7 trends in automotive supply to watch in 2017
After seven consecutive years of growth, auto sales remain strong. But while auto suppliers for both original equipment manufacturers and the aftermarket have reasons to be optimistic, there may be some causes for concern that are worth watching in the coming months.
Only a few short years ago—when the Detroit Three automakers seemed on the verge of collapse—it would have seemed difficult to imagine the success that the auto industry continues to enjoy today. But millennials are less interested than baby boomers in buying cars, preferring the freedom of ride-hailing over the hassle of ownership. This could mean the beginning of a trend towards specialized vehicles specifically built for these services—and the consequent reduction of private-use vehicles. Weakening economies, rising interest rates, credit tightening and changing consumer demographics are factors that many OEM and aftermarket suppliers feel could contribute to a decline of the automotive market. Skill shortages—particularly engineering and technical specialists, who are being lured by Silicon Valley—threaten to impair growth as well. Overall, sales of automobiles appear to be reaching a plateau and it is not clear what the impact may be of any tax cuts and tariffs on imports imposed by the new administration.
While proposed CAFE standards were of some concern to suppliers in 2016, the potential for reductions in fuel economy standards by the Trump administration could have a profound effect on the types of cars being made and sold.
Learn more about growth in this brief video interview with Byron Schneidman, automotive practice leader, and Joe Brusuelas, chief economist, at RSM US LLP.
Emerging fuel sources such as electricity, hydrogen fuel cells and biodiesel—as well as connected and autonomous cars—are among the primary drivers of technology development expected to increase in the automotive industry over the next five years. There will be significant growth of electrically driven components as well, and these high-level changes will generate opportunities for component suppliers and aftermarket service providers that are investing in new technology.
The changes in automotive technology will affect the component FIT (failure in time) rates and service requirements in the auto aftermarket in the years ahead. All of this activity challenges both OEM suppliers and auto aftermarket service providers to prepare now for the new service requirements to come.
On the operational side, auto suppliers have implemented or plan to implement a range of technologies, including supply chain tracking and monitoring, enterprise resource planning and the internet of things technologies. The automotive industry can expect the federal government to establish requirements for rising technologies. Studying and adapting to the changes in that technology will be central to the strategy of OEM suppliers that make the parts and the aftermarket companies that service them.
Learn more about automotive technology innovations in this brief video:
Auto suppliers are on the march to new markets, and a majority see the global economy having a positive impact on their businesses. For automotive suppliers, the attraction of expanding globally may differ depending on whether they serve OEMs or the aftermarket. With many already operating at or near capacity domestically, some suppliers—particularly those in the United States—are finding the operations capacity in some foreign markets attractive.
There are, however, a variety of challenges that companies face when going global: currency fluctuations, worldwide demand, logistics, personnel considerations, economic concerns, compliance requirements, financing and political issues, to name a few. This may in part explain why most suppliers prioritize expanding in domestic rather than offshore markets.
The issue most concerning suppliers is what the incoming Trump administration policies will be toward the North American Free Trade Agreement. Applying tariffs on imports, as President-elect Trump suggested he would do during his campaign, could have a significant impact on the network of production facilities—such as those in Mexico, where automakers and suppliers have made substantial investments—that automakers depend on for low-cost production and are made possible by NAFTA. (Ford Motor has already cancelled building a planned plant in Mexico but will nevertheless move some production there to an existing plant.[i] But this decision not to build may have been based on market demand as much as the incoming administration’s anticipated policies.) How and where OEMs would get their commodity parts would have to change in order to keep costs low.2 As a result, some suppliers are stalling their plans to move production overseas.
In their efforts to increase profitability, most suppliers are anticipating investment increases in research and development, equipment and machinery, information technology, and facilities. Business conditions were a factor in the strategic efforts to increase profits: Thriving suppliers are more likely than declining companies to implement new financial and corporate strategies as well as to leverage technology and supplier relationships. Declining companies are more likely than others to look for ways to reduce costs in operations, the supply chain and underperforming products, although other companies are doing this to some degree as well.
Excess dealer inventory is the driver behind anticipated plant closings and downtime, cuts in shift hours, and lower production schedules.3 The U.S. auto industry overall had a 72-day supply of vehicles toward the end of 2016 (some OEMs had as much as a nearly 90-day supply); a 60-to-65-day supply is considered a healthy level.
Some suppliers are experiencing supply chain constraints, particularly in powertrain and electrical components. It may be worth evaluating vendors in the supply chain and diversifying sourcing in order to be less dependent on a limited number of vendors. Currently, global economic conditions are uneven and weaker economic conditions in other markets may present purchasing opportunities.
Some OEM and aftermarket suppliers are already experiencing flat or declining revenues, employment and profits. Weakening economies and rising OEM pricing pressures are among the issues of concern for executives that could precipitate a market decline. To brace for a potential decline, one-third of U.S. auto suppliers are turning to contract and temporary workers, for example, to cover short-term labor shortages. To offset a potential decline, customer service and support is a priority among most suppliers. Many are offering increased technical support and other value-added services to OEMs and, ultimately, to end users.
But a number of auto suppliers are managing their companies in ways that may actually increase corporate risk by not investing in common strategic initiatives that include regulatory compliance, cybersecurity and other risk mitigation activities. In addition, many OEM and aftermarket suppliers do not have secondary products. In a sector-driven economy, this can be a questionable strategy that makes their companies vulnerable to downturns. These companies would do well to find ways to leverage existing production processes in new products or sectors—such as building materials, metal fabrication and machinery—to prevent over-reliance on any single area.
From initial production to delivery to car dealers, the supply chain will see dramatic changes on a global basis as new players with unique technologies enter the market. Thousands of “tech auto” start-ups will drive these changes as they imbed their products into vehicles. This will have an impact on production cycles; distribution will be affected by tech auto as well, as parts of the world may not be able to provide support services to some new technologies. Suppliers should prepare accordingly.
With anticipated production cuts and plant closings will come a reduction in workforce, at least temporarily in some cases. In what one analyst called a “sedan recession,”4 workforce personnel at car plants are finding themselves out of work or transferred to plants making more popular vehicles as sales shift towards SUVs and trucks.5
Technology is taking a toll on the workforce as well. In general, factory investments in technology are growing and this could have an effect on the number and type of workforce personnel being hired.6 Trained workers are in demand, but those with lower skills are finding themselves left out of the high-tech environment.
The view from here
How will technology affect the future of the auto industry in the United States and around the world?
1. Boudette, N. “Ford, Criticized by Trump, Cancels Plans to Build Mexican Plant” (Jan. 3, 2017), The New York Times.
2. Vlasic, B. “Worried Auto Industry Braces for Change Under Trump” (Dec. 9, 2016), The New York Times.
3. Burden, M., Wayland, M. “Excess Inventory Could Lower Auto Sales in 2017” (Dec. 21, 2016), Detroit News.
4. Bunkley, N. “In the grips of a 'sedan recession'” (June 6, 2016), Automotive News.
5. “GM and Fiat Chrysler Cut Jobs as Sales Pendulum Swings to SUVs” (Dec. 20, 2016), Bloomberg.
6. McGroarty, P., Tangel, A. “U.S. Factories Are Working Again; Factory Workers, Not So Much” (Dec. 19, 2016), The Wall Street.