Automotive Suppliers Sentiment Improves

The Original Equipment Suppliers Association (OESA) Automotive Supplier Barometer is a bi-monthly survey of the top executives of OESA regular member companies. The Barometer takes the pulse of the suppliers’ twelve month business sentiment. In addition, the Barometer provides a snapshot of the industry commercial issues, business environment and business strategies that influence the supplier industry.

The Barometer provides an on-going profile of the supplier industry. Following are excerpts from the most recent Barometer’s findings.

• Coming in at 73.1, the OESA Supplier Sentiment Index remained solidly optimistic about the next 12 months. While it was expected that the index would slip back as respondents changed their views from becoming more optimistic in the November survey to “no change” in the current survey, 75 percent of the respondents noted they were “somewhat more” optimistic than they were two months ago.
• Respondent quotes show optimism being driven in three specific areas:
  -- Automotive revenue growth: “There has been a marked increase in demand for current products and we have seen positive new business wins during the period.”
  -- Diverse market revenue growth: “We landed non-automotive and automotive work that will make 2010 positive regardless of car build levels.”
  -- Competitive cost structures: “We have dramatically lowered our breakeven point and expect the next 12 months to continue above this level.”

• The financial health of the suppliers appear to have stabilized – at least in the short term. Only 10 percent of the respondent report that they are in violation of their loan covenants. This was as high as 25 to 30 percent in the 2nd quarter 2009. However, the crisis is not behind the industry as 5 percent of the respondents who are not in violation report that they may be in violation in 2010.
• The cost and availability of credit remains an industry concern. While the majority of respondents state their banking terms have remained unchanged over the past three months, over 20 percent of the respondents note tightening terms in their maximum size of credit lines, the cost of credit lines, commercial loan interest rates and commercial loan collaterization requirements. ????Overall, the sample is confident they will have access to capital required for inventory financing, plant and equipment investment and other working capital needs. The greatest concern is adequate capital for merger and acquisition transactions.
• The Barometer probed issues suppliers expect to encounter as industry volumes return over the first quarter 2010. The most significant issues include:
  -- Production overtime premiums (76 percent of respondents)
  -- Outbound/inbound premium freight (51 and 62 percent of respondents, respectively)
  -- Raw material shortages (56 percent of respondents)
  -- Finished component shortages (40 percent of respondents) In addition, 40 percent of the respondents expect skilled labor shortages. Surprisingly, only 8 percent of the respondents believe liquidity issues will be a concern.
• The concept of running assembly plants around the clock on three shifts is being explored. Here, the suppliers have the greatest concerns around workforce staffing, production schedule stability, raw material availability and supply chain capabilities.
• Capacity rationalization continues to be a critical issue. Overall, for their primary product, the respondents estimate that 15 percent of capacity was rationalized in 2009. To reach full capacity in a 15 million unit production market, the respondents estimate another 18 percent needs to be taken out. As shown in questions 7a and 7b, there is a wide deviation around the “average” estimate of rationalization.
• Finally, a full 35 percent of the respondents believe they will need to change their benefit packages to reflect the health care reforms being proposed in Washington.