Automotive Update

January 1, 2010

In 2009, more than 30 North American automotive companies declared bankruptcy, and these losses have meant a rise in unemployment.

In the assembly sector, employment levels have fallen to their lowest point since the mid-1960s. More than 40 years of job growth has eroded in the past 18 months alone.

According to automotive industry analyst Dennis DesRosiers, most of these lost jobs are due to the cyclical downturn of the automotive sector across North America and therefore, some will be regained when consumers begin buying again. However, some of the lost jobs were caused by plant closings and are gone for good.

The assemblers are not the only ones affected, however.

The automotive parts sector is also down dramatically to only 61,300 in September 2009, said DesRosiers, although during some months last year, that number fell below 60,000 jobs. By comparison, in 2001 roughly 100,000 people were employed in the parts sector. Nearly 18,000 of those jobs were lost in 2009.

Collectively, the manufacturing side of the automotive sector is down by about 27,000 jobs this year and about 57,000 jobs from its peak at the beginning of this decade, added DesRosiers.

At the grassroots level, the numbers aren’t any better.

“The machine, tool, die, and mold sector is not faring any better with year-to-date employment down to 18,840 workers, a decline of 22.3 percent from last year,” said DesRosiers. “In total they are off by about 6,000 workers from 2008 and about 10,000 workers from their peak.”

What has caused these issues is the speed at which this current industry cycle slid downward.

“Most of the current problems in the auto sector are the result of the most serious cyclical downturn in the market that the U.S. has ever witnessed, and to a degree in Canada and Mexico as well,” said DesRosiers. “There also are serious structural issues, and they are made much worse by the current cyclical issues. But the market downturn trumps all structural issues at this point.”

New Platforms, New Growth

One way that automakers, especially the Detroit Three, will be able to slow market share erosion will be through the introduction of new products and platforms. New platforms normally represent opportunity for suppliers.

“A strong case can be made that the automotive supplier industry in North America is entering its biggest decade of opportunity since the 1960s and, at the same time, the biggest decade of threat in its history,” said DesRosiers.

In a best-case scenario this will trigger a large amount of spending on technology, which could be either very positive for suppliers or even negative if the work remains in-house.

“This record level of technology spend actually could be a serious downside threat to the supplier community,” said DesRosiers. “However, capable suppliers who invest in their products and factories will see significant upside opportunity.”

The following factors will all play a role in the success of automotive suppliers:

1. A serious rationalization of the number of components per vehicle
2. Nontraditional suppliers entering the market
3. Unprecedented demands on product and process innovation at the supplier level
4. Increased need for capital

And, according to DesRosiers, if the current supplier base falters even a little, the OEMs will quickly in-source rather than wait for suppliers to catch up.

“There is, however, unprecedented opportunity for selected suppliers to capitalize from the current restructuring on the OEM side of the sector,” added DesRosiers.

Good Times Ahead for Partsmakers?

The current downturn in the automotive sector may be unprecedented, but according to Linda Hasenfratz, CEO of Guelph, Ont.-based Linamar Corp., the future opportunities for the automotive industry also may be unprecedented.

“We’re starting from an incredibly negative point, but there’s going to be a huge opportunity on the other side for those companies who survive it,” said Hasenfratz recently.

She sees a new landscape ahead, one that will bode well for automotive suppliers in particular. Manufacturers are turning to outsourcing as a way to reduce capital burden, and that means the component and assembly work done in-house today represents a new market for suppliers.

“For the first time in a decade, we’re going to be looking at rising production levels with fewer competitors, and that amounts to fantastic opportunity in a market that’s estimated at $240 billion globally,” Hasenfratz said. “Car manufacturers are finding themselves cash-strapped and yet in a position where they have to invest for the future simply to meet looming vehicle emission-reduction requirements. They’re forced to outsource, and that means we’re going to start seeing bigger chunks of this billion-dollar market get out to the supply base, which is nothing short of completely exciting.”

That being said, however, suppliers should rethink current strategies moving forward.

Priority one, according to Hasenfratz, is finding innovative ways to grow sales and increase the content per vehicle that a company supplies, increase market share in existing markets, and tap into new markets.

Priority two is cost reduction. The aim of any supplier should be to get the current production run rates back to a break-even level. But perhaps the most important lesson, she said, is to take action now rather than waiting for the market to rebound.

“You can’t wait for those good old days to return because they might never come back,” said Hasenfratz. “It’s time to figure out what you can do with what you have and to grow your product offering now, whether that means diversification or something new that you haven’t done before.”

Linamar, for example, has been successful in leveraging its own precision machining expertise to branch out into other markets for machined components, such as the energy field. It has also included green technology as a key element to its strategy, targeting markets such as wind generation and solar energy.

Better fuel efficiency and reduced emissions are also key priorities for product development in core power train products.

“We believe green technology products are all we’re going to have in the future, so the idea is to figure out a way to focus a meaningful part of our business there today to position us for growth in the long term,” she said.

Manufacturing is vital to restoring a stagnant economy.

“You can’t have an economy that’s just based on service,” said Hasenfratz. “You need real manufacturing jobs, making interesting, innovative products that people want to buy. Every manufacturing job creates five or six other jobs to support it. Service jobs simply don’t have that multiplying factor.”

Also of importance: investment and growth.

“We can’t cut our way out of this current situation; we have to grow our way out,” she emphasized.

For more information, visit www.desrosiers.ca and www.linamar.com.