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... third reduction in wages and benefits
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Slide 6:Critical to Market Share changes are: Product, product, product Competitiveness of each OEM (ie: pricing factors) Speed to market Distribution Efficiency Excellence at the Retail Level
Parts Suppliers have a critical role to play with some of these areas but have little influence in others
GM, Ford and Chrysler are going through a three step process to address their issue of lost market share First is to re-size their organizations to eliminate excess capacity. Second is to re-structure and to address the cost structures within their organizations with the biggest task being the reworking of their supplier Agreements and their labour contracts ….UAW is done … CAW was this year (more on this later) Third is to re-invest in new products and new plants which is in the early stages! GM, Ford and Chrysler market share losses have translated into significant reductions in their light vehicle production and any entity touching them has had a negative adjustment to make starting with themselves New Domestic investments have resulted in significant increases in their N.A. production and overseas suppliers who have come to North America have significantly benefited. There is actually a surprisingly small increase in overseas sourced components North American Production of Vehicles # of Units 4 million units fewer Detroit based vehicles produced has resulted in huge downsizing at any entity touching these companies … suppliers, tool and die, dealers, raw material etc … and the OEMs themselves North American Production of Vehicles # of Units There does not appear much more downsizing required out of Detroit, although there will always be a select few plants that come and go but capacity is close to being aligned. The North American Auto Parts Sector is also in the midst of a mass Global “localization” of the supply base, not necessarily a “globalization” of the supply base as overseas suppliers move into North American The level of competition from on-shore has never been greater and will get more intense. OE Parts Supplier Issues About 800 overseas suppliers have relocated to North America restricting the ability of existing players to supply the “New Domestics” Traditional suppliers finding it difficult to create efficiencies in ‘old facilities’ with ‘older workers’ These new N.A. suppliers have new facilities, low legacy costs, new technologies, young well trained workers and are usually non-unionized N.A. Original Equipment and Aftermarket Parts Market There is little growth of Parts coming into North America from overseas, most of the activity is overseas suppliers building plants in North America Margins have been eroded by the traditional OEMs under severe pricing pressure and only a portion has been recouped with productivity improvements New Capital Expenditures by suppliers have been soft as access to capital is weak and often expensive given current equity valuations. OE Parts Supplier Issues Globalization has been difficult for North American based suppliers China is an issue but still a very small player in the North American supply base, indeed some other countries are doing better in N.A. than China China may be more of a problem with margin erosion and indirectly putting upward pressure on input costs than actually displacing N.A. suppliers OE Parts Supplier Issues Source of Automotive Parts in the U.S. Market Supplier Performance Outlook Any suppliers who touch the “Detroit Three” have had a negative adjustment to make Globalization of the North American supply base will continue There are pockets of growth … not many suppliers to Honda and Toyota are struggling What’s a Supplier to do? Run ultra lean, there is absolutely no room for cost increases Focus on Efficiency Improvements … Investment key to gaining back margin More reliance on your partners to develop ideas … MTDM partners, raw material partners etc. Move up the Value Added curve as OEMs are still willing to pay for Research, Design, Development & Testing and High Value Added parts What’s a Supplier to do? Focus on “New Domestics” … again, any entity over-reliant on GM, Ford and Chrysler has a negative adjustment to make Understand Globalization and identify opportunities with New Domestic Suppliers in N.A. Look to grow Non-North American business Issues of Concern Issues for Discussion The UAW/CAW Negotiations Is it possible to supply the Japanese OE’s in North America? Weakness in Canada’s supply base The UAW/CAW Negotiations Truly transformational. Brings a fundamental change to the cost structure of GM, Chrysler and Ford in the U.S.A. Eliminates up to $25.00 per hour of cost and brings cost structure closer to the cost structure of the new domestics VEBA for health care and two tier wages a large part of the savings But, some aggressive job guarantees and other language that could force investments into U.S. facilities to accommodate In addition, outsourcing of components will be very difficult in the future and indeed we could see in-sourcing of components if market share losses continue (this is the easiest route to cover job guarantees) The UAW/CAW Negotiations In Canada the CAW appeared to have no choice but to play the cost cutting game since Canada is now the highest cost auto assembly locations anywhere in the world for the Detroit Three. First Ford and then GM and Chyrsler choose not to test the waters. WHY? Well Canada does not have $25/hour in savings available without threatening base wages. Trying to cut base wages in Canada (likely needed $8 to 10.00 per hour) would be war!!. And the OEMs in Canada did not have a stomach for war. The UAW/CAW Negotiations G.M.,Ford and Chrysler appears to have missed out on a golden opportunity to address their fundamental competitive position in Canada … they essentially didn’t want to ‘Go to War’ at this very delicate time in their restructuring process They valued labour piece over confronting their core competitiveness and this may be understandable given that some “Critical” vehicles are based in Canada and important to their short term survival. They may just be saying “Heck we may not be around in 3 to 4 years unless we get through the next two years and Canadian operations are critical to survival so what ever the cost is we will just have to bear with it?” At least this seems to be their reasoning. The Agreement gives back somewhere between $5 and 8/hour ‘all in’. GM were asking for $30.00/hour ‘all in’. Needless to say the Agreement doesn’t come close to meeting the objectives of GM yet alone Ford and Chrysler. The Agreement leaves them in the $70 per hour range, their sister plants in the USA in the $50 per hour range … meanwhile the new domestics are in the $45 per hour range This is not the position Canada should be in. The UAW/CAW Negotiations Little negative happens in the short term since current investments in Canada are locked in and would be very expensive to move away from. The only truly vulnerable situations in Canada are where there are duel plants … the logic says that GM, Ford and Chrysler would now be “Canada Heavy” in the future with any re-sizing and re-structuring. (GM pick up trucks is the current example) But if the pattern holds true then the next round of investments, in 3 to 5 years, just became a lot harder. The CAW has thrown 30,000 member overboard in the last decade, there appears to be more to come. The UAW/CAW Negotiations Suppliers will have to follow suit with their labour agreements or else they face the possibility of not being competitive to their OEM customers, especially in the U.S.A. This was essentially the essence of the very long AXL strike with the U.A.W. The U.A.W. may have under-estimated the domino effect of concessions when they agreed to aggressively cutting compensation with the Detroit Three in the fall of 2007. We could be seeing a one-third reduction in wages and benefits “top to bottom” in the automotive sector which will set the table for significant upside in the market as prices follow these concessions. There also should be room to restore some profitability in the sector that has been lacking for quite some time if the domino effect flows through to the entire industry. Supplying the New Domestics in N.A. No doubt that this is proving to be difficult for many N.A. suppliers but the New Domestics are NOT bringing in components from the home market, instead they are bringing their best suppliers to North America. The roots of any OEMs strength is its supply base and it is very difficult to break into these relationships. The best of the best North American suppliers are making in-roads with the Japanese. Most successful route is levering off a joint venture opportunity, but JV partners are difficult to find UNLESS you truly have world class technology and/or production processes or are willing to invest in same. Weakness in Canada’s Supply Base You don’t have to take your shoes off to count the number of highly capable Canadian owned suppliers … We are fortunate to have attracted a number of very capable overseas suppliers but a lot more work has to be done here. This whole supply sector issue is currently the biggest downside for Canada from a jobs and production point of view Weakness in Canada’s Supply Base Four Distinctive Groups in the Canadian Supply Base First are about 300 to 400 smaller Tier II and Tier III Canadian owned suppliers These companies are struggling and many will fail They typically have not invested in their factories and have little to no capability to innovate Many will fail although there will always be a role for a large number of these suppliers Second are a very small ( 10 to 15 ) highly capable Canadian owned suppliers These companies are highly capable and most have growth potential They have invested in their factories and have the capability to focus on innovation, both factory innovation and product innovation … but they need help Likelihood of failure is low Weakness in Canada’s Supply Base Third are about 75 to 125 U.S. Based multi-nationals that came to Canada under the auspices of the AutoPact These companies are bearing the brunt of the GM, Ford, Chrysler resizing and many have left or are leaving Canada There is some opportunity to work with the few that remain to enhance their Canadian footprint Fourth are about 75 to 125 Off-shore multi-nationals that followed the New Domestic OEMs into North America and choose Canada as a location These companies represent significant upside for Canada and have the capability to grow Few do any innovation functions in Canada but this is an opportunity as their customers grow The Future of the Automotive Sector in North AmericaSlide 32:Wages and jobs are increasingly being linked to skill/intellectual capability N.A. Automotive sector annually spends about $30-35 Billion in Research, Design, Development and Testing of Vehicles and Parts In essence there are four possible scenarios for North America Low wage – Low skill (currently China, Korea, Mexico …) Low wage – High skill (currently India and possibly Mexico …) High wage – Low skill (Historically in Canada, U.S.) High wage – High skill (The Future for Canada, U.S and eventually Mexico ???)
The Future of the North American Automotive Sector is the “Six Inches Between our Ears”
Slide 33:A strong case can be made that the Automotive Sector in North America is entering its biggest ‘decade of opportunity’ since the 1960’s and at the same time the biggest ‘decade of threat” in its history The cost cutting at GM,Ford and Chrysler and their suppliers will free up billions in free flow capital, most of which will be invested in new products … and if the Detroit Three push the product button you had better believe that the Japanese and Europeans will match them product for product And the ‘climate change’ regulatory environment will trigger the largest technology spend this industry has ever experienced.
The Future of the North American Automotive Sector
Slide 34:This record level of ‘technology’ spend could be a serious downside threat to the supplier community although ‘capable’ suppliers will see significant upside opportunity Serious rationalization of number of components per vehicle Non traditional supplier players in the mix Unprecedented demands on product and process innovation at the supplier level Increased need for capital And if the current supplier base falters even a little, the OEMs will quickly in-source rather than wait for suppliers to catch up
The Future of the North American Automotive Sector
Slide 35:It appears that only two OEMs, GM and Toyota, have the resources, global reach, technology reach etc to emerge in a stronger position by 2020 Everyone else will have to find a safe haven and some will not survive Some might try to mimic GM and Toyota and there may be room for another and possibly two others Some might specialize and find their particular niche in which to play Some will likely just consolidate and be gobbled up by another friendly group Some will take extra-ordinary risk and experience extra-ordinary growth Some will take extra-ordinary risk and “Fail”
The Future of the North American Automotive Sector And each OEMs strategy is beginning to emerge and will become a lot clearer over the next few years
Conclusions The Automotive Sector remains North America’s most important industry and across all value chains employ’s over 7,000,000 workers But many aspects of the Automotive Sector have Globalized and this has resulted in a major restructuring of the sector across North America. Fierce competitive environment is fostering innovation with billions being invested in Technology and the ‘Green’ agenda will trigger even more innovation The North American Auto Sector is well positioned to survive the industry’s current re-structuring Focusing on innovation and efficiency is key to any success Questions? Dennis DesRosiers DesRosiers Automotive Consultants Inc. 80 Fulton Way, Suite 101 Richmond Hill, Ontario t: 905.881.0400 f: 905.881.7456 e: andrew@desrosiers.ca www.desrosiers.ca
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