Automobile Industry Essay Example For Students

Automobile Industry Essay Accessories are parts made for comfort, convenience, performance, safety, or customization, and are designed for add-on after the original assembly of the motor vehicle. Overview of Industry Market Conditions The U. S. Auto industry is a key component of the nations manufacturing base. In a typical year, it accounts tort about five percent to GAP and 16 percent of all durable goods shipments. The automotive industry, including the automakers and automotive parts sectors, accounted for about 674,000 U. S. Employees in 2010, a slight increase of percent from 664,200 in 2009. 2 and accounted for 5. Recent of all U. S. Manufacturing employees. While trying to work more collaboratively with suppliers, automakers put pressure on them by seeking price concessions and tasking their suppliers to take on more research, design and manufacturing responsibilities, and by absorbing the higher costs for their inputs. Suppliers that survived 2003 slashed costs by cutting capacity, laying off Workers , and restructuring financially. The Original Equipment Suppliers Association (GOES) reported that the automotive supply sector was operating at about AS percent capacity utilization. This is an improvement over the 45 Recent capacity utilization in early 2003, but far from the 80 percent historically needed for profitability. 3 As vehicle sales rebounded and suppliers started to realize some profit from their cost cutting efforts, the auto makers have started to pressure suppliers to cut prices. Industry analysts forecast severe pricing pressure and shrinking margins globally for suppliers in 2011. 4 Those suppliers that remained financially healthy during the downturn are likely to face increased pressure, while those suppliers that struggled may experience less pressure to cut prices. In 2010, the market for original equipment in the United States was 141. 5 billion, up 36. 5 percent from 2009, with the increase in vehicle production. Pressure was further exacerbated by global competition in the parts industry. As Japanese, German, and Korean-based vehicle manufacturers gained shares to the U. S. Market, they maintained relationships with their traditional supplier base. Many of those home market suppliers created or expanded transplant capacity in the United States to meet their traditional automakers production needs, At the same time those transplant suppliers aggressively sought business from the Detroit 3. In addition, suppliers in many Bureau of Labor Statistics data sing NAZIS 3361 3362, and 3363. Http://data. Ibis. Gob/PEG/outside? Survey=CE 3 Wards Automotive Reports, 1/25/10, p. 3. 4 Walsh, Dustin, Suppliers Back in Price Vise, Automotive News, 12/6/10, 2 International Trade Administration/Manufacturing and Services/Office of lower cost markets improved their quality and became capable of supplying even greater shares Of LIST. Demand from abroad. The Detroit 3 also advocated that u. S. -based suppliers move production to lower cost countries or risk losing future contracts. TO survive, many domestic parts manufacturers had to adapt to these numerous challenges. Appliers willingly took on the new responsibilities offered to them by automakers. Some transformed themselves into Tier One-Half systems integrators, that engineer and build complete modules (for example, an entire interior, 4-corner suspension sets, or an entire rolling chassis) and assumed both product design and development responsibilities, and down stream supply chain management functions previously undertaken by the automakers. Most u,S. Appliers are ill-situated to withstand major disruptions to their sales and the impact upon suppliers when an automaker sharply curtails operations can be severe, It takes many months ND significant resources to win business from vehicle assemblers or from the major *Tier l suppliers, A survey of suppliers taken in September 2010, revealed suppliers profit margins, before interest and taxes, would be around 6 percent in 2010. The increase was credited to s trong auto markets in China, Brazil, and India, and a partial recovery in North America, Europe, and Asia. Still there was skepticism about butcher the demand was going to be sustained, resulting in reluctance of suppliers to expand production and investment and hire back workers_5 The result has been Some temporary supply shortages, for example Scripps and some plastic resins, as vehicle production increased. Supply shortage is still a possibility as vehicle production increases. This situation to fulfill demand could drive further consolidation and acquisitions to improve suppliers competitive positions. The parts shortage is most acute among Tier 2 and Tier 3 suppliers that were forced to downsize and were unable or unwilling to secure financing for expansion. Dramatic growth in China, India, and other Asian economies, has also led to increased costs for critical raw materials. Demand in the developing world, primarily China, has been a major river behind increasing raw materials and energy commodity prices, Financial pressures from higher raw material prices have been affecting ties between suppliers and automakers, and between higher tier suppliers and their lower tier suppliers. Automakers are increasingly allowing material cost pass-thorough from suppliers, usually on a case-by-case basis, if the supplier can prove extraordinary pressures because to raw material costs and demonstrate efforts to keep costs down. Suppliers are concerned as the market rebounds that prices for raw materials will also increase. An example is the price of thermoplastic used in automotive manufacturing which increased 16 percent from January 201 C to December 2010. Steel makers are seeking to insulate themselves from fluctuating costs of their own raw materials. Iron ore prices went from 560 a ton in 2009 to $180 a ton in April 2010, 5 Automotive News, Surveys of Suppliers find Hefty Profits, Rosy Outlook, by Mike social, p. 20. Settling at $140 a ton in August. Steel makers seek more flexibility to set prices based on inputs or seek shorter term contracts with the auto industry, offering an adjustable-rate contract With relatively low prices or a fixed-rate contract with higher prices. North American auto makers tend to buy most of their steel from five companies: Recreational, United States Steel Corp.. OHO Several, AK Steel, and Togetherness GAG. Rare earth materials are also a growing concern of the automotive industry. For example, China controls the supply of many rare earth metals, Demand is increasing in the automotive industry in part because of the increase in hybrid and advanced technology vehicles that use rare earth materials in batteries and electronics. China has been controlling the mining, cutting back on exports, and increa sing export tees of many to these critical rare earth materials. This is encouraging competitors to seek alternatives to rare earth materials and will be an area to watch over the coming years. Many analysts and industry members expect the North American industry restructuring to continue during 2011 and into 2012, so the pressures driving industry consolidation will remain for some time, Industry analysts predict that at least 500 of the remaining 5,000 or so U. S. Automotive suppliers will fail in the next few years. 6 The continued pressure is forcing automotive suppliers to seek fork in alternative fields including military, space and wind energy. Greek Mythology and Religion EssayOnly two U. S. Suppliers were among the top 10 global OWE suppliers in 2009: Johnson Controls and Delphi. Johnson Controls global OWE sales were down 33 percent in 2009 to 512. 8 billion and Delphi was down 34. 9 percent from 2008, with $1 1. 8 billion in OWE sales. Most suppliers saw sales drop in 2009 with the global recession and decrease in vehicle production and sales. The global recovery trot the recession and increase in vehicle production and sales in 010 should result in an increase in global OWE sales for suppliers, especially large suppliers with close ties to auto makers. Growth for the majority of suppliers dependent mainly upon mature markets has stalled according to an analysis by PricewaterhouseCoopers. 12 The analysis observed that suppliers strategically entering emerging markets to improve both their cost position and diversify away from traditional customers have tended to generate above average operating income growth despite strong home market headwinds, 10 1 1 Merrill Lynch estimate via GOES Year in Review: Parts Market in North America, Dossiers analysis email, 2/23/11. 12 PWS Automotive Institutes Analyst Note, PriceWaterhouseCoopers, 8/1/07. Because of the 36 percent increase in vehicle production in the United States, OWE parts experienced a similar increase in sales volume in 2010. OWE sales by value are more affected when there is a shift from higher-content value Subs to lower-content value small passenger cars. OWE parts demand in 2009 was down to lows not seen since 1993 ($164 billion) in current dollars, or if the market demand is adjusted for inflation in constant dollars not seen since the asses. 3 Competition was also growing as foreign suppliers opened shop in North America. An estimated 800-1,000 suppliers from overseas built plants in North America in the past 20 years, creating a mass global localization of the supplier sector. 14 Some foreign suppliers, especially European companies, that expanded businesses in North America to supply their Detroit 3 customers, are also trying to move away from Detroit 3 business to Asian automakers. However, Japanese suppliers are not immune either, Suppliers in North America all face competition, historically high material costs, and demanding customers, although the foreign Appliers face fewer legacy costs and so tend to operate more efficiently than their U. S. Counterparts. Automakers, such as Ford, are attempting to design global platforms allowing the vehicle to be made in Asia, Europe and North America using the same platform. Global platforms reduce engineering costs, simplify manufacturing processes, and improve quality by reducing variability. Other efficiencies gained by the volume of the shared platform include working closer With suppliers from the design Of parts to the production Of the car Which will cut component cost and retail price. For example, the Ford Focus will use 80 percent common parts and AS percent of the same supply base. Large regional suppliers are a shrinking part of the market. Foreign-affiliated suppliers have made significant inroads into the LIST. Market through acquisitions, sales to transplant automakers, and sales to the Detroit 3. Moreover, transplant vehicle production in the United States grew significantly, from only 2. 6 million light vehicles in 1999 to just over 4 million units in 2007, and to 3. 4 million units in 2010. The Detroit 3 have continued to purchase more foreign-based supplier components. For example, Siemens, a German supplier, which had no share of audio systems in North America in 2003, had grown to 25 percent share by 2005. Also, Dense Corporation, now the largest supplier in the world, reported that its sales to the Detroit 3 were rising and that the North America market represented about 40 percent of its total sales, while Toyota accounted for another 40 percent of Tendons business in North America. 15 In August 2008, Chrysler named Dense Corporation as its first Supplier of Choice? This means Dense is the default supplier with whom other suppliers must compete to win contracts, and Dense ill not have to compete to keep current orders. 13 14 AN Outlook for Sales and Production and OWE Parts Demand, Dossiers analysis email, 1/23/09.. Size of the parts market in North America, Dossiers analysis email, 1/19/2007. IS Dense is a member Of the Toyota group with Toyota owning 22. 9 percent of Dense. Dense expected double-digit growth been 2007-2012 in North America. The effect of the foreign-based suppliers increased production within the North American market is also affecting the North American content o f vehicles. In fact, some Japanese vehicles, such as the Toyota Sienna, had a 90 percent LIE. S. And Canadian component content, while traditional American vehicles, such as the Chevrolet Suburban, Ford Mustang and Jeep Grand Cherokee have between 61-72 percent U. S. And Canadian content. Aftermarket The independent aftermarket experienced a sales boom after I ,160 dealerships closed in 2009. It was estimated that more than $7 billion in 2009 parts and services would be redirected to independent service outlets and auto parts stores and non-OWE auto parts distributors as dealers closed shop. 16 Independent garages employed an estimated 332,262 individuals It is estimated that 70 percent (1 76 million) of out- f-warranty vehicles are repaired at independent shops. The perception that a weak economy favors the aftermarket appears to be holding for the short- term. Cost-awareness amongst automobile consumers has led many to invest in servicing and repairs of their vehicles rather than purchasing a new one because of the effect of the weakened global economy. The aftermarket (parts and services) is estimated to be a nearly 5200 billion industry and has benefited as consumers defer new vehicle purchases because of uncertainty about their jobs, housing market, and availability Of disposable income. Still, even the aftermarket is not immune to the state of the economy. While the recession boosted the aftermarket financial viability in the shorthorn, not all long-term indicators are promising.