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Are Suppliers Ready for the Auto Recovery?
As light vehicle demand returns to pre-
recession levels, there are concerns automotive suppliers—particularly those in the
second and third tier—may not be ready to
take on the demands of the market recovery. Many lower-tier suppliers did not survive the 2008-2009 automotive crisis, and
those that did often had to cut their capacity to survive. Surviving suppliers are now
struggling just to meet current demand, often working 7 days a week and 3 shifts a
day. A return to years of 15- or 16-million
units of light vehicle sales could be challenged by the supplier sector’s ability to
manage volume increases.
A string of natural and man-made disasters—the financial crisis, the earthquake
and tsunami in Japan, floods, tornados,
and fires—have revealed a fragile lowertier automotive supply chain. This fragility is further compounded by the fact that
automakers have worked for decades to
winnow their supplier lists, resulting in a
much more consolidated base of suppliers. A stress at just one supplier can have
broad-based impact across the industry, as
was evidenced by the fires at the Magna
Atreum interiors plant in Howell, Michigan
in March 2011, and at an Evonik automotive resins plant in Germany in April 2012.
Automakers, who know their first tier suppliers quite well, often know very little
about the performance of their second and
third-tier suppliers—until there is a “supply
chain disruption.” Automakers themselves
have focused on continuous improvements
in quality, flexibility, speed, efficiency, and
productivity, and have supplier development programs that work closely with first
tier suppliers to improve their operations.
Extending this work to make the lower tier
suppliers’ manufacturing operations more
efficient and streamlined is a way to increase supplier capacity without minimal
new capital investment.
Lower tier suppliers frequently supply
more than one automaker, more than one
tier one, and often supply to each other.
The elements of a system that are important to one customer may differ from those
emphasized by another customer. What’s
more, purchasing relationships are frequently broken. Longer and more stable
customer-supplier relationships could help
to improve the supplier performance.
Most manufacturing systems are based on
the Toyota Production System, or TPS.
Lower tier suppliers may have focused on
just a few elements of a TPS-style manufacturing system, and may not have sophisticated software systems that the automakers and tier one suppliers have impemented.
Automakers are scheduled to roll out 133
new vehicle models this year, up from 85
last year, according to IHS Automotive;
models which will fill the suppliers’ pipelines with new work. In addition to an increased product cadence, automakers are
consolidating more model variants on a
smaller number of global platforms. Common platforms allow automakers to adjust
production more quickly to meet market
demands. However, this flexibility puts
pressure on lower tiers of the supply chain
to be both more agile and larger scale to
supply global implementation of the vehicle makers’ platforms.
Sources of Supply Chain Risk
• Market (demand variability, competition,
customer loss)
• Technology (obsolescence, materials or
process changes)
• Operations (equipment failure, product
defects)
• Product (obsolescence, substitutes, technology change)
• Input (materials prices, loss of key employees, strikes, supplier failure)
• Government (tax laws, environmental and
labor regulations, foreign trade)
• Legal (product liability, disgruntled shareholders, employee issues, patent infringement)
• Financial (cost or availability of funds)
• Credit (illiquidity)
Source: IHS Automotive
Much of the automotive value chain is in
the hands of the supply chain, and suppliers will be key to driving innovations in vehicle technology. The elements of a modern manufacturing system are well known,
and many consultants and services exist
to help suppliers improve their operations
by implementing a system. A rationalization to a common lower-tier manufacturing
system, a consensus of what lower tier suppliers must to do improve, and support for
making these improvements in suppliers’
manufacturing systems, can help the lower
tiers focus on the right things they must do
to expand to meet the projected increases
in demand. The state with the best policies
and services to support the supplier sector
expansion will benefit the most from the
market resurgence.
CAR Michigan Automotive Focus, Issue 7, September 2012
Page 2
Did You Know? The Relationship
between Vehicle Sales and GDP
Growth Rates has Changed
The chart below shows the relationship
between the U.S. GDP growth and the vehicle sales growth rate from 1952 through
2012. These two variables were once statistically correlated to a degree that one
could almost predict the GDP growth using
vehicle sales growth. However, the close
relationship between GDP and vehicle
sales seems to have been broken in 2010.
Double-digit growth in U.S. vehicle sales
in 2010, 2011, and 2012 YTD was accompanied by GDP growth rates of 3 percent or
lower. Based on historical trends, the GDP
growth rate for the past three years should
have been 4 percent or higher given recent
growth in vehicle sales.
There are three possible explanations for
the disconnection between vehicle sales
and GDP growth rates. First vehicle sales
may be driven by pent-up vehicle demand,
which would make sense given the economy alone is not a strong enough driver for
the current rate of sales growth. The age
of the fleet is at record highs. Second, interest rates on new vehicle loans are very
low—and credit is widely available, even
for sub-prime borrowers. Finally, GDP
growth rates may be suppressed by the persistently high unemployment rate—which
is still above 8 percent—3 percent higher
than 2007. Output of the economy would
grow if unemployment were lower.
U.S. GDP Growth Rate and Vehicle Sales Growth Rate, 1952 – 2012 Q2
GDP Growth
12.0
40
10.0
30
GDP Growth Rate
8.0
20
6.0
10
4.0
0
2.0
-10
0.0
-20
-2.0
-4.0
-30
52
57
62
67
72
*Through 2Q 2012
Source: Bureau of Economic Analysis
77
82
87
92
97
02
07 12*
Vehicle Sales Growth Rate
Vehicle Sales Growth
CAR Michigan Automotive Focus, Issue 7, September 2012
Page 3
Pickup Sales Poised to “Pick Up”
Despite these headwinds, several emerging
factors bode well for a recovery in pickup
sales. As the overall economy gradually
improves, the nation’s housing outlook has
likewise grown more optimistic. Record
low mortgage rates are expected to drive
sales of both existing and new homes, and
an improving economy also gives consumers greater confidence and capability to
make big purchases. Given that pickups
tend to have higher transaction values than
the industry average, the housing and economic factors are likely to drive improved
pickup sales.
In the automotive industry, nothing gives
vehicle sales a boost like the introduction of
new product, and the full-sized pickup segment is about to be bombarded with new or
updated vehicles. Chrysler has introduced
a refreshed version of its Ram pickups for
2013; General Motors will introduce a new
generation of its Chevrolet Silverado and
GMC Sierra pickups for the 2014 model
year; Ford is expected to debut a new generation of its F-Series pickups in 2014 for
the 2015 model year; and both Toyota and
Nissan—the only international automakers selling full-size pickups in the United
States—are also scheduled to update their
products during this timeframe. Taken together, this wave of new product is likely
to signal a sales recovery in the segment.
U.S. Housing Starts and Pickup Truck Sales, 2000– 2012*
Housing starts
2,500
2,000
Truck sales
3,500
3,000
2,500
1,500
2,000
1,000
1,500
500
0
1,000
500
Pickup sales in thousands
U.S. pickup sales are up 10.2%. Given
that the overall market has improved by
nearly 15%, pickups have lost share and
lag behind faster-growing segments (such
as midsize sedans, which are up over 24%
for the same period). Several developments
are behind this lackluster performance.
Key midsize pickups, such as the Dodge
Dakota and Ford Ranger have been cancelled, and GM’s Wentzville Assembly is
currently retooling to build the replacement
for the Chevrolet Colorado, and GMC Canyon. In addition, housing starts, which are
traditionally correlated with pickup sales,
have been underwhelming. Fuel prices also
remain at high levels, averaging $3.72 nationally in August–near the all-time high of
$4.05 achieved in July 2008.
Housing starts in thousands
Through the first eight months of the year,
0
Source: IHS Global Insight (2000-2008); LMC Automotive (2009-2012*);
New Privately Owned Housing Units Authorized, Aug 2012, Building Permit Survey, U.S. Census.
*Estimated, LMC Automotive, Inc.; housing starts through August adjusted at annual rate.
The improving fuel economy automakers
are able to squeeze out of these traditionally thirsty vehicles is another reason to
be optimistic about the future for pickup
trucks. The recently revised Ram, for example, achieves a fuel economy rating of
18 city and 25 highway with a 6-cylinder
engine—an impressive performance for a
full-size pickup. Ford’s EcoBoost engines
provide its F-Series pickups with similar
levels of fuel economy, and GM’s upcoming pickups are also expected to boast fuel
economy improvements.
Unlike body-on-frame SUVs, pickups are
forecast to remain one of the key segments
in the U.S. market. High fuel prices and
shifting consumer preferences have not
dampened pickup sales nearly as much
as they have Americans’ preferences for
traditional SUVs. Given the wave of new
introductions of increasingly sophisticated
and fuel-efficient pickups expected over
the next few years, pickup sales are indeed
poised to pick up.
Michigan Pickup Plant Models
• Chrysler Warren Assembly
• Dodge Dakota
• Dodge Ram Pickup Lt. Duty
• Mitsubishi Raider
• Ford Dearborn Truck Assembly
• Ford F-Series Lt. Duty
• Lincoln Mark LT
• General Motors Flint Truck Assembly
• Chevrolet Silverado
• Chevrolet Silverado HD
• GMC Sierra HD
• (some engines sourced from GM’s Romulus Engine plant)
CAR Michigan Automotive Focus, Issue 7, September 2012
Page 4
Are Autonomous Vehicles Coming to a Road Near You?
On August 6th, CAR and KPMG released
a joint whitepaper, “Self-driving cars: The
next revolution,” which discusses the coming convergence of vehicle communications and sensor-based vehicle technologies to develop autonomous vehicles. The
advent of such vehicles has the potential to
reshape the automotive industry, humanvehicle interactions, and urban transportation planning.
Autonomous vehicles could provide numerous benefits to both individual users
and to society in general. No longer will
people need to experience the stress of
driving; instead, the occupants of autonomous vehicles will be able to use their
commuting time to rest, read, use mobile
and internet services, or do countless other
activities. This shift could also expand mobility services to both younger and older
individuals, who may otherwise not be able
to drive. Proponents expect these vehicles
will enhance safety, increase road capacity, reduce congestion, and save fuel. They
could even drop-off passengers and park
themselves—features that could lead to
dramatically more effective and practical
car-sharing programs.
Transitioning to Autonomous
Before fully autonomous vehicles are
available, human drivers will continue
their traditional roles behind the wheel,
but with new features. Increasingly, more
of the tasks associated with driving will be
taken over by the car itself. This transition
to autonomous vehicles has already begun
and will likely continue at a gradual pace
over coming years. Many current vehicles
already have advanced driver-assistance
features, such as lane-keeping, self-parking, adaptive cruise control, and automated
braking systems; these are enablers of the
fully autonomous vehicle. Further setting
the stage, modern vehicles already have
engine, drivetrain, and braking systems
dependent on electronic, rather than mechanical controls, and thus are more easily
automated.
A significant amount of testing of fully autonomous vehicle has already occurred in
the United States and abroad. This past August, Google announced that its fleet of autonomous vehicles has now traveled a total
of 300,000 miles without an accident while
under computer control. Just this year,
states including Nevada, California, and
A Toyota Prius Outfitted for Autonomous Driving
Florida have taken legislative steps to further the testing and development of autonomous vehicles. In May 2012, there was a
field test of the European project SARTRE
involving platoons of five vehicles that ran
for over 100 miles on highways in Spain. In
that test, lead vehicles were driven by human drivers, and following vehicles were
programmed to follow at close distances.
Last year, BMW tested an autonomous
vehicle driving at highway speeds for 100
miles from Munich to Nuremburg, and
two years ago Audi’s autonomous vehicle
maneuvered the steep inclines and switchbacks to arrive at the summit of Pike’s
Peak.
Opportunities for Michigan
Because it is the center for North American automotive research, development,
engineering, and production, Michigan is
host to many stakeholders interested in the
development of autonomous vehicles. Besides the obvious automotive manufacturers and suppliers, many technical centers
and facilities belonging to international
robotics companies, which could leverage
their expertise to expand into a growing
autonomous vehicle technology market,
are located in the state. Michigan also is
home to companies such as Gentex Corporation, iTrack LCC, Soar Technologies, and
others that are developing vehicle robotics
technologies. With strong leadership in this
field, Michigan can be expected to attract
firms that are not yet located in the state,
as well as see the launch of new high-tech
start-up companies looking to compete in
the autonomous vehicle space.
To read the CAR and KPMG whitepaper,
go to http://cargroup.org/?module=Public
ations&event=View&pubID=87.
For more on connected vehicles, see the
April 2012 issue of Michigan Automotive
Focus.
Source: Google
CAR Michigan Automotive Focus, Issue 7, September2012
Page 5
Michigan Vehicle Production
Michigan’s June and July motor vehicle
output was down from April and May, due
to scheduled summer shutdown, but it was
still 36% higher than last summer. GM was
up by 47% over last year; Chrysler—up by
37 percent; and Ford—up by 28 percent.
GM’s Hamtramck plant production was up
most significantly due to both higher levels
of Chevrolet Volt sales, and the build-up of
inventories prior to the plant’s scheduled
retooling shutdown in September.
Growth in Michigan passenger car production (marked by asterisks) outpaced truck
and SUV production in June and July.
Gasoline prices, which was over $4.00 per
gallon in May, could be the major driver for
the sales and production growth of more
fuel-efficient vehicles this past summer.
June & July
Production
Company
Plant
CHRYSLER LLC
JEFFERSON
NORTH
50,094
35%
STERLING
HEIGHTS*
42,354
70%
WARREN
31,349
11%
DEARBORN
TRUCK
57,518
15%
FLAT ROCK*
23,953
36%
MICHIGAN ASSEMBLY*
50,877
43%
FLINT TRUCK
20,964
17%
HAMTRAMCK*
5,865
513%
LANSING DELTA
39,624
-8%
LANSING GRAND RIVER*
7,727
132%
ORION*
21,468
N/A
351,793
36%
FORD
GM
TOTAL
*Passenger car plants
Source: Ward’s Automotive
about
Michigan
Automotive Focus is sponsored by the Michigan Economic
Development Corporation to advance
knowledge of Michigan’s automotive industry, and is produced by the nonprofit
Center for Automotive Research (CAR).
CAR is focused on a wide variety of important trends and changes related to the automobile industry and society at the international, federal, state and local levels. CAR
conducts industry research, develops new
methodologies, forecasts industry trends,
advises on public policy, and sponsors
multi-stakeholder communication forums.
CAR Affiliates include more than fifty automakers, suppliers, associations, and key
stakeholders in the North American automotive industry, including: Chrysler Group
LLC, Ford Motor Company, General Motors, Honda, Nissan North America, Toyota, and Volkswagen Group of America.
% Change YOY