Auto Industry Evolution Presents Growth Opportunities for Suppliers
By Corinna Petry
Published: February 9, 2010
CHICAGO -- This is the time for automakers and their suppliers, especially in North America, to get it right-invest in the right technologies, consolidate platforms and depend on local sourcing-and thereby gain more control over costs and profits in the future, according to analyses from two global accounting and advisory firms.
"The current inflection point in North America presents an historic, once-in-a-generation chance to allow economic fundamentals to drive volume, rather than relying on an array of demand stimulants," PricewaterhouseCoopers (PwC) analyst Daniel C. Montague said in his latest report. "With the economy slowly improving and many major restructuring initiatives complete, the auto industry appears ready for methodical, market-derived growth."
The next five years "will see some of the most profound changes in the North American auto industry since the post-World War II shakeout that established General Motors Co., Ford Motor Co. and Chrysler Group LLC as dominant players," James Ricci, a director in Grant Thornton LLP's corporate advisory group, said at an auto industry meeting. "The aggressive plans GM, Ford and, to a lesser extent, Chrysler are implementing to switch their North American production from largely regional to overwhelmingly global platforms is going to create growth opportunities for suppliers, potentially including mergers, acquisitions and alliances, as the companies position themselves to win future business."
According to PwC, "a careful inspection of the fundamental economic metrics that underpinned the decade preceding the financial crisis will reveal an unsustainable era that took exception to the traditional rules of automotive market growth.
"Although the previous automotive state was principally enabled by an unnatural macroeconomic and regulatory environment, cyclical downdrafts were also averted via industry stimulants that sparked sales bursts well above the natural rate of demand," Montague said.
Today, the industry must recalibrate its business models "on different visions of the new normal," and the industry's recovery should more closely match the tone of wider economic health, he said.
Ricci said the conversion to global platforms is accelerating, "but to capitalize on the growth opportunity, suppliers will need to offer automakers more than high quality, a healthy balance sheet and a good track record on program delivery." They also must have the best technologies, the right geographic footprint and global engineering and manufacturing capabilities.
Grant Thornton believes suppliers will use strategic mergers, acquisitions, alliances and even divestitures to position themselves to win the longer-term sourcing business that Detroit has to offer.
GM, Ford and Chrysler plan to shrink their total number of vehicle platforms from 40 in 2009 to 29 by 2014. Of these, 14 platforms will be global, which means that they will be produced in North America and at least one other region, with no single region dominating production, Grant Thornton said.
Fully 65 percent of GM's and Ford's North American production will be on global platforms, up from 10 percent and 6 percent, respectively. GM's and Ford's business framework will be in line with Asia's largest automakers, which currently derive 78 percent or more of their North American volume from global vehicle platforms, according to Ricci.
Grant Thornton projects total North American production will grow by 2.7 million vehicles, with Canadian production flat, Mexico adding 800,000 vehicles and the United States adding 1.9 million.
The long-term benefits of a global platform strategy "will be significant," Ricci said, by helping to reduce engineering costs, provide flexibility, simplify the manufacturing system and supply chain, and improve quality-all of which contribute to higher margins."
The best-positioned suppliers will be those that are considered long-term partners by automakers for particular commodities, Grant Thornton said. "Some of the most interesting supplier companies to watch will be the 'pure plays' that have narrowed their focus to a particular commodity or group of commodities, such as safety, steering and fuel systems," Ricci said. "These companies tend to benefit from having highly focused product development and good economies of scale, which helps to establish clear value in the marketplace."
He also advised suppliers to divest non-core or regional product portfolios, saying those assets will degrade in value as global platform requirements will dominate sourcing decisions and automakers trim their supplier base.
Montague said that irrespective of the impending economic recovery's trajectory, "North America's surviving automotive entities that have used the industry downturn to establish flexible cost structures, explore new avenues to capital, invest in core products and technologies, and evaluate scenario-based risk projections will be well prepared for the next generation of automotive demand."