Ahead of the Curve: Forecasting Corner: Investment Certainty is Critical

Much has been written about the challenging operating environment within the North American automotive ecosystem. Suppliers and OEMs alike were never trained either in business school or past experiences for the erratic trade and legislative environment which we face today.

Since late 2019—and the UAW strike against GM, which lasted several weeks—there has been disruption after disruption impacting our industry. These include: the impact of COVID on supply and demand, the semiconductor chip shortage, labor shortfalls, inflation and erratic trade actions. These Black Swan events have all suppressed revenue and profits.

Among these unique occurrences, there is one, very obvious dynamic consistently impacting today’s auto industry: The lack of a stable, expected trade environment, which is critical to our long-term viability.

Those reading this column are likely well aware of the long-term perspective our industry requires to make viable business decisions. Investments are made over multiple cycles (typically measured in 5-year increments) dependent upon the form of capital. Dies and molds for a part/system are typically engineered for the duration of a program which lasts 5-7 years.

Some equipment/automation is structured to carryover to multiple programs—over 10 years. In fact, given the lack of stable volumes over the past 5 years and the expected lack of legislative movement of US vehicle emissions legislation in the future—one could expect that program may last up to 10 years in the future.

Building a vehicle, engine or transmission plant is a multi-decade, multi-cycle bet. The cost of designing, permitting and constructing body and paint shops is not a trivial expense. It can cost $3-4 billion US to design, test, tool and outfit a couple of vehicle/powertrain plants to ready a new family of vehicles.

Supplier investments would be in addition to this level of investment. These major capital investments are virtually impossible to move without significant cost, lost time and upheaval to the organization. One OEM executive once told me that they build plants with a view of 50 years’ viability. The pressures of near-term trade dynamics do not resonate with the constructs of a half-century perspective.

There are other casualties of a short-term perspective to automotive manufacturing investments. Given the potential for a severe shift in the automotive industry’s trade structure beginning in mid-2024, several OEMs started holding off new investments in both plants and vehicles to ensure their precious capital had a stable long-term foundation in which to be viable.

Though the industry is slowly gaining clarity as to the future environment, we are not there yet. Chances are that bilateral trade relationships with countries outside of North America, as well as whatever succeeds the current USMCA Agreement, may not be finalized until the end of this year. That is 18 months that this critical industry lacks a stable trade structure.

During this 18 month-period, the industry will be battling short-term issues—veering their focus away from long-term strategy to stay ahead of a competitive global market. At the same time that the industry is losing its ability to plan ahead, OEMs and suppliers are facing a market which is advancing at a blinding speed in China and other locations. A North America focused on short-term interruptions will only set us back on the global stage.

OEMs and suppliers will only continue to work on programs which are past the point of no-return—in other words, the tooling investment has already commenced. In some cases, decisions to halt investment and reverse course will be made after tooling has already been built and installed. This drives significant negative exposure to poorly utilized capital and resources—wasted effort.

This lack of trade certainty (not economic certainty) has emerged in several forms in our industry. Activity on programs past 2028 has been slowed or has several costly off-ramps integrated to protect the investment (read flexibility). Thus several programs have been rescoped, delayed or outright cancelled.

We have already seen many changes to the future launch cycle in North America—more ICE, less BEV and many delays. The accompanying graphic outlines the massive changes in launches from last August to our April setting within the S&P Global Mobility Light Vehicle Production Forecast. Additionally, investments at plants are under review—sometimes after tooling has already been installed. This level of capital utilization uncertainty is unhealthy at best.

We anxiously await stability in the automotive planning environment. Trade certainty—in whatever form that is found—will be welcome, even if it is not optimal. Given the capital investment over the past decade and the extraneous issues impacting OEMs and suppliers alike since 2019, stability in the planning environment can’t come fast enough.