If experts are to be believed, the automotive sector's longest stretch of continuous growth—more than a decade—is about to end. New vehicle sales are down across much of the globe, and the U.S. is expected to record sales below 17 million this year, the lowest since 2014.
Despite strong gross domestic product growth, a key indicator of economic success, the auto industry finds itself at the heart of uncertainty with sustained tariffs and trade wars, a shifting focus to autonomous and electric vehicles, tanking stock prices and competition from new market entrants.
The industry already is in transition, cutting workforce in spades ahead of any real continued fallout. The sector cut nearly 22,000 jobs in the U.S. through May, or 211 percent more than the same five months last year, according to data by Challenger, Gray and Christmas Inc. That's catching up quickly to the roughly 30,500 total from last year.
Pain, no doubt, is on the horizon for automotive suppliers and workers, but who suffers likely will be the result of business strategy.
Globally, automotive suppliers created $510 billion in shareholder value since the Great Recession, more than doubling the market value before the recession. But that growth was not equitable, according to research in Deloitte's 2019 Global Automotive Supplier Study released last week.
The top third of auto suppliers accounted for more than 99 percent of that growth, said Neal Ganguli, managing director and leader of the automotive supply base group for Deloitte.
"Past success is no longer a guarantee of future earnings," Ganguli said. "The industry itself is going to grow, but the supply base is going to change and just because the cost of parts per vehicle is going to go up, it does not mean a rising tide is going to lift all boats."
But the previous decade's successes are being evaporated this year. Every Southeast Michigan supplier has reported troubling earnings for the first half of this year. For example, Plymouth-based Adient P.L.C. reported a loss of $321 million in the second quarter, Detroit-based American Axle & Manufacturing Holdings Inc. reported a net income drop of more than 65 percent and Auburn Hills-based BorgWarner Inc. reported a net income drop of 37 percent. Even the hot Aptiv P.L.C., which develops self-driving software, reported lower income, down 5 percent from the same quarter last year.
Crain's requested comment from several suppliers on restructuring plans and all declined or did not make an executive available.
And there doesn't appear to be any relief on the horizon.
"... we exited the second quarter with softer sales than anticipated, and we expect this to continue to impact us in the second half of 2019," American Axle Chairman and CEO David C. Dauch said in a statement released in early August.
The troubling market forces are likely to drive consolidation in the industry, Ganguli said, where suppliers are either on the hunt for stronger segments to add to their portfolio or will become part of someone else's.
"If you're in a commoditized sector, you're asking how you consolidate," Ganguli said. "How are you going to be the last one, two or three companies standing? Someone has to make axles, for example. Will it be you? The solution is to build scale, consolidate and be the cost leader or be ready to be consolidated."
Global supplier merger and acquisition activity is near record highs, according to PwC's 2019 Auto Supplier Consolidation study released at the Center for Automotive Research's Management Briefing Seminars in Traverse City. Global auto supplier deal values are expected to reach $44 billion in 2019, well above the average of $20 billion.
Most of the deals between July 2018-July 2019 were in the powertrain segment, followed by electronics systems, according to the study. For instance, Lake Forest, Ill.-based Tenneco Inc. closed on a $5.4 billion deal to acquire Southfield-based Federal-Mogul. The merger will result in two separate publicly traded companies.