Suppliers to U.S. Auto Industry Boost Investments in Plant Expansions and Retoolings

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Continued strong U.S. car and truck sales are driving billions of dollars in capital investments to upgrade and retool factories. These facilities make everything from tires to transmissions for new vehicles. In fact, investments related to vehicle tire-manufacturing plants have been driving overall project spending in the automotive sector for some time. Since the beginning of 2011, according to Industrial Info's North American Industrial Manufacturing Database, 50 capital projects worth an estimated $4.3 billion have kicked off at U.S. tire-manufacturing facilities. This total includes grassroot projects and expansions of existing plants.

David Pickering, Industrial Info's vice president of research for the Industrial Manufacturing Industry, emphasized the importance of tire-related project spending to overall capital investment in the automotive industry.

"Each new car gets five tires, and many times used vehicles get a new set of tires before they go on the sales lot," he said in an interview. "Each new vehicle only needs one transmission, but every new car or truck gets five tires. Simple math is what's behind booming tire factory expansions.

"We're not seeing billion-dollar grassroot development of new automobile assembly lines, but we are seeing components suppliers expand or retool their existing plants to increase production and match changes in demand. That's been the biggest trend post-recession."

The largest domestic automakers--General Motors (NYSE:GM) (Detroit, Michigan), Ford Motor Company (NYSE:F) (Dearborn, Michigan) and Chrysler Group LLC (Auburn Hills, Michigan), a unit of Fiat SpA--each posted double-digit sales gains for this past April, when compared with April 2012. U.S. automakers reported their strongest April unit sales totals since 2007. For April 2013, Ford recorded an 18% jump in comparable year-earlier vehicles sales, while GM and Chrysler each recorded an 11% gain. Analysts and automakers said pent-up consumer demand, plus generous incentives and the gradual increase in consumer confidence, all contributed to strong April sales.

"U.S. automakers have adopted a 'just-in-time' approach to manufacturing, but the March 2011 earthquake and tsunami in Japan disrupted a lot of supply chains for the industry," Pickering said. "Vehicle production was interrupted because some parts manufacturing and paint production were concentrated in Japan, and production was stopped by the tsunami and earthquake. Since then, U.S. automakers have been sourcing more parts locally. They still practice lean inventory management, only now more of the inventory is sourced locally rather than globally."

U.S. carmakers closed 20 to 25 assembly plants during the "Great Recession," which officially lasted from late 2007 until mid-2009. Hundreds if not thousands of suppliers to the industry also closed, Pickering said.

Over the last three years, the U.S. economy has grown slowly and unevenly, at least according to changes in the gross domestic product (GDP) and employment. But Pickering said consumer confidence has recovered enough to support strong new-vehicle sales. Also, since a large proportion of U.S. vehicles are leased, consumers are forced to trade in those vehicles every few years, which supports new vehicle sales as well.

For the remainder of 2013, automakers and their suppliers are scheduled to begin work on 58 capital projects valued at about $2.5 billion, according to Industrial Info's North American Industrial Manufacturing Database.

"This is getting close to what the industry was spending on capital projects in the years before the Great Recession," Pickering said. "Evidently, automakers and their suppliers see current levels of demand as sustainable, so they're investing in plant expansions and retoolings."

Pickering pointed out that truck sales are a leading indicator for overall vehicle sales, and that trend supports an optimistic outlook for capital and maintenance project spending for automakers and their suppliers. Sales of Ford's F-series pickups rose 24% in April 2013, while sales of Chevrolet's Silverado line rose 28%. Dodge's Ram series of pickups also reported strong April 2013 sales gains, when compared with April 2012.

"Most trucks are purchased by companies engaged in construction or agriculture," Pickering said. "They put a lot of hard miles on those vehicles in a short period of time. A surge in new truck sales tells me that companies in those industries are replacing their existing vehicles as well as buying new vehicles, probably because their business is picking up."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.