Best of times, worst of times
Automotive sales are great, but investment is going south.
Industry leaders continue to urge auto parts manufacturers to leverage opportunities away from home and innovate.
Canadian auto parts suppliers are feeling pretty good these days but they shouldn’t get too comfortable.
The message at this year’s Automotive Parts Manufacturers’ Association (APMA) conference in Windsor (June 5-6) was clear: seek opportunities outside Canada to ease pressure from fast-growing players abroad; yes, an inflated currency is inflating labour costs – quit complaining about it; and be more innovative.
On the bright side, Canadian auto sales are on track for a second-consecutive record year. Industry analysts expect sales of 1.72 million units in 2013, the sector’s best since 2002. North American sales are expected to top 16.5 million units, while production will top 18 million units, according to IRN Automotive Inc.
Although strong sales numbers are a sign business has picked up, it’s the “what’s next” that has people scratching their heads. The Canadian auto sector is growing, just at a much slower pace than its competitors around the world.
“We hate to say it, but this really is a tale of two cities [as in ‘best of times, worst of times’],” says Steve Rodgers, APMA’s president. “Volumes are great and suppliers are running at or near capacity, but they’re going to have to expand. Luckily this is a good time and most of our members are profitable, and that’s likely to continue for the next two years. The downside, however, is the huge focus on logistics and pressure to move operations stateside.”
The automotive landscape in Canada is certainly changing. Automakers are diversifying production to cheaper labour markets such as China, India and particularly Mexico, where the Detroit Three, Mazda and Nissan are either setting up shop or expanding existing facilities. Parts makers, including Denso and Magna, are also beefing up their Mexican operations, where the sector’s share of employment has ballooned to 500,000 jobs. As those facilities continue to pop-up, OEMs will likely seek out local suppliers to cuts costs.
“OEMs and Tier 1s want their suppliers close, and their message has been very clear: if suppliers don’t localize, they will not get their contracts renewed,” says Carl Marcotte, vice-president of transportation at Export Development Canada (EDC).
Meanwhile, OEMs such as Chrysler, are responding to their own challenges.
Luncheon keynote speaker Reid Bigland, CEO of Chrysler Canada, focused on the rejuvenation of the brand, emphasizing the importance of rethinking product development to enhance customer experience.
“It’s more than product because it’s becoming increasingly hard to differentiate from the number of players in the market,” he said. “But we’ve done that by redefining the culture and values of our business.”
Chrysler, saved by a Canada/US government bailout in 2009, saw its sales on the North American side jump 26% to more than 1.35 million units in 2011 and another 21% in 2012 to 1.65 million. Bigland attributes the company’s comeback to the North American introduction of the Fiat 500 compact and some clever “hometown” marketing for its Chrysler 200 sedan.
The “Imported from Detroit” series of commercials featuring rapper Eminem that aired during the 2011 Super Bowl represented a significant milestone in the company’s resurgence, he said.
“We had sold 8,000 Chrysler 200s before the Eminem ad. After the Super Bowl, we ended 2011 selling more than 47,000 units, and in 2012, more than 72,000,” he said. The commercials got people to dealerships, where they were able to see how the company had improved.
“They’re all about value driven, hands on, making decisions quickly, moving quickly and designing quickly. That’s what saved Chrysler,” said Rodgers.
The evening keynote was a similar tune. The GAZ Group, a Russian manufacturer of almost everything automotive from compact cars to buses, was billions of dollars in the hole when Bo Andersson, a Swede, took over the company as CEO in 2009. By 2012, the company had turned out revenues exceeding $860 million and is once again profitable.
The company’s headquarters in Nizhny Novgorod, Russia houses a 3 million square-metre manufacturing plant that employs more than 52,000 people, and there are 12 more plants across 10 regions in Russia.
“We’ve sold more vehicles in the last two years than we did 30 years before,” said Andersson. “And it’s because we focused on building the best vehicles we could through design and R&D and on the people that work for us.”
GAZ is now the fifth largest bus maker in the world, and Andersson expects more than 75% of the company’s lineup to be refreshed in the next three years.
Known for his brazen and brutally honest management style, Andersson only fired the company’s management team. By 2011, GAZ’s rebirth earned him the Automotive Executive of the Year award at the International Russian Automotive Forum.
Rodgers is a big fan.
“Bo looked after his people. He gave them raises. He hasn’t asked for wage cutbacks and he made it about productivity. He got everyone to buy into the program,” said Rodgers. “He made sure he was producing a good product by being involved in all functions of the organization.”
The future, now brighter for Chrysler and GAZ, is also looking positive for the global sector, with the exception of Europe, where sales aren’t expected to top more than 13 million units. That’s more than 4 million shy of 2008’s total sales across the 27-nation European Union, which has been in recession for the better part of two-years.
A full European recovery isn’t expected until at least 2018, said Kim Korth, president of IRN Automotive Inc., a Grand Rapids, Mich.-based automotive consulting group.
In terms of production, Korth projects an increase in production of more than 1.3 million units globally in 2013, and another 2 million units between 2014 and 2018.
Most suppliers are also having issues keeping up with current demand, while OEMs are operating close to 100% capacity. She does, however, anticipate periodic production disruptions worldwide due to material shortages, quality issues, and troubled suppliers, but she is confident both suppliers and OEMs will add capacity in the next one to three years by expanding existing facilities or gaining capacity through acquisition.
Winds of change
“It’s a great time to be in the automotive industry,” she said. “But suppliers need to focus on maximizing the profitability of the manufacturing footprint they have and add capacity when there is no alternative.”
Korth also expects there to be a 50/50 split between sales of passenger cars and light-duty trucks, led by a healthier market for housing starts in the US. Industrial expansion in Western Canada is also creating a healthy appetite for pick-ups.
Sales of passenger cars will be led by crossovers at more than 5 million units. Compact cars are expected to top 4 million, while mid-size cars won’t surpass 3.2 million in sales.
She anticipates more than 120 global launches annually between 2013 and 2020, while 70% of current global vehicle offerings will be refreshed or brand new within the next five years, which OEMs and suppliers will have a hard time supporting. By 2020, only 20% of vehicles will be launched in North America.
With such drastic change coming, she advises auto parts suppliers to prepare for the future.
“Examine your product and customer mix because this is the kind of business environment that can really improve your company’s sustainability,” said Korth. “There’s no excuse for not diversifying your customer base – it’s just lazy not too.”
Marcotte agrees, suggesting that with the uncertainty in the global economy, emerging markets are outpacing the developed world, averaging about 5% annual growth compared to 2% in developed nations.
Some of that growth is led by what Marcotte calls “south-south” trade: trade between emerging markets, which include China, Mexico, Brazil and India. Business between these countries could double to 25% of global commerce by 2030. Consequently, the share of trade between developed countries and southern markets is expected to fall from 50% to 30% in the same time frame.
“This should be a signal to us all: the centre of gravity of the world economy is shifting faster than you would have believed five years ago, and this trend will accelerate,” said Marcotte.
For auto parts manufacturers, the message is clear: explore opportunities abroad and leverage them by investing strategically in capacity at home to ensure you’ve got the cash handy when your customers come calling.
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This article appears in the July/August 2013 edition of PLANT.