Auto suppliers are most concerned about the labor shortage, the relationships with OEMs, price of materials increasing and the increasing number of programs. - IMAGE: Actify

Auto suppliers are most concerned about the labor shortage, the relationships with OEMs, price of materials increasing and the increasing number of programs.

IMAGE: Actify

ACTIFY – Over the past few months, Actify CEO, Dave Opsahl, has spent a lot of time meeting and talking with automotive suppliers across the mid-west.  Here are some of his thoughts on how 2022 will play out for the automotive industry and automotive suppliers specifically, based on those conversations.

What are the biggest challenges that suppliers are concerned about right now? 

I think probably what comes to mind first is universally, well, these are all universal, but labor shortages is one of the things that's really impacting them, to the point where one or two of our customers are actually dismantling production lines and moving them to Mexico, because they're just unable to get any qualified workers at all. So, labor is one. 

I think another one that's pretty impactful for them is the uncertainty around not just the availability of components that they need. I mean, the chip shortage is something everybody's heard about, but it's not just chips. Even when there's supply, the fluctuation in pricing is causing them fits. That kind of leads us to the third one, which is the relationship they have with their customers. 

Some of the stories that we hear are there are certain OEMs that understand that the supplier's bid contracts based on certain assumptions about pricing that went out the window when the pandemic hit, and they are in some cases able to sit down with the OEM, negotiate how to handle those disruptions, but there are cases we've also heard about where the OEMs have said, "No, that's your tough luck. The fact that some material is 10 times more expensive, and that's your problem to deal with." 

So, the relationship I think is probably the third thing that they're worried about. Right behind that would probably be just the incredible increase in the number of programs that they're being asked to work on at any one time.  

I guess if you were to summarize all of that together, you've got four major issues that we hear universally with every conversation we have. Labor shortage is one, the price and availability of material fluctuating. There is the relationship they have with their suppliers and the increasing number of programs that every supplier is having to deal with at this moment. Those are four pretty big problems. 

How are suppliers working to resolve those problems?  

Well, one of the things that I think is happening when they are in the situation, they're in now where they have an abundance of programs they're being asked to bid on, is there's business they can actually turn down. I think the sense I have is, is that the leverage that the OEMs used to have over the suppliers is shifting in favor of the suppliers more often than it is in favor of the OEMs these days. 

So, suppliers have the ability to go back and say, "Well, I can bid on that program, but you might need to source that material, Mr. Customer, and deal with whatever those fluctuations are in pricing and availability." Something like that would be a tactic that we've heard of being used. 

Is the increase in electric vehicle programs affecting any of this? 

Well, it is in a couple of different ways. I mean, one effect it's having is it's just more programs, more work they're being asked to do. Some of that's coming from new OEM customers that have entered the market, like Rivian would be a good example of that, Lordstown, Tesla, all those EV makers. Even the traditional ICE or internal combustion OEMs, those product lines are being converted over to electrification, but that doesn't mean the other programs are shutting down. So, that's how you wind up with this multiplication effect on the number of programs that are out there. It is contributing, but not directly, it's more the volume of work that's creating that. 

Is your sense that the suppliers are optimistic about 2022? 

Well, I think suppliers are optimistic in a lot of ways. I think that they know that things like the semiconductor shortage and material and pricing problems, those will all get sorted out. It may take a little bit of time, but in the interim, they just have this tremendous amount of work they're able to do. So as long as they can manage the number of programs that they have, manage that increase in volume, their chances of keeping those programs on track and preserving the margin that they are allowed under the contract is something that they feel pretty good about. 

But the flip side of that coin is, is that there is this labor shortage underneath all of that, and that goes to can they actually meet the production goals that they have, or what the production commitments are in the contract? OEMs typically can adjust their demand side, what sort of order volume they expect to see. In a lot of cases, those numbers are being changed. Sometimes they'll be up, sometimes they'll be down on the forecasting, but you have to have the labor to be able to produce the product, even if you have material in hand. I think in terms of going into full production, labor is probably at the top of the list right now in terms of their concerns. 

Handling the number of programs, changing how they manage their programs is something that all of them are taking a look at, because the pressure's just getting to be intense. Which is where, of course, we come in and our ability to help them do a better job of managing programs can help resolve that problem for them. We maybe can't fix the labor side of it, we can't fix the material demand side of it, we can impact how they manage programs, and to a certain extent we can even manage how they can improve their relationship with their customers, which is a good position for us to be in. 

What do you think could be done at a government level, whether that's state, local or perhaps even federal, to help with the labor shortage? 

Well, one of the challenges in dealing with that is it's difficult for suppliers, for instance, to just think about picking up and moving to a better labor market. Moving a production line to Mexico is no task for the fainthearted, and you have limited ability to do that, because in most cases the plants themselves that are producing the components or assemblies for the OEM customers are located around where the OEM customer is actually doing final assembly of the car. There are reasons for that. 

So, they kind of are stuck dealing for the most part in trying to address the market where they are, and state and local governments really don't have much they can do that I can think of that would help. It's not a training issue. In most all the cases we've seen, the supplier is going to be doing the training, it's just getting people in the door that can pass the right drug tests and the simple basic skill tests that you need to be able to do a job there. But as far as training on equipment or process or things like that, that's something that they gladly would do if they could just get the bodies in the door. 

What about the industry overall and the supply chain, what do you see happening in the coming year in 2022? 

Well, I think there's going to be a big focus on reworking the relationship between the suppliers and their OEM customers, there has to be, because a situation like the one where the OEM is insisting that in a situation like the one we're in, the supplier maintain the price and delivery commitments they contractually had, when in many cases these OEMs don't feel or don't have that same obligation. They might say we want 20,000 of these parts over this period of time, and then maybe they only take delivery on 5,000. 

The relationship's got to change, and that's where I said I think it's really a point in time where the leverage is going to change to benefit the suppliers. It's going to take some of these OEMs and bring them to the negotiating table and start to talk about ways to deal with some of those challenges. In most cases, the suppliers tended to be working just in time. The notion of buffer stock or the notion of having flexible prices based on the price of the raw material are not part of the typical conversation or negotiation between a supplier and OEM, but I think those kinds of conversations will be happening more in 2022 and beyond for sure. 

That relationship has to change. There's got to be better visibility at any point in time on where the program is between the OEM and the supplier. That's going to have to get more into positive territory. Today typically, it's just an exercise in reactionary collection of data and finding a problem before it's too late to really do anything about it. If they can change, make the program have a level of a transparency at points in time that they don't have today, that would do a lot to improve the relationship, I think. 

What other challenges or changes can we expect to see in 2022 in the automotive industry? 

One example, that would be what happens to the aftermarket? Are we going to see an increase in the number of companies that are producing replacement parts for vehicles? There's already an issue where vehicle quality has gone up so much that the expected lifetime of a vehicle has gone up along with that. Are customers going to be doing more replacement of components on cars than they are buying new cars? What does that mean to the OEMs? 

How will electrification and the rise of connected vehicles affect the industry and suppliers specifically? 

There's definitely a situation where the movement towards electrification I think is assumed to be widespread, both geographically and also throughout various economic classes. You need a few things for that. You need infrastructure to be in place, that's not happening as quickly as it needs to. You have certain categories of use for which electrification isn't necessarily coming all that quickly. 

We've talked about this in other forms, where the presence of charging infrastructure, for instance, tending to be local to large population centers will tend to put electrification mostly around those large population centers. But this country is extremely diverse in terms of the distribution of people, where they're at, in a lot of cases. Particularly out west, there's really not a practical solution for electric vehicles, kind of the same way we have that problem with rural internet, for instance. It has to make economic sense to build out high speed internet, ground-based high-speed internet to rural areas. In a lot of cases, that hasn't happened, and I think the same thing is true about the infrastructure behind electrification. 

What about autonomous vehicles? 

Sometimes autonomy goes along with electrification, that's a whole other area that we haven't really explored very much, the amount of software content that's going into these vehicles. There's a conversation, I think it was the CEO of Stellantis that said they were thinking that they might be able to get in as much as $20 billion in software and services revenue. 

We had a very interesting conversation about that, and I think that's not a good model, economic model. The consumers probably aren't going to follow it, they're not going to be paying for a constant stream of things that you already get and are already paying for. Why would you want updated maps and pay for that subscription for your car when you have them on your phone already for free with Google Maps?  I think, a lot of uncertainty around what is the market for connected software and services and how does that play into the OEM's strategy for going electric?  

 

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