Hardware - And Software-Focused Suppliers
The industry is comprised into hardware-focused suppliers that provide the OEMs with traditional parts (old cos.); software-focused tech companies that are disrupting the industry in electrification, autonomous vehicles, mobility, and connectivity (new cos.); and well-established OEM and tech giants trying to navigate both areas, while remaining relevant and profitable through vertical and horizontal integration strategies.
Traditional suppliers are expanding technical centers that focus on mechanical engineering in key automotive hubs like Detroit, with facilities aiming to attract and retain talent and, at the same time, looking for cost-effective, skilled labor for manufacturing and just-in-time (JIT) operations in the U.S. Midwest and South, competing on very low margins to grow or retain OEM business. In either scenario, labor availability/cost and availability of existing facilities are creating pressure on the industry in key submarkets, while trade tariffs and USMCA guidelines are impacting FDI decisions; e.g., Ford Motor Co paid a $65 million penalty in 2017 to cancel plans for an automotive plant in San Luis Potosi, Mexico, transferring the project to China; one year later, in 2018, Ford announced a $740 million+ investment into a new “innovation hub” for future transportation in downtown Detroit to attract a millennial workforce.
Meanwhile, software-based tech suppliers are growing through acquisitions of startups and looking for software engineers with AI experience in key markets like Silicon Valley. These suppliers have much more financial flexibility to pursue new investments, but the competition for labor in this sector against many other tech giants makes organic growth opportunities limited and plug + play acquisitions more likely. Furthermore, many software-based suppliers are coming to the realization that they also need the experience and resources of the traditional suppliers and engineering talent in markets like Detroit; e.g., Waymo, Google’s self-driving affiliate and subsidiary of Alphabet, partnered with American Axle to repurpose a plant in Detroit to provide final assembly on Chrysler Pacifica’s and Jaguar’s I-Paces for its commercial fleet. We have also seen most of the OEMs and Tier-I companies establish a presence in Silicon Valley.
Labor Comes First
As traditional suppliers and tech-based suppliers continue to integrate, it is clear that labor availability and cost — whether in key automotive/tech hubs like Detroit or Silicon Valley, in urban CBDs where they’re hoping to attract millennials, or in the skilled labor pools of the U.S. Midwest or South — will be the horsepower these companies need to compete and succeed. So how do labor and other factors play a role in the site selection process for these suppliers, and what strategies are they using to overcome these challenges in order to unlock the best growth opportunities?
Understanding labor availability, cost, and unionization, as well as looking at secondary/ untapped labor markets, is more relevant than ever before. Labor comes first, period. Understanding labor availability, labor cost, and unionization, as well as looking at secondary/untapped labor markets, is more relevant than ever before as labor capacity across the board has become more and more scarce. Individual states and local EDCs can supply information on specific workforce availability and cost through NAICS codes during the site selection process or by using labor analytics tools (e.g., EMSI) to determine top locations based on specific MSA variables including total workforce and earnings. Along with regional STEM initiatives and training programs, this can lead to site selection decisions in secondary markets.
Importantly, suppliers should not rely on small pockets of labor or cannibalizing the pre-existing labor market, but instead look at the criteria — high quality life, a labor market that isn’t totally saturated, local schools and training options — that will be most favorable to a strong, sustainable labor pool.
- Below are some examples of states leading the way:
- Arizona’s governor signed an executive order to create an ecosystem with the state’s academic institutions and DOT to support the development and testing of autonomous vehicles, which has attracted companies like Uber, Waymo, and GM; and Lucid Motors just announced a $700 million electric vehicle manufacturing plant in Casa Grande, Ariz.
- Michigan, on the other hand, has developed the American Center for Mobility, a 500-acre state-of-the-art proving ground for the testing + validation and product + standards development related to connected and automated vehicles. The project — located in Ypsilanti, Mich., just down the road from the University of Michigan in Ann Arbor — is also developing an on-site tech park to give partners and suppliers the opportunity to build/lease on-site technical centers to leverage the largest density of automotive talent/mechanical engineers anywhere in the U.S.
- Alabama has also been seeing more large automotive projects like the Toyota-Mazda plant in Huntsville, due to having one of the largest skilled labor pools and mechanical engineering pools outside of Detroit, as the economy has shifted from the textile to the automotive industry. Due to this shift, Alabama has found the unique opportunity to reposition its workforce.
- Another example of developing a unique workforce is the Ph.D. program for automotive engineers at Clemson’s CU-ICAR in Greenville, S.C. This program focuses on electric vehicles and is one of the only graduate programs of its kind in the U.S. CU-ICAR also has an on-site tech park to give partners and suppliers the opportunity to locate technical centers on site.
Availability of existing facilities/creative reuse vs. the timing and cost associated with a greenfield project — including utility + infrastructure cost and local zoning and regulations — also plays an important role in where to locate, as vacancy rates in most markets have fallen below 5 below. Finding an existing facility that meets all of a supplier’s operational goals and objectives can be very challenging, whether that is trying to achieve a density ratio of 6 employees:1,000 square feet in a CBD/submarket that does not have ideal public transportation for its workforce, adjacent parking solutions, and zoning restrictions; or trying to achieve speed to market when finding large footprints in markets that have limited existing product; or tertiary markets with a limited labor pool. The best opportunity resource a supplier can give themselves is time to complete full due diligence on all viable options, including creative reuse options.