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Mixed signals from the automotive industry

January 26, 2013

Is the automotive industry feeling optimistic or pessimistic? It depends on who you ask. Two recently released surveys reveal a paradox in the industry, that while North American vehicle production continues to trend upward, sales are “way off from the 17 million cars per year automakers were selling in 2007,” according to a second-annual automotive industry survey from Booz & Company, which surveyed OEM executives.

May’s Automotive Supplier Barometer from the Original Equipment Suppliers Association (OESA) shows little change overall from the survey results in March, with “Somewhat More Optimistic” responses decreasing by 8% while “Somewhat More Pessimistic” increasing by 7%. Oddly enough, companies with revenue of less than $50 million were more optimistic in this survey, whereas pessimism increased for mid- and large-size companies, according to the OESA summary of results.

For the optimistic suppliers responding to the OESA survey, one said, “Toyota sales are booming and we’ve finally received relief for commodity [price] increases.”

The pessimistic group had its share of comments: “Orders are dropping. GM is having more difficulty and Ford is slowing down as well,” said one respondent. Another respondent said, “Our tooling supply orders have fallen off badly in the past three weeks—the outlook does not support this decline so we are puzzled.”

With 2012 being an election year, pessimism seems to abound, with several comments on the state of the country and the economy. “The election year and gridlock on Capitol Hill are of major concern,” said a respondent.

Issues that have plagued the automotive suppliers over the past year are still a concern among most suppliers who responded to the OESA survey. Supply chain disruptions over the past year have forced the automotive industry to “look hard at supply chain risk management,” said the report summary. Strategies to mitigate this risk that were starting to be implemented a year ago are now “standard operating procedure” according to the OESA.

Some of these actions include “monitoring and increasing buffer inventory stocks, considering dual material suppliers sources, investigating and validating alternate materials and sourcing of materials and components closer to the point of use.”

That last strategy brings up the increasing trend to source away from “low-cost countries” to reduce supply chain risk. However, noted the OESA survey summary, “. . . respondents were equally split in their opinions with 54% indicating they do see such a trend” and 46% saying “no,” they do not. Of the countries that see most vulnerable to this trend, China was first, with other Asian countries in general following.

One respondent commented that “overseas sourcing is dropping, with Mexico sourcing increasing.” Another respondent said, “[Our] customers are moving towards more ‘dual sourcing’ strategies as described by OEM purchasing organizations, but not all sourcing decisions are driven by this [trend] (yet).”

The Booz & Company survey’s executive summary also found that caution is prevalent among OEMs. “The industry clearly has expressed a very sober collective understanding that it needs to grow smartly—namely, not let capacity grow faster than natural market demand,” the summary said. “OEMs [are] focused on serving and delighting motivated consumers rather than trying to find buyers for an over-abundance of vehicles—i.e., making more profit on fewer sales.”

New powertrains have staying power
Brian Collie, a partner at Booz & Company, discussed with PlasticsToday the future of vehicles with alternative powertrains, commenting on the survey’s findings that while OEMs are generally bullish on these vehicles and believe they are here to stay: “The case for full-hybrid cars seems strongest; 70% of respondents say they are more confident in that category than they were a year ago.”

The automotive executives surveyed “are more skeptical of fuel-cell or battery electric cars—with respondents respectively saying 75% and 71% are less confident in these two powertrains compared to last year.”

Collie commented, “That gets to the heart of the problem—consumers are fairly rational and the economics [for fuel-cell or battery electric cars] just don’t make sense. Without government support these vehicles won’t go anywhere. Yet, if you ask the executives who responded ‘do you want the government picking winners and losers?’, they clearly don’t want that. It’s not clear what the right answer is.”

The high cost of these vehicles is a big component of what’s driving demand, or lack thereof. This includes what it’s going to cost for the vehicle to purchase, then you add the total cost of ownership. “The industry has to get that down,” said Collie. “What type of alternative power train will people buy? That hasn’t happened yet and without government tax credits or subsidies, it’s tough to make the numbers work. Right now the numbers just don’t make sense.”

If government support for these alternative powertrains continues, 58% of the respondents to the Booz & Company survey believe that non-gas cars could achieve a market share of 10% or more. “In the absence of government support, however, this figure drops to 30% [confidence], a stark contrast indeed,” noted the summary.

Collie concluded from the survey that “Alternative power trains are here to stay, and OEMs need them as part of their overall portfolio. Under certain driving conditions they could be a rational source, but costs have to come down and the infrastructure [for a national grid of rapid-cycle charging stations] needs to be addressed. Government can play a role in helping the stakeholders, but exactly what that role should be is still undecided.”

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