After three years of grinding losses, Ford Motor Co. announced a $2.7 billion profit in 2009 and a 25 percent increase in January U.S. sales. General Motors Co. announced a 14 percent increase in January U.S. sales to 146,825 vehicles, while Toyota, its powerhouse rival, suffered three expansive recalls that at press time had affected more than 8 million vehicles around the world. Chrysler lagged with an 8 percent drop in sales.
Auto suppliers felt the impact to their bottom lines. "We’ve had the best January we’ve had in 21 years," says Sid Taylor, president and CEO of Warren, Mich.-based SET Enterprises, a metal processor with four locations in the Great Lakes region. "I’m feeling very optimistic."
The optimism isn’t misguided, but analysts caution against too much giddiness. Although 2010 will feel better than the wasteland of 2009, it’s a transition year to the buttoned-down stability the industry will experience in 2011.
The surge of activity felt at the beginning of the year was fueled by the Cash for Clunkers program and restocking of anemic inventories, analysts say.
Even Toyota’s troubles will likely amount to a "temporary, small shift in market shares," says Jim Gillette, an auto analyst and director of financial services at auto forecasting firm CSM Worldwide’s Grand Rapids, Mich., office.
Toyota’s U.S. January sales dipped 16 percent as GM and Ford offered incentives to lure buyers to their lots, and the Japanese automaker’s public relations efforts have stumbled amid a slow-drip news cycle detailing the company’s troubles. But lasting recovery likely won’t be built on Toyota’s missteps, Gillette says.
If the road to lasting recovery is steadier, analysts say, it’s also long. Despite eyebrow-raising headlines in the early months of 2010, the real recovery will be a bland, steady climb to sustainable sales and production numbers that will hover around unit sales last seen in the 1990s.
"We saw a huge inventory rundown last year," Gillette says. "There was so much uncertainty that everyone ran very lean. Then the Cash for Clunkers program drained dealer lots.
"We think it will be a slow, cautious rebuild," he continues. "There’s a growing sense of optimism that we’re pulling out of the depths of this recession."
CSM forecasts U.S. auto sales to hit 11.8 million units by year’s end, nearly 1.5 million more than sold last year, which marked a 39-year low for the industry.
The number is considerably below the nearly 17 million sales average of the decade’s earlier years. But a leaner, healthier supply base can profit at the new normal levels, Gillette says.
The forecast is up more than 10 percent compared with last year, says Plante & Moran analyst Craig Fitzgerald. "Most suppliers have really aggressively cut costs and lowered their break-even points. In aggregate, the industry will make some money."
Tier One suppliers, rocked by bankruptcies and liquidations among their ranks, are showing black ink on income statements.
Southfield, Mich.-based Lear Corp. swung to a $1.2 billion profit during the fourth quarter of 2009 from a $688.2 million loss during the same quarter in 2008. The profit was largely because of $1.5 billion in gains from its financial reorganization and accounting adjustments; Lear restructured its debt in bankruptcy last year. But Lear Chairman, CEO and President Bob Rossiter said in a news release that the company is now poised for "longer-term success."
Detroit-based supplier American Axle reported a $48.6 million profit in the fourth quarter, compared with a loss of $112.1 million during the same quarter in 2008. Troy, Mich.-based ArvinMeritor broke even in the first quarter on $1.1 billion in sales compared with a loss of $961 million for the same period last year.
American Axle has "successfully navigated through one of the most difficult periods in the history of the global automotive industry," said Richard E. Dauch, co-founder, chairman and CEO, on a Feb. 5 conference call. Dauch called 2009 "transformational."
Those that survived restructured and shed any bulk they could find from their organizations, and most Tier Ones still standing are leaving behind fears of instability, Gillette says. Excess capacity, a longtime problem in the supply chain, has been sliced by half during the past 18 months.
"But that still leaves the other half around," he says, and long term, there probably aren’t the units to support it.
Wes Smith, president and CEO of Plymouth, Mich.-based E&E Mfg., says he’s seen the trend in metal stamping. A number of businesses have quietly folded, but still more capacity gets shuffled to a different owner, he says.
Smith says the recent increase has helped, but longer-term trends such as stiffer competition from global suppliers and the hemorrhaging of manufacturing jobs in the United States are still being felt.
"We’re like everyone else," he says. "We’re aggressively trying to grow the top line and diversifying. We’re making big dives into office furniture and military.
"There’s going to be more and more competition," he notes.
Gillette agrees. "Foreign manufacturers are pouring into the U.S. to serve foreign automakers. That drives the profit margin down."
The winners, he says, will be the ones that innovate to produce gadgets and amenities that become indispensable to American consumers. New security systems and sensors that help drivers do everything from parallel park to wake up sleepy drivers are good examples.
Credit still shaky
In the near term, analysts are eyeballing four macroeconomic variables for lasting stability. Real gross domestic product growth, consumer confidence, credit availability and vehicle affordability influence 92 percent of vehicle sales, Fitzgerald says, and so far, we’re in the early stages of seeing any lasting improvement.
GDP growth expanded at a 5.7 percent annual rate in the last quarter of 2009, but most of the gains were from cyclical inventory builds and government stimulus. GDP for 2010 is anticipated to be around 3 percent, and although consumer confidence has "improved off of the worst in record lows," Fitzgerald says, it won’t stabilize until jobs return.
The U.S. unemployment rate in January fell to a five-month low of 9.7 percent. Factories added to their payrolls for the first time since 2007, but real traction in job gains has been elusive.
Consumer credit is still tight, decreasing at an annual rate of 4.75 percent in the fourth quarter of 2009, according to a report from the U.S. Federal Reserve Bank. But going against the trend was non-revolving credit, including car loans, which rose by 5.2 percent, or $6.8 billion, to $1.59 trillion.
"Credit availability is a huge wild card that could really help things out or cause disruption," Fitzgerald says. "There’s still plenty of people who can’t get credit."
Although, anecdotally, Gillette says, credit is starting to show more freedom. A longer-term concern is the abysmal shape of American household balance sheets. Homeowners who are underwater on their mortgages will be reluctant to commit to buying a new car, he says. Foreclosure rates shattered records in 2009 and will likely remain high in 2010.
"People are still feeling lousy in their homes," Gillette says.
Statistically, even when people do start buying again, they’ll baby their cars and hold on to them longer, Gillette says.
It’s not just a factor of automakers boosting quality. It’s also a function of the graying of America. Older generations tend to drive less and keep their cars longer. "There will be 15 million more people in that group by 2020," he says. "Most of the growth is in that group."
Despite the anticipation of the Chevy Volt and other plug-in vehicles, what consumers choose will likely include a gas engine. CSM has an "extremely cautious view of long-term growth in electric and hybrid."
The BorgWarners of the world are finding ways to improve gas engine performance, and automakers, including Ford, are strongly pushing smaller, turbo-charged engines--a source of growth for light metal producers, Gillette says. Other options, such as diesel engines, also remain.
Meanwhile, production is continuing its slow migration south, catching the eye of more suppliers. "During the last four months, we’ve shipped more steel to Mexico than we have in a long time," says Ed Gonzalez, president and CEO of Cleveland-based toll processor Ferragon Corp. "We’re on course to ship more in 2010."
Mexico doesn’t produce automotive-grade steel, Gonzalez says, and its growing automotive sector relies almost wholly on imports.
"Monterrey and Mexico City are emerging as power regions," Fitzgerald says. "Things continue to trend southward."
Aligned global footprints are going to be an important pitch point for auto suppliers moving forward. By 2014, about two-thirds of General Motors and Ford vehicles in North America will be built from global platforms--or common parts that can be built in multiple places around the world--versus 10 percent today, according to a February report by Chicago-based Grant Thornton LLP. Chrysler, although lagging, will follow.
"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," said James Ricci, a director in Grant Thornton’s corporate advisory group, in a press release. "Suppliers will need to have the best technologies, the right geographic footprint, and global engineering and manufacturing capabilities."
Ford’s relaunching of its Fiesta is a prime example. Its underlying architecture will be the foundation for up to 10 new models that by 2012 will account for more than 2 million units of volume.
To keep up, suppliers will need to bulk up through acquisitions and get rid of nonperforming or noncore business divisions.
"The relative value of these assets will only degrade further, as global platforms will dominate sourcing decisions, and fewer suppliers will be awarded the business," Ricci said.
The changes will not only simplify overly complex automotive supply chains but will also force more transition to a wary industry.
"By 2014, we should be humming," says Taylor. MM