Is an Automotive Tooling Capacity Gap Looming?
OEM demand for vendor tooling will rapidly expand over the next five years
By Laurie Harbour
President and CEO
Harbour Results Inc.
Royal Oak, MI
Will there be a significant gap in automotive tooling capacity within the next five years? If so, how will this affect reshoring or the demand that other industries, such as appliance, aerospace and consumer products, are placing on the automotive tool supplier base? These are the important issues that Harbour Results Inc. (HRI) investigated in its latest research. With HRI’s years of experience in automotive tooling it seemed obvious when looking at the data that there could be a problem but this needed validation.
During 2013, HRI interviewed seven automotive OEMs formally, another three informally, nearly 50 Tier 1 and 2 suppliers and over 50 tool suppliers of molds and dies. Additionally, six surveys of industry associations were conducted, HRI talked to several analysts, crunched and analyzed data and developed in conjunction with the Original Equipment Suppliers Association (OESA) the 2013 Automotive Vendor Tooling Study. It is nearly 500 pages of in-depth analysis of the entire North American Vendor Tooling Value Stream Process. As the authority in automotive tooling HRI had access to information that most OEMs and suppliers are not willing to share. With this blind study, the focus was to highlight the critical issues that would help the industry take action to improve.
Tool Supply Base Survey
One of the core findings is the dramatic increase in demand by the OEMs for vendor tooling over the next five years in North America, creating a significant capacity gap with tool suppliers. HRI concentrated on those suppliers that largely support the automotive industry (80%+), are large enough to grow with the industry and have the capability to build an entire tool, not just support other shops with components. This analysis yielded 625 shops in the US, 125 in Canada and none, as of yet, in Mexico.
Using the average revenue of these shops of $15 million, a total capacity of $11.25 billion annually was calculated. This was compared to the current average spent with North American tool suppliers from the OEMs, provided to HRI directly from the automakers, of $9.25 billion. If HRI assumes, based on OEM interviews, that another $1 billion of capacity comes from China or other low-cost countries, it’s a total of $12.25 billion.
Tool suppliers can never operate at 100% capacity because of the capital-intensive nature of the business and the delays that consistently come from OEMs. As a result, this data shows about 80% utilization currently. HRI then developed an estimate of future vendor tooling demand of $15.2 billion by 2018. There was significant analysis that went into this estimate, but the premise of the data was the number of launches that have been announced and reported for future years by each of the OEMs using LMC Automotive data and the percentage of available sourcing that each of the OEMs told us they would have with each new launch.
The following are the key assumptions that are included in the $15.2 billion estimate:
- Each of the domestic three OEMs indicated that they would continue to spend the same amount on vendor tools for the next five years due to the number of launches. They indicated it would not be more due to capital constraints from the board.
- In North America over the next five years there will be 2.8 million units minimum of new assembly plant capacity that will enter the market. This capacity will be largely in the Southern US and Mexico and primarily from the foreign owned brands such as Honda, Nissan, Toyota, Audi, Fiat, BMW and others that have not announced to date. These new plants will largely make all new models that were not made in North America previously and each will require new tooling.
- In the next five years the number of launches will reach record levels as each of the OEMs work to capture a portion of the new sales in North America but also work to build models for export to other regions. And this significant number of launches does not even address the complexity of these launches. In other words, LMC counts a vehicle launch as one launch but that vehicle might have five trim levels and three separate tools for things like bumper fascias.
- The key change is that European OEMs told HRI that today they are making approximately 20% of their vendor tools in North America with suppliers located here but the majority are produced in Germany, with some made in low-cost countries and then shipped to North American suppliers to build parts. The Japanese said they are producing approximately 40% of their tools in North America with many still coming from Japan. This made sense when they had only a few models but with the many models now produced in North America and the level of complexity it no longer makes sense to build tools in other countries and bring them to North America for part production.
- Additionally, all OEMs indicated they are adding complexity to vehicles, which will increase the number of tools per vehicle 20–25% over previous models.
- Two estimates were impossible to include in this analysis: First, any potential reshoring from any OEM due to rising costs in China or lead-time issues. This will occur, but HRI cannot determine to what level. Second, the demand being placed on automotive tool suppliers today from other industries because of their reshoring is significant and many of these shops like this work because it pays higher margins, has progressive payments and gives them diversification.
Tooling Capacity Gap on the Horizon
These estimates by HRI show that an impending $6 billion tooling capacity gap will hit the automotive industry in the next five years. However, HRI’s estimate of $15.2 billion in demand is actually conservative. The OEMs indicated a higher degree of potential resourcing of tools from overseas to North America than HRI actually factored into its calculations and estimates. That said, the industry knows that some programs do not come to bear and the best-laid plans do not always get executed at the OEMs.
There will be a gap and HRI believes it is close to $6 billion, but even if slightly less than that, the industry is tighter than ever before. This is a great problem for tool suppliers because it means good demand for a while but a very tough one for OEMs that want to launch new vehicles in North America.
So how does the industry close the gap?
Let’s assume for a minute that the following occurs:
- Tool shops work diligently to improve their business with process improvement and new equipment to drive efficiency improvement. With that we could assume a potential 10% improvement or $1 billion in additional capacity.
- HRI anticipates that new plants will come into North America. Although many investors or entrepreneurs in North America are not looking to jump into the tooling industry at a high rate, there are tool shops in Europe and China that want to enter this market. German OEMs would like to see their tool shops in North America and will work hard to accomplish that. It’s not clear how many new plants will be built in five years, but let’s assume another $1 billion in capacity, which is probably very high for such a short period of time.
- Then let’s assume China or other low-cost countries grow their production of tools for export to North America and add another $1 billion of capacity to this market. This is probably the maximum that can be expected in the next five years due to dramatically rising costs in China, the significant lead time issues that North American OEMs have (making it tough to manage the tools’ transportation time) and the huge demand from Chinese automotive OEMs on their own tool shops in China to build for internal consumption as production volume grows from 16 million units to nearly 30 million units by 2020.
- There will be some sourcing of tools from European tool shops that will build in Europe and ship to North America, particularly on global programs where appropriate.
- One thing that will negatively affect capacity is the lack of skilled trades in North America. With an average worker age of 56 in tool shops many people will be exiting this industry in the next five years and there is a definite challenge to replace these people at the pace they exit.
With this analysis and all the potential ways to close the gap HRI believes that there is still a $2–2.5 billion gap in capacity going forward, and even if this analysis is high and you cut it 50% there is a $1–1.5 billion gap.
Collectively HRI knows that each of the stakeholders (OEMs, Tier 1s and tool suppliers) have a critical role to play. Tool suppliers must work on efficiency and reinvent the way they build tools to make more capacity available. Additionally, they have to continue to invest in the right resources, new technology and the next generation of toolmakers.
Tier 1 suppliers need to work more collaboratively with the OEMs and the tool suppliers. They are the critical glue that keeps the three stakeholders together. Their role is transparency through the value stream with the tool shops and OEMs and contributing their engineering capability to support the OEMs in reducing total cost, not just of tools but the parts as well. It is true that Tier 1 has been squeezed for many years as OEMs have gone after material cost reduction and this has created some challenges to Tier 1 profitability. That said it is critical for suppliers to partner with the OEMs and openly share the challenges while working together so both succeed. This makes it sound easy and it is not, but on the flip side the Tier 1s can also cause significant negative challenges if they do not play their role productively.
Lastly, the OEM has probably the most critical role in closing the capacity gap. Many may not think the OEM could have this critical of a role given that they don’t run the tool build plant. However, the decisions they make upstream and the downstream impact steals capacity from tool shops and is magnified across 10 North American OEMs.
Better to Look Upstream
The following graphic illustrates that many OEMs, particularly the Detroit Three, are still focused on those traditional elements above the water level that drive price. However, the OEMs that performed the best in the study were those that put their focus further upstream on the elements below the surface that are truly driving the waste or added cost to vendor tooling.
Things like program delays, incomplete data at kickoff of the tool program, inaccurate target setting when the program is put together, lack of commonization, engineering changes and poor design requirements are stealing massive amounts of capacity from tool suppliers on a daily basis. The graph below highlights the life of a tool supplier in a typical 18-month period. Their schedule can range from 55% utilization to over 100% as programs get delayed and pile up on top of each other. This makes for tough business conditions for a tool supplier, and they really have no awareness (visibility) of future delays or the impact on their plant. Oftentimes they are not even told of the delay until it is too late to smooth the curve with other tool production.
So what can the collective industry do to close the capacity gap and what specifically can OEMs do to capture capacity in the future if there truly is a gap? Every OEM’s focus has to be on capturing capacity of the best tool suppliers in the future while balancing cost internally. Anyone can go after capacity and get it but it could drive cost way up or the opposite could occur. If OEMs are focused mainly on cost they may not capture capacity from the best shops.
In order for this balance to occur and drive a healthy tool industry the key finding of the study highlights the need to collaborate and drive earlier involvement of tool suppliers in the part-development process. Most tool suppliers have indicated that they would welcome early involvement because it would give them the ability to affect the design, reduce cost for the OEM and gain a clear awareness of future capacity needs allowing them to improve efficiency.
What OEMs Can Do
If the OEMs truly want to reduce cost for vendor tooling in the future while capturing the capacity of their best tool suppliers, it is critical for them to support early involvement. By asking tool shops to reserve capacity and be globally competitive they would have visibility of future programs, see fewer delays and receive better data making them more productive. Then the shop can help optimize design, improve launch success and capture lessons learned. Lastly, it is HRI’s hope that OEMs will begin to implement progressive payments to these shops that are willing to work upstream in the process to drive cost reduction. This is critical to capture these shops’ interest in this upfront involvement. With it most suppliers will be on board and will engage.
The automotive vendor tooling industry has been through more consolidation and company attrition over time. Much of this is due to the fact that they are largely privately held and are under independent ownership. Overall, it is a very traditional industry that needs to re-invent itself. OEMs will not stop launching new vehicles over the next five to 10 years as they work to rebound from the recession, Without a doubt, they will find the capacity they need, whether in North America or in other regions of the world. This is the opportunity for North America to grow manufacturing, re-engage the next generation of workers into manufacturing and remain the powerful center of the automotive industry. ME
Combining operational and strategic advisory expertise with industry analysis and thought leadership, Harbour Results Inc. serves the automotive, aerospace, heavy truck and agriculture, marine, medical and motorcycle industries. HRI was founded by industry analyst Laurie Harbour in 2005. The full 2013 Vendor Tooling Study is available at www.harbourresults.com/vendortoolingstudy.aspx.
This article was first published in the April 2014 edition of Manufacturing Engineering magazine. Click here for PDF.
Published Date : 4/1/2014