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Market Report: Automotive Industry Breathes a Collective Sigh of Relief

"Automakers, suppliers, and dealers - every stakeholder involved with automobiles - is seeing some positive signs," says Chris Brower, manager, Global Automotive Advisory at KPMG, LLC in Detroit, Michigan. His cautious optimism is tempered by the inevitability that speed bumps will pop up during the recovery process.

April 2012
Toyota is shifting production of the Highlander SUV from Japan and expanding operations in Princeton, Indiana.
Toyota is shifting production of the Highlander SUV from Japan and expanding operations in Princeton, Indiana.
Executive Director of the Automotive Industry Action Group (AIAG) J. Scot Sharland concurs, adding, "Many companies had compressed their production and tried to maintain some level of profitability, and now we are collectively struggling to manage robust demand. That is a much better problem to have than the precipitous drop we have worked so hard to survive."

Automotive News reported that in February, U.S. auto sales rose 16 percent over last year "to the fastest selling rate in four years. The performance exceeded analysts' and automakers' forecasts." Sharland says that after the more than 30 percent volume decrease in the 2008 and 2009 timeframe, "We are very appreciative of the hand-up that we got from our government. In the last three or four years, very large players in the automotive industry were in acute economic distress, not just OEMs, but suppliers as well."

Brower pointed out that many variables affect business profitability for the auto industry, including currency, transit time, inventory and labor availability, regulatory compliance, and wage rates. Companies are also seeking sites with the least amount of risk from a natural disaster, political unrest, and economic instability.

In-Sourcing and Expansions
Some foreign companies have chosen to "in-source" back to the United States. In February, Toyota Motor Manufacturing Indiana, Inc. (TMMI) announced plans to shift production of the Highlander SUV from Japan and expand operations in Princeton, Indiana, creating approximately 400 new jobs by 2013. The Indiana Economic Development Corporation (IEDC) offered up to $2.7 million in conditional (performance-based) tax credits and up to $200,000 in training grants based on job creation plans.

Also in Indiana, Supreme Industries, Inc. a full-line manufacturer of customized truck bodies, plans to expand operations in Goshen, adding up to 350 new jobs to its work force of 630 people by 2015. The IEDC offered incentives of up to $1.5 million in conditional tax credits and up to $67,500 in training grants based on the company's job creation plans. Besides the incentives, the firm noted the state's labor force and strong heritage in specialty vehicles as reasons for expanding there.

"With nine interstate highways, three state-of-the-art international ports, and the second-largest FedEx hub in the United States, Indiana is where automotive companies from across the world come to find the resources they need for success," says Dan Hasler, Secretary of Commerce and CEO of the IEDC. "Add to this Indiana's central location, business-friendly environment, and skilled and reliable work force, and it's easy to see why a range of automotive-related businesses including Cummins, Delphi, Allison Transmission, Toyota, Honda, and Aisin U.S.A. call the Hoosier State home."

The good automotive news is not geographically limited, according to Sharland. "The automotive supply base is distributed throughout the continental 48 states, but especially has grown in intensity in the Southeast and Southwest." He says that economic development support at the state level has increased dramatically, with "technology incubators in conjunction with colleges and universities hitting on all of their cylinders to devise better ideas and better products."

Industry of the Future
Vehicles with creative power generation and advanced electronics will fuel the auto industry in the future, Sharland says. "Suppliers, OEMs, service providers, government, and academia must work together to take the sector to the next level, providing vehicles in a responsible way that provides a direct benefit to people, the planet, and our stakeholders." He notes that in Michigan, which was hit hard by the recession, "the R&D.and engineering centers for the major [automakers] will use their expertise to collaborate on solutions that will require new skill sets, and education that drives math and science skills to train the work force to fill these future jobs." He also notes that, currently, manufacturers are struggling to find workers with advanced technology and electronics skills.

Suppliers are also benefiting from the environmental focus. In March, Alcoa broke ground on an expansion of its Davenport Works plant in Iowa to meet the rising demand for aluminum. The expansion, which should be completed by next year, is expected to create an additional 150 full time jobs, bringing total employment to 2,300 people. An undisclosed economic development incentive package from the Iowa Department of Economic Development helped to clinch the expansion.

"The use of aluminum in the automotive market is expected to double, driven by the demand from consumers and OEMs alike for more fuel-efficient vehicles," says Kevin Lowery, director of communications at Alcoa. "With gasoline prices between $4 and $5 [a gallon] across the country, consumers want more fuel-efficient cars that are sturdy, safe, and are high performance, which leads them to convert to more aluminum. That's why we're spending approximately $300 million to expand our operations in Davenport, Iowa, to further expand our capabilities to supply auto customers. The incentives and cooperation we received from Iowa and our surrounding community made the decision to expand in Davenport and easy one. We're proud to say this will be the largest expansion at that plant in more than two decades."

Trickle-Down Effect
Even Evans Distribution Systems in Melvindale, Michigan, has felt the trickle-down effect. Leslie Ajlouny, the logistics company's vice president of business development, notes that the firm "supports automakers directly as well as a wide variety of Tier 1 and Tier 2 auto suppliers with complete supply-chain solutions. We have definitely seen an increase in activity through our warehouse facilities as the automotive industry continues its recovery. It's exciting to see new parts supporting new programs, increasing volumes for existing programs, and an overall increase in the velocity of inventory turns through our distribution centers. Our passenger and truck tire business is just one example - we have seen volumes of tires through our facilities more than quadruple over the last year alone."

As the auto industry continues to recover, other suppliers and service providers will surely benefit as well.

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