Suppliers race to fill orders
Strong N. America, easier credit spark optimism and plans for expansion
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Thanks to a rush of orders from automakers, suppliers are cranking up production in North America.
Feeling more confident about the next few years, suppliers are hiring and adding machinery and production lines, and even building plants. The extreme caution that followed the Great Recession of 2008 and 2009 is dissipating.
Don Walker, CEO of Magna International Inc., says his company is getting bigger orders from Chrysler Group, Ford Motor Co. and General Motors.
"We are flat-out at our plants in North America on some products," Walker told reporters last week at the Geneva auto show.
BMW, Volkswagen and Mercedes-Benz also are boosting orders, he said. "The export demand for those brands is much higher than planned, and we are trying to meet demand."
According to a January survey of 109 suppliers by the Original Equipment Suppliers Association, 64 percent of respondents said they were optimistic about their outlook for the next 12 months, up from only 27 percent in a November survey.
For GKN PLC of the United Kingdom, the tipping point came in December, when U.S. sales were much stronger than expected.
GKN's factory in Celaya, Mexico, was struggling to meet growing demand for constant-velocity joints, which allow the drive shaft to transmit power to the wheels.
GKN, which makes CV joints mostly for front-wheel-drive vehicles, decided to get around the problem of limited capacity in North America by producing some CV joints in Europe for shipment to North America.
"We made the decision at the tail end of last year," said Max Owen, president of GKN Driveline Americas. "We were working at the limit of our capacity."
Production in Europe buys time for GKN to expand its North American plants, Owen said.
In May, the Celaya complex will begin operating a new forge. By 2015, Celaya will produce 9 million CV joints a year, up from 3 million in 2005. GKN's plants in North Carolina and Ohio also are producing close to capacity, Owen said. "We are adding capacity across the board. There isn't a single product line that isn't growing strongly," he noted.
Owen says GKN will meet rising demand in North America, but he fears the industry may suffer spot shortages.
"I believe there are going to be bottlenecks," Owen said. "No supplier wants to be the weakest link, but there's always one. If U.S. sales stay at 15 million units, the plants will be challenged."
In February, the seasonally adjusted annual sales rate in the United States reached 15.1 million units, up sharply from the industry's low point in February 2009, when it was 9.3 million.
Long-term growth
These plant expansions are coming at a time when two firms that analyze production trends, IHS Automotive and LMC Automotive, are forecasting production of 14.4 million light vehicles in North American plants this year. That would be up from 13.1 million units in 2011, but remains well behind 2007 production of 15.2 million.
But suppliers are optimistic about the region's long-term prospects, and they are investing accordingly.
This spring, for example, Hella KG Hueck & Co. will start construction of a $97 million factory in Irapuato, Mexico, to produce headlamps and taillights.
The plant will produce 1.2 million headlamps and 1.5 million taillights annually, and production is scheduled to begin in mid-2013.
Hella's North American plants are running at 75 to 80 percent of capacity -- hardly a sign of distress. But in November the German supplier decided to expand those plants to accommodate future growth.
Credit is flowing
With global original-equipment sales of $3.5 billion in 2010, Hella can pay for such expansions out of its cash flow. But some suppliers -- especially small manufacturers -- are less fortunate.
After the recession, many suppliers were unable to get bank loans to buy equipment or build new plants. Now the cash crunch is easing.
At Precision Stamping, President John Parke in recent months overcame his reluctance to take on debt and obtained a $500,000 line of credit at 3 percent interest.
The Howell, Mich., company will add storage space and make room in its factory for a newly purchased 300-ton press. The small family-owned business, which has annual revenues of about $10 million, produces parts for engines and fuel systems as well as other components.
"My dad lived during the Depression," Parke said. "He knew the value of a nickel, and he didn't like the banks. But we got a loan for the expansion. With interest rates so low, my CFO said the money was practically free."
According to the Original Equipment Suppliers Association's January survey, 41 percent of respondents said they would increase their reliance on bank loans over the next 12 months, while only 21 percent said they would reduce their reliance.
"Credit is more available," said David Andrea, the trade association's senior vice president of industry analysis. "As far as risk management goes, suppliers are more concerned about production than financing."
In the first quarter of 2012, 76 percent of respondents in the trade group's survey said they expected to run their plants on overtime, and 54 percent said they expected to encounter capacity constraints within their manufacturing operations.
As suppliers gain confidence, they are installing new machinery and running checks on their vendors to spot possible bottlenecks.
"We are working closely with our Tier 2 and Tier 3 suppliers to make sure they have the production volumes," said Magna's Walker. "In a few cases, we're tight. It's a nice problem to have, to be running flat out. But we will adjust."
Jason Stein contributed to this report
| Optimism skyrockets | |
| Suppliers were asked: What is your outlook for the next 12 months? | |
| Optimistic | |
| Jan. 2012 | 64% |
| Nov. 2011 | 27% |
| Source: Original Equipment Suppliers Association | |
You can reach David Sedgwick at dsedgwick@crain.com.
