Revving a revival

There are glimpses of long-term hope for survivors of the auto supplier shakeout [From our print edition featured in Monday's City Paper]

Email | Print By Sam Claycombe

The tagline underscored the anxious mood of the Southern Automotive Conference that drew hundreds of industry execs to Murfreesboro late last month.

Learn. Lead. Last.

In the lean economic landscape of the current recession, growth has taken a backseat to survival. The gathering — which took place just 10 miles from Nissan’s Smyrna plant — provided a glimpse into the volatile state of the American automotive industry. Change has been wrenching and has caused many casualties even as it has generated new threats. Yet for those who survive and adapt, there also are new areas of opportunity.

Still flying South

Mark Innes flew all the way from Canada to attend the conference. He works for the National Research Council, the Canadian equivalent of the U.S. Lab System. Although his organization conducts research for more than 100 companies, only four are located in the United States. Asked why he had come all the way to Murfreesboro, he said “more and more companies are moving to the South, so we’re following that trend.”

It’s been an industry maxim for more than two decades: The cheaper, non-unionized states will — helped by millions in government incentives and tax breaks — continue to recruit new manufacturing plans and siphon off existing business. But not everyone is still buying that notion after the upheaval of recent years. During a pre-conference town hall meeting, Bill Hampton, editor of Autobeat Daily and a Midwest native, said Southern suppliers should not expect that migration to continue apace.

The American market, he said, is becoming “a very stable array with lots of players.” Firms in the Upper Midwest have digested massive capacity cuts — even before the economic collapse, Michigan had lost more than a fifth of its auto jobs from 2001 to 2006 — and reduced their labor and other costs to become more competitive.

Not all experts agree with his opinion. Mark Birmingham, analyst at the Center For Automotive Research, said the Midwest has “too much excess capacity across the board” to effectively compete with the South for new business. Any recovery there, he said, will “be more linked to traditional domestic automakers ramping up production as the market recovers.”

Jobs aren’t likely to return from the South anytime soon because car companies simply do not have the time or the money to build new supplier networks. For the moment, they’re happy with the status quo as the market edges its way toward recovery. But getting there this time figures to be a lot bumpier than past business cycles. Rather than seeing traditional boom-and-bust patterns, companies will have to maneuver smaller potholes more often.

At the Southern Automotive Conference, Jason Hoff, a vice president at Mercedes-Benz International Inc., said that will require companies to be both nimble and decisive, qualities he has seen emerge during this downturn.

“Suppliers that have reacted the quickest are the ones that are the most financially sound,” Hoff said. The future, he added, will be more about handling “bounces up and down than continually steady growth.”

Rethinking the model

Doing that effectively may require a fundamental rethinking of the U.S. automotive manufacturing model — and a big ask of the here-and-now American consumer. One of the main reason American carmakers have had to slash capacity is because they were stuck with a massive surplus of cars when the economy collapsed, the result of customers’ expectations to drive their cars home on the same day they purchase them.

In Murfreesboro, Hampton pointed out that European consumers order their cars from the dealer and wait several weeks while the factory fills out their order. American automakers would have fewer problems if they followed that model, but Hampton said he doesn’t see the American Way changing anytime soon — even if it makes sound business sense.

“Moving forward, companies that are able to maintain flexibility will have an advantage,” Birmingham told the Post. “If they can quickly adjust their labor force and output to match market swings, they won’t get stuck with either too much or too little inventory.”

One way the original equipment manufacturers are building in flexibility is by cutting their supplier ranks — in GM’s case alone by 500. That in turn has the survivors, who still employ more than 600,000 people, able to survive on less. Respondents to a September survey conducted by the Original Equipment Suppliers Association said they would be able to break even next year at an industry production rate of 9.5 million units. Less than two years ago, suppliers needed sales of more than 14 million units annually to stay out of the red.

Another factor contributing that shift is that many carmakers, following another European model, have become much more involved with their supply bases to ensure quality and profitability.

“We get suspicious if we’re not hearing about problems because we’re a very dynamic industry that has to deal with issues every day,” said Mike Lapham, purchasing division manager at Honda Manufacturing of Alabama.

Along those lines, Frank Fischer, CEO and chairman of Volkswagen’s new operations in Chattanooga, recently announced the construction of a supplier park adjacent to his company’s plant. The park will house up to 10 companies and enable VW to easily monitor and maintain quality standards.

Opportunity in green

An emphasis on quality over the traditional model of cutting prices year after year also will benefit suppliers looking to get a foothold in the making of the next generation of cars. The drive toward a more sustainable economy and consumers’ desire for environmentally friendly products has carmakers scrambling. While Toyota has elected to concentrate its efforts on the fuel-cell vehicle and Honda has chosen the hybrid platform, Nissan is making the biggest leap — and taking the biggest gamble — by attempting to produce a fully electric vehicle.

Susan Brennan, Nissan’s vice president of North American operations, gave a speech in Murfreesboro focusing on sustainability and the responsibility car manufacturers have to develop energy-efficient automobiles.

“Eleven planets would be needed if every country’s level of consumption reached that of the United States,” said Brennan.

Brennan’s presentation outlined Nissan’s goal to become America’s leading electric-car producer. Thanks to a $1.6 billion loan from the U.S. government, the company is building a battery production facility right next to its plant in Smyrna. The facility will produce the lithium ion batteries used to power the new Nissan Leaf, a zero-emission electric sedan that will start rolling off the line here in late 2012.

The rise of electric cars has the potential to create an entirely new class of suppliers. At the Business of Plugging-In Conference in Detroit last month, panelists said the door is wide open for suppliers to take advantage of this growth opportunity because many systems have to be designed from scratch.

“As you go into electrification, now you’re bringing in lots of other suppliers that have not been historic suppliers for the auto industry as well,” said David Cole, chairman of the Center For Automotive Research. “It’s going to be a very, very interesting period, to say the least.”

Global growth?

There’s another, much longer-term opportunity for U.S. auto suppliers. Nestled amid a maze of booths at the SAC was a delegation of representatives from Germany accompanied by members of the U.S. Department of Commerce. Germany represents 17 percent of the global automotive market and three out of every four cars made there are exported.

But the German industry struggles with high labor costs that threaten its ability to compete in an increasingly global market. Paul Warren-Smith, who works for the Commerce Department at the U.S. Consulate in Frankfurt, is convinced “German auto suppliers are going to go out of business” because their American counterparts offer cheaper products.

If that trend materializes, U.S. firms now getting in the door with Volkswagen in Chattanooga could have a leg up in exporting their wares to the auto giant’s European plants — even for cars that will eventually be sold in the States. That precedent was set earlier this fall, when Nissan announced that its Decherd engine plant would for the first time supply engines for Infiniti cars being assembled in Japan but destined for U.S. consumers.

Autobeat Daily’s Hampton said that — witness VW’s move to Chattanooga — global economic forces also are in favor of America’s vendor base. “The dollar needs to stay weak for another year or two,” he told SAC attendees. “Asia and Europe are considering moving more operations here.”

But first, cull

However, those long-term opportunities must take a backseat to more pressing concerns. Hampton expressed amazement at the resiliency of the supplier sector but said the American car industry has to “cull the packs and shed the inefficient and useless aspects out of a desire to survive.” In the short term, this means thousands of lost jobs and painful adjustments even for those who are sticking around. In the long term, the industry will benefit because it makes sense to be as lean as possible.

Yet even the likely survivors need some help getting there. This past March, President Obama created a $5 billion fund that guarantees payments to more than 1,000 struggling auto suppliers. There’s no doubt the money is helping, but the presentations given and the questions asked at the Southern Automotive Conference reveal the dire situation facing the automotive industry. In this brave new world, it’s clear the sector will have to rely more than ever on tenacity and ingenuity to emerge leaner, stronger and smarter.