Automotive Engineering - September 2024 - 6

SUPPLIER EYE
A New Reckoning
As the industry worked through accelerated production
volumes last decade, there were few
concerns surrounding low capacity utilization in
our fixed-cost-heavy North American ecosystem.
With the benefit of stronger demand and a
rich product mix, the industry was allowed to
shift attention toward other priorities. Having
too much capacity or not properly utilizing it
was not a major concern in a market that averaged
17 million units from 2016 through 2019.
The first few years of this decade - with the onset
of COVID, low chip availability, growing inflation
and a host of other supply disruptions
- provided plenty of reasons not to focus on
emerging utilization issues.
Despite last year's increasing production volumes,
the new UAW and Unifor labor agreements
(and their no-facility-closure clauses)
place the issue of capacity utilization back at the
head of the line, this time with the added complication
of an industry grappling with the complexity
of integrating battery EV and hybrid variant
builds into the same plants that have assembled
ICE vehicles for decades. The build processes,
supplier requirements and plant requirements
are too different to meld into one factory.
Many OEMs have opted to convert ICE facilities
to BEV - never to return. While efficiencies can
be gained with a singular build focus (ICE/
Hybrid or BEV), any delay by customers to
adopt BEVs upends these efforts.
Other factors will impact overall capacity utilization
through the end of the decade. Key
among them will be the addition of incremental
plants by current and new OEMs. This includes
Michael Robinet
Executive Director,
Consulting,
S&P Global Mobility
SAE Foundation
Trustee
michael.robinet
@spglobal.com
Smaller
suppliers
may not have
the financial
flexibility that
OEMs have.
Closing or
selling plants
may be their
only option.
Ford's massive Blue Oval Project (now called
TEVC-Tennessee Electric Vehicle Center), capacity
added by Tesla in Texas, VW/Scout in South
Carolina, the now-delayed Vinfast project in North
Carolina and other capacity expansions by current
players. Add to this a market that is grappling
with the impact of pent-up demand from the last
four years essentially being satisfied with little
inventory build and the affordability of those offerings
starting to come into question as consumers
face interest rates three times higher than just
a few years ago. Mix in the impact of various new
China-sourced vehicle tariffs by NA countries and
reciprocal ones installed by China, and volume will
face another constraint. Without the Detroit 3's
safety valve to take capacity offline, we have a
growing utilization issue which will impact profits
and the ability to compete in the future.
The graphic (below left) from the S&P Global
Mobility Light Vehicle Capacity Utilization
Forecast outlines that straight-time capacity
utilization may dip towards 65% later this decade.
Without the ability to restructure vehicle
sourcing to drive overall corporate efficiency,
one can already anticipate a growing list of
plants to be addressed when labor contracts
expire in 2027-28. OEMs with reduced profitability
and few strategic options to improve efficiency
while facing strong competition from
China-based OEMs outside of North America
may face a real reckoning.
Suppliers will not be immune. When OEMs
experience low utilization at one or more plants,
odds are that suppliers increased capacity to
handle the same lofty volumes. Thus, issues at
the OEM level immediately find their way to the
supply base. Several of these smaller suppliers
may not have the financial flexibility of their
larger OEM customers. Closing or selling plants
may be their only option.
In the end, several moons aligning to drive
utilization downward later this decade will have
severe consequences for an ecosystem still
climbing out of the recent COVID-driven supply
impacts. This new reckoning will not be solved
easily or delicately. It is clear that critical manufacturing
decisions will be forced upon many
OEMs, their labor unions and associated suppliers
later this decade.
6 September 2024
AUTOMOTIVE ENGINEERING
S&P GLOBAL MOBILITY
Automotive Engineering - September 2024

Table of Contents for the Digital Edition of Automotive Engineering - September 2024
