’re just going to see more losses of shops in Windsor and Ohio, and largely in Michigan,” she said. “It’s the fact that some of these smaller shops that have not had the money to invest have not brought in good solid people, have not put business plans together and they’re just struggling. (When) spend goes down, it makes big shops a little hungrier. They’re going to go after and steal some of the work that traditionally they’ve let go to some of those small $5 million shops. They don’t care anymore; they want any tool they can get.”
As the tooling market contracts, it is important that shops position themselves for the future through “edginess” and by eliminating complacency, Harbour said, adding that it also is important that shops continue to put plans in place to shore up weaknesses, maximize technology and talent, and control costs.
Paul Hendricks, president of Grand Rapids-based Creston Industrial Sales Inc., said shops in West Michigan are struggling or closing for reasons that “are all over the board.” Hendricks said he spends a lot of time studying data and projections from the tooling industry. The 2020 outlook from Harbour Results caught him somewhat by surprise.
“We are making significant investments into this industry,” he said. “We see this as an industry here in West Michigan and in the U.S. that is very strong, if we look at a long-term outlook.”
For nearly 60 years, Creston Industrial Sales has provided equipment, repair services and management systems to the tooling industry.
“While we have to be very mindful, we can’t start to try and just look at one year or two years out,” Hendricks said. “My role at Creston is to look beyond that to what’s next in our industry and where are we going. We do believe that the industry is here and it will do well.”
Some segments of the tooling industry — like automation — are emerging, noted Hendricks.
“It’s exciting when maybe one segment is off, but then we see one segment that’s doing well. They can offset themselves,” he said.