Planning Through
Peaks and Valleys
Mike Jackson
Executive Director, Strategy and Research
Original Equipment Suppliers Association
+1-248-430-5954
Federal Reserve Bank of Chicago-Detroit
Automotive Symposium
Detroit, MichiganJune 1, 2018
mailto:[email protected]
Championing the business interests of the automotive
OE supplier community:Founded in 1998, the Original Equipment Suppliers Association (OESA), serves as
the voice of the automotive supplier and a valuable resource for member
organizations. Throughout the supply chain and on legislative and regulatory issues,
OESA represents the collective voice of suppliers.
Exclusively for automotive suppliers: Supplier membership is exclusive to original equipment automotive suppliers that
directly provide components, tools, materials and services to the OE light vehicle
industry.
Strength in numbers: Membership is comprised of approximately 375 Tier 1,2, and 3 automotive suppliers
with North American OE sales that range from $10 million to $5+ billion. Affiliate
members support the supplier community with thought leadership, industry analysis
and other key information.
Led By supplier industry executives: OESA’s interests are guided by a board of directors consisting of CEOs from
member companies of all sizes.
Staff that works for members: Members enjoy direct access to a staff of dedicated association employees in
Detroit and Washington, D.C.
Planning Through Peaks and Valleys 2
Global Vehicle Sales Outlook By Region (2016-2018)
Source: LMC Automotive
Planning Through Peaks and Valleys
Global Vehicle ProductionOutput By Region (2018-2025)
Planning Through Peaks and Valleys
• Strong fundamentals remain with low unemployment, firm and steady
job creation, strong consumer spending and low interest rates
US: Economic Outlook
Source: wsj.com – May 2018 monthly economist survey
5Planning Through Peaks and Valleys
• Job growth has continued, lifting participation rates yet an
even tighter outlook is expected by late 2018 / mid 2019
US• Despite higher price volatility, fracking has altered the global
energy landscape, holding a constrained pricing outlook
6
Source: wsj.com – May 2018 monthly economist survey
Planning Through Peaks and Valleys
US: Economic Outlook US: Economic Outlook
• Greater pricing power has fueled activity for smaller, more
affordable homes, pushing builds toward a 1.5M/year pace.
Tights supplies & stock market gains have lifted home values
7
0.60
1.10
1.60
2.10
2.60
3.10
3.60
0.90
1.00
1.10
1.20
1.30
1.40
1.50
Oct-
16
No
v-1
6
De
c-1
6
Jan-1
7
Feb
-17
Ma
r-1
7
Apr-
17
Ma
y-1
7
Jun-1
7
Jul-1
7
Aug-1
7
Sep-1
7
Oct-
17
No
v-1
7
De
c-1
7
Jan-1
8
Feb
-18
Ma
r-1
8
Apr-
18
S&P 500 DJIA 30
30 Yr Treasury 2 Yr Treasury (Lt. Axis)
Trump Policy Implications: Market ReactionStocks and treasuries have soared, dollar lower – higher growth, higher inflation, higher interest rates
Equities/Treasuries (indexed to Nov 8)
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Oct-
16
No
v-1
6
De
c-1
6
Jan-1
7
Feb
-17
Ma
r-1
7
Apr-
17
Ma
y-1
7
Jun-1
7
Jul-1
7
Aug-1
7
Sep-1
7
Oct-
17
No
v-1
7
De
c-1
7
Jan-1
8
Fe
b-1
8
Ma
r-1
8
Apr-
18
Euro Yen Canada Mexico China
Exchange Rates (Per US$, indexed to Nov 8)
Election
Day
Election
Day
Planning Through Peaks and Valleys
8
Source: Department of Labor, Bureau of Labor Statistics
US: Wage Growth ObstaclesParticipation remains low since Great Recession even as unemployment rates reach pre-recession lows
58
59
60
61
62
63
64
65
66
67
68
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
Labor Force Participation Rate %
0
2
4
6
8
10
12
14
16
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
No High School Diploma
Some College
HS Graduate
College Graduate
Unemployment Rate % by Education Level
Planning Through Peaks and Valleys
9
Source: Department of Labor, Bureau of Labor Statistics
US: Job Market6.6 million openings; Quits rising too – workers gaining confidence
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
20
00
20
05
20
10
20
15
Total Non-Farm Manufacturing
Openings: Jobs Open Per 100 Employed (3m average) Quits: Jobs Quit Per 100 Employed (3m average)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
00
20
05
20
10
20
15
Total Non-Farm Manufacturing
Job opportunities strong – openings at an all
time high – well above pre-recession levels
Quits continue to rise, although they remain
relatively low. Higher worker confidence will force
business to raise wages to reduce turnover.
Planning Through Peaks and Valleys
10
Source: Department of Labor, Bureau of Labor Statistics, Production Non-supervisory
US: Labor Market WagesWage growth weak since recession; FED watching closely as a potential inflation “spark”
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
$8
$10
$12
$14
$16
$18
$20
$22
$24
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
Average Earnings $/hr - L Annual Change 3m avg - R
Average Hourly Earnings (monthly) Annual Change (3m average)
Average Annual
Wage Growth
1986-2009: 3.2%
2010-2018: 2.2%
Planning Through Peaks and Valleys
11
0
1
2
3
4
5
6
7
8
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Federal Funds%
10-Year Treasury%
30 yr Mortgage%
Effective Federal Funds Rate (%, overnight)
Source: Federal Reserve, WSJ, Mortgage Bankers’ Association
1.69
0
2
4
6
8
10
12
14
16
18
20
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
Key Interest Rate Forecasts (%)
US: Interest RatesMore aggressive tightening likely; FED walking a tightrope to avoid recession
Source: Federal Reserve Bank
Planning Through Peaks and Valleys
US Light Vehicle Sales By Segment – 2017 Divergent Trajectory Remains
Source: www.motorintelligence.com
17.23M -1.8%
-10.9%
+4.3%
12Planning Through Peaks and Valleys
http://www.motorintelligence.com/
14.50
15.00
15.50
16.00
16.50
17.00
17.50
18.00
18.50
19.00
U.S. Light Vehicle Sales (SAAR, Mils.)
17.92M
16.72M
US Light Vehicle Sales (SAAR)Year end 2017 Boost – Not repeatable
Planning Through Peaks and Valleys
14
5.29
0
1
2
3
4
5
6
7
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Source: Federal Reserve Bank, Weighted Average Finance Rate at Finance Companies
67.4
59
60
61
62
63
64
65
66
67
68
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Interest Rate on New Car Loan (percent) US Average Loan Length (months)
Source: Federal Reserve Bank, New Car Loans at Finance Companies
US: New Vehicle FinancingExtended terms keeping monthly payments low, despite record financing amounts and rising interest rates
Planning Through Peaks and Valleys
15
Source: Federal Reserve, Author’s Calculations
$30,295
$24,500
$25,500
$26,500
$27,500
$28,500
$29,500
$30,500
$31,500
20
11
20
12
20
13
20
14
20
15
20
16
20
17
US Average Amount Financed Auto Loan Monthly Payments
A 1% rise in interest rates raises
monthly payments by about $14 or
$950 in total
FED rate increases may add around
$1,500 over near-term
US: New Vehicle FinancingExtended terms keeping monthly payments low, despite record financing amounts and rising interest rates
Source: Federal Reserve, New Car Loan at Finance Companies
$520.87
$400
$425
$450
$475
$500
$525
$550
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Planning Through Peaks and Valleys
16
-25
-15
-5
5
15
25
35
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Stronger Demand for Auto Loans
Tighter Standards for Auto Loans
Net
Res
po
nd
en
ts “
Ye
s”, in
pe
rce
nt
Source: Federal Reserve, Federal Reserve Loan Officer Survey, 4 quarter average
0
20
40
60
80
100
120
140
160
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
760+ 720-759 660-719 620-659
Sales Success – All About Mix You Can’t Sell What You Don’t Have
Planning Through Peaks and Valleys
US: Light Vehicle Sales OutlookForecasts vary among firms – yet all reflect different rates of sales taper
Annual Sales (millions)
16.00
16.20
16.40
16.60
16.80
17.00
17.20
17.40
17.60
17.80
20
14
20
15
20
16
20
17
20
18
20
19
20
20
History PWC-Autofacts IHS-Markit LMC Automotive Wards Auto Intelligence
Source: 1Q 2018 OESA Affiliate Forecast Matrix – PWC/Autofacts, IHS Markit, LMC Automotive, Wards Auto Intelligence
17.2M
-1.8%
-320K
Forecast Avg16.8M
-2.4%
-420K
16.8M
0.0%
-60K
18
16.6M
0.1%
-110K
Planning Through Peaks and Valleys
• Sales declines forecast
for US, Canada and
Mexico in 2018
• Sales trend recovers in
2019 and retains
stable demand outlook
• Sourcing penetration
climbs as output
transitions from car to
truck, helped by added
capacity expansion
Mill
ion
s
North America Light Vehicle Sales
Source: Wards Auto Intelligence
Planning Through Peaks and Valleys
20
Source: WSJ Survey of Economic Forecasters
US: Recession Probability
The current U.S.
economic
expansion began
in mid-2010.
When is it most
likely to end?
0.0%
7.8%
58.8%
21.6%
7.8%
3.9%
2018
2019
2020
2021
2022
After 2022
Planning Through Peaks and Valleys
North America – Industry Production Cycles
0
2
4
6
8
10
12
14
16
18
20
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Mill
ion
s
NA Production
Recession
Linear (NA Production)
-26%-3.8M
-42%-6.4M
-19%-2.6M
-10%-1.7M
-48%-7.8M
Source: Wards Auto Intelligence, IHS-Markit
-4.1%-725K
21
9 ?7 65
Planning Through Peaks and Valleys
0 50 100
VirginiaIowa
MissouriWisconsinNew York
GeorgiaPennsylvania
CaliforniaTexas
South CarolinaNorth Carolina
IllinoisAlabama
KentuckyTennessee
IndianaOhio
Michigan
Top Automotive States
22
Top 20 - Supplier Employment (000s) US Vehicle Output - 2016 (Millions)
5%6%
49%8%
32%
Regional Share %
Source: 2017 MEMA Economic Study – 2015CY ; Share of total direct employment Source: LMC Automotive, OESA Analysis
0 1 2
California
Kansas
Georgia
South Carolina
Mississippi
Texas
Illinois
Missouri
Tennessee
Alabama
Kentucky
Indiana
Ohio
Michigan
SW5%
56%MW
38%SE
Regional Share %
CAR TRUCK
Midwest-MWSoutheast-SENortheast-NE
West-WSouthwest-SW
SE
MW
SWW
NE
Planning Through Peaks and Valleys
23
(in millions)
20182019
Forecast
2020
Forecast1Q
Forecast
2Q
Forecast
3Q
Forecast
4Q
Forecast
2018
Forecast
4.31 4.51 4.09 4.1417.05 17.62
18.18
4.45 4.60 4.19 4.1317.37 17.37
17.43
4.39 4.51 4.21 4.1917.30 17.07
17.29
4.39 4.48 4.22 4.0817.17 17.53
17.73
Forecast Average 4.39 4.53 4.18 4.14 17.22 17.40 17.66
Forecast Spread 0.14 0.12 0.13 0.11 0.32 0.55 0.89
2017 Average 4.51 4.47 4.07 4.26 17.31
Last Update: 1Q 2018
Source: 1Q 2018 OESA Affiliate Forecast Matrix – PWC/Autofacts, IHS Markit, LMC Automotive, Wards Auto (Car/Trk Class 1-5)
Planning Through Peaks and Valleys
North America Vehicle Production Forecast
24Q1 2018 OESA AUTOMOTIVE SUPPLIER BAROMETER
20
30
40
50
60
70
80
Jan-2
008
Jan-2
009
Jan-2
010
Jan-2
011
Jan-2
012
Jan-2
013
Jan-2
014
Jan-2
015
Jan-2
016
Jan-2
017
Jan-2
018
Euro
Crisis
Begins
Japan
Tsunami/
Grexit Crisis
US
Fiscal
Cliff
Lehman
Collapse57
0%
20%
40%
60%
Sig
nific
antly m
ore
op
tim
istic
Som
ew
ha
t m
ore
op
tim
istic
Un
ch
ang
ed
Som
ew
ha
t m
ore
pe
ssim
istic
Sig
nific
antly m
ore
pe
ssim
istic
Q4 2017 Q1 2018
121 responses
Describe the general twelve month outlook for your business. Over the past three months, has your opinion become…?
OESA Supplier Barometer: 1Q 2018 Results
Current Supplier Outlook (Share of Respondents) Supplier Barometer Index: (SBI and 6m Average)
SBI Score = 57; soars 11 points from Q4 level of 46
Tax Reform, a more hopeful view on NAFTA and continued Market Strength all Drive Optimism
Planning Through Peaks and Valleys
Passenger Cars: Under PressureSteady March To Reduce US3 Car Portfolios and Utilize Global Sourcing
Fiesta
Dart Focus
200
Sonic
Taurus
Verano
LaCrosse? Impala? CT6?
Volt? Cruze?
Segment
A/B
C
D
E
Fusion
25Planning Through Peaks and Valleys
Future Launch Activity
19 1925
16
34
19 2024
8
17
7
1412
8
24
2134 22
19
10
0
10
20
30
40 VehiclesCarsTrucks
Source: IHS Markit, Kelly Blue Book
Average Transaction Price
By Segment ($) – June 2017
0 10 20 30 40
B-Segment
C-Segment
D-Segment
Thousands
Utility
Car
+46%
+39%
+51%
26Planning Through Peaks and Valleys
Segments
FT-AC
B + C + D + E
Bra
nds
RAV4
C-HRHighlanderFT-AC
The Race to Fill White Space
Execution
Utility
RX 350L
27
NX RX RX-LUX
UX
(SMALL) (MIDSIZE)(SUBCOMPACT) (FULL)
Planning Through Peaks and Valleys
28
• 25% import tariff,
cut to 15% by 7/1
• Luxury growth
• Minority ownership
cap removed 0
50
100
150
200
250
300
350
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
XT5 / SRX X3 Grand Cherokee
-39%(-55K)
Double Edged Sword of Strong ExportsOverseas Demand Often Drives Local Sourcing
Annual Production (Thousands)
Source: IHS Automotive
-45%(-41K)
Strong Exports Global Sourcing
-16%(-51K)
Planning Through Peaks and Valleys
29
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10 17 22 10 17 22 10 17 22 10 17 22 10 17 22 10 17 22 10 17 22 10 17 22 10 17 22
SUV Truck Car
North American Vehicle Production Segment Shares Highlight Portfolio Strategy Differences
Percent of NA Production
Sources: Automotive News, IHS Markit
General
Motors
Ford FCA Toyota Honda Renault/
Nissan
Hyundai/
Kia
Volkswagen Industry
35
%
49
%
44
%
30
%
+14%
-14%
Planning Through Peaks and Valleys
Source: Wards, Federal Bank of Chicago, T. Klier
North American Light Vehicle OutputBy Country and Segment
Size of circle scaled
to 2016 volume
12.0M 3.5M 2.4M30Planning Through Peaks and Valleys
31Q1 2018 OESA AUTOMOTIVE SUPPLIER BAROMETER
0% 50% 100%
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
1=Highest Priority 2 3 4 5=Lowest Priority
2018
Average
Rating
If you had additional dollars for R&D investment, rating in terms of
importance, how would you allocate it across the following technology areas?
Research & Development Technology Investments
Advanced Materials Technologies
(composites, lightweight materials, etc.)
Sustainable Manufacturing Technologies
Powertrain Technologies (ICE Hybrid, Electric, Alternate Fuels, Fuel
Cell, Transmissions)
Driver Assist Technologies (park assist,
crash avoidance, lane departure, etc.)
Autonomous Driving Technologies (V2X)
2.4
2.6
2.7
3.8
3.8
Planning Through Peaks and Valleys
Source: 1Q 2018 Supplier Barometer
Source: IHS Markit Production Forecast – September 2017
Global Propulsion Design Islands - 2025
32Planning Through Peaks and Valleys
Global BEV Demand By Market
Planning Through Peaks and Valleys
September 13, 2017 - Bloomberg
• German automaker seeks to trim component spending
by 5%
• Suppliers to face more competition amid savings
squeeze
BMW Aims to Cut Parts Costs
by $2.4 Billion in E-Car Shift
Planning DynamicsElectrification Push Drives Profound Change
Mercedes will cut costs to
fund EVs September 11, 2017 - AutoNews‘to launch a $4.8 billion cost-cutting program’
34Planning Through Peaks and Valleys
GM – Future Electrification Bandwidth and Plan
• FLEXIBLE STRATEGY
• BUILD SCALE
• LEVERAGE CHINA
35Planning Through Peaks and Valleys
Planning Through Peaks and Valleys
The EV Profit Challenge
ICE EV
EV
• Clean sheet design
• Ground up capex
• ‘New Everything’
• Must scale to survive
• Low margin of error
• Incremental approach
• Incremental capex
• Weighs on current profits,
yet can reinvest proceeds
• Enables transition
‘All In’
‘Incremental’"We wanted to wait for
the fifth generation (to
scale) to be much more
cost competitive,“ BMW
CEO Harald Krueger
Expects its EVs to be
profitable by 2020 after
first EV launched in 2013.
37Q4 2017 OESA AUTOMOTIVE SUPPLIER BAROMETER
25% 35% 40%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
AcquisitionsOverall
$150 million or less$151-$500 million
$501 million-$1 billionMore than $1 billion
High Likelihood Moderate Likelihood Unlikely
Percent of respondents
4% 22% 74%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
DivestituresOverall
$150 million or less$151-$500 million
$501 million-$1 billionMore than $1 billion
High Likelihood Moderate Likelihood Unlikely
OESA Supplier Barometer: 2018 Planning
Over the next 12 months, what is the likelihood that your company will make acquisitions and/or divestitures?
Up from 2017 levels, suppliers are actively assessing acquisitions and divestitures;
acquisitions from larger companies, divestitures from smaller (ref appendix)
37Planning Through Peaks and Valleys
Summary
• Market: Global opportunity, US demand slowing, divergent performance
• Offense: SUV growth/Truck peak—opportunities and risks (i.e. competition)
• Defense: Growing scope of passenger car dislocation, turbulence
• Strategy: Requires counter-cyclical innovation planning
• Flexibility: Liquidity is key; vital to balance ‘Core’ vs Emerging
• Stretch: Surge in BEV opportunities, not all created equal - prioritize
38Planning Through Peaks and Valleys
Federal Reserve Bank of Chicago-
Detroit Automotive Symposium
Detroit, MichiganJune 1, 2018
Mike Jackson
Executive Director, Strategy and Research
Original Equipment Suppliers Association
+1-248-430-5954
Thank You!
mailto:[email protected]