Analysts: Automotive suppliers should ‘expect the unexpected'

TRAVERSE CITY, Mich.—A mixture of positive and negative factors is making it difficult for automotive analysts to firmly forecast hurdles and triumphs in the industry. And the uncertainty is creating some uneasiness among suppliers, the analysts said during a session at the 2019 Center for Automotive Research Management Briefing Seminars, held Aug. 6-8.

Ongoing trade issues—including tit-for-tat tariffs and the signed, but not ratified, U.S.-Mexico-Canada Agreement—are some of the main sources of the industry's anxiety, they said.

"They're causing uncertainty because they make capacity planning and other factors more challenging by being unresolved and potentially having a huge impact on the industry," said Bernard Swiecki, director of the Automotive Communities Partnership at CAR.

Swiecki also is the assistant director of Ann Arbor, Mich.-based CAR's industry, labor and economics group.

"It really appears that the best advice is to expect the unexpected and prepare for just about every eventuality," he said. "There does not seem to be a magic formula right now for a supplier."

There is good news for the automotive industry, however, in terms of gross domestic product growth, steady oil prices, low unemployment, wage growth, robust consumer confidence and downward-trending interest rates, among other positives.

More vehicle mixes in the overall volume is good for suppliers, too, Swiecki said.

"More now than ever before, your mix within that volume is critical, and it's very fortunate that it's trending in a positive direction with folks choosing to buy the pricier vehicles, where there's a greater chance of a margin not just for the auto maker that built that vehicle, but for the supplier as well," he said.

Trucks and SUVs are still growing globally, while cars are declining, said Stephanie Brinley, principal automotive analyst at IHS Markit Ltd.

"The SUV nameplates are growing faster than the market itself, which makes it difficult to support," she said.

The automotive industry also has seen "a tremendous amount of growth" in electric vehicles and corresponding technology, said Jeff Schuster, president of the Americas operations and global vehicle forecasts at LMC Automotive Ltd.

This has resulted in top-dollar investments from auto makers and suppliers as they try to carve out their share of the market.

"I think the issue in the near term is all of the investment that's poured into this without a return, combine that with the autonomous investment without a return," Schuster said. "At some point, that's going to have to give, so that's another pressure point."

The industry still is bracing for a downturn. Though, when it hits, Swiecki said "its impact will not be quite as hard felt" because there is no bubble to burst.

"The economy gets to be the economy without a particular threat hanging over it," he said.

CAR's automotive sales outlook forecasts U.S. light vehicles sales at 16.8 million units this year, followed by a continued decline in 2020 and in 2021, when sales are expected to hit their lowest at 16.5 million units. Sales are projected to rebound by 2022 and continue upward through 2025.

The automotive industry has been in a positive cycle. 2019 could mark the first year auto sales fall below 17 million units since 2014.

Swiecki said too much time in a positive cycle can create a "paranoid state" in the industry, where everyone is bracing for the bad news.

"We don't actually need the recession formally, right? What we need is folks to start spending as if there is a recession and then you have the same negative impact," he said.

The level of uncertainty is high and that causes a lot of concerns, Schuster said. But that uncertainty and the risk associated with it is here to stay even if the underlying issues change over time.

The No. 1 message Schuster had for suppliers is to do your homework, make sure you're on the right vehicle programs and make sure the volume is there to support it.

"If we behave like there's a downturn, there will be a downturn," he said.