As the automotive suppliers look to the remainder of the year and weigh their short-term outlook, they remain cautiously optimistic in their abilities to weather whatever uncertainty comes at them next, be it new tariffs, a redrafting of trade agreements, recalls, and so on.
Automotive supplier resiliency was the focus of a roundtable outlook discussion earlier this month held by MiBiz reporter and Editor Joe Boomgaard. With Boomgaard:
Scott Hill, partner at the Grand Rapids-based law firm Varnum LLP, which sponsored the roundtable discussion
Tom Rizzi, CEO of Grand Haven-based GHSP Inc., a manufacturer of electronic vehicle shifting systems and pumps for the automotive industry, and COO of parent company JSJ Corp.
Bill Veldboom, general manager and president of the Muskegon-based Seabrook Plastics Inc., a Tier 2 automotive supplier that specializes in customized injection molding
Mike Wall, director of automotive analysis at IHS Markit in Grand Rapids
Here are some highlights of what they had to say.
Given all the challenges the automotive industry has faced so far this year, how do you see the rest of 2018 playing out?
Wall: From a sales environment, the first half of the year has been actually better than expected. In fact, we recently just boosted our U.S. light-vehicle sales forecast marginally up to 17 million units for this year. We were previously at 16.9 million. … We’re cautiously optimistic, although I would say too that there are brewing headwinds. We’ve got interest rates that are still on the rise. We’ve got vehicle pricing pressures that are going to be having an effect on the manufacturing field. … What we’re (experiencing is) a declining plateau in terms of U.S. demand and that’s going to be important for suppliers as they think about program targeting, OEM targeting and customer targeting.
Veldboom: We were afraid a little bit with the disruption with the (Meridian Magnesium factory fire) that gave us a poor second quarter, but then we see the schedules and forecasting now improving a little bit. We think it’s going to be a solid year — not a great year — but overall decent.
Rizzi: We also experienced a very strong first half and also weathered some storms. We actually had some direct experience dealing with a couple of those supplier fires. We also struggled with the supply of electronic components. That’s been an issue for us, and that’s sort of receded right now, which is great. (We see the same) brewing headwinds — there’s a little bit of that — but we’re positioned well globally, especially with what we’re doing in China. We feel pretty comfortable that that’s going to provide continued future growth for us, and GHSP is well-positioned to take advantage of some of that.
Hill: I’m seeing some capping of talent, some capping of getting materials supplied to the next stage, transportation issues. … I’m (also) seeing more of a shift to shorter-term supply relationships. Two, three, four, five years ago, it was, ‘Let’s try to enter into something for the life of a program’ … but now, it’s more trials of things. You do have to, in my opinion, qualify more suppliers in their shorter-term relationships. I think that helps from a risk-management standpoint, but that requires more assistance and the people are going to be stretched a little bit.
How does the industry view this plateauing of sales around 17 million units?
Wall: If we’re in that 16- to 17-million unit bandwidth, that’s great territory to be in in North America. The U.S. market, when we came out of the downturn, we did not see suppliers simply lathering in capacity and lathering in adding additional capital (equipment) to the extent you might have expected, which I think was actually a positive. … Now, production-wise, we see some growth and opportunities with about 17.6 million units in terms of North American production, but we’ll grow into that and it will be challenging on the supply chain side. … It’s tough to find staff for plants and being able to find the right engineering talent from A to Z — those are still challenges that still reside now eight, nine years into the recovery.
How do the recent supply chain disruptions and tariff discussions affect this cautious optimism?
Rizzi: They were challenging issues. We’re not single-source with any supplier, so we have been able to leverage the other suppliers that we have. Even in the cases where we were working with a supplier that had an issue, we had multiple locations that were certified for us. We just moved the supplies to one of those particular companies’ other locations. Electronics and the lack of capacity being built in the electronics component area was probably even more challenging for us. That really forced our supply chain organization to double their efforts with finding other supply and looking offshore to China and qualifying China-based suppliers for electronics components. We even looked at our capacity evaluation because we do manufacture circuit boards internally, and (debated whether we) should be increasing our capacity availability for that. We’re actually making some investment in new capacity there, and that’s just a way to partially offset some of those challenges.
Veldboom: We’ve seen a couple situations where customers are coming to us because they’re having problems within their supply chain. It’s showing that strain that they’re having quality issues or delivery issues and so in a way, those relationships might be getting shorter because you have people dealing with labor or capability constraints. We’ve seen a lot more of those opportunities popping up when they’re fundamental problems. I’m not sure if that’s just indicative of the whole system being somewhat strained or not, (but) we’re certainly seeing those opportunities.
How are the trade and tariff discussions affecting project budgeting, given that raw material costs have risen in the short term and seem to be unpredictable?
Rizzi: To say it’s hard to predict is an understatement. It’s changing daily and we don’t know where it’s going to land. Not to get politics into this, but hopefully it’s just gamesmanship that will turn into something a little bit more favorable with how the United States negotiates trade with our partners. I personally hope that there’s more open borders. This is certainly complicating things and, ultimately, it will be more expensive for everybody in the supply chain and it will get to the consumer at some point if things don’t change.
With more unknowns just from a materials cost standpoint because of tariffs, does that result in more contract transparency between OEMs and the supply chain?
Rizzi: For us, it’s a little bit too soon to know, but we are talking internally about the need to do that very thing. Every one of our sales team understands that (tariffs) need to be part of the discussion going forward.
Veldboom: Right now, everyone’s kind of wondering, ‘What are they going to do?’ No one’s sure. Is this just talk? Are we going to back off? Are we going to make it worse? I think there’s a lot of comparing notes, if you will, in terms of what we do, but we haven’t really seen anything tangible yet for most of our customers at this point. I think it’s going to take another six months or so for things to really pan out, see the impact and force people to be more open book.
Wall: If I think about it from an automaker perspective, they seem to be making the right noises. The challenge has always been communicating that down through the purchasing teams and purchasing managers. … The good thing I would say from a supply chain perspective is suppliers are more valuable now than probably ever, as cliché as that sounds. When you think about where the centers of excellence lie in terms of research and development and technology development, automakers cannot be masters at everything. If they want the innovation … then they (need to be) easy to work with and certainly more rational.
How do you assess the state of supplier relationships in the current market?
Wall: We’re hearing a lot about automakers or even some of the Tiers 1s trying to maintain some degree of nimbleness with their supply chain to be able to react and re-react where they need to. … On the other side, the larger suppliers are multi-generational sourcing. Because (automakers) are requiring these suppliers to invest a lot more in moving to another facility, moving to another country, the supplier’s like, ‘Well, if you want me to build a whole new greenfield facility, I need a bigger commitment than just a one-generation vehicle.’ There’s that natural tension there. If I’m an automaker, I may not want to commit that, but you may have to in order to get those suppliers to go global or to really be able to support you on a whim wherever you want to be — especially now in an environment where you may be in Mexico one week and six months later, you may need to be in the U.S. or over in Asia. It’s a tough time for a supplier to wind through those demands.
Hill: We hear that strain from the small (suppliers) saying, ‘I don’t understand the regulatory environment; I don’t understand the tax environment; What is transfer pricing? How do I make this work?’ So, educating them in a relatively short period of time so that they can enter (a market) quickly is a challenge for them, too.
Wall: I see smaller suppliers that are maybe more regionalized that are thinking about going global, and they’re thinking about a whole different set of questions and capital and cost needs that they need to satisfy in order to really make that leap. It’s a lot tougher now to do that than it was five or 10 years ago because of some of the other headwinds that we’re facing.
How is the recall-heavy environment affecting the supply chain?
Hill: I haven’t seen a whole lot of willingness to change. There have been certainly the (questions of) how can we manage our risk. We’ve seen (that) on the tariff side, too, (where) maybe you introduce something, but it comes back to leverage. … Recall coverage and tariff coverage have risen to the top (of suppliers’ issues). At the end of the day, there’s only so many things that you can push for and get.
Veldboom: That’s helped us in a big way because when we project launch, (we have) the ability to do assessments on what we quote and get a little deeper than we ever had before. … I think it’s made us better in that sense, but you’ve got to have much more rigorous review upfront. (There are a) lot more elements in there in having to make sure you’re looking for that unexpected liability.
Wall: I think we underestimate the cost that’s involved in that. It does not get costed out probably as much as it needs to be. Even if you are capturing that cost, the harsh reality is that you may lose the business because that next supplier isn’t capturing that cost. … Suppliers are being required to do more than ever before. It’s a matter of capturing and hopefully costing that, but then also having to be able to get that cost to the automaker or the Tier 1, which is not always easy. It’s definitely a balancing act. I’m struck by just the amount of stuff that is raining down on the supply chain that they’re now responsible for.
Veldboom: That’s exactly the thing that’s really hurting us. … We may only be seeing the beginning of some of that where people weren’t doing their homework, were aggressive on price, couldn’t really do it, and now we’re seeing things come back.
Rizzi: We had an interesting issue recently … where we were working very closely with one of our customer partners on a new design, and our engineering team actually got to the point where we had a very frank discussion with that customer and said, ‘We are not going to be able to do this for you, and here’s why.’ The team was a little bit concerned that that would not go over well, but it had the exact opposite effect. Our customer was so appreciative of the fact that we explained to them why their request wasn’t going to work, and that turned into just a much more fruitful way to look forward and viewing something very differently.
In an environment where some suppliers are better able than others to weather cost increases and risk exposure, could that lead to distressed situations, even though the industry as a whole remains relatively healthy?
Wall: I don’t know if I’d call them distressed suppliers, but maybe suppliers that have gotten out beyond their skis. Those Tier 1s and automakers are getting a little worried about them, so they’re trying to either backstop themselves or be able to prepare for that inevitability if they can’t do the job or there’s an issue that they run into. … It’s not so much (that they) got upside down leverage-wise and/or balance sheet-wise, but it’s more on the fundamental business side. ‘Yeah, we can do it but, boy, that cost is a lot more than we thought. We bid it out too tight and now we’re faced with either having to go back to our customers — which nobody wants to do in that case — or having to find some alternatives.’
How is the current cycle affecting that distressed situation?
Wall: As we start entering into this sort of plateauing volumes, what happens is it all rolls downhill. We’ve got commodity price pressures now — they’re starting to creep back up. We’ve talked a little bit about the tariffs: That’s adding some costs, obviously. As volumes start to plateau, you are starting to see that cratering of (sedan) programs (in favor of) crossover utility vehicles. Suppliers have generally done a pretty good job at getting ‘segment diversification’ where they’re going to run some car programs, but they’re also on some good utility vehicle programs. … The problem is as those car programs have gone down and we’re seeing just a sheer proliferation of crossover utility vehicles, not every one of those crossover utility vehicles are going to sell. There’s a stark reality that as we get to that plateau, volume can’t carry us out of it as much as it used to back in 2013, 2014, and 2015.
What are the implications of these market factors on M&A in the local supplier base?
Hill: We’re seeing a lot of buy-side activity inbound from other countries. At the front of it, (we also see) some private equity plays that are happening, but they’re strategic plays. … In my view, the hot thing is no longer to have that joint venture, it is to have that fund or strategic buyer from outside the U.S. coming inbound and saying, ‘We have something we think we can collaborate on,’ and we’re just going to buy it. We want to keep the talent here, we want to keep the operating team here, (but) I have a new master and that master is bringing different things that are throwing curve balls. I think it’s a great opportunity, but on the front end of it, it’s not what anyone’s used to, so it’s different.
Every executive interview these days inevitably comes around to the topic of talent. What has the current labor situation forced auto suppliers to do that maybe they didn’t before?
Veldboom: I think you have to be pretty innovative and flexible to find what works for the right profile of the long-term team member you’re looking for, and if anyone knows what that is, they’re obviously not going to share it because everyone’s competing for different talent. We’ve spent an inordinate amount of time finding the right people, going through that vetting process and training. We invest a lot of training into our people. Once we get them over that year’s threshold — that’s where all our churn is — then we have a pretty good career path we’ve developed for people. We have long-term employees, (and) we are trying to track people toward that. And it’s not just about pay — we have excellent benefits.
Rizzi: We partner with all the local universities. We (also) have a very strong intern program throughout JSJ. GHSP specifically had well over 35 interns come through it this year. We’re even cascading that internship program down to the high school level. We take very seriously the lack of interest in a lot of the trades, so as we’re talking to high school students, we’re trying to generate some energy behind some of the more classical training type positions or manufacturing type positions.
Do you expect this worker shortage to play out until the next downturn?
Rizzi: I don’t know that it’s ever going to go away. I think the type of skill set that contributes to the talent shortage will probably continue to change as technology changes. What I think we need to continue to do — and we’re talking more and more about this — is (ask) how do we solve the talent program with a global outlook. We’re not only looking at filling positions here in West Michigan, but we’re looking globally to do that, especially from an engineering perspective. How can we leverage our continued growth in China, how can we … utilize foreign-based engineering as a solution? These are just examples of really having an open mind to the opportunities that exist globally, and if we can do that well, I think that talent challenge becomes a little bit less of a problem for us.
Veldboom: For us, it’s the same thing in terms of having to operate differently than we have in the past. I think talent development is becoming a bigger part of what we need to do better, and that isn’t just because of Millennials, it’s just a change in the workforce that we don’t foresee changing anytime soon.
Hill: I’m encouraged by the high school, junior high level of robotics programs that are being offered in small communities, not just at … places that have historically great programs for young students. By getting kids involved in that maker’s fair, (it’s) now becoming cool to engineer something. You have kids that are saying, ‘I don’t want the Matchbox set, but I want the 3-D printer (where) I can design something.’ That’s a different mindset. Does that help us in the next two years? No. But five to 10 years out, I think it does.
Wrapping up, what’s one thing that’s keeping you up at night within the industry?
Veldboom: There’s a lot of uncertainty that’s going on with all the talk about NAFTA and tariffs. There’s the added dimensional uncertainty, and that makes it very difficult to plan. But by the same token, that’s that double-edged sword. It’s also a great opportunity, because we’ve seen a lot of activity on opportunities to pull down products. … We kind of look at it as a glass half-full in that respect. Yeah, there are some headwinds that we know we’re going to have and a lot of uncertainty, but if we know ourselves very well and cultivate some of our core competencies and expand some of those, we think we will come out stronger as a result.
Wall: Given where we are in the cycle, we’re keeping our eyes open for that next downturn. When I’m talking to suppliers, I always emphasize the scenario planning, the what ifs. If and when that recession comes, and we see sales go to maybe 14 or 15 million, how do we adjust? How are we targeting a wider variety of customers and segments to try to accommodate? … I think, by and large, everybody is kind of keeping their powder dry and just kind of seeing where this is all going.
Hill: I think we’re better prepared for the supplier downturn that will happen, because of what we went through eight to ten years ago. When’s it going to happen? I don’t know. But I’m hopeful and optimistic that the Chapter 11 process that we go through, workouts, and restructuring processes can be more efficient and effective. Our clients are getting smarter in a good way.
Rizzi: When the next recession is going to hit continues to be part of a lot of what we talk about, but because we’ve been talking about it for so long, I feel like we are prepared. There’s a confidence. … What keeps me up more is, really, the pace of change of technology and hoping that our customers have the ability to make the right bets — even more so than we have the ability to make the right bets and support them — because things are just changing so much.
Galloway, Mitch. (2018). "Automotive supplier roundtable - heightened uncertainty tests resiliency for automotive suppliers". Retrieved from https://mibiz.com/item/26052-automotive-supplier-roundtable-heightened-uncertainty-tests-resiliency-for-automotive-suppliers.