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September 01, 2016 02:00 AM

Auto suppliers hope for the best, prepare for the worst

Chris Sweeney
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    Charles Chesbrough

    TRAVERSE CITY, Mich.—Now that the industry has pulled itself out of the Great Recession, it doesn't want to suffer a repeat of the experience.

    Regardless of whether the next downturn is right around the corner or still many years off, suppliers seem to be more prepared for the storm if it ever does come.

    Charles Chesbrough—executive director, strategy and research, and senior economist at the Original Equipment Suppliers Association—told attendees at the Center for Automotive Research's Management Briefing Seminars in Traverse City, Mich., that while the automotive industry might not be heading for another recession, there is growing pessimism and uncertainty among the supply base.

    “I think as an industry we should be very proud of how far (we've come) and how much we have achieved,” Chesbrough said. “But the U.S. economy is entering its seventh year of recovery. After reaching vehicle sales highs last year, what happens next is more uncertain. Technology, autonomous vehicles and shared driving will all impact the number and types of vehicles folks will drive in the future. However, there are real short-term concerns as well. The key question is: how long can the party last?”

    Based on conversations with industry leaders across the supply base, he has found there's a division of opinion as to where the industry is headed from here. Will light vehicle sales continue to climb to record heights as it did in 2014 and 2015? Or will the next economic business cycle kick in?

    On one hand, buying conditions remain very strong, job creation remains robust, low interest rates and long loan terms are keeping monthly payments low for new buyers, and strong products are keeping consumers interested in the light vehicle market, he said.

    But OESA's supplier barometer tells a different tale, outlining that the Brexit impact had most of the supply base at least somewhat concerned—though Chesbrough added that nearly half of the respondents to the quarterly survey didn't feel the decision would directly impact their business.

    However, the survey asked the membership to rate its outlook on the overall industry. Chesbrough said there is a continuous downward trend in the supply base, with the last result the lowest it's been in a number of years, implying that suppliers are growing more pessimistic with regards to the immediate future.

    “Buying conditions are expected to change and this will impact production volumes,” he said. “Interest rates will impact monthly payments for consumers and borrowing costs for manufacturers. Higher energy and material costs from recovering commodity markets will impact household finances and profit margins. Vehicle supply and demand will be impacted.”

    Even if there is a downturn, suppliers seem to be prepared. Chesbrough said most of the respondents said they're aware of the situation and claim that their organization is much better prepared compared to the last one.

    He added that in the wake of the 2009 recession suppliers consolidated manufacturing tremendously. Now, though, they are much more diversified in terms of products and customers, and that should help the industry better weather future downturns.

    “I'm not trying to feed the bear, I'm only suggesting we're entering a period of rising uncertainty,” Chesbrough said. “There's little evidence to suggest that the next crash is around the corner, and many possibilities are still available to us from here.”

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