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April 06, 2014 02:00 AM

THEN AND NOW: A new road

Brad Dawson
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    In 2007, Rubber & Plastics News published a series about rubber manufacturing in America. RPN will post one story a day from the 2007 collection March 31-April 6,updating where the companies are today. Check out the April 7 print issue of RPN for a report on where the sector stands now and what its prospects are for the future.

    Today's story “A new road” from the June 25, 2007 issue, covered the automotive manufacturing industry in America.

    UPDATE: The automotive market has seen more ups and downs in the past seven years than most sectors. First the recession sliced heavily into vehicle sales and production volumes. Then the recovery came more quickly than expected, leaving many in the supply base scrambling to catch up.

    Suppliers of rubber components and systems to automotive weren't immune. Among just a few of the many moves, Tenneco Inc. moved its elastomer conventional molding operations from its Milan, Ohio, plant to the firm's Reynosa, Mexico, factory; Chardon Rubber Co. closed its manufacturing operations at the end of 2009, though it continues to operate a custom mixing business; and Cooper Standard Automotive went through Chapter 11 bankruptcy reorganization but has rebounded and is once again a growing global enterprise.

       

    North American automotive suppliers hoping to thrive in the future need to find ways to meet omnipresent pricing pressures and diversify their customer bases to take advantage of growing foreign-owned transplant business.

    That's the view of people in the trenches, executives at automotive rubber component companies. Their businesses face a supplier squeeze that starts at the top with the original equipment manufacturers and works down the chain.

    Several OEMs in recent years have dictated that suppliers source a growing portion of their production from low-cost regions, shifting work away from the U.S. and resulting in numerous consolidations and shutdowns. At the same time, the automotive business has experienced a general downturn, and a significant number of suppliers have sought Chapter 11 bankruptcy protection to stay afloat.

    Still, many companies planning on serving Big Three or transplant OEMs that are making vehicles in North America are committed to finding cost-effective ways to produce their goods in this region, too

    Growing transplant opportunities

    Automotive suppliers have to make a concerted effort to diversify their customer bases because of the rising number of opportunities coming from transplant companies, said Dave Andrea, vice president of economics and industry analysis for the Original Equipment Suppliers Association.

    Andrea said industry estimates he's seen project transplant manufacturers like Toyota, Honda and Nissan will make about 5.6 million North American light duty vehicles in 2007, compared to 9.4 million from the Big Three. That's a 63/37 ratio.

    Ten years ago, the breakdown was 12.6 million vehicles from the Big Three to 3.1 million for transplants, an 80/20 ratio, he said.

    "Suppliers who are doing well are the ones with a customer makeup that more closely mirrors North American production,'' Andrea said, especially those with Toyota and Honda in their portfolio.

    Toyoda Gosei North America Corp., which makes components such as body seals and fuel systems, serves the market with primarily North American-produced parts, said Joseph Mannino, vice president, technical, of the Troy, Mich.-based manufacturer. The company's target for products sold in North America is more than 95-percent local content.

    Transplants are the supplier's biggest customers in North America, and while those customers are building their manufacturing base in the market, Toyoda Gosei's goal is to increase its production as well, Mannino said. "Our potential (with transplants) is strong, but trust must be earned from all of our customers,'' he said.

    At Avon Automotive Inc., which makes primarily hose products, the focus traditionally has been on serving tier suppliers to the Big Three, with specialization the key to success, said President and CEO Lee Richards. But much of the company's growth of late has been with the new domestic auto makers.

    Cadillac, Mich.-based Avon has some key programs in place with transplant companies where it supplies those customers domestically, but it took five years in some cases to implement those programs, Richards said.

    It takes time to break in with transplants because it "requires quality standards-not necessarily tougher, but different,'' he said. "You have to find an opening and convince a customer they need you. It takes diligence. They have to have confidence you can meet their requirements.''

    Andrea agreed it's a "long road'' for a supplier to get in with transplant auto makers. Many companies started years ago with the Toyotas, Hondas or Nissans and have been building those relationships over time, he said.

    Toyoda Gosei, for example, has been making parts in North America for transplants for 20 years. It expanded on the deep relationships built by its Japanese parent Toyoda Gosei Co. Ltd., particularly with Toyota, which established the Toyoda Gosei business in 1949.

    Barry Von Lanken, manager of marketing services with components manufacturer Cooper-Standard Automotive Inc., also said it can be a slow process to become a preferred supplier with transplant OEMs; it takes many meetings and presentations to show your capabilities, then you must start with small volume parts that grow over time.

    "You do not enter exclusively on price,'' Von Lanken said, noting the difference from serving a Big Three company. "You must bring technology or new ideas. You are considered a partner once you are in.''

    Seal manufacturer Freudenberg-NOK G.P. believes it has an advantage with a global manufacturing network provided by joint venture partners Freudenberg Co. of Germany and NOK Inc. of Japan, said Steve Philippart, the company's vice president of sales and marketing, OEM Powertrain Products.

    Freudenberg-NOK's North American lead centers have partner lead centers in Asia and Europe, allowing the company to serve customers in the same manner wherever they choose to design and manufacture. "We have worked on many projects where design and development have occurred in one region and production in one or more different regions,'' Philippart said.

    Tier supply

    A strategy ideal for smaller suppliers is to diversify into supplying larger Tier 1 suppliers who source parts into companies like Toyota and Honda, according to Andrea. That's why the domestic content of cars made by those companies in the U.S. increase, he said.

    Richards said the place for small-sized companies to make it in the automotive industry is targeting Tier 2 suppliers, where Avon does about 70 percent of its North American automotive business.

    Chardon, Ohio-based custom molder Chardon Rubber Co. primarily supplies Tier 2s for the Big Three, but does business with those who manufacture products for transplants as well, said Marian DeVoe, the company's president and chief operating officer.

    "The transplants want innovation, and that has worked well for us,'' she said, because of Chardon's "strong innovation and engineering base.''

    Richards re-emphasized it is different serving the Toyotas and Hondas than serving the Big Three. But, "if you're competitive, have good delivery, impeccable quality and good engineering support, you can get in with transplants,'' he said.

    That doesn't mean the adherence to quality is any less or more among the Big Three, Richards added. "Ford cares as much about quality as any auto maker. (Quality is) critical for every auto maker.''

    Fostering relationships

    OEM customers are looking for quality parts at a competitive price, said John Wells, Toyoda Gosei's general manager of corporate planning/external affairs.

    Toyoda Gosei's plan is to continue increasing the number of parts it makes in North America at its nine U.S. plants. However, it still has a need to purchase certain components and machinery offshore, Wells said.

    "Customers require quality parts at a worldwide competitive price,'' he said. "Pressure to reduce automotive part cost is a common industry request, and Toyoda Gosei is improving planning initiatives to remain competitive in producing automotive parts in North America.''

    Freudenberg-NOK serves the North American market predominantly from factories located here as well, but also from other global facilities when it best serves the customer's needs, Philippart said.

    Generally a company looks at total cost, not just piece price, in determining where to supply from, he said, including available capacity, raw material availability, transportation costs to ship the goods and the cost of the inventory in safety stock and in the pipeline. Customers are willing to entertain supply from all over the globe as long as certain criteria-like quality and delivery-are met, Philippart said.

    Pressure placed onto suppliers from customers to push down prices can cause stress in a working relationship, Andrea said. If a company's main OE customers are Ford Motor Co. or General Motors Corp., where sales have been flat and the number of suppliers is being rationalized, it's natural there will be more tensions than with customers that are increasing sales and working with fewer suppliers.

    "There are a lot of pockets throughout the industry where there are very solid relationships, where the focus is on improving productivity and reducing cost,'' Andrea said.

    He views the trend of boosting productivity and cutting costs, as opposed to just pushing prices down, as becoming more prevalent.

    GM also is working more closely with its suppliers to address costing issues, he said. Three ways the auto maker is doing this include:

    * reducing the cost of a supplier to do business with GM by reducing changes in design criteria as the bidding process progresses;

    * making the interface between customer and supplier seamless, in terms of engineering; and

    * helping improve productivity of the supplier itself.

    "If you continually work with these three, that's where you drive cost out,'' Andrea said.

    Locating capacity

    The tremendous cost pressures throughout the automotive industry require a company, if it wants to grow or even survive, to continuously improve its cost structure to provide maximum value to its customer, Philippart said.

    But producing locally does generally offer transportation advantages, reduced inventory and pipeline costs, shorter lead times and faster responses to changes, he said.

    Novi, Mich.-based Cooper-Standard also supplies the vast majority of its products to North America from local plants, according to Von Lanken. The company's weather sealing products are not economically transportable and many of the rubber fluid components are part of a larger assembly and need to be made close to where the assembly operation takes place, he said.

    But Cooper-Standard also has consolidated some North American operations in the past few years to reduce unnecessary capacity and associated costs, Von Lanken said. The company targets all key OEMs no matter where they are in the world, and has established manufacturing capacity in China, South Korea and Europe sites in recent years through expansion, partnerships and acquisitions.

    "We believe for most of our products we will continue to manufacture where the OEMs assemble,'' he said. "We will import components or sub-components that make economic sense. We will consolidate manufacturing and continue our lean efforts to stay a cost leader.''

    The cost-cutting push has led many suppliers to look abroad for less expensive production sources. Avon's Richards believes that unless you have a very specific, highly engineered product, you must have a presence in low-cost countries.

    "Suppliers to auto makers are sending labor-intensive products to lower-cost countries to drive costs down,'' he said. "We did it, too; that's why we moved to Mexico 20 years ago.''

    Avon has two plants in Mexico and seven in Europe to go with two in the U.S.-one of which is closing later this year, Richards said. About 55 percent of the company's revenues come from outside North America and volume with traditional customers has gone down in recent years, though "it seems to be stable now,'' he said.

    Avon's business is growing in some sectors of the Big Three, but overall market share with those auto makers has diminished while it has increased with transplants. With the overall strength of its global supply base, the company has been and will continue to be wherever auto makers are located in order to service them, Richards said.

    Toyoda Gosei's long history with Toyota and other transplant OEMs has given it an advantage as a preferred supplier. But the company also supplies domestic auto makers and has challenged itself to become a preferred supplier to them as well, Mannino said.

    The road ahead

    OESA's Andrea believes that three to five years down the road, the supplier base within the automotive market could be 30-percent smaller than today because of financial fallouts, mergers and acquisitions. But overall North American vehicle production probably will be increasing about 1 percent per year, the overall market will be stable and there will be a need for a ``strong, vibrant'' supply base, he said.

    This year also could be an important one for several reasons, Andrea said. Some of the major auto suppliers will be exiting Chapter 11 and United Auto Workers negotiations will be taking place this fall, and there probably will be restructuring and buyout offers as a result.

    If, as expected, close to 100,000 employees take early buyouts, financial burdens could be placed back on the suppliers. "If you're looking for reductions, you go to the biggest piece of the pie,'' Andrea said.

    For Toyoda Gosei, its policy is to try to produce parts where they are sold, and therefore "we expect to continue our growth in North America, including the U.S.,'' Mannino said. The company also expects to be producing at or above current manufacturing levels in the future.

    Avon's customer base will continue to diversify among the Big Three and transplants, with its U.S. and Mexican plants supplying North America, Richards said.

    Like Andrea, Richards believes there is potential for the auto industry to be much healthier than it is now. Overcapacity will have to be eliminated, and "suppliers will have to be with the right customers,'' he said. "But there's a big opportunity for companies.''

    Cooper-Standard's Von Lanken said the company expects the current trend of easy-to-transport components being sourced from low-cost venues in China and Southeast Asia to continue, along with more assembly done in Mexico or southern U.S. states.

    The firm needs to remain competitive, and how its production balance will change depends on factors it can control to maintain that competitiveness, he said.

    "Know-how and technical service to our customers will be important drivers, and our plants will remain operating as long as they meet these requirements, regardless of where they are located.''

    Mike McNulty and Bruce Meyer, Rubber & Plastics News staff, contributed to this report.

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