OESA Event Calender

Upcoming OESA Events:

Apr. 27 GM Purchasing/Supply Chain Town Hall

May 5

May 12 Strategic Insights Executive Series: EV Sector Learning: Driving Momentum and Scale

South Carolina Regional Supplier Meeting

May 24 13th Annual Purchasing Summit

Upcoming 2022 OESA Town Hall Meetings

Mark your calendar for the Members-Only OEM Town Hall Meetings

April 27 GM Town Hall

July 27 Toyota Town Hall

Sept. 20

Nov. 29 Honda Town Hall

Ford Town Hall

Upcoming Council Meetings:

Apr. 6

Apr. 12

Apr. 14

Apr. 19

Apr. 21 Automotive Public Relations Council

Advanced Technology Council Tooling Council Council Legal Issues Council

Human Resources Council

Apr. 26 Young Leadership 9 Council

Apr. 28 Emerging Leadership Council

Insight from the McDonald Hopkins Automotive Practice Group

Automotive industry

outlook: Planning for the changes ahead

By Stephen M. Gross

McDonald Hopkins PLC Chair, Automotive Practice Group Co-Chair, Business Restructuring Department

The auto industry has experienced extreme change over the past few years. Just over two years ago, volumes were projected to remain stable and the industry was considering both a long-term conversion to EV and the impacts of automated driving. Today, as a result of COVID, North American volumes plummeted and are not expected to return to pre-pandemic levels until 2023 or 2024. Nevertheless, even with a partial recovery to about 15 million units in North America, OEM profits are solid. The total retail spend on new cars is up 13% due to prices increasing 29%. The OEMs also now operate with less inventory and are not likely to return to prior inventory levels anytime soon. The situation for suppliers, who mostly have been unable to increase prices, is quite different.

Not only do suppliers now have to contend with reduced volumes, they must do so with little ability to plan. To allocate scarce chips to profitable vehicles, OEMs have developed a pattern of stopping and starting production, especially for lower priced vehicles. These changes are frequently done with little notice, making it difficult or impossible for the supply base to operate efficiently – especially when combined with other supply chain weaknesses.

The fragility of the just-in-time system is being tested and, in many cases, exposed. Recently, the shutdown of the Ambassador Bridge resulted in OEM plant shutdowns within 24 hours. On top of the stop-start-stop scheduling, suppliers are contending with increasing material and labor costs, and staffing issues (especially at the tier 2 and 3 levels where liquidity is often less available), as well as difficulties in procuring materials to meet customers’ just-in-time needs.

Suppliers with facilities in the EU and elsewhere are also constrained by the near impossibility of reducing employment to efficient levels, and have an even more difficult time closing unprofitable facilities. With volumes not expected to return to pre-pandemic levels until 2023 or 2024, suppliers are left with many months of managing both liquidity (especially if interest rates increase as projected) and increasing production (unless material supply chains and customer scheduling improve). Coupled with these short-term issues, OEMs have accelerated the move to EV. Over 200 EV launches are planned by 2028, with nearly half being new vehicles. The OEMs’ stated timeline for the transition continues to shorten. Most OEMs intend to have the bulk of their production be EV by 2030 or 2035. Ford has even announced that it will split its EV and ICE production into separate business units.

However, unlike the industry’s growth over the past 100 years that was fueled by market demand, actual market demand for EVs is still speculative. Absent cost reductions to make EVs more affordable, subsidies will be required to support volumes. Forcing a migration of a relatively constant volume of vehicles from ICE to EV over a period of only a few years will dramatically

impact the supply base. Numerous constituents will be producing parts for ICE vehicles at reduced levels, with these suppliers needing significant capital to create or acquire EV component production capacity. Suppliers for EVs will have to anticipate reduced volumes, when sales of new EV models increase (if they increase).

These dynamics make maintaining production and cash flow difficult and planning almost impossible for suppliers; however, auto suppliers have demonstrated time and time again they are resilient. While these conditions will create supply disputes, liquidity issues, and lead to consolidation, they will also result in opportunities. Change always creates winners and losers.

About our Automotive Practice Group

McDonald Hopkins has successfully advised automotive suppliers for over 40 years. Whether the issue is the need for price increases, IP licensing, supply disputes, mergers and acquisitions, HR and employment matters, regulatory matters, or obtaining new capital, we have experienced attorneys ready to assist to enable our clients to avoid a crisis and to prosper.

mcdonaldhopkins.com 39533 Woodward Avenue, Suite 318, Bloomfield Hills, Michigan 48304

This content (©2022 McDonald Hopkins PLC All Rights Reserved) is designed to provide current information regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action. This material is not intended to create, and your receipt of it does not constitute, an attorney-client relationship with McDonald Hopkins.

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