United States: Navigating Peaks And Valleys: The OESA's Industry Outlook Panel

The Original Equipment Suppliers Association (OESA) celebrated its 20th Annual Conference this week in suburban Detroit under the theme: "Transom Innovate Lead." And while this year's discussion that occurred the day after Election Day was dominated by trade and tariff concerns as well as discussions of talent strategies, leadership and technology, the afternoon session included a discussion of the North American automotive outlook in a session called "Navigating Peaks and Valleys."

Mike Jackson, Executive Director of Strategy and Research for the OESA moderated the panel, which included Emily Kolinski Morris, Chief Economist, Ford Motor Company; Michael Robinet, Managing Director, Automotive Advisory Services, IHS Markit; and Ryan Brinkman, Senior Automotive Equity Research Analyst, JP Morgan. And while the panelists sounded an overall theme that we continue to be in a good automotive market in North America, their level of enthusiasm varied with Mr. Brinkman at the high end and Mr. Robinet striking a more cautious tone, with Ms. Morris somewhere in the middle. All of the panelists noted the risks, headwinds and increased cautionary sentiment that the industry is experiencing as we are set to complete another positive year in one of the longest positive automotive industry cycles on record.

Mike Jackson reviewed the OESA's most recent sentiment surveys, including a very strong start to 2018 (a sentiment of 57, with 50 being neutral) that followed a good 2017. As the real and perceived impacts of trade policies took hold this year, the second quarter sentiment survey fell to 52 and the third quarter fell to 43. In addition to trade concerns, higher costs and greater CAPEX requirements have weighed increasingly on the minds of suppliers as 2018 has unfolded, he noted.
Emily Morris Kolinski asked the question: "Is the U.S. nearing the end of a long expansion?" She noted that by 2020, she sees certain factors that will make it a slower growth year (rather than a "recession year"), while the usual suspects that could cause a recession such as an overcorrection by the Fed with too rapid tightening or rapid oil price increases do not seem to be in the cards.

Mike Robinet noted that he is seeing "a lot of trepidation" in the automotive market in North America, in part caused by the unknowns and risks that are facing the market. These include trade and regulatory policy, higher commodity costs, the proliferation of launches, the impacts of ACES (Automated, Connected, Electrified and Shared) and other factors. Mr. Robinet sees a pattern of "multi-speed" growth in the world, with some regions performing better than others but noted that in North America "the trend is in a slight decline or plateauing." A large stormcloud on the horizon is increased producer price indices impacting the automotive market generally, including the steel PPI, he noted. This will disproportionately impact spot buyers of steel vs. larger companies that spread their steel purchases over three-year periods, as a "true escalation" in steel prices takes hold.

In terms of North American sales expansion, Mr. Robinet noted a 2% projected CAGR for the 2018-2025 forecast period, vs. the 6% CAGR that the industry has experienced this decade (chopped about 2/3). Most of the forecast global industry growth over the same horizon will be concentrated in China and India, he believes. In terms of the Detroit 3 production, Mr. Robinet forecasts a 4% decline in both 2019 and 2020. In 2019, we will experience an "artificial peak" in launches, which will provide good volume but which pose a lot of complexity and risk for the industry. By 2020, the mix of C/SUV's to sedans will reach 3.1:1 he projected, nearly double the rate of 2015.

As in the past, Mr. Robinet noted the potential for North America to become a "technology desert" in the area of emissions, as other global automotive regions move forward with stricter emissions standards. Overall, Mr. Robinet noted that "nothing is apparent that is going to stop the train," but he sees risks and uncertainties as we move forward into a "slight trough" (especially depending on which platforms an auto supplier is on).

Mr. Brinkman from JP Morgan noted that dollars spent on vehicles in the U.S. remained unchanged this year; Europe is expected to remain solid; and China is an area of concern as recent SAAR levels are down 14% (but only 2% on a year to date basis). Over the long term, he views China sales as "up and to the right" as new buyers come on line (60% of buyers in China this year are buying their first car). He echoed Mr. Robinet's concerns on commodities prices, and forecast a 150 basis point negative impact on profitability in North America over the forecast period. Mr. Brinkman remains very bullish on auto stocks, noting historical EBITA multiples of 5.3x compared to 5.8x currently, but which have been averaging around 7x since the Recession and accordingly may have room to grow. He noted that while certain things may "muddy the waters," he did "not think the water is that dirty" right now.

In the Q&A session, Mr. Brinkman noted the proliferation of EV nameplates and their challenging profitability picture, and offered up his own formula: "electrification is inversely related to profitability." The panel was asked how suppliers can properly diligence the various EV opportunities that OEMs are pursuing, and some questions that might be asked included: (1) how important are EV's to the OEMs compliance strategy? (2) what other OEMs are in this segment/what does the competition look like? and (3) can the OEM scale production, including to other global markets?

From an overall perspective, Ms. Kolinski Morris agreed with the thesis of the other panelists that the automotive industry "is not running far ahead" of its long term trend lines, and does not see a picture where we "fall off a cliff" (if so, the "cliff is not too high right now," she noted).

On the whole, the only certainty for 2019 is risk and change, which could otherwise negatively impact an automotive supply industry in North America that continues to be good by almost all historical measures. Overall, the panelists predicted a sales rate in the low 17 million unit range for 2019, respectable to say the least.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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