5 trends in automotive supply to watch in 2016
The automotive industry is at an inflection point: Automotive sales have risen to record levels since the recession. Supplier sentiment for 2016 remains cautiously optimistic, buoyed by projections for sales and production volumes. At the same time, this outlook is tempered by supplier skepticism that the record demand can continue. In addition, driverless cars, the increasing use of technologically connected cars, the introduction of new and innovative production materials, CAFE standards, ride-booking and alternative ownership models are among the factors changing the dynamics of the industry.
The auto industry is cyclical and now is the time, while manufacturers are enjoying a period of high demand, to anticipate and prepare for the challenges that lay ahead.
2016 automotive outlook
With the stunning recovery of the U.S. automotive sector and sales increases that haven’t been seen in decades, there is an enormous burden being placed on suppliers. Many are reaching capacity and running extra shifts to meet demand. Yet, there are risks on the horizon: A slowing global economy, changes in interest rates and shifts in demand are among the factors that could eventually have a negative impact on the industry.
Learn more in this short video interview with Byron Schneidman, partner and automotive sector leader at RSM US LLP.
Since the end of the recession, production volumes and capacity utilization rates have increased dramatically. To address increased demand, suppliers have invested in new facilities and added production capacity to existing facilities. The substantial expansion of facilities that has occurred since the recession has caused the break-even level of many suppliers to rise, which could be problematic when the demand for automobiles declines. If production levels increase in 2016 and into 2017, however, scheduling difficulties will continue to be among the primary challenges suppliers will be facing. Suppliers are working closely with customers to understand and coordinate scheduling, secure the maximum lead time possible, and share forecasts. At the same time, suppliers are engaging in continuous improvement initiatives to improve efficiencies, utilizing flexible work schedules and identifying alterative sourcing options. In addition, some suppliers are challenged by OEMs who dictate the selection of the tooling manufacturer, which shifts the burden of controlling that critical process and forces suppliers to work with tool houses with which they might otherwise choose not to do business.
The auto industry is coming off a record-breaking sales year, but who will be buying cars in 2016 and beyond? Older baby boomers are currently dominating vehicle sales; this trend is not expected to change, in part because millennials are less interested in car ownership, preferring the freedom of ridesharing over the hassle of ownership. A significant number of cars are coming off their leases in the coming years, but it is not clear that these cars will be replaced by contracts for new vehicles. The popularity of alternative transportation models is changing the ways consumers are traveling. The intermediate and long-term strategic concern that auto suppliers must address is how they will continue to grow sales in an environment in which consumer demand for automobiles has either plateaued or will decline.
Nearly three-quarters of automotive parts are manufactured in the United States for assembled components produced in North America. Yet an increasing amount of that North American production is taking place in Mexico, where many suppliers are either planning to bring production facilities or have already set up operations to take advantage of that country’s low labor costs and its close proximity to the U.S. market where the OEMs have or will be opening assembly plants. The attraction of locating operations in Mexico may also be due, in part, to challenges in South America, where increasing political and economic concerns have made that region a less-attractive business location.
From self-driving vehicles to gesture controls to apps that connect vehicles and home thermostats, technology is changing the ways vehicles and their passengers interact. OEMs, major corporations and even governments are pouring billions of dollars into developing these technologies, and their impact will be felt by consumers and ride-booking companies as well as by auto parts manufacturers. Unfortunately, many suppliers are focused on managing production of the parts OEMs need now rather than on what they may need in the future. That could be a strategic mistake, as many new ideas could make some parts and materials obsolete. To keep up to date, successful suppliers are working with the OEMs to develop, engineer and manufacture value-enhancing technologies.
Despite the number of industry jobs created since the end of the recession, suppliers continue to be challenged by the shortage of available skilled talent needed to operate increasingly sophisticated machinery. Manufacturers are turning to intern and apprentice programs to identify new talent, working with local colleges to develop industry programs, and coordinating with economic development programs and skills-training resources to bridge the talent gap. Attracting and retaining skilled labor, however, may also mean adjusting the value proposition of jobs in the industry.
New producers, suppliers and partnerships are changing the face of automotive industry. Technology companies are developing and producing innovative enablers that serve to connect vehicles to consumers’ homes and offices. New forms of ownership are also appearing, as the preferences of a young generation are changing the ways OEMs are building, marketing and selling their automobiles.
Learn more in this short video interview led by Joe Brusuelas, chief economist at RSM US LLP.