Auto suppliers continue to face worker shortages, high costs

Auto suppliers are grappling to find workers and facing higher expenses, even as the Federal Reserve signals that labor supply and demand are in balance in the economy for the first time in years.

"It's certainly alleviated, but is it where we were pre-COVID on costs and availability, which weren't much of an issue?" asked Neal Ganguli, managing director in the automotive and industrial practice at AlixPartners. "No."

That stands in contrast to the broader U.S. economy. While the overall labor market remains strong, it has cooled to the point where supply and demand appear to be "fully back in balance," Federal Reserve Chair Jerome Powell said at a July 9 congressional hearing. He pointed to monthly job gains concentrated in health care and government as signs the market was cooling off.

"That tells you job creation is becoming less broad in the economy," Powell said.

Along with improving inflation numbers, the cooling labor market could lead the Federal Reserve to cut interest rates in the months ahead, potentially providing a boost to the U.S. car market as the cost of borrowing money becomes cheaper. That could also benefit suppliers, particularly interest-sensitive companies with higher debt levels.

But while suppliers could see interest rate relief, there's less indication that parts manufacturers will see improvements in labor availability and costs in the coming months. Suppliers have cited labor availability as a key issue since the beginning of the pandemic more than four years ago, when demand for workers exceeded supply. While much improved from the low points of the pandemic, that general dynamic has persisted in the ensuing years, contributing to higher wages.

"We're still raising wage rates—at a smaller percentage than we were in 2021 and 2022 but still bumping up wages regularly," said Laurie Harbour, a partner at advisory firm Wipfli.

Suppliers have said it's especially difficult to find and keep skilled workers. It's a trend driven by many factors, including lingering pandemic effects and increased labor competition. Suppliers to assembly plants in rural regions, for example, might find themselves competing for workers from the same small pool as a new electric vehicle battery manufacturer.

Suppliers continue to navigate those dynamics amid the uncertain pace of electrification. U.S. EV sales growth has slowed in recent months, causing some auto makers to delay or scale back their electrification targets.

That's proven to be difficult for suppliers that have plans in place to hire workers for EV parts programs well in advance, Ganguli said. If an auto maker needs fewer EV parts and more internal combustion engine components than originally anticipated, a supplier might find itself with too many workers on an EV program at one plant and not enough at an ICE one.

"It's a balancing act that's a challenge," he said.

Dynamics in the labor market, both in the U.S. and globally, have prompted some suppliers to invest heavily in automation. Forvia, for example, recently rolled out flexible, automated door panel manufacturing lines at plants in Michigan and Tennessee that are capable of assembling large components and can be quickly adapted to new programs if needed.

"There are still operations that are perfect for a person, but we want to automate the ones that are more repetitive tasks," said Matt Myrand, Forvia's North American digital transformation director.

Lear Corp., likewise, has made significant bets on automation. It closed an acquisition of Spanish company WIP Industrial Automation in July and has made automation a key strategy to fight high labor costs.

Lear CEO Ray Scott said on a July 25 call with analysts that "continued pressure" on labor inflation and scarcity has forced the company to double down on automation as it looks to become more efficient.

Automation will take time, though. Scott likened the company's position on the automation road map to the second inning of a baseball game, in that the industry is still in the early stages.

Many automation investments can take an entire program life cycle to implement, Ganguli said. While such investments might not immediately aid traditional suppliers in addressing labor difficulties, it will make them nimbler in the future — and help better compete with newer companies in the supply chain, he said.

"It's not a short timeline with these automation investments," Ganguli added.