Planning Through Peaks and Valleys › ~ › media › others › events › ...June 1, 2018....

Planning Through

Peaks and Valleys

Mike Jackson

Executive Director, Strategy and Research

Original Equipment Suppliers Association

[email protected]

+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)


• 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


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


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


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.


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%


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


US Light Vehicle Sales By Segment – 2017 Divergent Trajectory Remains

Source: www.motorintelligence.com

17.23M -1.8%

-10.9%

+4.3%


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


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


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


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


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


• 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


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


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


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


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)


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


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


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%


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)


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)


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%


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


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


Source: 1Q 2018 Supplier Barometer

Source: IHS Markit Production Forecast – September 2017

Global Propulsion Design Islands - 2025


Global BEV Demand By Market


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’


GM – Future Electrification Bandwidth and Plan

• FLEXIBLE STRATEGY

• BUILD SCALE

• LEVERAGE CHINA



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.


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)


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


Federal Reserve Bank of Chicago-

Detroit Automotive Symposium

Detroit, MichiganJune 1, 2018

Mike Jackson

Executive Director, Strategy and Research

Original Equipment Suppliers Association

[email protected]

+1-248-430-5954

Thank You!
mailto:[email protected]

Planning Through Peaks and Valleys › ~ › media › others › events › ...June 1, 2018....

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