OESA AUTOMOTIVE SUPPLIER BAROMETERTM Q1 2020 … · Weakness in the U.S. Economy Terrorism or some type of international event Implementation of new government regulations Likelihood

OESA AUTOMOTIVE SUPPLIER BAROMETERTM

Q1 2020

PRODUCTION, PLANNING & ELECTRIFICATION

MARCH 3, 2020

Q1 2020 OESA AUTOMOTIVE SUPPLIER BAROMETER

Executive Summary

Supplier Barometer IndexTM (SBI)SBI Score = 47;

up from Q4 level of 37

The outlook is much improved from the

past 6 quarters, jumping 10 points from

the prior reading. Despite a dramatic jump,

the supply base remains pessimistic on

net, with the SBI 3 points below the

neutral threshold of 50. Passage of

USMCA has fueled net optimism,

especially in firms with revenue below

$150 million as they are less exposed to

global trade disruptions. Larger firms

remain pessimistic on net.

The median ‘all-in’ capacity

utilization rate is unchanged from a

year ago at 80% with the range of

responses tightening a bit compared

to last year

Over the past 6 years, utilization rates

have remained stable, fluctuating

between 80 and 85%

Poor vehicle sales in

programs supplied overtook

changes to government trade

policy as the leading threat to

the industry for the first time

since Q4 2017

Results show a less threatening

outlook for the next 12 months in

areas of poor vehicle sales,

changes in trade policy and

weakness in the U.S. economy

The spread of coronavirus in

China caused a large increase in

risks from an international event

Suppliers running over 90%

utilization are taking the following

actions to balance production

requirements:

• New capital investment

• Outsourcing

• Flexible manufacturing

• Scheduling / Overtime

• Operating at high utilization rates

Production breakeven level

rises to 15.0m units:

Suppliers hold a buffer between

production and an estimated

breakeven point, yet the gap

continues to tighten


Executive SummaryThe primary internal and

external production issues

are a shortage of skilled labor

The top three internal and

external issues are all related to

a tight labor market

As the economy is expected to

remain strong for the

foreseeable future, there is little

relief in sight for talent

acquisition

R&D spending is unchanged

from last year; remaining at 4%

of total sales

From the R&D budget,

approximately one-fifth goes to

research while four-fifths is

allocated to development. The

advanced material technologies

category remains the top priority for

investments

Despite economic and political

uncertainty, suppliers feel

committed to R&D investment in

the near-termSuppliers are confident their

customers’ production

releases are aligned to their

sales and inventory

requirements overall

Uncertainty is most apparent in

programs to support car

production as well as programs

that support HEV/PHEV and

BEV production

Inventories increased in 2019

Nearly half of all suppliers

reported increased inventories

compared to last year, however

this occurred at a slower rate as

compared to 2018

Suppliers are already benefitting

from the drive to a Battery

Electric Vehicle future

Innovation is being driven by new

customers and technologies

despite potential concern over

program profitability, changing the

way suppliers do business

Suppliers expect it will take 5-10

years for BEV production to reach

10% of global vehicle output

Regionally speaking, suppliers

expect a 10% share of BEV

production to occur first in China,

followed by Europe, with North

America taking an estimated 9

years to reach that threshold


SUPPLIER OUTLOOK


47

20

30

40

50

60

70

80

Jan-2

009

Jan-2

010

Jan-2

011

Jan-2

012

Jan-2

013

Jan-2

014

Jan-2

015

Jan-2

016

Jan-2

017

Jan-2

018

Jan-2

019

Jan-2

020

Euro

Crisis

Begins

Japan

Tsunami/

Grexit Crisis

US

Fiscal

Cliff

Lehman

Collapse

0%

20%

40%

60%

Sig

nific

antly m

ore

op

tim

istic

Som

ew

ha

t m

ore

op

tim

istic

Un

ch

ang

ed

So

me

wh

at m

ore

pe

ssim

istic

Sig

nific

antly m

ore

pe

ssim

istic

Q4 2019 Q1 2020

272 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)

Passage of USMCA and a trade deal with China pushed the SBI up 10 points to 47 from the prior quarter.

Volume concerns in the U.S. and China kept the SBI in pessimistic territory on net.

US Tax

Reform

US Trade

War

Escalates

OESA Supplier Barometer: Q1 2020 Results


13% 10% 10%20%

23%

21%

30%

7% 31%

14%24%

8%13%

30%

43%

46%

45%

31%

35%

31%

36%

23%

33%

45%

20%

29%

15%

48%

29%

56%31%

62%

49%

5% 4% 3% 4% 9% 7% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Significantly more pessimistic

Somewhat more pessimistic

Unchanged

Somewhat more optimistic

Significantly more optimistic

>$1

billion

41.3 57.5 45.8 58.8 43.1 48.4 39.6 43.9 33.3 38.8

<$50

million$50-$150

million

$501 million –

$1 billion

Quarterly

SBI ∆

$151-$500

million

Oct. Feb. Oct. Feb. Oct. Feb. Oct. Feb. Oct. Feb.

Regardless of revenue size, responses improved from prior quarter.

Larger, more globally exposed firms continue to show strong levels of pessimism.

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

OESA Supplier Barometer: Q1 2020 Results By Revenue


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

Poor sales of vehicles in programs supplied

Changes in government trade policy

Weakness in the U.S. Economy

Terrorism or some type of international event

Implementation of new government regulations

Likelihood of higher interest rates

Inability to address internal labor constraints

Inability to fulfill customer volumes

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

4.2

4.9

5.0

5.8

6.0

6.4

6.4

7.1

3.4

3.2

3.8

7.3

5.1

6.6

6.2

7.4

Oct.Feb.

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

Poor sales in programs supplied overtook changes in government trade policy as the top industry threat,

yet both improved sequentially. The coronavirus outbreak in China fueled higher international event risk.

Average Rating

OESA Supplier Barometer: Industry Threats


PRODUCTION,

PLANNING &

ELECTRIFICATION


0

5

10

15

20

25

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

Sales Production Breakeven Survey Production Outlook Survey Breakeven Outlook IHS-M Sales Forecast

Mil

lio

ns o

f L

igh

t V

eh

icle

s

Source: IHS Markit (History, Sales and Production); IHS Markit (Sales Forecast)

Historical Breakeven

(Millions of Units)

2019 = 14.7

2018 = 15.0

2017 = 14.5

2016 = 14.3

2015 = 13.5

2014 = 12.7

2013 = 12.0

2012 = 11.0

2011 = 10.5

2010 = 10.0

2020 Median

breakeven level

=15.0 million units of

production.

Suppliers hold a buffer between production and an estimated

breakeven point, yet the gap continues to tighten.

Considering North America light duty vehicle production, estimate the required 2020 industry volume needed to achieve breakeven in your North

American operations?

Production Planning: Breakeven and Year-End Estimates


February 2020

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

70% 80% 85%

January 2019 January 2018 January 2017

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

70% 80% 87% 75% 85% 87% 74% 85% 90%

Please estimate your 'all-in' capacity utilization levels (in percent)'All-in' capacity is the total of your current capacity utilization (current workforce levels and operating plant and equipment assuming 270 working days and 3 shifts)

plus warm-idled capacity (idled capacity but being able to ramp up production within 3 months with minor capital needed)

plus cold-idled capacity (idled but being able to ramp up production after 3 months with moderate levels of capital required).

The median ‘all-in’ capacity

utilization rate unchanged at

80% with the range of

responses tightening

marginally compared to last

year.

January 2016 January 2015 May 2014

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

Lower

Quartile

Value

Median

Value

Upper

Quartile

Value

75% 85% 90% 66% 80% 86% 70% 80% 90%

Supplier efforts if over 90%

capacity utilization:13% of responding suppliers

➢ New Capital Investment (5)

➢ Outsourcing (3)

➢ Flexible Manufacturing (2)

➢ Scheduling/OT (2)

➢ Continuing to run at High

Utilization (2)

Production Planning: Capacity Utilization


Other Issues and Comments:

• Supplier performance and capacity is

our biggest concern

• Steady as she goes for now.

Planning for the future in new

technology

• Skilled labor continues to be the

biggest challenge in our industry /

region.

• A number of new launches this year

as we increase production in NA to

reduce exposure to any trade policy

uncertainty.

• Changing focus on electrification will

require change in engineering talent

required.

• We are currently fairly well situated

to meet demand in the near term.

• We import from China, Germany,

France and Brazil. Unsure of how

long China will be impacted. Air

freight costs may be required, and

air freight costs are already

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

Engineering Talent or Availability

Skilled Labor Shortages

Hourly Labor Shortages

Inventory Carrying Costs

Outbound-Expedited Freight

Re-allocation of Resources to Monitor for Quality/Production Issue

Internal Manufacturing Capacity Constraints

Production Overtime Premiums

Set-up and Change-over Costs

Liquidity Shortages within your own company

Other

1=Not at all an issue 2 3=Neutral 4 5=Severe issue

Over the next 12 months, identify which of the following internal issues you will face as you meet required levels of production?

Production Planning: Internal Issues


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

Engineering Talent or Availability

Skilled Labor Shortages

Hourly Labor Shortages

Inventory Carrying Costs

Outbound-Expedited Freight

Re-allocation of Resources to Monitor for Quality/Production Issue

Internal Manufacturing Capacity Constraints

Production Overtime Premiums

Set-up and Change-over Costs

Liquidity Shortages within your own company

Other

1=Not at all an issue 2 3=Neutral 4 5=Severe issue

Over the next 12 months, identify which of the following external issues you will face as you meet required levels of production?

Production Planning: External Issues


• Coronavirus may impact supply

chains

• Raw material increases


Are your customers’ 2020 production

releases aligned to their 2020 sales and

inventory requirements?

Are your customers’ 2020 production releases

aligned to their 2020 sales and inventory

requirements by powertrain platform?

3.03.2

3.43.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ICE HEV/PHEV BEV Diesel

1=Far too low 2=Too low 3=About right 4=Too high

5=Far too high Don't know N/A Avg. (Rt. Axis)

3.0 3.0 3.0 3.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Overall Car Truck Utility

1=Far too low 2=Too low 3=About right

4=Too high 5=Far too high Avg. (Rt. Axis)

Production Planning: Confidence in Customer Releases


Generally, across customers and programs, are you

currently tending to inflate or deflate your releases down

through your supply chain?

Suppliers are generally deflating their releases down through

their supply chain more frequently compared to last year,

with 35% indicating deflation in 2020 down 3 ppts. from 2019

Deflate over 10%2%

Deflate 5%-9%12%

Deflate 1%-4%21%

Pass Through48%

Inflate 1%-4%7%

Inflate 5%-9%6%

Inflate over 10%4%

Comments:

Deflate

• This depends on the customer

• Planned very conservatively for 2019, so deflating 5 - 9 % is

still above planning volumes and sales.

Pass Through

• We analyze both historical and forecast to ID anomalies and

make adjustments down through the supply chain.

• We ship from Asia so try to build based on releases and

modify accordingly.

• With things flat, we just pass through

Inflate

• Due to risk of electronic component shortages / allocations

and long corresponding lead times

Production Planning: Releases to Supply Chain


Decreased 10% or more

2%

Decreased 7-9%1%

Decreased 4-6%5%

Decreased 1-3%13%

No Change31%

Increased 1-3%19%

Increased 4-6%22%

Increased 7-9%5%

Increased 10% or more2%

Compared to average 2018 levels, how did your average 2019 finished

goods inventory levels change?

Inventories increased on net across the supply base but at a

lower rate compared to 2018, with the percentage of suppliers

reporting an increase down 6 ppts. to 42%

Comments:

Decreased

• Lack of orders from customer

• Based on TTI actions to improve turns, not due to customer requirements

• Change of incoterms; consignment

• Trying to keep lower inventory at our warehouse

• Cost management

• Internal efforts to actively manage inventory levels

• 2018 levels were too high and consumed too much cash

Unchanged

• As a Tier-I supplier, we only keep 1-2 days of finished goods inventory

Increased

• Increased due to new program launch significantly growing our business

• Capacity, Labor as related to Overtime, Supplier issues.

• Primarily due to the GM strike

• Less frequent turnover of certain inventory, results in higher avg carry levels

• 1) Customers ordering more than they are pulling. 2) Program cancellations.

• GM Strike skewed numbers

• Inflated customer schedules

• Delivery issues caused significant premium freight in late 2018 and early 2019.

Conscious effort to raise inventory levels slightly to help avoid premium freight

• Reliance on passenger cars and older models that are well past their prime.

• strategic bank builds required due to minimal customer and mfg. flexibility

Percent of

suppliers

with

increased

inventory…

Through CY:

2019 = 42%

2018 = 48%

2017 = 32%

2016 = 38%

2015 = 34%

2013 = 51%

Production Planning: Finished Goods Inventory


Lower

Quartile

Median

Value

Upper

Quartile

Development budget (for specific programs)

2020 60% 78% 90%

2019 70% 80% 90%

2018 50% 67% 80%

2017 58% 75% 85%

2015 35% 67% 80%

2014 50% 70% 84%

For 2020, estimate your R&D spending as a

percent of total sales.

For 2020 R&D budget, estimate the percent allocated

to research and percent allocated to development.

Lower

Quartile

Median

Value

Upper

Quartile

Research budget (for future technologies)

2020 10% 25% 40%

2019 10% 20% 30%

2018 20% 32% 44%

2017 10% 20% 40%

2015 20% 30% 50%

2014 16% 30% 50%

Lower

Quartile

Median

Value

Upper

Quartile

R&D Share of Total Sales

2020 2% 4% 7%

2019 2% 4% 6%

2018 3% 4% 5%

2017 2% 4% 6%

2015 2% 3% 5%

2014 2% 3% 5%

R&D Spending is essentially unchanged from last year, around 4% of

total sales. Approximately 78% of the R&D budget is allocated

towards the development of specific programs, while 25% is allocated

to researching future technologies, weighted slightly more towards

future technologies compared to last year

Production Planning: Research & Development Spending


0% 50% 100%

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

1=Highest Priority 2 3 4 5=Lowest Priority

The order of

top supplier

R&D priorities

remains

consistent

with last year.

Emphasis on

AV technology

development

fell drastically

from prior year

Advanced Materials Technologies

(composites, lightweight materials, etc.)

"Industry 4.0" (Connected Manufacturing

Technologies.)

Powertrain Technologies (ICE Hybrid, Electric,

Alternate Fuels, Fuel Cell, Transmissions)

Driver Assist Technologies (park assist, crash

avoidance, lane departure, etc.)

Autonomous Driving Technologies (V2X)

Other

2020

Average

2019

Average

2.6 2.4

2.9 2.8

2.9 3.0

3.6 3.4

3.7 3.4

3.5 3.3

If you had additional dollars for R&D investment, rating in terms of importance, how would you allocate it across the following technology areas?

Research & Development Technology Investments


2.3

1.9

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Reasearch Investment Development Investment

1=Very Committed 2 3 4 5=Not at all Committed Avg. (Rt. Axis)

Comments:

• More inclined to develop or tweak

products, as opposed to doing pure

research.

• Making significant investments globally

to align with growth in the electric vehicle

market. These investments are focused

in Europe and Asia as the market is

developing much slower in NA.

• This will drop fast if the economy takes a

bad turn

• Continuously investigating ways to

mitigate short term margin impacts due

to significant growth and leverage.

• The development of products for non-

OEM vehicle markets is our top priority.

• Customer satisfaction and development

support must be maintained through

tough times.

How committed is your organization to its R&D spending over a 2-3 year time horizon in the face of economic uncertainty?

Research & Development Technology Investments

Research Investment



• Growing our knowledge of BEV

vehicle to prepare for the new

opportunities.

• Uncertain how it will affect our

product line

• Customer acceptance of our

solutions

• Capacitizing for low volume

vehicles

• Market penetration of new,

innovative product

• Neutral impact so far

• No clear direction by some of the

OEM’s

• Over capacity vs. market demand

• Volume Uncertainty

• Infrastructure for BEV adoption,

incentives for BEVs, consumer

acceptance, battery costs

• Low Volume Offerings

75

69

42

38

33

27

25

14

12

0 10 20 30 40 50 60 70 80

New customers/technologies are driving innovation

Program profitability

We are currently capitalizing on BEVs

BEV programs are changing the way we do business

Our products are not aligned to BEVs

We lack a clear vision on how to prepare for BEVs

Regulatory challenges

We will be unable to secure the necessary talent

Other

Number of Responses

What are your biggest challenges/opportunities as the industry prepares for a Battery Electric Vehicle (BEV) future?

Electrification: Risks and Opportunities


How confident are you that global BEV production

will reach a substantial portion (10% of total

production) within...

1.5

2.3

3.3

4.1

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

The next 2years

2-5 years 5-10 years 10+ years

1=Not at all confident

2

3=Neutral

4

5=Very confident

Wtd. Avg. (Rt. Scale)

How confident are you that global BEV production

will reach a substantial portion (10% of total

production) within...

Regionally speaking, where do you believe a

substantial level of BEV production (10% of total

production) will first occur?

China77%

Europe18%

North America5%

8.9

6.1

4.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

North America Europe China

Within the next 2 years

2-5 years

5-10 years

10+ years

Wtd. Avg. (Rt. Scale)*

Electrification: Supplier Outlook


Appendix

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 Global Automotive Leader

317.805.6205

[email protected]

Original Equipment Suppliers Association

25925 Telegraph Road

Suite 350

Southfield, Michigan 48033

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.

Survey Methodology

• Data collected Jan. 28 – Feb. 12 via invitation to online survey.

• Executives of OESA supplier companies.

• 156 complete survey responses were received, with 272 responses total.

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.

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/

http://www.rsmus.com/

https://www.facebook.com/rsmusllp/

https://www.twitter.com/rsmusllp

https://www.linkedin.com/company/rsm-us-llp

Documents

OESA AUTOMOTIVE SUPPLIER BAROMETERTM Q1 2020 … · Weakness in the U.S. Economy Terrorism or some type of international event Implementation of new government regulations Likelihood