The automotive industry team at Bank of America Merrill Lynch (BofAML) spends its days fine-tuning and funding the strategic plans of middle-market parts suppliers. What do these companies say are their most pressing concerns as the new year begins? Globalization and capacity.
But there is a new twist on these familiar pressures — a paradigm shift toward what the BofAML team calls “manufacturing in theater.” OEMs expect suppliers to follow them around the globe, setting up shop near assembly plants instead of shipping parts around the world from one country to another.
This presents considerable risk to sup- pliers who must weigh which countries to enter first, then figure out how to go about it. All options are costly, but also potentially very profitable. BofAML sees these forces at work from the inside out as it helps its clients manage capital investments, acquisitions, joint ventures, international cash flow and currency fluctuations.
These clients cover the industry spectrum: raw materials producers, parts suppliers, OEMs, dealerships and consumers. Covering the full spectrum of the automotive ecosystem helps BofAML see trends and pressures before they become apparent to much of the rest of the world. Here’s more on these trends from my conversation with the BofAML team that included Matt Elliott, Michigan state president and commercial banking market executive, and senior credit officers Brian Kundich and David Komrska.
HOW DOES THE CAPACITY SITUATION LOOK?
The capacity envelope left after the economic crisis has been filled up. Now expansion is required to support an increase in sales volume. The slow growth of sales after the recession really delayed capacity concerns, but everyone knew we’d hit that wall eventually. Now we’re at the tipping point.
WHY ARE AUTOMAKERS SO KEEN TO BRING SUPPLIERS CLOSER TO PLANTS?
For one, OEMs want to shorten and strengthen their supply chains — it’s a lesson from the 2011 tsunami in Japan that highlighted weaknesses in the supply chain. At the same time, OEMs also expect suppliers to work at an international scale to support the automakers’ global platforms. So, for example, a manufacturer that wants to supply a part in North America also has to produce it in two or three other geographies. We call this “manufacturing in theater,” and it means the supplier either has to find a local partner or build a plant in that new location. Each option costs money and entails risk, but has the potential to be very lucrative.
WHAT DO SUPPLIERS HAVE TO DO TO GET STARTED, AND WHAT’S THEIR BIGGEST CONCERN WHEN PLANNING THESE GLOBAL STRATEGIES?
Getting the finances in place is usually one of the first orders of business. We have a client, a small public company, that knew it needed more of a global manufacturing footprint but was behind the curve. We first helped them increase debt capacity to make acquisitions. Then we helped implement a cash management system to handle the expanded global enterprise and we’re now reevaluating the capital structure to position the company for the next phase of growth. The company has made five acquisitions in the last 18 months in Europe and the U.S. The next project is a joint venture in China.
Another client of ours was thinking about buying a foreign company for the first time. The first thing on their plate was arranging a financial package — before getting into deep discussions with potential buyout targets. Their big concern in picking a financial partner was they wanted to know we had done it before, that we knew how to structure a deal and had the people who know how to do it. Clients like these are looking for an international bank. They’re saying, “We need a partner that can help us go to places like Europe, China, India, Brazil.” We have bankers who structure and advise automotive clients in those markets and they work alongside our local U.S.-based teams to deliver the entire global firm to the client.
WHAT ISSUES DO COMPANIES FACE IN THESE SITUATIONS?
There’s a lot of risk and complexity when entering a foreign market, and much of that stems from jumping into an unknown regulatory environment, which is why it’s important to bring in knowledgeable people. One supplier, a smaller public company, always had used a contract manufacturer to make its product, in what really was a two-player market — this company and a European company.
Our client wanted to buy their competitor, but it was three times its size, and was majority owned by a German hedge fund and a collection of individual investors. This supplier needed help financing the purchase and navigating German laws concerning tender offers and shareholder rights. It had asked a few banks for ideas and nobody came back with a great answer. They came to us and we recommended and executed a strategy for them, getting them financed and working through all the legalities, while arranging a cash management system for what had become overnight a global company. We were able to do this in a short time because of our in-market expertise.
WHAT OTHER PRESSURES ARE SUPPLIERS FACING?
Lightweighting (removing weight from vehicles), powertrain electrification, autonomous vehicle technology and mobility are coming into play. These developments will drive change, and change requires investment, talent and experience. Another big issue we consistently hear from business owners is that lack of talent is handicapping growth.
They’re also wondering about the sustainability of the current sales volume. Every supplier is skeptical of sales projections they get from customers. Excess capacity in this industry is not your friend if you’re a supplier. It’s a classic greed-versus-fear dilemma. To learn more, visit go.bofaml.com/auto.