As demand slows, auto suppliers face production downshift
Auto-part suppliers face the prospect of slowing vehicle production
INSIGHT ARTICLE |
The slowdown in 2019 demand will compress automakers’ margins, forcing them to think defensively for the first time since the global financial crisis of 2008–2009. Suppliers will need to adjust to automakers' attempts to maximize capacity utilization by being nimble and evaluating new strategic directions.
Automakers continue to evaluate their autonomous and electric vehicle platforms; as a result, they are altering their business models and product portfolios. This comes to the forefront just as sales start to decline and become more susceptible to external factors such as growing political tensions across the globe.
Sales mix shift continues
Although they are facing a reduction in volume, U.S. automakers profits have recently been buoyed by their continued shift in product portfolios to higher-margin pickup trucks, SUVs and crossovers. Since 2014, the percentage of truck sales has skyrocketed from 53% of units to around 71% in 2019; the U.S. sales mix of the largest Detroit automakers combined is 85% light trucks in the year to date.
The continued shift from cars to light trucks has masked a softening of overall demand and is pressuring margins at U.S. automakers just as they are starting to lose market share to foreign competitors who are ramping up their SUV and crossover portfolios. Volkswagen and Hyundai-Kia have been the most aggressive in adding trucks since 2017. European luxury and Asian brands have all been shifting to a heavier mix of light trucks.
Profit pressure on suppliers
Automaker restructurings at Ford, General Motors and Volkswagen will create ripples throughout the supplier base at a time when higher raw-material input costs, especially steel and aluminum, are already creating more intense profit pressure. Given the scope of this round of realignment, where key customers are ending legacy coupe and sedan programs, the investment in training and educating the existing workforce about new parts, processes and technologies will be significant and add to the already growing profit pressure being felt. It will likely take years for consumer uptake of trucks and electric vehicles to offset the decline in cars, creating significant challenges for smaller suppliers dependent on a single automaker.
What lies ahead
In November, there should be visibility into whether the United States will initiate additional duties on automobile and automotive part imports under Section 232. The Section 232 investigation is a component of the current administrations agenda related to U.S. trade and the auto industry, focusing on the following:
- Expanding domestic auto manufacturing
- Addressing bilateral trade deficits
- Reducing disparities in U.S. and trading partner tariff rates
At 2.5%, U.S. passenger auto tariffs are lower than some trading partners, including the European Union, which imposes auto tariffs as high as 10%. U.S. tariffs on light trucks, including pick-ups and sport utility vehicles, are much higher at 25%.
If the United States does move forward with their threat to impose further punitive tariffs, there could be significant effects on the U.S. economy. U.S. motor vehicle and parts imports from the EU and Japan totaled nearly $120 billion in 2018, or one-third of total U.S. auto and parts imports. Economic studies generally show that U.S. GDP performs worse in models that incorporate tariffs compared to models that do not, though the magnitude varies depending on modeling techniques and assumptions.
Ultimately, there is danger of a global car crisis, which could hit suppliers particularly hard. The tariffs could increase the price of motor vehicles sold in the United States, prompting some consumers to delay purchases or purchase used cars instead of new vehicles, putting further strains on the profits of automakers and their supplier base.
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