Shifting Focus to Rising Costs

Welcome to a new era of cost avoidance and risk containment.

January 1, 2019

Michael Robinet

According to the Federal Reserve, despite moderating oil prices, the Automotive Producer Price Index has been rising year over year since December 2017. (CC BY-SA 3.0)

Welcome to 2019, a new year that’s already brimming with challenges for mobility-industry suppliers. As they deal with escalating technology investments, unpredictable product-launch cadences, an influx of non-traditional competitors, extreme U.S. import tariffs, and other factors, most suppliers (and their OEM customers) are in a reactive mode to stabilize the bottom line.

The tariffs – 25% on steel and 10% on aluminum – have been a thorny issue since March 2018. According to IHS Markit, the Steel Producer Price Index in September 2018 was up over 22% year over year, significantly impacting material economics for this metals-intensive industry. Exposure to such unplanned economic price hikes depends upon who is the importer of record, as well as whether or not they’re participating in OEM material resale programs.

Some tools and automotive components sourced from China are already subject to U.S. tariffs, ranging from 10% to 25% depending upon the situation. When the China tariffs were imposed last July, several suppliers and OEMs scrambled to airlift molds back from China before the deadline. In doing this they incurred premium freight charges. Paying an unanticipated $25,000 at the border for a $100,000 mold landed after the deadline will upset any income statement. Capturing these additional costs after the fact with your customer is a difficult balancing act indeed.

Downstream, increasing material prices and the impact of tariffs are having an impact on vehicle costs. Despite the positive impact of recently moderating oil prices (allowing some relief on resin), the Federal Reserve Automotive Producer Price Index has been rising year over year since December 2017. Over the past few months this index has been up an average of 2-3%.

The tight labor market plays a role: While U.S. unemployment is at a healthy 3.7% (as of late November ’18), the industry continues its struggle to find skilled and semi-skilled workers. Non-farm payroll wages rose almost 3% in 2018 and are forecast to continue rising in 2019, according to IHS Markit. Suppliers used to employ factory automation to substitute for tight labor markets, but this has slowed due to shortages in machine build and construction trades.

Moving finished products is also getting expensive. Beyond the well-publicized driver shortages in the logistics industry, costs are rising. Last year, the IHS Markit Transport and Storage index outlined a jump of 7% as the economy sustained its strong pace. Though more modest, the forecast calls for costs to rise over 3% on average over the next three to four years.

If that’s not enough of an alarming outlook for you, there’s more: Expect an increase in the cost of borrowing money. A handful of U.S. Fed Fund Rate increases are forecast for 2019; these may well carry over into 2020. Other factors such as erratic exchange rates will impact suppliers’ overall costs unless an organization is ‘currency neutral.’

And no less critical will be the cost of compliance. Though still to be ratified by all parties, there is little doubt that suppliers and OEMs will bear the cost of additional reporting for the U.S.-Mexico-Canada Agreement—the trade pact formerly known as NAFTA. Another concern is warranty exposure, to which OEMs have shown a heightened awareness and swiftness to respond.

Of course, the vehicle buyer is the final arbiter regarding the industry’s rising costs. According to Autodata, overall U.S. new-vehicle incentive spending was up over 3% for 2018 through October. OEMs will likely pull back on incentives to raise transaction values and achieve moderate economic relief. Eventually, production volume will suffer as consumers start to feel the impact of higher new-vehicle transaction prices—averaging nearly $36,000 as of 3Q2018.

The next few years will be an era of cost avoidance and risk containment for suppliers. Being flexible and innovative to aggressively attack issues, re-source problem components and guard against over-exposure to any one segment, supplier or customer will be paramount for survival.