Surging North American auto sales are prompting large and small suppliers to make contingency plans to cope with pressure on production capacity.
Three years ago, the automotive industry contracted and hundreds of plants were idled. Today, rising auto sales and production mean an increasing number of suppliers are running their plants ragged, said Bill Diehl, president and CEO of the Southfield, Mich.-based advisory firm BBK Ltd.
In Southeast Michigan, some small suppliers are facing big decisions -- spend capital or ditch contracts -- and midsize and large suppliers are in a calculated planning mode.
Industry watchers say suppliers have become more sophisticated coming out of the most recent downturn, but the rapid rise in demand is still a challenge.
According to June reports, U.S. auto sales rose 20 percent, reaching an estimate of 14.1 million for the year, up from 12.8 million in 2011.
“There are suppliers out there running plants 24/7,” Diehl said. “The supply base isn’t shutting down [automaker] plants yet. But as volumes continue to grow, the constraints are worrying. Suppliers have been running on the ceiling too long, so the question is: What’s going to break and when?”
North American automotive plants are running at 88 percent capacity, estimates Northville, Mich.-based IHS Automotive Inc. Germany-based KPMG AG estimates that plant capacity in the United States alone will reach 94 percent by 2018.
A May survey of suppliers by the Troy Mich.-based Original Equipment Suppliers Association found that plant capacity use was 85 percent across the supply base, up from 80 percent in September.
Crunch time is coming for many suppliers, and that has domino effects, Diehl said.
“It is a tricky issue to call as impacting any one particular component category or another,” he said, “but supplier capacity constraints can impact nearly everyone to the extent that the lack of a single component can derail production of the overall vehicle.”
Contingency plans
Northville, Mich.-based Key Plastics LLC is closely watching its North American suppliers, said Claire Walia, senior vice president of global purchasing.
“I’m not concerned about my bigger suppliers like BASF,” she said. “It’s the smaller component suppliers with added volume requirements, more cash outlay and more financial burden and risk. That’s where we are looking at more risk assessment.”
Walia said many suppliers are getting pressured by last-minute spot orders from customers needing more components than contracted to keep up with demand.
These spot orders likely stemmed from the lack of automakers performing the typical summer shutdown of plants, said Dan Sharkey, a partner at Birmingham, Mich.-based Brooks Wilkins Sharkey & Turco PLLC.
Ford Motor Co., Chrysler Group LLC and General Motors Co. skipped two-week summer shutdowns around the Fourth of July holiday at several plants. Without the shutdown, Ford said it boosted production by 40,000 vehicles -- which need millions of parts from many suppliers.
“Half of what I work on is capacity issues for suppliers,” Sharkey said. “Without the summer shutdowns, many are maxed out on capacity, running three shifts.”
Walia said establishing successful long-term relationships with suppliers is helping Key Plastics and automakers keep components in supply as capacity gets tighter.
“We operate in a different environment today, where companies don’t carry inventory and there’s more due diligence,” she said. “People that play games with suppliers on pricing may find they can’t get material. You must have good long-term relationships and more transparency these days.”
Key Plastics projects sales of $400 million in 2012.
Mike Wall, director of automotive analysis for IHS Automotive, said capacity is a lingering issue in North America. Suppliers need new equipment -- and must hire -- to take advantage of increasing volumes.