Suppliers invest in brick and mortar -- finally
The dam has broken.
North American vehicle production has grown to the point where it's no longer enough for suppliers to run an extra shift to keep up with customer demand. After years of dragging their feet, companies have no choice but to build or expand factories -- and that's precisely what they're doing.
Just like automakers, suppliers are investing big sums in brick and mortar.
"Nobody anticipated the industry would come back at the rate that it did," said Danny Infusino, Martinrea International Inc.'s head of business development and engineering. The supplier is based in Vaughan, Ontario.
In April, Martinrea began constructing a plant in Riverside, Mo., to make engine cradles for General Motors' plant in Fairfax, Kan., which is 3 miles down the road.
"There is a lot of juggling going on," Infusino said. "The plants are running six or seven days a week."
Even as demand soared in recent years, suppliers were loath to break ground on a plant or even reopen one they had spent time and money shutting down during the recession. Instead, they turned to three-shift operations and various overtime schemes, such as flex time and volunteer shift work with pay premiums, all in an effort to squeeze out volume without making big capital investments.
That was then, and this is now.
"Overtime is an issue and a problem because people are getting exhausted," says Markus Erlbacher, North American commercial manager at German bumper supplier REHAU, which is expanding a plant in Alabama to supply Mercedes-Benz.
Production of light vehicles in North America is expected to top 16.8 million units this year, according to IHS Automotive. In 2016, production is expected to rise to 17.5 million units, topping the previous record of 17.3 million units in 2000.
There has been especially strong growth of investment in North America among suppliers based in Europe and Asia, said IHS analyst Mike Wall.
"North America is a safe haven, in some ways," Wall said. "We are a mature market, but we still have growth, and we are not nearly as volatile as emerging markets."
North America is an especially attractive market at a time when the economies of the vaunted BRIC countries -- Brazil, Russia, India and China -- have become increasingly volatile and Europe's economy remains stagnant.
So foreign suppliers are expanding in North America. Some examples:
REHAU has spent $115 million to expand its plant in Cullman, Ala., to produce bumpers for the redesigned Mercedes-Benz C-class sedan, which will be produced in Alabama for the first time.
Austrian firm Voestalpine Group has opened a $62 million plant in Cartersville, Ga., to produce body-in-white components for Mercedes-Benz.
Fuyao Glass Industry Group of China plans to spend $200 million to convert GM's shuttered assembly plant in Moraine, Ohio, into a glass production facility.
Following the customer
Foreign suppliers are investing in new North American plants because their customers are doing so.
For example, BMW AG plans to spend $1 billion to expand production at its plant in Spartanburg, S.C. And in February, Honda Motor Co. launched production of the Fit in its new $800 million plant in Celaya, Mexico.
Likewise, Daimler AG was reported to be spending an estimated $2 billion to expand its Vance, Ala., assembly plant. The plant builds the M class, GL class and R class and is starting production of the C class this year. And when Daimler expands, its suppliers expand, too.
REHAU's Alabama plant, which also supplies Nissan and BMW, needed additional floor space to accommodate a new production line for the C class.
The existing plant routinely has been running weekend and triple shifts to keep up, Erlbacher said.
The expansion will allow the company to reorganize production, hire more workers and ease the stress on the plant staff, Erlbacher said.
"It doesn't matter if it's Nissan, BMW or Mercedes -- production figures are always higher than expected," he said.
North American suppliers are investing, too, according to data compiled by consulting firm PwC. Last year, capital expenditures of 30 publicly traded suppliers totaled 4.4 percent of sales, up from a low of 3.0 percent in 2009.
"The increase in capital spending reflects rising confidence with the industry," said Jeff Zaleski, a PwC partner in Detroit. "You are seeing a lot more investment."
Banks are lending
To finance their expansion, suppliers are finding it easier to qualify for bank loans, Zaleski noted. "Banks are willing to loan companies more money," he said. "North America is a very attractive investment right now."
Like their European and Asian peers, U.S. and Canadian suppliers are racing to keep up with rising production. Martinrea International's engine cradle plant in Missouri will launch production late in 2015 for GM's Epsilon platform.
The Fairfax plant assembles the Chevrolet Malibu and Buick LaCrosse.
At any rate, Infusino says the Riverside plant will avert production bottlenecks in two of Martinrea's stamping plants.
Previously, the plants would stamp components for the engine cradle, then weld the cradle together. But cradles are difficult to ship long distances because of their odd shape.
Instead, Martinrea will ship the stamped components to the new Riverside plant, which will weld them together just a few miles from its customer, GM.
Infusino calls the new approach a hub-and-spoke strategy, since the stamping plants will ship stamped components to satellite factories for final assembly.
Shipping costs will be much lower, and Martinrea won't have to undertake a costly expansion of its stamping plants, which are a seven-hour drive from Riverside.
And that, in turn, will cushion some of the strain on Martinrea's plants to fill rising orders from the Detroit 3, Nissan and the German automakers. A number of plants are running at or near capacity, and Infusino expects that to continue in 2015.
You can reach David Sedgwick at email@example.com.