A few years ago, high(ish) gas prices and fierce competition had Detroit automakers talking about the "perfect storm" that the domestic industry was facing. Fast forward to 2008 and the entire auto industry, not just U.S. automakers, is in a full-blown tsunami. Gas is $4 per gallon, the U.S. is muddling its way through some seriously wobbly financial times, and now the price of steel has nearly doubled in five months to $1,035 per ton. Since just this January, the cost of steel in your automobile has risen $500 per car. The reasons for the sharp incline in prices includes both the increased cost of energy for steel makers and higher demand for the strong stuff coming from rapid growth in countries like China and India.
With everybody feeling the pinch of high materials, which also includes sharp increases in platinum and aluminum, suppliers are passing these costs on to OEMs, who in turn will be passing them on to us. That means we may soon be paying a lot more for our next vehicle. With rising gas prices, inflation, and a weak U.S. economy, car customers appear to be experiencing their own little thunder storm, too.
The nine-day-old UAW strike on American Axle has already halted production at five GM plants and seven suppliers, and the two sides have yet to hit the bargaining table. That will change today, as both sides at least agree that they should be trying to reach an accord. The two sides are still far from agreeing on anything else, however, as American Axle wants to cut wage and benefit costs in half, even though the parts supplier is currently profitable.
Following the pattern of wage cuts at other suppliers, American Axle is prepared to offer buyout packages of $80,000 to $110,000. American Axle may also offer buy-down deals that will give workers a bonus for a number of years to cushion the blow of wage cuts. So far the strike has done little to hurt GM, as the automaker has been able to pare-down SUV and truck inventories while its plants are idled, but it's only a matter of time until the best available vehicles are gone. The 20,000 workers at GM and several suppliers that aren't working because of the strike are likely a bit more worried, but at least the two sides are talking.
In this blustery economy, we often hear of jobs being outsourced to save money. The auto industry, however, and in particular Ford, is set to start a new trend: insourcing. Rather than contracting with suppliers to build certain components or sub-assemblies, automakers are now considering doing that work internally with union employees. The Detroit Free Press reports that Ford will be one of the first this spring when it begins assembling its own instrument panels for the Ford Taurus and Lincoln MKS sedan at its plant in Chicago.
The motivation to insource is the same it is for outsourcing: saving money. The United Auto Workers union signed new contracts with Ford, General Motors and Chrysler LLC. that allow each automaker to hire union workers at a new second-tier wage of around $14, or about half of the previous starting wage. Coupled with lower benefits, it's now cheaper in some cases to have the union do what was previously outsourced to a supplier.
It appears that the UAW had this in mind all along. The Big 3 actually agreed in writing with the UAW to begin insourcing a certain number of jobs – 3,000 for GM, 1,500 for Ford and 1,025 for Chrysler. The UAW even secured the right to effectively bid for future work along with the suppliers, for whom all of this does not bode well. Automakers, however, are not out to destroy their supplier base, as there'll still remain plenty of parts that make more sense to outsource and plenty that need to still be produced in the mean time.
BMW's running full-bore as it strains to double its profit margin within the next five years. Across all 23 of the company's manufacturing locations, capacity is maxed out at 100-percent, and there's nary an extra Roundel badge to be had. As BMW pushes for a 10-percent profit margin, they're also putting the squeeze on suppliers. To the OEMs, it seems that BMW has shifted its focus from quality and innovative technology to the bottom line. Not helping matters was a public statement by Manfred Scoch, deputy chairman of BMW's supervisory board, criticizing their suppliers for having better profits than the automaker. With their focus on building the Ultimate Driving Machine, BMW has enjoyed a reputation as a favorite customer of automotive suppliers. Scoch's lead balloon didn't go over well with the companies that make parts for BMW, and has stirred further rumblings that there's growing dissatisfaction with BMW's apparent focus shift. Suppliers shot back at BMW, expressing alarm at Scoch's statement and stating that their ability to generate a profit is tied to their innovation and hard work, rather than overcharging BMW. Understandably, suppliers are loath to concede any price breaks on agreements that are already in place.
For its part, BMW's decided that it's more cost effective to increase their ability to make some components in-house. With that in mind, the Leipzig and Regensburg stamping plants are undergoing expansion, and there will be a new Leipzig stamping facility in 2009. At least 200m euros will be invested in Leipzig and Regensburg, but BMW believes it's a better idea to invest its capabilities, rather than pay a supplier to sort it all out. By the time it's all said and done, further integration may happen to keep the slices on the pie chart looking healthy. If they keep ticking off the companies that make the pieces that they bolt together into automobiles, BMW may end up doing it all themselves.
It is no secret that Toyota has had its share of quality problems this year. The company has recalled over 1 million vehicles, and Kazuo Okamoto, head of its research and development organizations, is looking for the silver lining.
According to Okamoto, his company's recent quality problems can be pinned on their suppliers, and once Toyota figures out how its component quality slipped, its quality scores will be even higher than they are now! While we did not see any form of sinister laughing tucked in Okamoto's comments, we did find that he admitted the crux of Toyota's success in the US: the company's quality image in the United States is the 'lifeline' for all of its products. What was that, you mean it's not Toyota's exciting products?
Gary Convis, Toyota's executive vice president of Toyota's North American engineering and manufacturing operations, claims that the recall numbers seem high because of Toyota's move to consolidate suppliers by sharing components across several product lines. We call baloney on that, since many of the recalls we've seen also effect vehicles made ten years ago. Sharing components across products is nothing new. Anyway, we can all rest assured that Toyota's plans for global automotive domination will continue once it gets to the bottom of its component quality issues.
The Level Field Institute - a group consisting of Big 3 retirees - has released a report detailing the impact of domestic and transplant automotive OEMs on the American auto parts industry, and it contains some interesting nuggets of information.
Of the $225B in auto parts purchased from the US last year, approximately 77% was bought by the Big 3. GM led the spending with $85B in purchases, compared to $20B by Toyota. Overall, the domestic content of vehicles from the Big 3 averaged 71%, while Japanese automakers came in at 48% (note that both figures include vehicles that were manufactured elsewhere and imported into the US). Honda has the highest domestic content of any company outside of the Big 3, with 59% of its parts sourced in North America.
As the Level Field Institute points out, if the Big 3 were to drop their domestic parts buying down to the level of import manufacturers, the net loss to the US auto parts industry would be about $83B and 232,000 jobs. On the other hand, if the import manufacturers bring their domestic component buying up to the same level as the Big 3, the gain would be about $47B and 131,000 jobs. In all likelihood, what we'll actually see in the coming years is a convergence of these trends, with domestic manufacturers buying fewer components state-side, and foreign manufacturers increasing their domestic content.
Ford Motor Company's recent $123 million second quarter loss may have the company scrambling to cut costs and otherwise speed up the Way Forward plan, but the company's suppliers shouldn't be too concerned. The company maintains that its efforts to streamline its supplier base will stay on track, which have already seen its supplier base of 2000 cut in half. Ford has already identified 36 preferred suppliers identified as supplying crucial parts to its manufacturing operations and signed multi-billion dollar long term contracts with some of them.
Not surprisingly, the United Auto Workers have taken issue with a bonus plan proposed for Delphi's executive management, saying that if the bonuses were to pass, it would ruffle some feathers as the two parties proceed with negotiations. The plan, which Delphi successfully petitioned the judge for in the first half of 2006, is in place to keep compensation at a level necessary to retain the best talent at the executive level, the company says. UAW workers don't agree, and as such, have filed objections with the court.
Al Koch helped see over the revival of Kmart, so he knows a thing or two about financial difficulty - and that's exactly what he sees in the auto-part industry. Koch specially mentions decreasing production from domestic automakers as potentially causing severe trouble. While a move away from incentives has increased the profitability of the Big Three, it puts the squeeze on suppliers by decreasing production (you can bet that none of that profit makes its way down the supply chain). The loss of cash flow is particularly hazardous to those who have made substantial capital and R&D investments - not the sort of businesses that the industry wants to see struggling.
One potentially good shred of news is that capital is still easy to obtain, so that those suppliers who wish to borrow money can still do so. Conditions could also improve if gas prices fall or if the domestic automakers manage to stabilize their market share. A relatively painless resolution of the Delphi situation would also be viewed as a positive sign for the segment.
Delphi has announced the successful negotiation of a buyout deal for its employees who are represented by the International Union of Electrical Workers (IUEW). Approximately 8,000 employees are eligible to participate, and will receive either lump-sum payments of $35,000 or packages ranging from $40,000 to $140,000.
Delphi's former parent company General Motors will be footing the bill for these buyouts, which will be in the neighborhood of several hundred million dollars. Additionally, up to 3,200 IUEW workers will be able to transfer to GM for retirement purposes.
A few years ago, high(ish) gas prices and fierce competition had Detroit automakers talking about the "perfect storm" that the domestic industry was facing. Fast forward to 2008 and the entire auto industry, not just U.S. automakers, is in a full-blown tsunami. Gas is $4 per gallon, the U.S. is muddling its way through some seriously wobbly financial times, and now the price of steel has nearly doubled in five months to $1,035 per ton. Since just this January, the cost of steel in your automobile has risen $500 per car. The reasons for the sharp incline in prices includes both the increased cost of energy for steel makers and higher demand for the strong stuff coming from rapid growth in countries like China and India.
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