Massive opportunities await automotive tooling contractors

Features - Manufacturing

Automotive manufacturing analyst and consultant Laurie Harbour says several trends point to big sales increases for tool and die companies and other producers of specialized vehicle systems.

May 15, 2014
By Robert Schoenberger

About Laurie Harbour

President and CEO of Harbour Results, she has consulted with automakers and suppliers for more than 25 years, advising on strategic planning, benchmarking, operational assessments, lean manufacturing, and performance enhancement.

Prior to Harbour Results, she founded Harbour-Felax Group and was vice president and company officer at Harbour Consulting. Harbour was responsible for development and management of “The Harbour Report,” the landmark study of labor efficiency for automotive OEMs.

She is the chairman of Society of Automotive Analysts and sits on the board of a Tier II automotive supplier and the Manufacturing Association for Plastic Processors (MAPP).

Photo courtesy of Harbour Results Inc.

Every unique headlamp, door handle, grille, and bumper fascia on every car built requires a unique tool – a purpose-built piece of equipment that pumps out those parts for automakers.

Lately, the companies that make those tools have been very busy. A surge of new vehicle designs and auto plants in North America is creating a shortage in toolmaking capacity, creating a massive opportunity for companies that make plastic injection molds, stamping dies, and other customized parts.

Harbour Results Inc. recently published a report predicting a $6 billion gap between what toolmakers in North America can realistically produce today and what the auto industry will need by 2018 and beyond, a 64% increase from current production levels to future needs.

Study author Laurie Harbour spoke with Today’s Motor Vehicles about the challenges and opportunities posed by the expected increase in tool ordering.
 

Quoting factories
TMV: Your study found that toolmakers are so busy chasing business these days that many top executives spend most or all of their time on bids, rather than focusing on plant productivity, technology, or quality. How serious is this problem?

LH: There’s always been a significant amount of quote activity in this business. When you’re working on one project, you need to have the next few lined up. But since the recession ended, the amount of quote activity has at least doubled. There are a lot of requests for quotes (RFQs) out there.

The hit rates are so low that some shops need to quote an entire year’s worth of revenue every month. They’re hearing “no” 10 times for every “yes.” They’re becoming quote factories. I have clients that have seven or eight people who do nothing but quoting. With smaller shops, it’s often the owner or top manager doing the quoting, so there’s a risk of neglecting the rest of the business.
 

TMV: If the shops are spending so much time responding to RFQs, it sounds like the OEMs and Tier 1 suppliers must be spending a lot of time reviewing all of these.

LH: The OEMs and the Tiers are working harder and harder to reduce price. They’re market-testing these tool producers more than ever before. Quotes tend to reflect capacity. Empty shops may bid lower, so [OEMs and suppliers] are putting stuff out for quote to see if they can get a deal.

They’re having some success with that strategy now, but it won’t work as they soak up all of that excess capacity.


Capacity constraints

TMV:
Your report found that tooling suppliers are now operating at about 82% capacity, putting out $9.25 billion per year in parts. By 2018, you predict tooling demand of $15.2 billion, well more than the current $11.25 billion capacity of suppliers.

LH: Exactly. The Tiers and the OEMs have the pricing power now because the toolmakers are under capacity. But it’s not going to stay that way for too long.
 

TMV: Though auto sales have improved dramatically since 2008, analysts aren’t expecting big increases this year or in the near future. Why are companies launching so many new vehicles into a flat market?

LH: The market is moving from high-volume, low-mix, to low-volume, high-mix. In the good old days, you could make one model and sell 500,000 units a year. Outside of the Toyota Camry and the Ford F-150, that doesn’t happen anymore.

OEMs have been moving this way for years. They’ve benefitted from the commonization of platforms (using the same basic engines, transmissions, and suspension components on a wide range of dissimilar vehicles). They’re cutting costs by sharing all of those parts, but they have to differentiate every vehicle.

To meet the demands of the Millennial generation, they’re offering choices, altering the top hats on vehicles that are all very similar mechanically. That makes design and production easier for the OEMs because it pushes all of the complexity of maintaining different models onto the supply base that provides those unique touches that separate a Chevy Cruze from a Buick Verano.
 

TMV: So your prediction for increased tooling comes from the same trend – automakers ordering more unique tools to craft differences between mechanically similar vehicles.

LH: That and the increase in foreign-owned production. VW is increasing production in North America, both in Tennessee and Mexico. Toyota, Honda, Nissan, and Hyundai are all trying to increase production here. As they bring cars here that used to be built overseas, they’re going to need to bring tooling as well.

There are a number of German and Chinese tool companies that are looking to build facilities or partner with shops in North America. They don’t want to rely on supply bases in Europe or Asia for these tools. It takes too long to get the tools here, and if there’s a problem, it takes too long to get things fixed. Additionally, the German OEMs are pulling their German tool suppliers to this country because of the lack of capacity.
 

Better cooperation
TMV: Are you expecting a wave of new tool shop openings to feed this automotive demand?

LH: The current tooling industry can meet this demand if the industry changes how it works. If the Tiers and the OEMs begin working with the tooling companies earlier in the process, that would save both sides a lot of time.

If a tool shop knew it had a long-term revenue stream from a customer to work on a whole vehicle family, instead of one-off tools for a specific model, it could focus its attention on quality and productivity.

With some visibility into the future, toolmakers could invest in new equipment to automate more of their processes. They’re not going to do that if they don’t have a strong sense that they’re going to recoup those investments.

And the payment terms have to get better. Most of the time, the toolmakers don’t get paid until the tool goes into service. That can be months or even a year after they finish working on a project.

 

 

TMV: That long gap between when companies perform their work and when they get paid must put a financial strain on domestic shops.

LH: And that’s a cost that toolmakers in low-cost countries (LCCs) don’t face. When OEMs or Tiers buy tools from China, they typically pay 30% up front and 90% by the time the tool is shipped. So those companies have some cash to work with as they start production.

Generally, it’s the low-complexity tools that get outsourced. Anything complex tends to stay domestic because companies have to work with the toolmakers on minor changes throughout the process. (Harbour’s report does not predict any increases in outsourcing of tools to LCCs).
 

TMV: Do you expect toolmakers and their customers to work more collaboratively in the future?

LH: I think they’re going to have to. The current payment model is broken. Companies are spending too much on interest and too much on bid-chasing and not enough time on work. With some careful planning, that can change.

Better visibility, better payment terms, and a better understanding of how the tooling business works will offer big benefits to the OEMs and Tiers. The toolmakers are a very innovative bunch. The ones that survived the recession got through it for a reason. These are clever, skilled companies that can make great partners if they’re given the opportunity.

 

Harbour Results
www.harbourresults.com

 


About the author: Robert Schoenberger is the editor of TMV and can be reached at rschoenberger@gie.net or 330.523.5381.