First Person: Auto Industry Comeback Presents New Opportunities
One of Area Development’s staff editors recently interviewed Daron Gifford, the partner leading automotive industry strategy consulting at accounting firm and consultancy Plante Moran in Detroit. Gifford provides us with some deep insights into how the comeback in the auto industry has given new opportunities to the hundreds of Tier 1 suppliers that provide millions of parts to the OEM assembly plants, what’s driving this supply chain, and the new competitive issues facing the U.S. automotive industry.
Gifford: There are several trends that we’re seeing impact the automotive supply chain. First, there’s the geographic move toward a regional supply base. Automakers who operate large assembly plants want their suppliers near these plants. It’s obviously self-serving; they want access to components and fast response from their suppliers. Secondly, they’re reassessing the cost equation. What is the total cost to get the parts on the vehicle, which includes labor plus transportation? There’s also the quality factor: being responsive to engineering changes and problems that arise has driven the OEMs and suppliers to have the plants as close as possible.
AD: Many of the foreign domestics are encouraging their suppliers from Japan and Europe to locate in the U.S. Has that been successful?
Gifford: The suppliers are trying to follow their customer to maintain that close relationship benefiting both the OEM and the supplier. The European suppliers are close to their OEMs, and have built long-term relationships and trust that they want to maintain. BMW, for example, encourages their suppliers to come to the U.S. There are also the cultural aspects, particularly with domestic U.S. suppliers. The Japanese and European suppliers, as part of their OEM network, are closer to, and more aligned with, their customers.
Because the cultures are different, it takes time to bring production standards here. The Europeans are trying to move engineering to the U.S. so there’s not that huge distance between U.S. management and the “home office” in Europe. An interesting example of multiple cultures is Volvo, with a plant being built in South Carolina, managed by the Swedish, and being Chinese owned.
AD: It appears that the Southeast U.S. has fast become the new automotive region. Can you speak to that geographic movement? What are some of the benefits?
Gifford: It’s the need to be close to their U.S. customer base that is driving a lot of the movement. There is a large influx of automotive production from every major OEM, except for the domestic automakers. The Southeast has been attractive because those states have been aggressive in their willingness to make it attractive to locate OEM and supplier plants there.
AD: And the challenges?
Gifford: When the evaluation process is taking place, worker education and training is a key factor. That’s one of the challenges. The Southeast doesn’t have the same level of skills for the automotive industry as the Upper Midwest; while the skills may not be as high, the opportunity is good for the Southeast to provide jobs for their people. Historically employee development was thought of as soft money, but now it’s a direct investment. The automotive companies know they’ll have to spend the money to get the workers up to par. Southern States, such as Georgia, South Carolina and Alabama, have thrown a lot of dollars on the table, as well as provided funding for training and skills development.
Many skills are disappearing from the industry as older workers retire, particularly in the Upper Midwest, as that region has been slow to respond. Some workers may stay on longer, because of the economy, but over the next 10 years, these skilled workers will be retiring.
AD: What about the fact that the Southeast was attractive because these states are right-to-work states rather than unionized?
Gifford: The first wave of thinking was that this is a non-union region, but that’s becoming less of a differentiator. The unions understand the labor competition, but they struggle with an effective strategy to compete in the South.
AD: Mexico’s automotive industry is booming. Can you speak a bit about that trend and how it might be affecting U.S. automakers?
Gifford: That will be challenging to the supply base. We’re seeing the OEMs expanding and establishing new plants in Mexico for vehicle production, which has the Tier 1 suppliers evaluating how much it will cost to serve these OEMs, and how do they expand effectively? There’s a skills shortage in Mexico as well. There’s only so much expertise to go around, so we’re seeing a lot more plant automation. The suppliers already in Mexico are challenged, as they’re ?not always located where their OEM customers are putting in new plants. They’re trying to figure out whether to import parts from the U.S., ship from other plants in Mexico, or site a plant near the assembly plant. To do that, they need enough assurance they’ll get a return on their investment.
AD: What do you see as a major challenge of the future?
Gifford: Keeping up with change! The architecture of the vehicle will change drastically and will revolutionize the way the vehicle is structured and built. There will be 10 times the electronics in the car of the future than we have today; more electrification, electronics for safety, greater fuel efficiency — the overall structure of the car will be reformed. Artificial intelligence (AI) will change it as well. Toyota is talking about investing a billion dollars in AI so that the computer in the car can do what the human can do. The technology is out there, but the question is how long will it take to develop? And how smart will the car need to be?
Another challenge is people. The industry is growing so rapidly, and it’s so lean on expertise and skills that there’s a need to transfer production methodology, as well as management structure, from plant to plant, enabling these transitions. We’re definitely seeing more joint ventures with a supplier that already has a local operation. Suppliers will partner up rather than create their own greenfield facility.
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