OESA AUTOMOTIVE SUPPLIER BAROMETER Supplier Barometer... · accessing capital is for use in plant and equipment investment, while confidence in accessing capital deteriorated sharply

1Q2 2019 OESA AUTOMOTIVE SUPPLIER BAROMETER

OESA AUTOMOTIVE SUPPLIER BAROMETERQ2 2019

CAPITAL MARKETS & INNOVATION


Executive Summary

Supplier Barometer Index (SBI)

SBI Score = 35;

unchanged from Q1 level

The outlook remains in deep negative

territory, 15 points below the neutral

threshold of 50, remaining at the

lowest level since 2009. Accelerating

trade tensions and poor vehicle sales

of programs supplied continue to

weigh on the outlook of supplier

executives across firms of all sizes.

Trade policy is identified as

the greatest industry threat,

followed closely by poor

vehicle sales.

Trade policy remains the

greatest industry threat, as the

threat of proposed 232 tariffs on

autos and auto parts remains

on the table.

Using 2018 as a base, most

suppliers are planning for

decreases in capital

expenditures in 2019 and

2021.

Suppliers with between $151

and $500 million in revenue will

be making the largest

decreases in capex.

Suppliers indicate that

sustained production levels

of 17-20 million units are

required before needing to

add capacity to operations.

These production levels are in

line with what was stated in Q2

last year, however the

distribution of responses is a bit

more broad.

Growing capital needs are

being allocated to support

robust product innovation

investments.

Some 55% of supplier

respondents plan for higher

innovation investments in 2019.

Generally speaking the need for

additional capital declined in

comparison to last year.


Executive Summary

Eighty-five percent (median)

of suppliers prefer to

purchase new equipment

rather than used.

Technology, availability and

quality drive the decision to buy

new.

Fifteen percent of

respondents have, over the

past year, significantly

altered their capital structure.

Availability of commercial loans

and lines of credit are expected

to tighten over the coming year.

The greatest of confidence in

accessing capital is for use in

plant and equipment

investment, while confidence in

accessing capital deteriorated

sharply for inventory financing,

M&A opportunities, and off-

shore manufacturing

opportunities.

Fifty-seven percent of

suppliers are very confident

that their company will move

ahead and implement the

needed capital investment to

meet their 2019/2020 demand

requirements.

Sales and production volumes,

customer program launches,

technology direction and

political decisions are all

concern for delayed or hindered

investment plans.

The majority of supplier

capital strategies support

open innovation.

74% of supplier respondents

indicate their capital planning

process helps them achieve

their innovation objectives by

leveraging external partners to

accelerate innovation and

learning.

Asia Pacific and North

America are expected to be

capex growth regions, while

South America and Europe

will contract.

Firms across all revenue streams

are funding their capital needs

primarily through free cash flows

Firms with greater than $500 million

in revenue have the heaviest cash

flow position in their weighted

average cost of capital in

comparison to firms smaller in size.


SUPPLIER OUTLOOK


SBI Score = 53; drops 4 points from the Q1 level of 57

Tax reform supports optimism while trade and declining sales drive pessimism

35

20

30

40

50

60

70

80

Ja

n-2

009

Ja

n-2

010

Ja

n-2

011

Ja

n-2

012

Ja

n-2

013

Ja

n-2

014

Ja

n-2

015

Ja

n-2

016

Ja

n-2

017

Ja

n-2

018

Ja

n-2

019

Euro

Crisis

Begins

Japan

Tsunami/

Grexit Crisis

US

Fiscal

Cliff

Lehman

Collapse

0%

20%

40%

60%

80%

Sig

nific

an

tly m

ore

optim

istic

So

mew

ha

t m

ore

optim

istic

Un

ch

ang

ed

So

mew

ha

t m

ore

pessim

istic

Sig

nific

an

tly m

ore

pessim

istic

Q1 2019 Q2 2019

99 responses

Describe the general twelve month outlook for your business. Over the past three months, has your opinion become…?

Current Supplier Outlook (Share of Respondents) Supplier Barometer Index: (SBI and 6m Average)

SBI Score = 35; unchanged from Q1 and remaining the lowest level since 2009

Tariffs and weaker demand contribute to pessimism

OESA Supplier Barometer: Q2 2019 Results




>$1

billion

9% 7%14% 17%

18%

17%6%

17% 14%7% 6%

29%33%

27%42%

40%

24%

25%21%

11%21%

57%50% 45% 42%

40% 71% 50%57%

75%68%

13%8% 7% 7% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Significantly more pessimistic

Somewhat more pessimistic

Unchanged

Somewhat more optimistic

Significantly more optimistic

39.3 41.7 47.7 43.8 36.7 33.8 37.5 35.7 29.5 31.6

<$50

million$50-$150

million

$501 million –

$1 billion

Quarterly

SBI ∆

$151-$500

million

Regardless of revenue size, responses continue to reflect a high level of pessimism;

Smaller firms were slightly more optimistic in comparison to large firms, but remain pessimistic on net

OESA Supplier Barometer: Q2 2019 Results By Revenue

Describe the general twelve month outlook for your business. Over the past three months, has your opinion become..?

Mar. May Mar. May Mar. May Mar. May Mar. May




0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Changes in government trade policy

Poor sales of vehicles in programs supplied

Weakness in the U.S. Economy

Inability to address internal labor constraints

Implementation of new government regulations

Likelihood of higher interest rates

Terrorism or some type of international event

Inability to fulfill customer volumes

1=Greatest threat 2 3 4 5 6 7 8 9 10=Smallest threat

Average

Rating

2.9

3.9

4.4

5.5

5.4

6.0

6.7

7.4

3.6

4.3

4.5

5.3

5.4

5.5

6.6

7.1

Feb.May

Trade policy remains the greatest industry threat, at 2.9 in the second quarter, down sharply from Q1

Poor sales of programs supplied was identified as the second largest threat at 3.9

OESA Supplier Barometer: Industry Threats

What are the greatest threats to the industry over the next 12 months?




0% 20% 40% 60% 80% 100%

Proposed section 232 tariffs on autos and auto parts

Section 232 tariffs on steel and aluminum

Section 301 tariffs on China imports

Changes in USMCA policy

Changes to other FTA's

1=Greatest threat 2 3 4 5=Least Threatening

Average

Rating

2.1

2.4

2.4

2.9

3.4

The threat of proposed section 232 tariffs on autos and auto parts is the most threatening aspect of changes to

government trade policy, followed by 232 tariffs on steel and aluminum

OESA Supplier Barometer: Industry ThreatsChanges in trade policy has been identified as the leading threat to the industry for the past 5 quarters.

Please rate the following changes to government trade policy from 1-5 (1=Most threatening, 5=Least threatening).


CAPITAL MARKETS & INNOVATION


Lower Quartile Value Median Value Upper Quartile Value

2019 2018 2015 2019 2018 2015 2019 2018 2015

Plant square footage

to existing facilities

17.0

million17.5

million

17.5

million

17.5

million18.0

million

18.0

million

18.0

million19.0

million

19.0

million

Plant square footage

through new facilities

17.5

million18.0

million

17.0

million

18.3

million19.0

million

17.5

million

20.0

million20.0

million

18.0

million

Equipment beyond

normal replacement

17.0

million17.5

million

17.0

million

17.5

million18.0

million

17.5

million

18.0

million19.0

million

18.0

million

Salary headcount

beyond normal

attrition levels

17.0

million17.0

millionNA

17.5

million18.0

millionNA

18.0

million18.4

millionNA

North America Vehicle Production

All else equal, what sustained level of NA production is required before your company needs to add?


13%

11%

11%

42%

36%

32%

30%

33%

33%

23%

44%

10%

14%

32%

24%

6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Product Innovation Investment

Merger & Acquisition Opportunities

Capital Investments

General Working Capital

Significantly Increased Somewhat Increased Basically Unchanged Somewhat Decreased Significantly Decreased

Comments:

• Electrification needs more review

• Many new products being developed

• Some cutting back already started

• Shifting capital needs from legacy, core assets towards innovative/new

capabilities

• Based on current market dynamics, potential for multiple compression

for M&A targets

• NPI high priority

• More capital investments in the previous year simply because there

was a new factory and this year there is no new factory spending to

the same scale.

• Innovation investment increasing to address electrification.

• Spending on Product Innovation as we prepare for a slowing

volume/production

Capital Needs

For your next fiscal year, how do you see your capital needs changing for the following requirements, compared to current year?


2019

2021

2019

2021

2019

2021

2019

2021

0% 20% 40% 60% 80% 100%

More than 20% Increase

16%-20% Increase

11%-15% Increase

6%-10% Increase

1%-5% Increase

No change

1%-5% Decrease

6%-10% Decrease

11%-15% Decrease

16%-20% Decrease

More than 20% Decrease

Estimate of Percent Increase over 2018 Base

All respondent Companies

By Company Revenue

<$151 million

$151-$500 million

>$500 million

Capital Required

To better understand the capital needed to support the number of new program launches and production volume in North America,

please estimate the change in capital expenditures using 2018 as the base year.


15

10

5

4

4

3

3

3

2

2

0 10 20

Technology

Availability

Reliability/Quality

Require Specialty Equipment

Policy is to only buy new

Cost

Productivity

Lead times

Customer Requirements

Economic Uncertainty

% of spend being allocated to purchase new equipment

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

May 2019 75.0 85.0 100.0

May 2018 75.0 90.0 100.0

September 2014 75.0 82.5 100.0

% of spend being allocated to purchase used equipment

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

May 2019 0 17.5 25.0

May 2018 0 10.0 21.3

September 2014 5.0 20.0 38.8

New Versus Used EquipmentFor your equipment capital expenditures budgeted in the next fiscal

year, estimate what percent of spend you are allocating to the

purchase of new vs. used equipment.

What market issues are driving your decision to buy new versus

used?

Responses


In the last 12 months, have you significantly altered your company’s capital structure?

If yes, what were the most significant sources of new funds?

Yes15%

No85%

0 2 4 6 8 10

Bank Loan

Private Equity

Additional Equity from…

Mezzanine Lender

Bonds

Other Debt

Other Equity

Other

Number of responses

Other sources identified:

• Retained Earnings - cash

Changing Capital Structure

Comments:• Invested 10% of 2018 revenue in new capital

in 2019

• Received new business requiring capital

investment

• Reduced from 5% to 3.5%

• In an effort to improve cash flow we are

making major reductions globally.

• one small acquisition

• We are a recent carve out of on OE

company.

• Still owned by a private equity company.

• We have a very low capital budget relative to

sales.


Percent of respondents0% 20% 40% 60% 80% 100%

Maximum Size of Credit Line

Cost of Credit Line

Maximum Size of Commercial Loans

Commercial Loan Interest Rates

Commercial Loan Covenants

Changes in terms by Revenue Overall <$151 Million $151-$500 Million >$500 Million

Maximum Size of Credit Line -0.11 -0.19 0.00 -0.11

Cost of Credit Line -0.21 -0.29 -0.19 -0.16

Maximum Size of Commercial Loans -0.10 -0.05 -0.06 -0.14

Commercial Loan Interest Rates -0.29 -0.29 -0.31 -0.26

Commercial Loan Covenants -0.05 0.10 0.00 -0.14

*Weighted Value

2=Ease Considerably

1=Ease Somewhat

0=Remain Same

-1=Tighten Somewhat

-2=Tighten Considerably

Commercial Loans and Lines of Credit

Considering your lead commercial bank, over the next 12 months,

how do you anticipate the terms of your commercial loan or credit line applications changing?


0% 20% 40% 60% 80% 100%

Plant and Equipment Investment

Tooling

Accounts Payable Financing

Inventory Financing

Other Working Capital Needs

Product Innovation Investment

Merger & Acquisition Opportunities

Off-Shore Manufacturing Operations

U.S. Re-shoring ManufacturingOperations

Very Confident Somewhat Confident Neutral Somewhat Doubtful Very Doubtful

4.17

4.14

3.96

3.92

3.89

3.83

3.58

3.43

3.32

% of Respondents

4.20

4.24

4.14

4.32

3.72

3.60

3.96

4.20

3.68

Wt. Value*

*Weighted Value

5=Very Confident,

1=Very Doubtful

20182019

Access to CapitalOver the next 12 months, how confident are you that you will be able to access

required levels of capital at appropriate costs for the following uses?


Level of Confidence

in Accessing CapitalOverall <$151 Million

$151-$500

Million>$500 Million

Plant and Equipment Investment 4.17 4.09 4.59 4.04

Tooling 4.14 3.95 4.47 4.09

Accounts Payable Financing 3.96 3.77 4.41 3.78

Inventory Financing 3.92 3.82 4.41 3.84

Other Working Capital Needs 3.89 3.77 4.29 3.78

Product Innovation Investment 3.83 3.14 3.59 3.49

Merger & Acquisition Opportunities 3.58 3.52 4.00 3.93

Off-Shore Manufacturing Operations 3.43 3.05 3.47 3.40

U.S. Re-shoring Manufacturing Operations 3.32 3.57 3.76 3.51

*Weighted Value

5=Very Confident,

1=Very Doubtful

Access to CapitalOver the next 12 months, how confident are you that you will be able to access

required levels of capital at appropriate costs for the following uses?


Over the next 12 months, indicate whether the following sources

of funds will increase/decrease/remain the same in importance on your balance sheet?

0% 20% 40% 60% 80% 100%

Additional Equity from Others

Bank Loans (term or revolver)

Bonds

Private Equity

Mezzanine Financing

Overall Debt

Overall Equity

Increase Remain the Same Decrease Not Applicable

% of Respondents

*Weighted Value

1=Increase, 0=Same, -1=Decrease

Wt. Value*

20182019

0.07

-0.01

0.00

0.11

-0.10

-0.12

0.31

Sources of Capital

0.03

-0.05

-0.04

0.05

0.01

NA

NA


*Weighted Value

1=Increase, 0=Same, -1=Decrease

Change in Sources of Funds Overall <$151 Million $151-$500

Million>$500 Million

Private Equity 0.11 0.25 0.10 0.08

Additional Equity from Others 0.07 0.14 0.10 0.04

Bonds 0.00 0.00 0.00 0.00

Bank Loans (term or revolver) -0.01 0.11 -0.07 -0.05

Mezzanine Financing -0.10 -0.20 0.00 -0.08

Overall Debt -0.12 0.10 -0.19 -0.18

Overall Equity 0.31 0.45 0.20 0.29

Over the next 12 months, indicate whether the following sources

of funds will increase/decrease/remain the same in importance on your balance sheet?

Sources of Capital by Company Revenue


How confident are you that your company will move ahead and implement

the needed capital investment to meet your 2019/2020 demand requirements?

60%

28%

8%

4%

76%

17% 6%

1%

2014

for 2015/2016

2015

for 2016/2017

71%

20%

4%

5%

2018

for 2018/2019

Very confident

(>75%)57%

Somewhat confident (50-75%)

27%

Slightly confident

(<50%)11%

Not applicable, we are not

planning for increased capital

expenditure investments

5%

Capital Planning


Comments:

• Currently in favorable cash flow situation, with positive net working capital and without borrowing, with great liquidity etc.

• Funding all from free cash flow

• All Capex for programs are funded from Free Cash. Some Capex for innovation products are funded thru lines of credit (i.e.

2021-2012 SOP).

• We will do some short term borrowing beyond free-cash levels.

What percent of your capital needs do you estimate you will fund from free cash flow?

Capital Planning

2018 Budgeted2019 Estimated




0% 20% 40% 60% 80% 100%

0%-15%

16%-30%

31%-45%

46%-60%

61%-75%

More than 75%

All respondent Companies

By Company Revenue

<$151 million

$151-$500 million

>$500 million


28%

21%

38%

6%

57%

33%

43%

26%

15%

46%

19%

68%

0% 20% 40% 60% 80% 100%

Regional cap ex investmentwill grow greater than theregional share of corporatesales

Regional cap ex investmentwill grow equal to theregional share of corporatesales

Regional cap ex investmentwill grow slower than theregional share of corporatesales

N America –

Capital Expenditures

Asia/Pacific -


S America -


Europe -


Looking at your current global footprint, for each of the following regions,

how do you anticipate your regional cap ex investment levels shifting over the next five years?

Capital Planning


Well behind industry6%

Slightly behind

industry22%

On pace with industry

35%

Slightly ahead of industry

27%

Leading the industry

10%

Comments:

• Behind in one manufacturing area, slightly ahead in many others.

• ERP launch in process has negatively impacted innovation resource

availability

• Slightly behind, however added resources to be on pace.

• Ahead in some ways, but behind in others, so let's just say "on pace

with industry" here.

• We invest significantly in new technology

Given the dynamic pace of industry change, describe your firm’s pace of innovation.

Innovation


How well does your company's capital strategy enable your

organization to fully realize its innovation objectives?

Not at all8%

Minimal18%

Moderate39%

High26%

Very high9%

Not at all1%

Minimal14%

Moderate48%

High27%

Very high10%

To what extent does your company’s capital strategy support

dimensions of open innovation, which includes working with

external partners?

Capital Strategy

Comments:

• Innovation is accepted slowly by traditional OEM companies, however more accepted by the new EV and start up companies.


The information and opinions contained in this report are for general information purposes. Comments are edited only for

spelling and may contain grammatical errors due to their verbatim nature. Responses to this survey are confidential.

Therefore, only aggregated results will be reported and individual responses will not be released or shared.

Antitrust Statement:

Respondents/participants should not contact competitors to discuss responses, or to discuss the issues dealt with in the

survey. It is an absolute imperative to consult legal counsel about any contacts with competitors. All pricing and other terms

of sale decisions and negotiating strategies should be handled on an individual company basis.

OESA Automotive Supplier Barometer is a survey of the top

executives of OESA regular member companies. The OESA

Automotive Supplier Barometer takes the pulse of the suppliers'

twelve month business sentiment. In addition, it provides a snapshot

of the industry commercial issues, business environment and

business strategies that influence the supplier industry.

www.oesa.org.

Survey Methodology

• Data collected May 10 - May 24 via invitation to online survey.

• Executives of OESA supplier companies.

• 99 survey responses were received.

Contacts

Mike Jackson

Executive Director

Strategy and Research

248.430.5954

[email protected]

Joe Zaciek

Manager

Research and Industry Analysis

248.430.5960

[email protected]

Larry Keyler

RSM Detroit Office Managing Partner

317.805.6205

[email protected]

Original Equipment Suppliers Association

25925 Telegraph Road

Suite 350

Southfield, Michigan 48033

RSM US LLP is the leading provider of audit, tax and consulting

services focused on the middle market, with nearly 10,000

professionals nationwide. It is a licensed CPA firm and the U.S.

member of RSM International, a global network of independent audit,

tax and consulting firms with more than 41,000 people in 116

countries. RSM uses its deep understanding of the needs and

aspirations of clients to help them succeed. For more information, visit

rsmus.com, like us on Facebook at RSM US LLP, follow us on Twitter

@RSMUSLLP or connect with us on LinkedIn.

http://www.oesa.org/

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Documents

OESA AUTOMOTIVE SUPPLIER BAROMETER Supplier Barometer... · accessing capital is for use in plant and equipment investment, while confidence in accessing capital deteriorated sharply