Carmakers in recent years have come to recognize risks inherent in relying on a global gaggle of suppliers for everything from tires to touch screens. And if they don't turn quickly, they could crash into a wall that everyone should see coming.
Within five years, the North American auto industry will fall far short of its ability to make the machines that make the parts that make our cars. Making all this production equipment, or tooling capacity as it’s known in the trade, will fall 40 percent short of the level necessary to keep the industry humming, according to a new study from Harbour Results Inc., a Royal Oak, Michigan-based consulting firm.
As U.S. vehicle sales approach the annual record of 17.4 million, car companies will need tool-makers to be able to produce $15.2 billion in business each year, far more than the current capacity of about $9.3 billion, said Laurie Harbour, chief executive officer of Harbor Results, a consulting firm. That estimate is "extremely conservative," she said.
“Are we going to have the right capacity in place to support the record number of vehicle programs coming into the market?” said Dave Andrea, a senior vice president with the Original Equipment Suppliers Association trade group. “The auto industry is trying to put so much through its current capacity that there’s no room for error.”
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Automakers are introducing 42 new models for 2014 and 112 more by 2018, Harbour said, adding that a new vehicle can require as many as 3,000 new tools.
The auto-industry supply chain became a risk area in recent years, first during the recession when it wasn’t clear that enough companies would survive to make parts for automakers. Then production was lost after the 2011 earthquake and tsunami in Japan and, the following year, an explosion at a German chemical supplier. Since then, companies have worked to develop back-up sources for emergencies.
There are about 750 tool shops in the U.S. and Canada serving the auto industry, Harbour estimates, with most of them in the Midwest and southern Ontario. The global recession helped pare their ranks by a third since the late 1990s. The remaining shops, where the average worker is 52, cope with a shortage of skilled labor that can’t be quickly addressed. Training new toolmakers takes about five years, Harbour said.
“It’s a very difficult industry yet it is very critical to the marketplace,” she said.
Adding to the challenge is the proliferation of vehicles and their many novel requirements, Harbour said. Newer models have more detail, from accent lighting in cup holders and dashboards to louvered front grilles that improve fuel efficiency. For example, the face of a car, called the front fascia, can have as many as 35 tooled parts; one vehicle can have as many as three distinct fascia looks depending on the version of the model in question.
“The complexity is going up and so is the number of tools required,” Harbour said. “If you design a vehicle for multiple trim levels to meet multiple customer preferences, that’s tooling.”
Tool shops vie for business with Chinese competitors, who are able to produce tools more cheaply. So far, automakers in North America have resisted using Chinese suppliers for complex tools, and they have used tool shops in Mexico only to maintain or repair tools, so far.
As more foreign automakers build factories in the U.S. and Mexico and design cars in the U.S., the need for tooling will increase, Harbour said. Chinese companies are looking at buying U.S. and Canadian shops and German tool-makers are considering starting operations in North America, she said.
“They’ve been visiting tool shops in the U.S. and Canada and they know there’s a capacity shortage,” she said. “Somebody’s going to fill it. We’re not going to not launch vehicles.”
The tooling shortage is a new headache for an industry already under pressure to eliminate vulnerabilities in the supply of parts.
An explosion at Evonik Industries’ Marl Chemical Park in western Germany killed two people on March 31, 2012. That facility manufactured a chemical called cyclododecatriene, or CDT, that’s used widely in automobiles: in fabrics, brake components, fuel tanks.
It took months to restart production, creating a major production bottleneck for car manufacturers, said David Simchi-Levi, professor of civil and environmental engineering at Massachusetts Institute of Technology.
“This is a supplier that nobody was focused on,” he said.
After the crisis, Evonik moved to open a plant in China, where it can shift production in a pinch, said Simchi-Levi, an author of the 2013 joint PwC and MIT Forum for Supply Chain Innovation study “Supply Chain and Risk Management.”
The auto industry’s need to rely less on individual third-party suppliers wasn’t a new lesson in March 2012. Nor was it a year earlier, when an earthquake and tsunami in Japan knocked offline Renesas Electronics, a company that makes 40 percent of the world’s supply of chips used in cars or disrupted production of paint pigments made by Merck KGaA. The disaster caused disruptions that slowed or stopped production and sales for automakers around the world.
“You cannot just wait until something happens to respond,” Simchi-Levi said. Companies that understand their vulnerabilities in advance return to production more quickly after a disaster, he said.
Simchi-Levi’s department at MIT has been working with Ford Motor Co. on supply-chain risk management, and he has written a piece slated for Harvard Business Review’s January issue.
The Evonik blast aroused serious efforts to sniff out vulnerabilities before they become crises. Investors, Simchi-Levi said, are “looking at companies, and saying if you have a disruption and you’re unable to respond, the market is punishing you.”
“This is an issue not only for supply-chain executives, not only for CFOs, but also the board and CEO. That’s why companies are taking a deep dive analysis into their supply chains: Where is the hidden risk? Where are the bottlenecks?” he said.
A potential kink from far down the chain can have a direct impact on automakers, said Jeoff Burris, founder of Advanced Purchasing Dynamics Inc., a Plymouth, Michigan-based consulting firm that works with auto suppliers to improve purchasing.
“Everyone’s trying to do more with less,” he said. “But the economy has a great ability to fix itself and send resources where they are needed. No one wants to be the one stopping GM from launching a new vehicle."