By Chris Sweeney, Crain News Service
DETROIT (April 11, 2014) — With the recession in the rearview mirror and North American light duty vehicle assembly production returning to pre-recession heights, the automotive industry is back on track.
But forgive companies for being skeptical.
While 2013 turned out 16.2 million light duty vehicle assembly units, and most forecasts, according to the Original Equipment Suppliers Association (OESA), are projecting 16.8 million for 2014, OESA members are budgeting conservatively. The association said in order to break even for 2014, its members need production schedules to hit 12.7 million units — about 24 percent below what is forecasted.
“The guys have been very cautious at bringing back capacity, and that’s why we see the financial margins we do in the industry,” said Dave Andrea, OESA senior vice president, industry analysis and economics.
According to the OESA, North American light duty production rates averaged about 15.7 million units from 2001-07. In 2008, production dipped 15.1 million units to 12.6 million, then bottomed out at 8.58 million in 2009.
Mr. Andrea said some OESA members reduced their work forces by as much as 40 percent.
“The recession was a unique situation,” said Torsten Maschke, Freudenberg-NOK’s president of automotive sales and marketing. “We’ve never experienced such a drop in the business. This was not only for America; it occurred in Europe and all the other regions. We were significantly impacted like all the others, by this significant drop.”
Mr. Andrea said companies learned two lessons during the recession. The first is return on invested capital. Firms that had access to cash can better survive those kinds of economic drops.
Secondly, companies focused on capacity utilization, and Mr. Andrea said not just production capacity. Companies had to make sure every dollar was utilized fully during the downturn because budget sheets were tight. When the recession ended, firms continued to focus on the details, albeit with a little more breathing room.
Production has been rising for the last four years. Light duty rates climbed to 11.9 million in 2010, 13.1 in 2011, 15.4 million in 2012 and broke the 16 million mark in 2013.
“Certainly it was a welcomed change,” said Doug DelGrosso, president and CEO of Henniges Automotive Holdings Inc. “I think like a lot of suppliers during the downturn, Henniges took out capacity and used it as an opportunity to address some longstanding operational issues, but volume was a very welcome development.”
Mr. DelGrosso said smaller regional suppliers struggled, and some continued to struggle in the wake of the recession. Companies with glo-bal footprints were able to navigate through the downturn better than the regional firms, especially those companies with operations in China.
The OESA tracked 57 automotive suppliers that went into bankruptcy during the recession: 25 have emerged from bankruptcy; 21 were acquired; and 11 folded.
“Never before in any other recession had we had so many of the top 150 suppliers go through bankruptcy restructuring,” Mr. Andrea said. “Without a doubt it’s a cyclical industry, but when basically all but a handful of the assembly plants were running in January and February of 2009, that affected not just the smallest of the suppliers, but the largest ones as well.”
Companies that went into crisis mode with extensive layoffs experienced pitfalls when production returned. Because most of Freudenberg’s products follow the same process throughout the globe, the firm was able to lean on its international legs to shift tools and produce in other regions while the ones affected by the recession were building back up.
“It was quite a headache to return to the previous production levels,” Mr. Maschke said. “Because of our flexibility, we were able to support all of our customers. Equipment was not the problem. All the assets were available. We needed to have the people in place in order to run those machines.”
Auto makers still are looking for the basics—quality, delivery, service and technology. But Mr. DelGrosso said the industry is more focused on supplier cost and financial stability because dealing with suppliers under financial stress can be expensive.
Mr. Maschke said Freudenberg shifted its focus and pushed technology into other markets while the automotive market was struggling.
“We have a huge research and development effort in order to come out with new innovative products, and this is what auto manufacturers are looking for,” he said.
Auto makers changed their behavior a bit after the recession, Mr. Maschke said. Instead of huge platforms and volumes, the market slowed down because of immense stress on many companies.
Mr. DelGrosso said prior to the recession, customers were driving too much capacity into regions because suppliers felt they could go into a new region where capacity already existed and offer a different price point. What ended up happening is suppliers increased too much capacity in the region.
“When that happens, you don’t have a sustainable economic model,” Mr. DelGrosso said. “Suppliers compete too aggressively on price and are awarded programs that can’t sustain themselves.”
But it’s still important for suppliers to be located near their customers.
“Any time you have an engineered product, it requires close collaboration with the customer’s engineering organization,” Mr. DelGrosso said. “Many of our engineers are on-site with their customers. They spend 90 percent of their time operating with our customers at their location.”
Mr. Andrea said there is an increased focus on suppliers who can develop new technology, especially with new vehicle programs being launched more frequently in light of new governmental standards—such as fuel economy.
Closing the gap
Mr. Andrea cited the Working Relationship Index, compiled by Planning Perspective—which according to Planning Perspective’s website quantifies suppliers’ working experience with a company it is supplying products or services. He said the index has shown over the years that the Detroit Three auto makers are closing the gap between themselves and the transplants with respect to supplier relations.
One reason, according to Mr. Andrea, is that the Detroit Three recently have adopted more common architectures worldwide, whereas Japanese firms traditionally have had fewer platforms. But of late, the transplant companies have become more complex, specifically with their truck and sport utility vehicle offerings.
“Fast forward to today, and the Japanese now have some unique platforms,” Mr. Andrea said. “Their product offering has become more complex. The Detroit Three has moved towards global common architecture that has made it easier for suppliers to work on a global basis with the Detroit companies.”
Auto manufactures have reexamined their supplier relations in the wake of the recession.
“There is so much increased mutual dependency now that there is an increased attention on improving the working relationships,” he said. “That is all tied back to the allocation of constrained capacity.”
General Motors Co. launched its Strategic Supplier Engagement program, which targets its largest 400 suppliers and gives them earlier access to GM product and technology plans, providing training to suppliers that rate highly on key measures.
Ford Motor Co. and Chrysler Group L.L.C. established similar programs over the last few years.
“Each one of these programs is identifying the suppliers, bringing them in early on in the design and engineering process and identifying new technologies that vehicle manufactureres will need so that there is a greater working relationship,” Mr. Andrea said. “There is a better visibility of the technology road map.”
This report appeared originally in Rubber & Plastics News, an Akron-based sister publication of Tire Business.