The Automotive Supply Chain – Tier 2 and Tier 3 Suppliers – are Extremely Vulnerable
Automotive Suppliers Should Brace for Possible Strikes That Will Have a Domino Effect on the Entire Supply Chain
One area that has received little visibility as the Detroit 3 automakers and the UAW and Unifor negotiate future contracts is the impact a strike would have on the automotive supply chain –specifically the Tier 2 and Tier 3 suppliers who might be the most vulnerable if the auto industry shuts down for a prolonged period.
“Our recently finalized 2023 Harbour IQ Manufacturing Benchmarking study looked at the health of small to medium-sized manufacturers based on their 2022 performance and found that nearly 30% of the respondents were in poor financial health or what we call ‘unbankable’ and another 21% that are ‘somewhat bankable’” said Laurie Harbour, president and CEO, Harbour Results, Inc. “We have been collecting and reviewing profitability and debt-to-equity for years and we have seen a 10 point increase in the manufacturing companies that are not bankable from 2021 to 2022. This is the biggest jump in recent history. The suppliers in these two categories are at risk if the automotive industry experiences a long shutdown.”
Over the past several years manufacturers have experienced significant challenges – the pandemic, supply chain disruptions, material cost increases, weather disasters, increased cost of doing business, talent shortages – that have made it increasingly more difficult to be profitable.
In fact, in all manufacturing processes, we have seen profitability decline since 2017, even among top performers in manufacturing (10.9% EBIT in 2017 – 9.2% EBIT in 2022). Furthermore, the benchmarking study indicated that 84% of manufacturers predict flat or a decline in revenue and profit in 2023 based on information through June 2023. Finally, volumes have decreased since the pandemic and the average small to medium-sized manufacture is just under 60% capacity utilization.
This paints a bleak picture as the automotive industry faces a shutdown for those Tier 2 and 3 suppliers. A shutdown of more than two weeks resulting in a significant decrease in volume will create an untenable situation for many, which puts the entire supply chain at risk.
“Companies need to have a plan of how they are going to wind down their business and take out costs and, maybe even more importantly, how they will ramp back up after the strike ends to meet the demand. Businesses need cash to buy raw materials and secure talent for a ramp up and having a gap in receivables will make that difficult especially if the business is not in good standing with their bank.”
The impact of a long labor disruption will be far-reaching Anderson Economic Group estimates an economic impact of $5 billion for a 10-day strike for the state of Michigan alone. And, a $1.2 billion impact on manufacturing leaving the Tier 2 and Tier 3 supplier community as the biggest victim.
“Just this year, we have worked with six manufacturers to wind down or restructure their businesses. Our fear is that this could be the last straw for many based on the current state of the industry,” added Harbour.
*All data cited above is from the 2023 Harbour IQ Benchmarking Data which primarily collected 2022 data from manufacturers as well as some 2023 forecast data. The study was completed in mid-August 2023.
Who is Harbour Results?
Harbour Results Inc., is the leading manufacturing benchmarking company. The organization has been collecting data from 1,000 of manufacturers (stampers, die casters, metal formers, plastics processors and tooling) for the past eight years and provides trended data from the manufacturing supply chain (primarily Tier 2 and 3). They annually collect data from more than 600 companies typically under $500M in revenue and work with various industry organizations, businesses and the federal government to provide manufacturing data and insight. Additionally, HRI, founded the North American Automotive Tooling Forecast, which looks at the annual NA tooling spend by OEM and powertrain (BEV vs. ICE) as well as forecasted spend.
Frequently Ask Questions
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Over the past several years manufacturers have experienced significant challenges – the pandemic, supply chain shortages and disruptions, material cost increases, weather disasters, increased cost of doing business, talent shortages. This has made it difficult to run a profitable business and has put stress on the entire supply chain.
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The likelihood of a UAW strike is extremely high. A shutdown of more than two weeks resulting in a significant decrease in volume will create an untenable situation for many, which puts the entire supply chain at risk. Some experts are saying a strike could last as long as two months.
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The last national strike for the UAW happened 2019 and lasted six weeks. This strike was the first in over a decade and led to 48,000 employees on strike, caused 34 plants to halt operations and cost General Motors $4 billion. The supply chain in 2019 was not in poor condition like it is today. This makes the impacts of the 2019 strike on the entire automotive supply chain very different from what we can now anticipate, and they were felt well into 2020—further compounded by pandemic complications.
