The opening decade of the automotive industry’s second century is evaporating any notion that the sector is a mature, smokestack industry. Private equity and hedge fund money is dramatically restructuring the supplier sector. Market share shifts underneath relatively healthy sales and production volumes are creating an industry of “haves and have nots” and bifurcated financial results. Finally, industry norms are being transformed as the largest suppliers emerge from Chapter 11 with new labor contracts, reassessed legacy burdens, and rewritten customer contracts. As the industry focuses on return on invested capital and cash flows, the players and the manufacturing footprint will change dramatically.
The industry is in direct competition with firms from around the globe. This forces suppliers to focus intensely on cost. Many have found it necessary to look at low cost country sourcing and finding parts in locations that have lower labor rates, tax rates, and legacy costs. This trend has been beneficial to many suppliers, allowing them to become truly globally competitive. However, it has also has put increased pressure on companies that are not in an optimal position to develop international sources or manufacturing.
The industry is in the middle of a great transformation as GM and Ford have announced the elimination of some 50,000 to 60,000 jobs between 2006 and 2010. Many of these jobs are located in Michigan as 20% of all Michigan employment is related to the manufacture and retail of motor vehicles. While all 50 states have some level of motor vehicle, part component, and dealership employment, the states of Michigan, Ohio, Indiana, and Illinois that will feel greatest cost of this transformation.
The North American industry’s design and engineering footprint remains concentrated in the upper Midwest, particularly in Michigan. However, the industry’s manufacturing footprint has expanded with increasing automotive foreign direct investment in the Southern states. Toyota has lead this charge with assembly plants in Kentucky, Texas, and soon to be Mississippi along with Indiana and California. Nissan, BMW, Hyundai, Mercedes-Benz and Honda’s third U.S. assembly plant in Alabama are all located in “non-traditional” southern states. This investment, along with other foreign manufacturers, will push the foreign-owned share of North American production over 36 percent in 2007. This is a remarkable achievement given these firms have been manufacturing in North American for only a little over 20 years.
The component suppliers, needing to be close to their customers, are following this pattern. It appears when new, incremental automotive investment is not following the basic geographic pattern of I-75 and I-65 for north-south expansion that firms are “back-filling” in locations along I-70, I-40 and I-20 along east-west routes. Recent research by the Center for Automotive Research shows that Tennessee, Kentucky and North Carolina are now in the top 10 states with supplier employment and Texas, Georgia and South Carolina in the next 5 top states of supplier employment. In addition to logistic patterns, operating costs, government incentives and climate all contribute to this site location trend.
The vehicle manufacturers will continue to control vehicle assembly, engine, transmission, and major stamping production. However, the supply base contributes some two-thirds of the vehicle’s total value. Given the pressure on costs, economics will continue the pressure to outsource parts from high cost to low cost production sources. The process of outsourcing has better aligned product value-added and has reduced the industry’s levels of fixed costs. This trend will continue over the next decade.
The entire industry is under severe financial pressure. Some estimate that up to 30% of the supply base and tool and die industry are at risk and may exit the business through mergers, bankruptcies or simply a strategy to de-emphasize automotive. The vehicle manufacturers and suppliers will increasingly shift their overall focus to improving human and capital asset productivity. By focusing on asset productivity, the industry is more likely to operate at a break-even position, even throughout a mild downturn. A certainty in this industry is constant restructuring as individual companies will always face new competitive challenges.