jump starting innovation amid market volatility · 2019-02-28 · interest rate on new car loan...

Jump Starting InnovationAmid Market Volatility

Mike JacksonExecutive Director, Strategy and ResearchOriginal Equipment Suppliers [email protected]+1-248-430-5954

South Carolina Automotive SummitFebruary 21, 2019

mailto:[email protected]

2

Introduction

Mike JacksonExecutive Director, Strategy and ResearchOriginal Equipment Suppliers Association (OESA)

Mike Jackson serves as Executive Director, Strategy and Research of the Original Equipment Suppliers Association (OESA). Jackson has more than 20 years of progressive experience in market forecasting, strategic planning and management consulting. Jackson is a recognized global industry expert, thought leader and public speaker on light vehicle sales and production, manufacturer strategies and OEM product planning. Jackson assists an extensive membership of automotive suppliers, affiliate members and industry stakeholders to anticipate market dynamics, enhance competitiveness and mitigate risk to achieve business success.

Jackson is a highly sought after public speaker, regularly presenting to executive leadership teams and industry conferences throughout North America and around the world. He is frequently quoted by leading print, radio and television media on the industry and light vehicle sales and production dynamics while also serving to represent the voice of automotive supplier community.

Mike Jackson previously directed the North American Vehicle Production forecasting practice at IHS Markit for more than 15 years. As a global product planning and strategy expert in the automotive/mobility sector, Jackson served as subject matter expert on the North American market for a global client base of automakers and all levels of the supply chain with a deep knowledge of the industry and global markets.

Jackson previously held senior strategy roles for electrical system supplier Alcoa Fujikura, Ltd. (AFL) and French-based automotive interior supplier, Faurecia. Jackson gained international experience during a multi-year stay, living and working in Germany, developing language fluency. Jackson holds a degree in management strategy from Eastern Michigan University and also earned his M.B.A. in international marketing from Wayne State University. Jackson is also a member of the Federal Reserve Bank of Chicago’s Automotive Roundtable.

Championing the business interests of the automotiveOE 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 400 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.

Jump Starting Innovation Amid Market Volatility 3

• Economic Update

• Trade, Tariffs & Tripwires

• Auto Sector Dynamics

• Takeaways

Roadmap

Jump Starting Innovation Amid Market Volatility

• Strong fundamentals remain with low unemployment, steady jobcreation, strong consumer spending and low but rising interest rates

US: Economic Outlook

Source: wsj.com – February 2019 monthly economist survey

5

• Job growth has continued, lifting participation rates yet an even tighter outlook is expected by through 2019

1.6

2.2

1.8

2.5

2.9

1.6

2.2

3.0

2.2

1.7 1.8

0.0

1.0

2.0

3.0

4.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20212.0

4.0

6.0

8.0

10.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

GDP (% ∆, YoY) Unemployment (%)


0.61

0.780.93

1.001.11

1.18 1.21 1.26 1.27 1.30

0.00

0.25

0.50

0.75

1.00

1.25

1.50

2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

• Higher interest rates and supply constraints limiting growth in housing starts over the forecast horizon. Demand for smaller starter homes remains strong

• Despite higher price volatility, fracking has altered the global energy landscape, holding a constrained pricing outlook

US: Economic Outlook

6

Oil Prices (WTI, $/Barrel) Housing Starts (million)


Source: wsj.com – February 2019 monthly economist survey

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

1978 1983 1988 1993 1998 2003 2008 2013 20180.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

(60%)

(40%)

(20%)

0%

20%

40%

60%

1978 1983 1988 1993 1998 2003 2008 2013 2018

S&P 500 (% ∆, YoY) Consumer Sentiment Index

US Business Cycle Indicators

Source: Yahoo Finance, University of Michigan,ISM, U.S. Census Bureau


8

Interest Rate on New Car Loan (percent) US Average Loan Length (months)

US: New Vehicle FinancingRising interest rates, and shorter term loans send average monthly payments to record levels

65.6

59

60

61

62

63

64

65

66

67

68

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

6.43

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: Federal Reserve Bank, Weighted Average Finance Rate at Finance Companies Source: Federal Reserve Bank, New Car Loans at Finance Companies


9

$542.25

$400

$425

$450

$475

$500

$525

$550

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

$29,921

$24,500

$25,500

$26,500

$27,500

$28,500

$29,500

$30,500

2011

2012

2013

2014

2015

2016

2017

2018

US Average Amount Financed

Source: Federal Reserve, Author’s Calculations

Auto Loan Monthly Payments

US: New Vehicle Financing

Source: Federal Reserve, New Car Loan at Finance Companies


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar 2019 Apr/May2019

Jun 2019 Sept 2019 Other NextAction

Rate Cut

Oct. 2018

Dec. 2018

Jan. 2019

Probability of Next Rate Hike

Substantial Swing in Future Fed Funds Rate Path

Source: WSJ Survey of Economic Indicators, Federal Reserve

• Volatility in financial markets has caused the outlook for a March 2019 rate hike to fall from nearly 90% in October to just under 30% in March

• The last two surveys show a small chance that the Fed will reverse tightening, and start to lower rates as their next action

• December FOMC “Dot Plot” shows a median estimate of two 25 bps. rate hikes in 2019

• Economic fundamentals remain strong however, and the current policy rate remains below the estimated neutral rate

-60%

+30%


11

US: Recession Probability

The current U.S. economic expansion began in mid-2010. When is it most likely to end?

4.3%

45.7%

39.1%

10.9%

2019

2020

2021

2022

Source: 2/2019 - WSJ Monthly Survey of Economists


US: Yield CurvePast 5 recessions preceded by an inverted yield curve; Latest 10-2 spread at 15 bps.

Yield Curve (10 minus 2 yr. Treasury)

Sources: U.S Federal Reserve, US Bureau of Economic Analysis, Bloomberg

0.00.10.20.30.40.50.60.70.80.91.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018


US: Light Vehicle Sales OutlookForecasts vary among firms – yet all reflect declining sales after a marginal increase in 2018

Annual Sales (millions)

16.00

16.20

16.40

16.60

16.80

17.00

17.20

17.40

17.60

17.80

2015

2016

2017

2018

2019

2020

History PWC-Autofacts IHS-MarkitLMC Automotive Wards Auto Intelligence

Source: 3Q 2018 OESA Affiliate Forecast Matrix – PWC/Autofacts, IHS Markit, LMC Automotive, AutoForecast Solutions

17.2M-1.8%-320K

Forecast Avg.17.3M+ .6%+96K

16.8M-2.9%

-500K

13

16.7M-0.7%-110K

17.2M-1.8%(326K)

+4.4%118K

+3.5%283K

-10.8%(727K)

+0.6%96K

+4%130K

+9%730K

-12%(764K)

2017 2018

17.3M


Shifting U.S. Demand Preferences

Sources: Ford Motor Company, IHS Markit, J.D. Power PIN


15

15

Roadmap

• Economic Outlook



• Takeaways


16Q4 2018 OESA AUTOMOTIVE SUPPLIER BAROMETER

SBI Score = 53; drops 4 points from the Q1 level of 57Tax reform supports optimism while trade and declining sales drive pessimism

39

20

30

40

50

60

70

80

Jan-

2009

Jan-

2010

Jan-

2011

Jan-

2012

Jan-

2013

Jan-

2014

Jan-

2015

Jan-

2016

Jan-

2017

Jan-

2018

Euro Crisis Begins

Japan Tsunami/

Grexit Crisis

US Fiscal Cliff

Lehman Collapse

0%

20%

40%

60%

Sig

nific

antly

mor

eop

timis

tic

Som

ewha

t mor

eop

timis

tic

Unc

hang

ed

Som

ewha

t mor

epe

ssim

istic

Sig

nific

antly

mor

epe

ssim

istic

Q3 2018 Q4 2018

101 responses

Describe the general twelve month outlook for your business. Over the past three months, has your opinion become…?

Current Supplier Outlook (Share of Respondents) Supplier Barometer Index: (SBI and 6m Average)

Rising concerns over tariffs and trade policy pulled down the Q4 2018 OESA Supplier Barometer Index (SBI) by four points to 39, eleven points below a neutral reading.

OESA Supplier Barometer: Q4 2018 Results


Presenter

Presentation Notes


SBI Score = 53; drops 4 points from the Q1 level of 57Tax reform supports optimism while trade and declining sales drive pessimism

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Changes in government trade policy

Poor sales of vehicles in programs supplied

Implementation of new government regulations

Weakness in the U.S. Economy

Likelihood of higher interest rates

Inability to address internal labor constraints

Terrorism or some type of international event

Inability to fulfill customer volumes

1=Greatest threat 2 3 4 5 6 7 8 9 10=Smallest threat

AverageRating

3.1

4.2

4.6

4.6

5.2

5.2

6.5

6.8

3.1

5.1

5.2

5.2

5.2

5.7

6.7

7.3

JulyNovember

Trade policy remains the greatest industry threat, at 3.1 in the fourth quarter, unchanged from Q3 2018. Poor sales of programs supplied was identified as the second largest threat, declining substantially from Q3.

OESA Supplier Barometer: Industry ThreatsWhat are the greatest threats to the industry over the next 12 months?


18

Cumulative Impact of Trade Actions on Suppliers

Steel & Aluminum Tariffs & Quotas

China Tariffs and Investment Restrictions

Sec. 232 Investigation on Autos &

Parts

Uncertain Future of NAFTA “2.0”

18



0

5

10

15

20

2519

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Sales

Production

Breakeven

Mill

ions

of L

ight

Veh

icle

s

Source For Sales & Production Volumes: IHS Markit forecast (January 2018)

Historical Breakeven(Millions of Units)

2017 = 14.5 2016 = 14.32015 = 13.52014 = 12.72013 = 12.02012 = 11.02011 = 10.52010 = 10.02009 = 9.5

Production Planning: Breakeven and Year-End EstimatesConsidering North America light duty vehicle production, estimate the required 2018 industry volume needed to achieve

breakeven in your North American operations?

2018 Median breakeven level

=15.0 million units of production.

Suppliers are “OK” if a mild downturn occurs over the near-term: Breakeven is well below forecasts


Presenter

Presentation Notes

Production Breakeven Level Rises To 15.0m Units: Suppliers’ minimum necessary production levels rose modestly to 15.0 million units over the 2017 level of 14.5 million units. If a mild downturn should occur over the near-term, suppliers appear to be sized correctly. However, the gap between BE and demand gets tighter with continued increase in BE, coupled with decreasing demand.

21

-3.8

-6.4

-2.6 -1.7

-7.8

-50%

-40%

-30%

-20%

-10%

0%

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

1975

1982

1991

2001

2009

Source: Wards, LMC Automotive, Authors’ Calculations

Peak to Valley Chg. (Mils. Lt. Axis, Pct. Chg. Rt. Axis) Valley to Peak Chg. (Mils. L-Axis, Pct. Chg. Rt. Axis)

Peaks and ValleysNorth America Vehicle Production Cycles

Boom Bust3

Cycle (In Years)

4.9 4.35.4 5.8

0.9

9.2

0%

25%

50%

75%

100%

125%

0.0

2.0

4.0

6.0

8.0

10.0

1973

1978

1985

2000

2002

2016

5 7 9 6 ?


Roadmap

• Economic Update



• Takeaways


Last Update: 3Q 2018

Source: 3Q 2018 OESA Affiliate Forecast Matrix – PWC/Autofacts, IHS Markit, LMC Automotive, Auto Forecast Solutions

Planning Through Peaks and Valleys

North America Vehicle Production Forecast

(in millions)

20182019

Forecast2020

Forecast1Q Actual

2QActual

3Q Forecast

4Q Forecast

2018Forecast

4.35 4.40 4.07↓0.01

4.22↑0.07

17.04↑0.24

17.34↑0.10

17.47↓0.10

4.38 4.36 4.07↓0.20

4.22Unch.

17.03↓0.21

17.11↓0.30

16.80↓0.55

4.40 4.38 4.12↓0.10

4.25↑0.01

17.15↓0.11

17.13↑0.10

17.25↓0.11

4.41 4.37 4.22 4.30 17.31 17.63 17.79

Forecast Average 4.38 4.38 4.12 4.25 17.13 17.30 17.33

Forecast Spread 0.07 0.04 0.15 0.08 0.28 0.52 0.99

2017 Average 4.51 4.47 4.07 4.26 17.31

2019 North American International Auto Show

• Primary Utility & Truck focus

• Driving Content + Record ATPs

• Growing Segmental Competition Jump Starting Innovation Amid Market Volatility

25

Source: LMC Automotive, OESA Analysis

Mils. (000s)

Production DynamicsRegional SUV Surge: Nameplate Volume Washed Away by Increased Competition

90

95

100

105

110

115

120

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Total SUV Units (Lt. Axis)

Units per Nameplate (Rt. Axis)


0 1 2

CaliforniaKansasGeorgia

South CarolinaMississippi

TexasIllinois

MissouriTennessee

AlabamaKentucky

IndianaOhio

Michigan

0 50 100Virginia

IowaMissouri

WisconsinNew York

GeorgiaPennsylvania

CaliforniaTexas

South CarolinaNorth Carolina

IllinoisAlabama

KentuckyTennessee

IndianaOhio

Michigan

Top Automotive States

26

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

5%1%

Midwest, 56%

S-East, 38%

Regional Share %

CAR TRUCK


• ENGINEERS• TECHNICIANS• HOURLY SKILLED

27

OESA Supplier Barometer Survey: HR & Talent Focus

SKILLS + CULTURE GAP

58%MODERATE TO WIDE

NEW VALUES

TIME

FLEXIBILITY

TALENT SCARCITY

CHANGE ROLESTO FIT SKILLS

CROSS FUNCTIONAL

TRAINING

APPRENTICESHIPS

NEW HIRING PRACTICES

ACTION PLANS:∆ SKILL SETS

• SPECIALIZED• AUTONOMOUS• COLLABORATIVE


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.


Global BEV Demand By Market

41


GM – Future Electrification Plan

• FLEXIBLE STRATEGY

• LEVERAGE CHINA

• BUILD SCALE

• ADD PARTNERS

• CADILLAC ROLE

30Jump Starting Innovation Amid Market Volatility


Well behind industry…

Slightly behind

industry16%

On pace with industry

33%

Slightly ahead of industry

32%

Leading the industry

14%

Given the dynamic pace of industry change, describe your firm’s pace of innovation.

Innovation Capital StrategyTo what extent does your company’s capital strategy support dimensions of open innovation, which includes working with

external partners?

Not at all3%

Minimal11%

Moderate36%

High39%

Very high11%


Driving Innovation


Jump Starting Innovation Amid Market VolatilitySource: www.wired.com


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 PlanningOver the next 12 months, what is the likelihood that your company will make acquisitions and/or divestitures?

Suppliers are actively assessing acquisitions and divestitures; acquisitions from larger companies, divestitures from smaller (ref appendix)

34Jump Starting Innovation Amid Market Volatility


Roadmap

• Market Outlook



• Takeaways

“A crucial battle has begun -- not one about winning or losing, but one about surviving or dying.”

Akio ToyodaToyota Motor Corp. President

“This is an era in which the correct answers are unknown.”

“Cost reduction is crucial. It is a fight to restore our original strength.”

37

• Growth: Surge intensifies competition; amplifies risks & rewards

• Culture: Humble, Curious, Inventive, Collaborative, Resilient

• Strategy: Counter-cyclical innovation planning; Maximize SPEED!

• Flexibility: Liquidity is key; vital to balance ‘Core’ vs Emerging

• Stretch: Align BEV opportunities with capabilities, sweet spots

Takeaways

Jump Starting InnovationAmid Market Volatility

Mike JacksonExecutive Director, Strategy and ResearchOriginal Equipment Suppliers [email protected]+1-248-430-5954

South Carolina Automotive SummitFebruary 21, 2019

mailto:[email protected]

jump starting innovation amid market volatility · 2019-02-28 · interest rate on new car loan...

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