Ian Henry examines the key trends in the North American automotive supplier sector where technological progress and feisty trade policies continue to present a range of business challenges

Forging the dealWith rapid technology change across the sector as the automotive market accelerates into the era of electrification, the uncertainty over the future of NAFTA and continued threats of tariffs being applied both by the US and its trading partners around the world, the supply base has plenty on its collective plate. Amid the plethora of challenges facing the sector, investment in new plants and M&A activity which has long categorised the market continue, but at somewhat reduced rates. This review looks at the key trends in the North American supplier sector with examples drawn from a mix of domestic suppliers and international suppliers who are – despite, or perhaps because of – the increasingly protectionist nature of US government policy, looking at increasing their presence in the US market and not just within NAFTA.

Suppliers challenging Trump’s tariffsThe supplier industry appears unanimous in opposing the imposition of tariffs on steel and other materials. The American Institute for International Steel (AISI), for example, has filed a lawsuit in the US Court of International Trade in New York against the 25% tariff on imported steel.

Alongside industry bodies such as the AISI, several individual companies have been very vocal in their opposition to tariffs and their consequences for established industry structures and supply chains. One of the leading opposition voices here is that of Linda Hasenfratz, CEO of the leading Canadian company, Linamar. She has described the 25% tariff on steel and aluminium as “unbearable”.

According to Hasenfratz, prices will increase “dramatically” for consumers while car sales will fall. She suggests the impact on the automotive market will be worse than that of the 2009 financial crisis. Moreover, she expects industry-wide layoffs, which will further depress demand across the economy, both nationally and internationally, especially if the industry has to deal with the double whammy of tariffs on raw materials, steel and aluminium, and on finished vehicles.

New technologies rely on international suppliersWhile tariffs are used in part to protect existing US suppliers to a large extent, in many new technology areas, the US automotive industry is dependent on international suppliers, whether from US production sites, or international supply points. As the world moves into EVs at increasing rates, US vehicle companies are highly dependent on overseas suppliers investing in the US, as well as supplying the US from abroad. Tesla’s move into the automotive market for example relies on Japanese battery supplies in particular.

"While tariffs are used in part to protect existing US suppliers, in many new technology areas, the US automotive industry is dependent on international suppliers, whether from US-based sites, or international points"

Panasonic is the sole supplier of battery cells to Tesla, having already invested US$1.6bn in a jointly operated battery plant in Nevada. Further investment at this gigafactory would be possible according to Panasonic, should Tesla request this. Some of the cells used by Tesla come from a Panasonic plant in Japan, but moving all of this production to the US is also possible.

US suppliers wary of government policy on fuel economyThere is also a growing concern that the US supplier base could be left behind in the technology race if the US government rolls back on fuel economy standards. The current US government remains intent in reducing the fuel economy standards required of vehicles due to be launched in the 2022-2025 model years. This would, the industry fears, reduce the incentives on suppliers to accelerate developments in fuel efficiency systems. The result could, industry executives fear, see US companies operating efficiently on a technology island, with standards quite different to those prevailing in much of the rest of the world.

Dana has acquired a majority stake in TM4

Dana has acquired a majority stake in Quebec-based EV components supplier TM4

US suppliers also diversifying into new powertrain technologiesDespite this concern, companies like Eaton, for so long focused on traditional areas in conventional powertrain technology, have begun to move into electrification technologies. Eaton has established its eMobility division and will invest US$500m in this business area by 2023. This new division will develop intelligent power electronics, smart diagnostic technologies and predicative health monitoring for drivers; it will serve, the passenger car, commercial vehicles and off-highway sectors. The new unit will be based in Detroit and employ 1,200 people initially. This is a logical development for the company which has already supplied over 15,000 hybrid and plug-in hybrid systems globally; with the company expecting the EV market to reach 15m pure battery electric vehicles and over 30m hybrids of various forms annually by 2030 such a move is hardly surprising.

At the same time, companies like Eaton will have to fund their diversification into new technologies while continuing development work in established fields; the death of the internal combustion engine and its associated componentry will not happen overnight and the rate at which consumers adopt full electric vehicles remains to be seen. Having to straddle both technological worlds at the same time will place significant stresses on both the financial and human resources of companies like Eaton.

Meanwhile, as the boundaries between automotive and other sectors continue to blur, Dana has taken a majority stake in a subsidiary of an energy company. It has paid US$127m for a 55% stake in TM4 from Montreal’s Hydro-Quebec. TM4 is a manufacturer of electric motors and other components for the electric vehicle market. Dana already makes electric gearboxes and thermal managements systems for batteries and inverters, while TM4 brings manufacturing capability in electric motors, power inverters and control systems, and market access not just in cars, but also in mining, rail and a range of off-highway equipment, meshing well with Dana’s broader interests.

Martinrea International is opening a US$26m technical centre in Detroit to boost its US R&D capabilities Martinrea International is opening a US$26m technical centre in Detroit to boost its US R&D capabilities

A potential hidden value in the 55% stake in TM4 is the 50% which TM4 in turn holds in Prestolite E-Propulsion Systems (PEPS), a joint venture between TM4 and Prestolite Electric Beijing (itself a subsidiary of Chinese supplier Zhongshan Broad Ocean Motor), established in 2012. This JV supplies motors, inverters, generators and control units for electric buses, electric trucks and marine applications and with the stake in TM4, Dana now has a direct route into the Chinese market, as well as access to Chinese expertise in electric vehicles. Many observers believe the Chinese market is developing traditional powertrain markets than is the case currently in the US. Quite how stakes and technical co-operations such as these will be able to function in the anti-Chinese environment promulgated by President Trump will be interesting to observe.

Established automotive technology providers see new opportunities in electric vehiclesWhile it is certainly true that customers for electric and hybrid vehicles appreciate the low fuel costs which these vehicles offer, they are also seen as wanting stylish and attractive looking vehicles. In this light, companies like Superior Industries – one of the leading wheel makers in North America – see a major opportunity in aluminium wheels for electric vehicles. The company is working on a new generation of lightweight aluminium wheels designed specifically for EVs, having established through market research than EV buyers wanted the same large, shiny and sporty wheels of conventional premium vehicles. Superior is already the supplier of 19-inch wheels for the Tesla Model X SUV and sees this contract as the start of a trend for up-scale wheels in the EV market. This reflects a trend across the automotive market as a while, with Superior expecting the market share of large wheels, 19-inch and above, to reach 35% in the US by 2020, almost double what it is now.

Superior’s new wheel design, AluLite, saves around 10-15% in weight compared to existing designs, something which will be increasingly relevant in the light of rising tariffs on aluminium. Where all these new wheels will be made is an interesting issue to monitor. It is by no means guaranteed that production will be in the US itself.

Market opportunities in existing automotive technologies demand further investment in the USAs well as investment in new powertrain technologies and associated markets, domestic and overseas suppliers alike are continuing to invest in established technologies in the US. For example, German supplier Pierburg (part of the giant Rheinmetall group) is expanding its plant at Fountain Inn, South Carolina to make a new form of solenoid valve which will improve engines’ fuel efficiency. This plant has more than doubled the number of products it makes in the last decade, and its new production line will involve investment in automation and robotics, as well as significant upskilling of the existing workforce.

Electrical tech driving acquisitions

A very good example comes from Lear, one of the leading global suppliers of automotive seating, which has added new capabilities in electronics to add value to its seats. This has come through acquiring the seat manufacturing operations supplier of Spanish supplier, Grupo Antolin, for US$307m.

This acquisition was not just to add market share in seats, especially Antolin’s skills in 2nd and 3rd row seating for crossover vehicles, but also to give it a technology which Antolin has recently developed – this is akin to a third electric rail system for seat power, replacing wiring harnesses and allowing far greater flexibility in seat design and the location of mechanical and moving parts.

The new solenoid value in smaller than existing products and this makes fitting it into increasingly space constrained engine bays somewhat easier. Next up will be an inline valve, due in 2020; this is expected to produce a 30% weight reduction, allowing car companies to use smaller pumps which in turn draw less energy, improving engine efficiency. Longer term, the Pierburg plant in the US will add capability in the electric vehicle market, including electric coolant pumps for EVs and lightweight aluminium battery cell boxes. These are expected to see a production launch during the early-mid 2020s.

Other investments from international suppliers include those from another Canadian company, Martinrea International is opening a US$26m technical centre in Detroit to boost its US R&D capabilities; and German supplier of seat components, Grammer, will double its US presence with the acquisition of Toledo Moulding and Die Inc. This purchase, for US$271m, covers 10 factories in the US and one in Mexico, giving Grammer a strong presence in door panels, pillar trims, glove boxes and centre consoles, as well as simpler, non-functional parts, such as ducting.

Meanwhile, US supplier of injection mouldings, especially bumpers, Flex-N-Gate, is expanding its US operations. It is spending over US$175m on a new production facility in Grand Prairie, Texas. The company will spend US$70m in new injection moulding equipment, metal stamping lines and robotic welding systems. 172 workers will move from an existing factory in Arlington, with around 500 more workers to be recruited by 2020. The Arlington site will be closed once the new facility is fully operational, including using equipment transferred from Arlington as well as the new systems referred to above.

The new factory will make front and rear bumpers for the Chevrolet Suburban and Tahoe, GMC Yukon and Cadillac Escalade large SUVs, all of which are made at GM’s plant in Arlington. To incentivise Flex-N-Gate, the City of Grand Prairie gave the company a nine-year reduction of 75% in property taxes.

The Texas factory is not the only new investment by Flex-N-Gate which is also building a new factory in Detroit for Ford, to make metal and plastic parts. This has involved the acquisition of a new facility, Ventra Ionia Main, and a modest investment of nearly US$5m, creating 109 new jobs nonetheless. The factory will supply bumpers to a new mid-size pick-up truck, the Ford Ranger, which will be launched in early 2019. This will operate in one of the most competitive segments in the pick-up market, alongside the Chevrolet Colorado, GMC Canyon and a new mid-size Ram pick-up which was announced in June by FCA.

Transferring from Japan to the US

One of the biggest and most significant investments in the US supplier industry announced in recent times has comes from Japanese supplier, Denso. This involves a US$1bn investment in Maryville, Tennessee, expanding an existing plant and creating 1,000 new jobs. Significantly this will involve transferring the production of EV inverters, radar components and data control modules from Japan to North America. This move was described by Denso’s US senior vice president of engineering as consistent with Denso’s policy of localising production of components as far as possible, especially where this builds on established skills and capabilities which Denso has built up in a given location.

The company went out of its way to deny that this move was in response to the pressure on international companies to reduce imports into the US, emphasising how it is in line with its established corporate policy. It cites the case of the inverter, a heavy component, which is ideally made as close as possible to the end customer, ie the factory making the vehicle on which it is fitted. With this move, Denso believes it has US production capability in all the areas it needs to be in to support the growing EV market in North America – further all-new greenfield sites are said to be unlikely, but expansion at existing operations is inevitable; it is simply a matter of when this takes place. Similar moves like this from international suppliers especially might well be announced if the protectionist policies of President Trump continue.