Coming off a year which saw a rally in both automotive production and sales – mostly evident in the US and China – it’s not surprising to see that momentum course through the entire parts manufacturing supply chain. In fact, a newly released survey of global original equipment automotive parts producers shows that some suppliers are downright giddy about the prospects for prolonged improvement in business conditions.
The results of the January 2013 OESA Automotive Supplier Barometer – published by the Original Equipment Suppliers Association – reflect a “significant shift” from survey respondents who just a few months ago felt “somewhat more pessimistic” about overall business and market conditions but now harbour a “somewhat more optimistic” outlook. Specifically, 34% of respondents expressed a more upbeat view (up from 25% back in November), while only 7% conveyed slightly more pessimism (down from 17%) over the same period. This partially explains the upward movement in the telltale OESA Automotive Supplier Barometer Sentiment Index – currently 55, four points higher than the November 2012 reading. (Note: “50” represents the median between negative and positive attitudes.)
“Things are positive in North America and Asia; Europe is still a question mark,” one survey respondent observed. That observation is reflected in the market analyses. According to LMC Automotive – the forecasting arm of the venerable J.D. Power & Associates – an estimated 15.4 million units were produced in North America in 2012. It was a year marked by vigorous sales activity in the light trucks segment and fuel-efficient sedan categories, with companies such as GM and Chrysler breaking records over the course of the year. Even players in the luxury/high-performance arena shattered targets, according to financials published by Audi, BMW, Infiniti, et al.
The same can be said for the Chinese market. After overtaking the US in 2009 as the world’s largest automobile manufacturer, China continues to build capacity. According to the China Association of Automotive Manufacturers (CAAM), China produced more than 16 million vehicles last year – thanks to not only government-subsidized production and lucrative partnerships with Western manufacturers, but also a burgeoning middle class whose appetite for higher-quality durable goods has grown quite ravenous.
Another plus – at least as it pertains to the US market – is the flow of cash to credit-worthy suppliers. More than 70% of survey respondents describe the commercial bank lending environment as “favourable”. This marks a tangible improvement over the same period last year, when only 55% considered commercial banks to be generous with their lending terms.
In many parts of Europe, however, concerns persist. According to the European Automobile Manufacturers’ Association, 2012 sales were off by 7%. Nearly one-third of the January OESA survey respondents said that their European operations have fallen more than their North American operations have grown! This phenomenon explains their aversion to invest in new equipment or hire additional workers. For the short term, many parts suppliers are adjusting by tempering their fixed cost increases in North America to offset declines in Europe, and some have shifted resources altogether, moving production to Mexico.
Now, this is not to suggest that North America and China are completely in the clear. Some survey respondents point to slightly diminished orders among Detroit’s major automotive suppliers at the start of this first quarter, as well as overstock conditions at the dealership level. At the same time, lingering issues regarding the so-called “debt-ceiling” dilemma facing the US government is also making it difficult for manufacturers to plan long term. With respect to China, the danger of overcapacity looms large if supply outpaces demand.
Survey respondents also point to supply chain constraints relative to material markets, powertrain/engine components, chassis systems, electronics and capital equipment. The latter two sectors in particular have remained challenged since the recovery began to take shape in 2010, analysts say. In response to these issues, some suppliers are outsourcing production of the more “simple” components in order to free up capacity for more of the core “strategic” parts. Suppliers are also exercising more vigilance as it pertains to their partners across the chain by aggressively driving productivity improvements with focused teams.
On the whole, if current trends persist, automotive production should continue on an upward path, resulting in a reciprocal rise in parts production. LMC Automotive projects production in North America will hit nearly 16 million units this year, with equally aggressive forecasts expected in China (CAAM is banking on surpassing the 20-million-unit mark by 2015). Heck, even the UK automotive industry is starting to mount a comeback.
“Building on the momentum the industry has been gaining over the past two years, sales remain on a trajectory to return to pre-recession levels within the next few years,” said John Humphrey, senior vice president of global automotive operations at J.D. Power & Associates.
What’s that expression about rising tides?
The complete January 2013 OESA Supplier Barometer is available online.
--By Reginald Tucker