DETROIT (Bloomberg) -- The global auto industry in recent years has come to recognize risks inherent in its long and diffuse supply chain. Now it's starting to face an almost 40 percent bottleneck in the ability to make vehicles.
Within five years, the North American auto industry will be almost $6 billion short of tooling capacity -- the ability to make the machines and molds automakers and their suppliers use to build auto parts -- according to a new study from Harbour Results Inc., a suburban Detroit consulting firm.
As U.S. vehicle sales recover toward the annual record of 17.4 million, car companies will need toolmakers to be able to produce $15.2 billion in tooling each year, far more than the current capacity of about $9.3 billion, said Laurie Harbour, chief executive officer of Harbor Results. She called the tooling-needs estimate conservative.
"The attention has been focused on the suppliers; that's been the most immediate need," said Dave Andrea, a senior vice president with the Original Equipment Suppliers Association trade group. "But this study is really forcing the industry to look out two to three years. Are we going to have the right capacity in place to support the record number of vehicle programs coming into the market? The auto industry is trying to put so much through its current capacity that there's no room for error."
North American automakers are introducing 42 new models for 2014 and 112 more by 2018, Harbour said, adding that a new vehicle can require as many as 3,000 new tools.
Recent risk
The auto industry supply chain became a risk area in recent years, first during the recession when it wasn't clear that enough companies would survive to supply automakers. Then production was lost after the 2011 earthquake and tsunami in Japan and, the following year, an explosion in Germany.
Automakers have worked to develop back-up sources for emergencies and to get enough parts to sustain the U.S. light-vehicle sales growth that analysts estimate will continue for a fifth straight year and exceed 16 million for the first time since 2007.
Tooling is a slightly different problem.
There are about 750 tool shops in the United States and Canada serving the auto industry, Harbour estimates, with most of them in the Midwest and southern Ontario. The global recession helped pare their ranks by a third since the late 1990s.
The remaining shops, where the average worker is 52, cope with a shortage of skilled labor that can't be quickly addressed. Training new toolmakers takes about five years, Harbour said. Most are closely held enterprises, averaging $15 million in revenue, she said. Alleghany Technologies Inc., a $5 billion maker of specialty materials, supplies parts to the auto industry and tooling for rail wheels and axles.
"It's a very difficult industry yet it is very critical to the marketplace," she said.
Adding to the challenge is the proliferation of vehicles and their many trim levels and options, Harbour said. Newer models have more detail, from accent lighting in cup holders and dashboards to louvered front grilles that improve fuel efficiency. For example, a front fascia -- sort of the face of the car -- can have as many as 35 tooled parts and one vehicle can have as many as three distinct fascia looks depending on the trim level.
"The complexity is going up and so is the number of tools required," Harbour said. "If you design a vehicle for multiple trim levels to meet multiple customer preferences, that's tooling."
Foreign competition
Tool shops vie for business with Chinese competitors, who are able to produce tools more cheaply. So far, automakers producing in North America have resisted using Chinese suppliers for complex tools and so far have used tool shops in Mexico only to maintain or repair tools.
As more foreign automakers build factories in the United States and Mexico and design cars in the United States, the need for tooling will increase, Harbour said. Chinese companies are looking at buying U.S. and Canadian shops and German toolmakers are considering starting operations in North America, she said.
"They've been visiting tool shops in the U.S. and Canada and they know there's a capacity shortage," she said.
"Somebody's going to fill it. We're not going to not launch vehicles."
Then there are the times when the industry can't see a shortage coming five years down the road.
Factory explosion
An explosion at Evonik Industries' Marl Chemical Park killed two people on March 31, 2012. That facility manufactured a chemical called cyclododecatriene that's used widely in automobiles: in fabrics, brake components, fuel tanks.
It took months to restart production, creating a major production bottleneck for car manufacturers, said David Simchi-Levi, professor of civil and environmental engineering at Massachusetts Institute of Technology.
"This is a supplier that nobody was focused on," he said.
After the crisis, Evonik moved to open a plant in China, where it can shift capacity in a pinch, said Simchi-Levi, an author of the 2013 joint PricewaterhouseCoopers LLP and MIT Forum for Supply Chain Innovation study "Supply Chain and Risk Management."
The auto industry's need to rely less on individual third-party suppliers wasn't a new lesson in March 2012. Nor was it a year earlier, when an earthquake and tsunami in Japan knocked offline Renesas Electronics Corp., a company that makes 40 percent of the world's supply of chips used in cars or disrupted production of paint pigments made by Merck KGaA. That earthquake caused disruptions that slowed or stopped production and sales for automakers around the world.
Plan ahead
"You cannot just wait until something happens to respond," Simchi-Levi said. Companies that understand their vulnerabilities in advance return to production more quickly after a disaster, he said.
Simchi-Levi's department at MIT has been working with Ford on supply chain risk management, and he has written a piece slated for the January issue of the Harvard Business Review.
The breadth of the repercussions of the Evonik blast have aroused more serious efforts to sniff out vulnerabilities before they become crises.
Investors, he said, are "looking at companies and saying if you have a disruption and you're unable to respond, the market is punishing you."
A fire at a Royal Philips NV radio-frequency chip plant in Albuquerque, New Mexico, on March 17, 2000, destroyed components relied on by Nokia OYJ and Ericsson AB. Nokia had prepared for such a risk, and switched its manufacturing to a working plant.
Ericsson lost $400 million in potential sales, most of which was covered by insurance. Total losses related to the incident exceeded $1.5 billion, and they eventually left the business, he said.
Board-level issue
"This is an issue not only for supply chain executives, not only for CFOs, but also the board and CEO. That's why companies are taking a deep dive analysis into their supply chains: Where is the hidden risk? Where are the bottlenecks?" he said.
A potential kink from far down the chain can have a direct impact on automakers, said Jeoff Burris, founder of Advanced Purchasing Dynamics Inc., a suburban Detroit consulting firm that works with auto suppliers to improve purchasing.
"Everyone's trying to do more with less," he said. "But the economy has a great ability to fix itself and send resources where they are needed. No one wants to be the one stopping GM from launching a new vehicle."
