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Carmakers strain suppliers

50% surge in US models leaves scant stock at parts companies

– Automakers plan to introduce 61 new or redesigned models in the United States this year, 50 percent more than any year since 2006. While the resurgence gives consumers more choices, suppliers could be hard-pressed to keep up.

“As the demand continues to heat up, we are potentially looking at some areas of the market that could be running short in terms of supply,” delaying the introduction of new models, said Jeff Schuster, senior vice president of forecasting at LMC.

“That really is where the risk is. The buyer who wants to come in, they want a vehicle now.”

Auto parts suppliers cut thousands of workers and closed factories during the industry’s collapse, and the survivors are stretched after three years of at least 10 percent U.S. vehicle-sales increases. Scarred by the recession, many are cautious about adding engineering or manufacturing capacity.

Adding to the pressure, new models introductions may rise to 74 next year, compared with 40 in a typical year, Schuster said.

“I get a sense that a number of companies have panicked a little a bit, and they’re pushing product into the marketplace just a little bit too early,” said Dennis DesRosier, president of DesRosiers Automotive Consultants in Richmond Hill, Ontario.

Since accelerating production can lead to defects, he called this month’s Detroit auto show the “riskiest” he has seen.

Many of the best-selling models of the 2013-14 product wave were featured at the auto show this month. General Motors displayed new versions of its Chevy Silverado and GMC Sierra pickups, which go on sale in the second quarter. Toyota showed a concept design for its next Corolla, and Honda’s Acura revealed its new MDX sport-utility vehicle.

Late next year, Ford will begin selling a new version of its iconic F-Series, the top-selling U.S. vehicle line for 31 years, and it has teased pickup buyers with a brawny, fuel-efficient concept truck. The automaker is ramping up production of the Lincoln MKZ midsize sedan, its turnaround car for the luxury brand.

Sales competition

Automakers are racing to brighten stale showrooms with new models to attract the growing number of vehicle shoppers. Any delay in the release of a new model, quality defect or shortage of options can harm sales and give an advantage to competitors.

Chrysler Chief Executive Officer Sergio Marchionne said the company erred in introducing the Dodge Dart with only a manual transmission that was unpopular with U.S. drivers. Ford had four recalls on its redesigned Escape SUV and two on its new 2013 Fusion sedan last year.

Automakers will remain under pressure to keep their products fresh because new models “age very, very quickly” and then they must rely on expensive incentives to keep sales going, said Jeremy Anywl, vice chairman of Edmunds.com, at the Detroit auto show.

So even though it’s risky, the car companies have to keep pushing, he said.

“I think there’s definitely going to be problems,” he said. “Where car company suppliers are really pushing to maintain the volume, sometimes quality slips. We’ve seen that happen.”

Restructuring

The ripple effects of downturn and recovery on the supply base have created challenges throughout the industry, including at Ford, CEO Alan Mulally told reporters this month after discussing recalls of the Escape SUV.

Suppliers “really had to restructure,” he told reporters after a speech at the Automotive News World Congress in Detroit. “So the issues that we’re seeing are mainly associated with them just being able to go back up and come back up.”

U.S. auto sales may climb this year to 15.1 million – the average of 18 estimates in a Bloomberg survey of analysts – from 14.5 million in 2012. The industry is benefiting from consumers’ replacing cars and trucks that are, on average, the oldest ever on U.S. roads. The gain would be the fourth in a row since the 2009 U.S. government rescue of GM and Chrysler.

Supply constraints

The U.S. auto industry will produce roughly the same number of vehicles as in 2007 with nearly 100,000 fewer employees, according to the Original Equipment Supplier Association, a trade group for parts makers. That includes the roughly 100,000 jobs that auto suppliers have added in the U.S. since 2009.

More suppliers this year expect manufacturing capacity constraints, overtime pay for production workers and shortages of skilled labor, according to a survey of parts makers by the OESA released this week. Supply constraints will probably be concentrated in materials, engine components, electronics and capital equipment, respondents said.

U.S. auto suppliers are using 82 percent of their production capacity, according to a November OESA study. For some parts, including those that require casting and forging, capacity utilization may exceed 90 percent, said Jeoff Burris, founder of Advanced Purchasing Dynamics Inc., a consulting firm that works with auto suppliers to improve purchasing.

“It’s commodity by commodity where you’re running into the issues,” Burris said. “Some foundries have been taken off line and dismantled, and some still haven’t been able to get back up to peak capacity. That’s creating issues.”

Prices rising

Demand for auto parts is keeping suppliers busy and driving up stock prices. Delphi Automotive forecast it will top last year’s $24 billion in future business, with new contracts from companies such as Volkswagen and BMW.

The company’s stock gained 78 percent last year and on Jan. 2 reached a post-bankruptcy high.

BorgWarner Inc.’s $2.3 billion backlog from 2013 through 2015 helped the maker of turbochargers rise 19 percent over the past six months.

That’s more than double the 8.8 percent gain of the Standard & Poor’s 500 Index.

Job-creating investments also follow. Denso Corp., the partsmaker 23 percent owned by Toyota, said this week it plans to invest $750 million in the U.S. over the next four years to meet demand for parts such as auto-climate systems and radiators, adding more than 1,200 jobs in Michigan, Tennessee, Iowa, North Carolina and California. Denso reached a four-year high this week.

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