GRAND RAPIDS — As the automotive industry continues to grow and becomes more globalized, suppliers will face a steady increase in vehicle production volumes and new product launches.
By 2022, global vehicle production is expected to top 107 million units compared to the 87 million produced in 2014, while analysts predict a steady uptick in new vehicle launches, peaking at 169 new vehicle launches in 2018, according to recent data from IHS Automotive.
Despite the robust outlook for the industry, West Michigan auto suppliers face a series of challenges ranging from customer pressures to expand manufacturing operations and competion for an ever-shrinking pool of talent.
MiBiz gathered a group of automotive supply chain executives and industry experts to discuss their growth strategies and the headwinds the sector faces as sales and production volumes continue to track upward. Participating in the conversation with this writer and Managing Editor Joe Boomgaard were:
· Chris Blanker, senior vice president of the Huizenga Group and president of Monroe Products LLC, a Grand Rapids-based manufacturer of plastic instrument cluster needles
· Jim Hurley, CFO of Muskegon-based Port City Group, a manufacturer of aluminum and zinc die castings
· Milan Milivojevic, CFO of Walker-based Plasan Carbon Composites Inc., a Tier 1 supplier of carbon fiber parts and assemblies
· Jerry Nichols, CPA and shareholder at Grand Rapids-based Hungerford Nichols CPAs + Advisors, which sponsored the roundtable discussion
· Jim Teets, president and CEO of Grand Rapids-based ADAC Automotive, a Tier 1 supplier of door handles and exterior mirrors
· Blair Thomas, director of customer care for Columbian Logistics Network of Grand Rapids
· Mike Wall, director of automotive analysis for IHS Automotive
Here are some highlights of the discussion:
The recession taught the industry quite a few hard lessons. How are you managing those lessons learned with the push to grow now that the industry has heated back up?
Hurley: There’s more of a push to go more aluminum for the CAFE standards, so we have basically been turning away business. We don’t feel that the downturn is going to come any time soon, and if it does come, there is still the greater push for aluminum.
Teets: Our partner STRATTEC Security Corporation (is) very proficient in Mexico and we’re just looking now and working with Grupo Prodensa on a research project on mid-Mexico. We’re definitely walking before we run because that’s a big decision and we know there are a ton of OEMs that are in that mid-Mexico region and a lot of them are current customers. We realize that if we don’t do something, then within the next 18 to 24 months, we’ll probably end up losing the opportunity to get the business.
What’s the timeline before the window of opportunity closes in Mexico?
Hurley: You almost worry if you’re too late. At this point in time, that was one of those pushes for why we wanted to go faster rather than slower … because the Mexican supplier base is going to get finalized. If you’re not part of it, you’re going to be out. (Editor’s note: Port City Group recently merged with Pace Industries to access the capital needed to expand into markets such as Mexico.)
Teets: There are certain cities in mid-Mexico, too, where there is a little bit of a talent shortage as well — just like there is up here.
Wall: I’ve heard that the supplier structure down there is still really underdeveloped. Once you get below Tier 1 into Tier 2 and Tier 3, it’s the Wild West. It’s a risk and a huge opportunity still, and I think there is a window of time there, but it’s tough to gauge. You’re balancing if you’re going to get there too late, but you don’t necessarily want to be there too early either because then you’re having to break everyone else in. The automakers are obviously driving this significantly.
ACCESS TO CAPITAL
With the automotive market back to being so robust, how is access to capital right now?
Nichols: Coming through this increased sales activity, the smaller manufacturers that we work with … (are operating) very tight and trying to build their capital via profitability to get to that point to be able to withstand what’s going on.
Wall: Going through the downturn, we had several large-exposure automotive lenders that washed their hands of the industry to a great extent. Slowly but surely over the last five years, what I’ve noticed is a lot of those guys are coming back and are re-engaging with a vengeance. Now we are getting some other lenders, maybe what we consider a Tier 2 or Tier 3 bank, re-engaging and it’s creating an interesting situation for suppliers. We’re seeing re-engagement finally on the lending side. I think definitely more of that is coming from lending than really the true capital markets for this region.
Blanker: I would agree with that. We’ve not had an issue with access to debt financing (or) bank financing. It hasn’t been an issue for us.
Hurley: We have no issues with getting capital. The banks are more than willing to lend. Our issue is probably our owners’ resistance to (the question of) when’s the next 2009 coming and how much do we really put in.
Teets: We just renegotiated our line with a local vendor and they were more than willing and happy to listen to any terms that we wanted. We did have a cap on international expansion in that line and there’s no cap anymore. We like that.
Thomas: We’re not particularly capital-heavy, but we’re seeing it through customer organizations. Investment into capacity has been pretty healthy the last couple of years. What we aren’t seeing is people investing in real estate particularly heavily. All the money that is freeing up and moving seems to want to go into production.
Are there any local lenders that are more willing or receptive to negotiating than others?
Hurley: I’d say it has a lot to do with your size and the size of the bank that you’re using. Our previous lender was Chase and our size wasn’t up to the point of Chase. But a smaller, local Bank of Holland may not be able to handle it.
Blanker: We found when it’s time for renegotiating a line or looking for new debt financing that there’s more than one partner willing to talk and compete for your business.
Hurley: Even the leasing-type guys are getting more involved, not just the banks. GE Capital and few others all have open lines of credit with us without anything down or any participation bank-wise.
M&A ACTIVITY
Between Fiat-Chrysler’s proposed merger with General Motors and the countless other deals that have been happening throughout the supply chain, how do you see M&A activity impacting the industry?
Hurley: Our merger (with Arkansas-based Pace Industries in early July) was a good thing for both sides — that’s the bottom line. It was a necessary thing that both sides needed to diversify. It gave us access to their capital market, capacity and was a win-win for everybody. It wasn’t a hard thing to do. I think for people with the right motives, it’s out there.
Wall: It’s interesting. We’re definitely seeing the intensity of the interest (in M&A) has picked up significantly. The big guys are getting bigger — call them the Super Tier 1s — and then it’s creating opportunities because they have to get more focused. Maybe they’re shedding other operations, and it starts to trickle down through the system somewhat. Some of the smaller and mid-sized companies are really at this point where you’re seeing multiples so high and they’re really starting to think about if they want to be in the business anymore.
Nichols: With that downturn, there were a lot of people ready to make that exit and they couldn’t do it. Now all of a sudden, lending is much better, their profits are up, the buy-ins are looking better and there seems to be a lot more activity going forward of people who are exiting.
Have private equity firms started to play a larger role in the M&A activity in West Michigan?
Wall: What we’ve been experiencing is private equity starting to re-engage, but when I talk to them, they’re freaking out because the multiples are high-single-digits — double-digits in some cases — so there is some pause there.
Hurley: Well, the outlook is so good for the next five years that they don’t want to miss the boat. They want to be on that train ride. We talked to some of the private equity guys about our (deal), and that’s part of what they want: They don’t want to miss out.
Milivojevic: I came from that (private equity) world and lived in Indianapolis and Chicago, and I’m not seeing much of that type of activity here with the actual players in the community.
PHYSICAL EXPANSION
What happens when you need to expand your physical presence given the current real estate market?
Teets: I think the real estate market is pretty wide-open right now. Finding decent space is becoming a little more difficult if you’re picky, which we are. But right now, I think that just like the capital structure, the real estate market is pretty wide-open.
Blanker: We’ve certainly been told and have heard that the real estate market is tight and there isn’t much available, but maybe we’ve been in the right place at the right time and we’ve been able to find the real estate that meets our needs so far.
Hurley: That’s what I’m experiencing in the Muskegon area. You’re not looking at super-sized buildings, you’re looking at 15,000 to 30,000 square feet, but there’s nothing available. Our industrial park where we’re in is full. Really, Muskegon is tapped out. If you want a building, you’re probably going to have to build it.
Milivojevic: We had trouble only because we have two manufacturing facilities, one commercial for automotive and the other for defense and armoring systems on military vehicles. We wanted to adjoin ourselves and there’s a lot of overlap in things our production shares. All we had next door to us was a shipping warehouse. There was another suitable factory building three miles away, but you might as well be back in Vermont from whence we came if you’re three miles away. We leased the warehouse and now we’re making it a factory, so we had to put a lot of extra cost into doing that.
Wall: That’s what I’m hearing too from talking to clients. They are making those multiple decision points: Do we go greenfield, brownfield, buy and build new, or do we expand and invest in equipment? (But) equipment lead times can be 18 months in some cases because equipment builders are so short-handed at this point. Then you bring in the whole concept of construction. That business has really come back with a vengeance too where you have long lead times for construction. A lot of what I’ve been seeing is the capacity investment – (companies are) just trying to keep up.
ECONOMIC DEVELOPMENT
Given the struggle to add capacity and find talent in Michigan, are you fielding offers from economic development groups in other states? We’ve heard in the past that other states will give you land or build you a plant, but we don’t necessarily do that here.
Milivojevic: They’ll do all that, and depending on where you go, like Indiana, they’ll give you one thing that Michigan can’t get: lower workers comp rates. The comp rates are yet half again what they are here. The roads are better (and) taxes are less. So there are a lot of incentives that are there and they have a pretty good automotive base. Toyota has three plants that are there. Honda has a major facility. Subaru is down in Lafayette. So there’s a lot of stuff going on.
Thomas: The other thing that Michigan can’t give you is the intersection of I-65 and I-70 as the crossroads of America.
SUPPLIER-OEM RELATIONS
With more suppliers focusing on bringing innovation to the car makers, how do you as manufacturers protect your intellectual property?
Wall: I’ve been in meetings where automakers have said, ‘Why didn’t that supplier bring it to us — that innovation?’
Milivojevic: Well, they’ll just steal it.
[Laughter]
Wall: Exactly! … I think automakers are finding themselves behind the eight ball because the guy down the street now has that killer technology. I think they’re having to recalibrate on their own front. It’s been my experience talking to some suppliers on that end where they’re being a little more protective, trying to protect their I.P. as much as possible, to prepare for that.
Blanker: Our innovation with our companies have been more project-specific. You just have to find ways to protect yourselves to not share too much of the solution before you’re assured of the project or production. We found our customers are willing to do that.
Isn’t that a symptom of the OEMs pushing more research and development downstream?
Wall: That’s the whole thing. Obviously, there are pressures on dollars all around, and they have to be focused on what they’re going to be the best at. Hopefully, that is marketing and building the right vehicles (but) look at the Getrag acquisition by Magna. What does that mean? Back in the day, if you look at the old (Ford) Rouge plant, raw materials would go in and a car would come out. The irony now is maybe (the OEM’s) control is over the electric powertrain or the infotainment system. Those decision points can create opportunity points for us here in West Michigan that weren’t there before.
Milivojevic: They’ve been pushing the risk of doing business forever out to the suppliers. That’s more and more the case. Even like you said, what do they own anymore? They own a brand, they market a brand. You talk about design: We’re working with designers right now on the C8 Corvette because they don’t know how to use carbon fiber, and the nature of the material changes.
Nichols: If you’re investing in a lot of R&D into that project, you have to be repaid eventually. You have to get your money back to do the next project.
When does supplier pricing with automakers get better?
Wall: That was the joke coming out of the downturn. I’d be asked when are the pricing pressures going to come back, and well, they never really leave. Even when the industry is on its deathbed, you’re going to get an OEM purchaser knocking on your door saying, ‘I still need 5 percent.’ Getting them to come to the table — that’s a big deal. So there is more bargaining power, now more so than ever. Now, it’s a bigger conversation because the purchasing guy doesn’t have a 1-800-Dial-A-Supplier anymore where you can just call up and get the cheapest guy on the block to come in and undercut you.
FUTURE CHALLENGES
What are some of your strategies to attract and develop the talent you need to run your plants?
Teets: I think you need to start back in the junior high school level. You need to get their parents talking about manufacturing. I’m part of Talent 2025 and a group out of Muskegon that’s trying to put something together similar to the Kalamazoo Promise. For the most part, manufacturing is so much different than it was 20 or 30 years ago, and you have to get the junior high area and early high school and get them through your plants.
Thomas: We’re having that exact same headwind on the supply chain and logistics side. One of the most overused wells to go to is veterans — this magical pool of veterans doesn’t really exist. They tend to scatter and there’s no bat signal for veterans, either.
[Laughter]
Blanker: For the more skilled positions, we’ve been growing our own. It’s very difficult to find a skilled laborer who is trained and ready to go from day one with exactly what you need. So you just look for good people with a high likelihood of success and then you train them. It takes more time and could take three to six months before they’re fully doing what they need to be doing, but there really isn’t an alternative.
Milivojevic: The (temp) agencies produce people who are not so good. Anything else that’s full-time, they’re gone. If their work is a little bit harder than what they thought, they’re gone. We’ve created a screening program that we call Carbon University and we invest a couple of days into people just for them to know the business. We found that has been helpful when people know what they’re making and how that works. Some people leave and some don’t. It’s been an interesting investment, but it’s a hell of a lot cheaper than putting two or three weeks of training into them and just as they might get a little better, they leave.
There has been some talk in the industry about a potential capacity bubble. Do you see any evidence on the horizon that would support that?
Milivojevic: We’ve been running at MCR (maximum car rate). Usually that lasts us a little while. We’ve been doing it on this entire program we’ve been doing for Corvette, and it’s just not stopping. We went to 30 percent of MCR about six months after we started and then had a new definition of MCR put into place. As we look at this thing right now, it’s consumed almost all of our capacity. We only have two programs, one for GM and the other for Chrysler.
Teets: I think the production numbers show that things are pretty robust through at least 2020.
Wall: I think there’s been an incredible discipline on the part of the suppliers to maintain cost containment and breakeven points. Coming out of that downturn, what we saw is a slow-but-steady recovery and we saw a slow-and-deliberate growth path on the part of suppliers. Well, there was reason there was that pragmatism. It was a near-death experience for the vast majority of the supply chain and automakers. So flash forward to now, and I’m not seeing any evidence that suppliers are getting a little looser and starting to overheat.
Source: mibiz.com
