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Auto demand prompts suppliers to expand

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DETROIT—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.

“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 Co.'s site in Fairfax, Kan., which is three 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.

“Overtime is an issue and a problem because people are getting exhausted,” says Markus Erlbacher, North American commercial manager at German bumper fascia and system supplier Rehau A.G. + Co., 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,” he 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 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. The company already had molding and assembly at the site for other vehicle production. It also invested $3 million for a North American technical center in Cullman to add more product development capabilities in the region.

• 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 General Motors' 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 A.G. plans to spend $1 billion to expand production at its factory in Spartanburg, S.C. And in February, Honda Motor Co. Ltd. launched production of the Fit in its new $800 million plant in Celaya, Mexico.

Likewise, Daimler A.G. was reported to be spending an estimated $2 billion to expand its Vance, Ala., assembly facility. 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 Motor Co. Ltd. and BMW, needed additional floor space to accommodate a new production line for the C class.

The existing facility 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.”