Now, suppliers have managed to regain some leverage over manufacturers, and they are loath to surrender that leverage. A survey by the Original Equipment Suppliers Association found that 76 percent planned to run overtime shifts in the first quarter of 2012, and more than half of our respondents said they were constrained by capacity. In other words, even as overall volumes and orders rise, many suppliers are choosing to postpone investing in new fixed assets that would increase production capacity, opting instead to add overtime shifts and other incremental approaches in order to optimize their existing capacity.
With this better alignment between supply and demand, suppliers are now in a much stronger position to set sustainable prices. The days of suppliers providing big price markdowns may be over. In interviews, suppliers who had complained for years about “taking it on the nose” now say the crisis has shifted the balance of power. Many supplier sectors no longer have excess capacity. In particular, suppliers that are truly differentiated — in terms of technology, manufacturing, or branding — report that they have more leverage now over manufacturers than ever before.
Given the likely continued increase in sales, suppliers can afford to postpone new capital investments for only so long. In making these choices on how and where to expand, suppliers must bear in mind their relative competitive positioning, their strategic goals, and their own independent view of demand — developing more advanced and analytically rigorous capabilities and linking all the pockets of knowledge in individual business units. Furthermore, these new investments should be made only after all steps have been taken to stretch current capacity. (See “Memo to Suppliers: Improve Your Capacity Planning,” below.)
Four Key Forces for the Future
The survey results illustrate several fundamental forces that will collectively shape the U.S. auto industry over the coming years: (1) a reemergence of fundamentals, (2) a shift in demand centers, (3) uncertainties about alternative powertrains and other technology, and (4) an increasingly interconnected supply chain.
First, the reemergence of fundamentals is evident throughout the survey results, which illustrates just how much potential this industry has to be a profit engine. Many major auto manufacturers and suppliers effectively hit the reset button to make more efficient use of production capacity and generate a profit at lower volumes. Now, as sales volumes rebound, driven in large part by pent-up demand, easier credit, and greater consumer confidence, executives are seeing these efforts pay off. Many companies report record profitability since mid-2011. Also, as one might expect in a product-led recovery, the industry leaders tended to express strong confidence in their current portfolio. In our view, these findings represent a sober, collective recognition on the part of auto companies and suppliers that they need to grow intelligently and not chase sales volume for its own sake.
The second key force that will shape the industry is the shift in demand around the world. The U.S. remains the most profitable automotive market, and the place where all global manufacturers need to succeed. But over the long term, emerging markets have much stronger growth prospects. Automakers must preserve their competitive position in developed, mature markets while also funding the investment necessary for longer-term growth elsewhere. To that end, they need a better understanding of emerging markets — which have unfamiliar economics, consumer profiles, and competitive dynamics.
Third, there are real uncertainties about alternative powertrains — including electric vehicles, fuel cells, and hybrids — and other technologies. The industry is on the cusp of significant technological changes that could result in paradigm-shifting innovation. Whether a company is a leader or a follower, playing in these new markets will require a significant investment in both financial and human capital. Companies should thus be very selective in placing their bets; they should invest only where they have confidence that they have the distinctive capabilities necessary to win, and that these investments are coherent with their broader strategy.