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OEM Report: Automotive

Back from the brink

By Meghan Boyer

Auto manufacturers and suppliers move past the bankruptcies and bailouts to a leaner, more profitable industry

April 2012 - The automotive industry crisis forever changed U.S. vehicle manufacturers and the ways in which they conduct business. General Motors, Ford Motor Co. and Chrysler Group LLC—the Big Three—have emerged from 2008-2010 with changed practices, a focus on fuel-efficient vehicles and plans for recovery.

Although they made the most headlines, the U.S. automotive manufacturers were not the only industry companies experiencing difficulties in recent years. The tiered suppliers that support automotive manufacturers also dealt with challenges and changes. Many suppliers had to alter business plans, consolidate or, in some cases, cease operations entirely.

“Like with most companies during the downturn, our business went to half overnight,” says David Millunchick, production control at Principal Manufacturing Corp., a Broadview, Ill.-based Tier 2 and Tier 3 manufacturer for automotive, industrial and OEM companies. “It affected our staff and our ability to acquire metal,” and the company was forced to make dramatic cuts, he says. “The goal was to survive the downturn in the economy and protect the families at PMC.”

For the companies that made the necessary changes to survive, the industry outlook is better. “The positive news has significantly outpaced negative news since the industry bottomed out in the second quarter of 2009,” says Dave Andrea, senior vice president of Industry Analysis & Economics at the Troy, Mich.-based Original Equipment Suppliers Association.

Levels of optimism among suppliers have increased while pessimism has decreased, according to the OESA Automotive Supplier Barometer. The Supplier Sentiment Index reached 64 in March, a stable level to the 66 in January and far better than the 37 registered in September. The index has a base line of 50. Totals greater than 50 indicate positive sentiment, and totals less than 50 are negative.

Additionally, 53 percent of barometer respondents felt “somewhat more optimistic” in March, almost equal to the 58 percent in January. One percent felt “somewhat more pessimistic,” down from 4 percent in the previous barometer report.

Opportunity for change
Many automotive suppliers were not immune to the challenges the auto manufacturers faced before and during the depths of the recession, and also like the Big Three, suppliers had to find ways to restructure and thrive to move forward profitably.

The industry’s drastic changes “affected Dura like it affected the rest of the industry,” says Jeff Stafeil, CEO of Dura, an Auburn Hills, Mich.-based Tier 1 automotive manufacturer. While vehicle production was high prior to the recession, most of the automotive industry was overburdened with debt, from the customers all the way to the suppliers, he says. “Ford, GM and Chrysler had too much debt as well as the auto supply base,” says Stafeil.

The large amount of debt stifled innovation and made it difficult for the industry to do more than survive with its pre-existing obligations and expenses. “You look at 2009, and it’s a good example of what doesn’t kill you makes you stronger,” says Stafeil. “There was a tremendous restructuring of debt obligations and balance sheets,” and the industry was able to correct many of the problems and challenges that had plagued it previously, he says.

In the pre-recession years, Dura was losing funds and saddled with debt, despite consumers purchasing roughly 16 million vehicles in 2007. “Fast forward to 2010 and 2011, and we are quite profitable,” says Stafeil. “We have liquidity, we have the ability to invest in innovation, we have the ability to invest around the globe and the ability to support growth, and we are not alone.”

For Dura, the crisis was an opportunity to improve. “Never let a good crisis go to waste,” says Stafeil. “Generally, as an industry, we did take advantage of the crisis. There are things we probably couldn’t have pulled off from a restructuring of ourselves during that time period if we weren’t in a crisis.”

At Principal Manufacturing, the management opted to invest in a new MRP system to focus on the company’s cost structures and operational performance, says Millunchick. “Nobody has perfect information, but at this point in our history, we have the best information that we’ve ever had. So when we make decisions, there’s a better chance that we’re going to hit the target,” he says.

The changes have helped the company, but challenges still exist, notes Millunchick. “We were able to come out of it stronger and smarter. The pain is still not completely gone, doing business has changed, but we’re a lot stronger knowing exactly what our cost structures are,” he says.

While not every company survived the recession intact, it’s difficult to identify what happened to every company, as some businesses simply ceased operations without going through the bankruptcy process, says Andrea. Among companies that can be identified as filing for bankruptcy, roughly one-third were liquidated, one-third emerged through restructuring and the remaining third continued operations through mergers and acquisitions with other companies, he says.

Differences and similarities
In the aftermath of the automotive downturn, “there’s a lot that has changed and a lot that has stayed the same” for suppliers, says Stafeil.

“It’s imperative we deliver high-technology, low-cost parts and that we continually find efficiency,” Stafeil says. “The things that have changed are really important. One is the ability for all of us to have” a longer-term focus, so as suppliers think of the next generation of products, they are able to put more investment and resources toward them.

“The long-term focus in the auto industry in the past was very difficult to focus on,” says Stafeil. “Now we can focus on several years down the road and start to think about what makes sense for a longer vision.” Ultimately, suppliers now are able to think about their research and development investments, engineering, people and resources differently, he says.

The overall emphasis continues to be on producing the best products at the lowest costs, which means the supplier base must develop methods to offset price decreases continually, says Mark Stoddart, chief technology officer and executive vice president of marketing at Linamar Corp., a Tier 1 manufacturer for the auto industry. However, the Big Three are more willing to work with their suppliers to achieve their goals. “Just the fact that they are being more open and willing to discuss things with us” and wanting to understand the issues are indications they are trying to improve relationships, he says.

The auto manufacturers have changed their purchasing strategies and philosophies, says Stoddart. In the past, “they looked at their supply base as something to constantly beat to get productivity, price reductions. They felt that you do so much business with them that you’ve got to stick,” he says.

Coming out of the recession, automakers have realized if their suppliers are not healthy, they are not healthy, says Stoddart. “There’s definitely improvements in supplier relations and really what’s driving it is a better attitude. The top management recognize that the suppliers need to make money, because if they are financially healthy then they’ll be here today and tomorrow and in the long term,” he says.

Suppliers also now want to know more about the automakers’ strategies, says Stoddart. “Suppliers are pushing back more when they get told, ‘We want you to have the capacity to produce 40,000 parts,’” he says. Gaining additional information about the viability of product lines helps suppliers manage their businesses properly and take on appropriate amounts of risk.

Market improvement
The auto industry is continuing its recovery. An estimated 13.6 million new cars and trucks will be sold this year, a solid increase from 2011, according to Edmunds.com, an online provider of automotive information.

The steady pace of recovery will continue, but auto manufacturers won’t see sales reach pre-recession levels prior to 2016, according to Edmunds.com. The company anticipates new car sales will climb to 15.85 million in 2015, just below the benchmark of 16.1 million sales achieved in 2007.

“In the past six to eight months, an increasing number of signs suggest that economic fundamentals are improving, and these factors are contributing to rising auto sales momentum,” Lacey Plache, chief economist at Edmunds.com, said in a press release. “We expect this momentum to continue, but at a moderate pace, given the fundamental steps that are still needed for a full economic recovery,” with factors that include unemployment, the housing crisis and tightened lending standards.

The Big Three automakers each reported an increase in net income for full-year 2011.

Chrysler reported net income for 2011 of $183 million, up from a net loss of $652 million in 2010. The growth exceeded the objective the company set in November 2009. The company will continue to execute the goals it has set for itself, Sergio Marchionne, chairman and CEO of Chrysler Group, said in press release.

Roughly two years after emerging from bankruptcy, General Motors reported 2011 net income attributable to common stockholders of $7.6 billion, up from $4.7 billion in 2010.

“In our first full year as a public company, we grew the top and bottom lines, advanced our global market share and made strategic investments in our brands around the world,” Dan Akerson, GM chairman and CEO, said in a press release. “We will build on these results as we bring more new cars, crossovers and trucks to market.”

Ford reported full-year net income for 2011 of $20.2 billion, an increase of $13.7 billion from a year ago.

“Despite the continued uncertainty in the external environment, the strength of our North American and Ford Credit operations allows us to continue to invest for future growth and develop outstanding products,” said Alan Mulally, Ford president and CEO.

Though there have been many difficulties and changes in the industry recently, the future is optimistic, says Stafeil. It’s an exciting time to work in the industry because of the changes in fuel-economy requirements and the introduction of electronics in vehicles.

“It’s a very active industry and a very active place,” he says. “The opportunity and outlook from being in manufacturing or being in the supply business is better than I’ve seen in a long time.” FFJ

Industry barometer
For consumers, purchasing a new car increasingly has become a need more than a want.

“The age of the nation’s fleet is now older than it has ever been—nearly 12 years,” Steve Foley Jr., chairman of the 2012 Chicago Auto Show, said in a press release. “Increasingly, people not only desire new cars but have a need to replace what’s in their garage.”

The combination of aging vehicles and higher fuel costs may spur increased purchases of fuel-efficient vehicles, including hybrids and all-electric models, he says. Among the top trends visitors at the Chicago Auto Show saw this year were the latest in gas-electric plug-in hybrids as well as advancements in technology and safety and increased connectivity with social media.

The largest auto show in North America, the Chicago Auto Show each year not only is an opportunity for consumers to view the sector’s latest and greatest offerings, it also is an indication of the state of the industry.

This year, the strength of the show—with attendance up 10 percent from the previous year—indicates an uptick for the auto sector.

The FFJournal team was at the show to learn about the industry’s progress from the manufacturers themselves. View FFJournal’s video coverage of the event at www.ffjournal.net/autoshow.

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