Suppliers double down on diversification amid industry uncertainty

The automotive industry doesn't know which way it's going, and that makes the golden rule of survival for suppliers even more relevant: Don't put all your parts in one basket.

As the Detroit 3 emerge from a costly UAW strike — an estimated loss of more than $10.4 billion for carmakers, suppliers and workers in its sixth and final full week, per the latest Anderson Economic Group report — and automakers delay electric vehicle rollouts, suppliers are faced with launch volume projections they cannot trust from customers likely looking to counterbalance hefty new labor costs by driving down prices for parts.

That has suppliers on the defense and in search of ways to hedge against the uncertainty.

The best way to do that is to keep a diverse portfolio, said Dave Andrea, principal at Plante Moran. While diversification of customers has been a constant pressure since even before the industry's Great Recession bankruptcy era of the mid-2000s, the transition to EVs adds urgency and complexity.

"It's going one level deeper, looking at it by platform, by internal combustion engine and electric vehicles because there's so much uncertainty in terms of what market demand is going to be that you want to try to spread that out," Andrea said.

At power management giant Eaton Corp., whose vehicle division is based in suburban Detroit, the electric mobility business is expected to nearly triple to $1.5 billion by 2025 from $538 million in revenue last year, said Pete Denk, president, Mobility Group. Should those projections not pan out, the company has fuel systems and all sorts of other business units, from furniture to golf grips, to fall back on.

"Diversification over the next 10 years is so critical, I'd say, to the survival of suppliers," Denk said. "So, if the combustion does go down, we'll feel it, but it will bring it up on e-mobility, and if e-mobility is delayed, we'll just keep on delivering our vehicle business that we've delivered for decades now. I don't know how you make it through a transition time like this other than a strategy like that."

Suppliers have also been looking to Tesla Inc. While the Detroit 3 were feuding over labor, the EV darling was churning out vehicles. That helped buoy business at magnetic parts supplier Storch Products Co., whose orders were otherwise down because of the strike. Tesla and its Tier 1 equipment integrator continued taking Storch's parts without disruption, said Matt Carr, the supplier's president and CEO.

"They're purchasing, we're having machines that are heading their direction," Carr said a couple weeks ago before the UAW strikes ended. "We've been part of some programs that have been wonderful. They're tooling up."

Storch has been on a mission to diversify its product offerings and customer base as the existential threat of EVs looms large. Like other auto suppliers, it has found success in the defense sector as the business of war is steadier than that of automobiles.

"We've seen this technology that's been born out of the needs of automotive now go into military," Carr said. "That's how we're handling the slowdown because (automakers) are on their heels wondering, is EV really here to stay?"

In a similar way, Craig Carrell, president of Team 1 Plastics, has been working to wean his Albion, Mich., company off gasoline-powered cars. The Tier 2 supplier has gone to 60 percent internal combustion platforms from 80 percent in the past two years. While it does its biggest business on Ford pickups, its diversification efforts helped it manage through the strike without layoffs.

"We do a lot of business with the Japanese, and we've seen some increases on those," Carrell said. "It's not enough to make up what we lost, but it's a little bit of a bump."

Rapidly rising Chinese automakers pose a serious threat to the Detroit 3 and other automakers, as Ford CEO Jim Farley made clear this year. BYD Auto Co., Geely Holding Group Co. and SAIC Motor Corp. are some of the dozens of automakers that have cropped up in the Far East.

The big auto suppliers have certainly taken notice as competition to get on Chinese platforms has ratcheted up — and where suppliers place their bets is a good indication of where the market is heading. With Ford and General Motors rapidly losing market share in China, Chinese domestic OEMs are expected to account for 65 percent of the Chinese market by 2030, according to an analysis by consulting firm AlixPartners.

"Now with Chinese brands making up 50 percent or more of sales in China, that becomes a big market, and so many suppliers want to expand their share of that market," said Stephen Dyer, a former Ford vice president who heads up AlixPartners' China business.

Increasing penetration in local OEMs in China "is a key strategic imperative across the auto supplier universe right now," Luke Junk, senior research analyst at Baird, told Automotive News affiliate Crain's Detroit Business in a recent interview.

Chinese automakers still have a long way to go in expanding influence beyond their borders, especially in the U.S., but it may be just a matter of time.

"The primary opportunity is still local OEMs in China for China," Junk said. "Certainly, there's recognition of the fact that some of the players in China are looking to push more aggressively outside of China. That's less material today, but there is an opportunity going forward."

Lear Corp. highlighted recent China wins, including wiring awards from Geely and seating contracts with BYD, in its quarterly earnings report last week. The seating and e-systems supplier, which makes 20 percent of its revenue from GM and 14% from Ford, lost $170 million because of the UAW strike, just about a third of the $525 million it lost in the 2019 strike against GM. Regardless, it has paid the price for significant exposure to the Detroit automakers.

"Customer diversification was a key part of our strategy, and we're doing a really nice job of diversification across Geely…we talked about Land Rover, European OEs … just continue to accelerate our diversification across customers," Lear CEO Ray Scott said on a call with investment analysts last week.

Rival seating supplier Adient is also growing its business with the Chinese. It has $4.6 billion of new business awards in the country in fiscal year 2023 and expects to be 60 percent weighted toward local Chinese automakers in the next three to five years.

"Does that mean we're abandoning all our traditional customers? No. But we're focused on certain brands that we think can coexist with the domestics that are developing their platforms," CEO Doug Del Grosso told investment analysts this summer.

Diversification, while essential, must also be done with balance, Andrea added.

"As a supplier, your costs go up as you serve more and more customers," he said. "The supplier has to be cognizant to balance out the revenue opportunities to the additional costs."