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Parts Shortages Could Cripple Auto Market Rebound

After recession, suppliers racing to rebuild capacity.

by on Aug.12, 2013

The 2014 GMC Sierra 1500 Denali gets a new face, upgraded interior and more power and it's one of many new vehicles buyers are flocking to showrooms to buy.

The good news is that American motorists are racing back to showrooms at a far faster pace than even industry optimists had anticipated at the beginning of the year. The bad news is that automakers are struggling to keep up with that burgeoning demand – and part of the problem is that after years of cutbacks and bankruptcies, industry suppliers can barely keep up.

That could be particularly troubling for Detroit makers who made some of the biggest cutbacks in capacity during the Great Recession only to find that they can’t keep up with consumers as they return to showrooms.

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“It’s amazing if you look at the change,” says Mustafa Mohatarem, General Motors’ chief economist. “At the beginning of the year people were asking do you have too many truck. Now we’re being asked are you sure you are going to have enough?”

New vehicle sales plunged by nearly 40% during the recession, reaching their lowest level in decades and forcing both GM and Chrysler into bankruptcy. Dozens of key suppliers, including Visteon, Delphi and Tower Automotive, also went through the Chapter 11 process.

Lincoln's MKZ sedan is drawing buyers to showrooms.

That led the industry to shutter or mothball scores of factories across North America in the hopes of maximizing capacity utilization once the economy began to rebound.

The U.S. market has been climbing back since 2010, reaching 14.5 million last year, which was still almost 3 million units short of its one-time record. But where analysts and industry planners were anticipating demand might reach somewhere between 15 million and 15.3 million for 2013, the pace has quickened far faster than anticipated – in part due to a surge in pickup sales driven, in turn, by a nascent recovery of the U.S. housing market.

All three of the domestic makers are racing to rebuild production capacity. Ford, for example, has increased the line rates at virtually every one of its North American plants and just announced a third shift for its St. Louis F-Series pickup line.

But the bigger question is whether the makers will be able to get the parts they need from suppliers to keep their factories going. It takes only a single missing part to bring an assembly line to a halt, as the industry discovered on numerous occasions when sales were hitting their peak a decade ago. But now, with suppliers having made some of the sharpest cuts during a recession, that’s again become a serious risk.

Federal Reserve Board data showed that auto suppliers, on the whole, have a fair bit of remaining capacity, operating at about 79% of normal straight-time capacity during June, but a report by the Detroit Free Press warns that about a quarter of the industry’s parts makers are actually already at the 100% level.

That doesn’t mean there’ll be immediate shortages. Parts manufacturers are already looking for ways to break manufacturing bottlenecks and, like Ford, they can take steps such as adding third shifts and more overtime. But some have reportedly already gone that route and are being hard-pressed to keep pace with the market’s recovery.

(U.S. automakers struggling with capacity issues as market rebounds. Click Here for more.)

“The cardinal sin is you never shut an assembly plant down,” David Andrea, senior vice president for the Original Equipment Suppliers Association, told the paper.

But there’s another rule manufacturers have tried to get suppliers to honor: never cut corners in order to meet production targets. In today’s industry, automakers routinely use key components on a variety of different vehicles in order to increase economies of scale. But while that can reduce costs it also leaves makers more vulnerable if there is a defect. That became particularly apparent over the past year when problems with faulty airbags and defective power window switches each led to the recall of millions of vehicles – in both cases affecting numerous manufacturers and models.

(Click Here to read more about GM’s looking to save $1 billion through logistics.)

After hammering suppliers when they cut orders during the recession, automakers are now trying to lend a helping hand. General Motors’ global purchasing chief Grace Lieblein noted during an industry confab in Traverse City, Mich. last week that the maker has put 200 of its own quality engineers into the field to work with suppliers. Ford has taken a similar step with 200 of its own engineers.

Meanwhile, suppliers are taking aggressive steps to increase production hoping to take advantage of the good years following so many bad. But whether they can pick up the pace quickly enough remains to be seen. If not, consumers could see unexpected shortages of key products in the months ahead.

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