GGI - Automotive Manufacturing

H. Gammer
Hubert Gammer, President of Gammer Group International, Inc. (GGI)

J. Pisani
Jerry Pisani,
GGI Associate,
North America

Ford just reported its highest profit since 1998, GM has reclaimed the title of top selling global auto maker, and Chrysler, in a reversal of roles, now is more profitable than FIAT. European and Asian car manufacturers rush to set up new manufacturing plants or expand existing ones, VW opened a plant in Tennessee, BMW is expanding its plant in South Carolina and Daimler is considering adding a new plant to its existing one in Alabama. In a similar vein, Asian manufacturers such as Nissan and Honda are planning major expansions to their existing plants.

What are the dynamics that are driving the rush of automotive manufacturers to North America and have restored the confidence of the traditional OEM’s? What makes an industry suddenly sexy and profitable after it has been languishing in “no profit” or low profit territory for years?

It is an interesting inflection point where economic forces, governmental intervention and market dynamics converge and enable a mature industry to reinvent itself. There has been a significant restructuring of the traditional North American OEM’s both financially and strategically during the recent economic contraction. After years of trying to buy market share to cope with high breakeven points, these OEM’s have used the economic crisis and in some cases, Governmental assistance, to establish competitive labor agreements, close old and inefficient plants and rationalize an overly complex product mix. The burden of legacy retirement benefits has also been significantly reduced.

Growth potential of reinvigorated industry

The newly lean OEM’s have not only lowered their operating costs; they and the European and Asian “Trans-plants” are enjoying a much improved business climate: flat or declining wage levels, low borrowing costs, a weakening of the dollar against the currencies of competing regions and a surge in natural gas production that is reducing factory energy costs.

Profitable at today’s North American demand rates of 12 to 13 million annual units, the industry expects to return to a 17 to 18 million annual unit sales rate over the next few years. The reasons for this optimism are that the average age of cars in use exceeds 11 years (up from 9 years before the recession) scrappage exceeds new vehicle registrations, and licensed drivers continue to increase.

With their customers no longer fighting for survival and their weaker competitors having exited, Tier 1 and Tier 2 suppliers can expect a more collaborative business climate and price stability. As the industry transitions to a greener vehicle, suppliers once again become essential partners in developing differentiating technology for the OEM’s and Tier 1 systems integrators.

The North American automotive suppliers have not only gained from these same economic trends, they have continued to pursue a cultural shift to lean, just-in-time manufacturing. The OEM’s have benefited from this more flexible and efficient methodology while recent natural disasters and currency trends have increased their incentive to keep the supply chain within the region served.

Opportunity for Tier 1 and Tier 2 suppliers

Currently in North America there are approximately 1500 to 2000 automotive suppliers. Given the investment demands, technological support and globalization of the industry, consolidation is expected. The current cost of capital and the positive business climate will accelerate this trend. Successful automotive suppliers will position themselves globally but produce locally. It is a time to carefully examine your company’s competitive position:

  1. Is your customer base sufficiently diversified?
  2. Are you geographically balanced?
  3. Is your product/technology profile complete?
  4. Are you following your core customers globally?

This is a window of opportunity for Tier 1 and Tier 2 suppliers with a global strategy to position themselves, or to expand their footprint in the North American market. Late-comers may find the cost of entry significantly higher.

GGI is very familiar with the automotive supplier community in North America. We feel that at this time the easiest and least risky way to participate in this market opportunity is to acquire or merge with a company that is already established in the region. We at GGI know companies that are for sale and more importantly we know of companies that are not for sale today but would be inclined to sell or merge their companies if the key decision-makers are approached by an appropriate suitor.