The Automotive Supply Chain-Glass Half-Full

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The evolution of the automotive industry is happening before our eyes.

Jason Busch wrote about the failing automotive supply chain today on Spend Matters.  It is an excellent piece and points out two critical challenges facing a recovering automotive sector.

1. Lack of access to capital as OEMs ramp up production.

There is no question there is a major problem here and banks must start lending and be given incentive to lend.  There is so little justification to keeping the flow of capital tamped it is almost criminal for the banking industry to behave the way it is behaving.  Then again, it was the banking industry behaving irrationally and possibly criminally that put the U.S. economy into a tail spin to begin with.

2. Questionable supplier rationalization practices by the large automotive OEMs

As ever, Jason is well thought out, rational, and correct.  I am not a fan of the automotive industry's attitude toward supply management either.  However, I see an automotive supply base that is finally getting with the program and changing directions.  At the Detroit Auto Show this week there were a number of reasons to be optimistic.  There were several major announcements regarding retooling Michigan plants  for electric vehicles and green energy initiatives and we aren't talking about small investments. (The investments announced here are worth well over $1 billion)

General Motors, Ford, and especially Chrysler may be on the wane, but there are plenty of companies on the rise and they are all going to need suppliers who are experienced and invested in the manufacture of quality automotive components and associated goods.  It is an ever-growing number of potential new customers that are getting me excited about an increase in overall automotive supply health.

Greener automotive start-ups are achieving new heights every day.  Tesla Motors announced their newest model this week.  Fisker Automotive announced $115.3 million in private equity funding that will secure them access to a $528.7 million conditional loan from the U.S. Department of Energy.  In addition to their funding Fisker announced a major supply contract with A123 Systems to make batteries for the Fisker Karma. Bright Automotive is also floating major news about a joint venture.  Capital is flowing, but it seems like it is going to those trying to innovate, which is where the smart money should be.

It isn't just the domestic innovators that are making me feel better about the future of domestic automotive manufacturing.  I know that sounds strange, but Tata Motors announced it plans on bringing the Nano to the U.S. market in 2012.  The little car that changed the industry will need some re-engineering before it will be ready for American roads but it is coming.  North American manufacturers will eventually feel the benefit of the arrival, because almost every successful international auto-maker is currently building cars in North America.

My conclusion is one of optimism.  There are challenges we will all have to face in 2010, especially in the automotive sector.  The smart OEM is going to enable its supply base financially and be able to ramp up production as necessary.  The smart Tier 1 or Tier 2 supplier is going to focus on new business development and take advantage of a hungry market with open capacity to better serve their current customers.  The smart bank is going to get the money flowing and smooth the road for everyone.

David Landsman

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