FOCUS ON FINANCE AND CAPITAL PLANNING OESA AUTOMOTIVE SUPPLIER BAROMETER Q4 2017 1
Executive Summary Supplier Barometer Index (SBI) SBI Score = 46; up from Q3 level of 40 Opinions have become more optimistic across most revenue groups; yet small companies are the exception. Inventories, production volumes and the political environment are holding sentiment down, below a neutral reading of 50. Poor vehicle sales moves ahead of trade policy as primary threat over the next 12 months Suppliers remain confident in their ability to deliver customer requirements Capital equipment purchases are the primary focus of suppliers in meeting targets for next year Talent continues to be a planning focal point as additional staffing for salaried and hourly personnel ranks as the next highest priority Income and operational investments are both expected to be lower going into next year, but relatively balanced in comparison to 2017 results Product development and direct material costs are also expected to increase Suppliers expect the current strong sales mix across Detroit Three, Asian and European automakers to be largely maintained Current and future sales mix reflects declines in share of sales to other tier suppliers and non-automotive firms 2
Executive Summary Suppliers remain active and engaged in assessing opportunities for acquisitions and divestitures compared to last year; acquisitions from larger companies, divestitures from smaller Acquisitions are being driven by the need to gain access to technologies and expand access to new customers Divestitures are being driven by the need to consolidate core business, selling off non-core technologies Skilled labor shortage remains the highest rated risk in both impact to business and difficulty in mitigating while the concern over emissions regulations is subsiding Supplier respondents feel better prepared to manage risks arising from an industry downturn 79% of respondents indicate they are somewhat more to much more prepared due to a stronger financial position and better diversification Suppliers continue to bank customers with days sales outstanding receivables Days payable outstanding is improving but reflects a cost that continues to be carried by the supply chain For 2018, suppliers plan the greatest budget increases in customer specific product development and in direct material prices Tight markets for technical talent and rebounding prices for metals and resins highlight cost pressures and drive the need for operational excellence 3
SUPPLIER OUTLOOK 4
OESA Supplier Barometer: October Results Describe the general twelve month outlook for your business. Over the past three months, has your opinion become? Current Supplier Outlook (Share of Respondents) 60% Q3 2017 Q4 2017 40% 80 70 60 Supplier Barometer Index: (SBI and 6m Average) Lehman Collapse 20% 0% Significantly more optimistic Somewhat more optimistic Unchanged Somewhat more pessimistic Significantly more pessimistic 50 40 30 20 Jan-2008 Jan-2009 Jan-2010 Euro Crisis Begins Jan-2011 Japan Tsunami/ Grexit Crisis Jan-2012 Jan-2013 Jan-2014 US Fiscal Cliff Jan-2015 Jan-2016 Jan-2017 46 84 responses SBI Score = 46; up from Q3 level of 40 Inventories, production volumes and the political environment drive sentiment down 5
OESA Supplier Barometer: SBI Comments More Optimistic The current administration is not likely to impose further regulations on automotivebased manufacturers. Our outlook is very great We are getting more high quality opportunities now than we were earlier in the summer and a number of them are considering bringing business back to the US from Asia. General volumes are good but NAFTA negotiations raise concerns underlying macroeconomic trends around the globe and internal operational improvements global macroeconomic baseline is strong along with internal operational improvements New business opportunities. Macro economic outlook is positive Growth has accelerated from 7% to 10% per year Actively quoting new programs Regarding the sales and inventories in US, we were really worried about the high levels of inventories that affected our customers but the last month they slipped considerably No Change Uncertainty on NAFTA and tax changes Planning for some softening of demand but the outlook is generally ok. The ongoing NAFTA rhetoric from the administration is a major concern and will drive a conservative outlook until it reaches a point of certainty. Growth plan from one year ago consistent with current projections. The Hurricanes added new sales but will take away in future months Political uncertainties in the US offset and NAFTA concerns offset by continued low energy prices and a stable (but slower growing) economy automotive market is stable Next 12 months will be strong, but there is a good possibility for a minor market decline We had predicted a slight slowing in the market and that is what we are still anticipating. More Pessimistic Political climate more unstable NA volume and mix risk modest softening of the NA market; somewhat offset by steady Asian, slightly improving Brazil and Europe Volumes seem to be unstable and incentives are up. Usually a sign of trouble ahead. Volume reductions impacting planning and profitability Volume concerns customer projected volumes are down. Scheduled downtime at various customers. Sales of top selling models down. Mid segment is self destructing. Reduced industry volumes starting to impact our business more significantly GM strike at Ingersoll, slowing car sales, NAFTA changes inventories up government unsettled technology shifts leading to unclear product strategy Volume uncertainty remains the big question starting to feel pull backs by N.A. OEM\'s price pressures from customer have been enormous on existing work Sales Decreasing Volume uncertainty Raw material supply and the lack of cooperation to move production to newer locations. 6
OESA Supplier Barometer: October Results By Revenue Size Describe the general twelve month outlook for your business. Over the past three months, has your opinion become? Quarterly SBI 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 52.1 46.4 NR* 58.3 40.9 47.7 35.7 56.3 36.3 44.3 July October July October July October July October July October 7% 6% 3% 17% 27% 33% 33% 36% 45% 37% 33% 52% 79% 17% 25% 21% 64% 40% 42% 36% <$50 million There were no survey responses received from this supplier group 50% 0% $50-$150 million 45% 9% $151-$500 million 42% 7% 7% 9% 7% 8% $501 million $1 billion 32% 10% 20% >$1 billion Significantly more pessimistic Somewhat more pessimistic Unchanged Somewhat more optimistic Significantly more optimistic Opinions have become more optimistic across most revenue groups; small companies are the exception 7
OESA Supplier Barometer: Industry Threats What are the greatest threats to the industry over the next 12 months? Average Rating 0% 20% 40% 60% 80% 100% Poor sales of vehicles in programs supplied Changes in government trade policy Weakness in the U.S. Economy Implementation of new government regulations Likelihood of higher interst rates Terrorism or some type of international event Inability to address internal labor constraints Inability to fulfill customer volumes 3.7 4.3 4.9 5.2 5.6 5.8 6.1 7.6 1=Greatest threat 2 3 4 5 6 7 8 9 10=Smallest threat Poor vehicle sales moves ahead of trade policy as primary threats over the next 12 months 8
FINANCE AND CAPITAL PLANNING 9
OESA Supplier Barometer: 2018 Planning Rate the following actions your company is budgeting for in North America to meet expected volume targets for next year. Percent of respondents 0% 20% 40% 60% 80% 100% Purchase capital equipment Hire direct salaried employees Hire direct hourly employees Expand current facility footprint Hire temporary/contract employees Open additional facilities Acquire companies Partner with companies Average Rating 3.44 3.84 4.16 4.94 5.63 5.79 5.66 5.40 2016 Rating 3.68 4.00 3.88 4.93 5.47 5.74 5.78 5.67 Highest Priority = 1 Rating = 2 Rating = 3 Rating = 4 Neutral = 5 Rating = 6 Rating = 7 Rating = 8 Lowest Priority = 9 2018 planning activities mimic 2017 10
OESA Supplier Barometer: 2018 Planning For your North American operations, what is your budgeted percentage change in USD for next year compared to this year in each of the following areas? Percent of respondents Revenue EBIT Plant and Equipment Advanced Research IT SG&A Talent and Training 0% 20% 40% 60% 80% 100% 72% of respondents are increasing budget compared to 83% in 2016 66% of respondents are increasing budget compared to 67% in 2016 62% of respondents are increasing budget compared to 63% in 2016 56% of respondents are increasing budget compared to 54% in 2016 55% of respondents are increasing budget compared to 53% in 2016 45% of respondents are increasing budget compared to 51% in 2016 70% of respondents are increasing budget compared to 79% in 2016 >30% Increase 21-30% Increase 11-20% Increase 6-10% Increase 1-5% Increase No Change 1-5% Decrease 6-10% Decrease 11-20% Decrease 21-30% Decrease >30% Decrease Comments Increasing quality throughput with current assets is our priority. Company needs to increase its competitiveness on a faster pace. We are budgeting quite a bit of money for expanded training programs. Technology scouting. We can meet 2018 requirements without addressing any of the above items. The majority of our product ships outside of North America. IT cost increase due to new ERP implementation. Income and operational investments are expected to be lower next year, but relatively balanced compared to 2017 results 11
OESA Supplier Barometer: 2018 Planning Assuming constant 2017 production volumes for 2018, what is your budgeted percentage change in USD from 2017 in each of the following metrics for 2018? Percent of respondents: 0% 20% 40% 60% 80% 100% Utilities Customer specific product development Transportation/Logistics Purchased components Tooling Direct material inflation-metalics Direct material inflation-resins >6% Increase 5-6% Increase 3-4% Increase 1-2% Increase No Change 1-2% Decrease 3-4% Decrease 5-6% Decrease >6% Decrease Not applicable Comments Minimal to moderate increases are expected for 2018, with a focus on product development and direct material costs (ref appendix) If builds push above the 17.5 million unit level, raw material increases will be much higher. Steel companies are beginning to levy surcharges for graphite tips, used in the rolling process. 12
OESA Supplier Barometer: 2018 Planning Estimate the percent of your company sales mix in 2017/2018. Estimate the percent of your company sales mix in 2022/2023. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008/2009 Avg Mix 27% 35% From 2009 From 2011 From 2015 2013/2014 Avg Mix 29% 31% 2010/2011 Avg Mix 2015/2016 Avg Mix 17% 19% 18% 20% 21% 21% 23% 21% 22% 25% 2015/2016 Avg Mix 2020/2021 Avg Mix 12% 14% 25% 21% 17% 17% 10% 14% 37% 34% 36% 35% From 2016 2016/2017 Avg Mix 2021/2022 Avg Mix 10% 11% 8% 9% 24% 21% 16% 18% 11% 12% 40% 38% From 2017 2017/2018 Avg Mix 11% 11% 1% 2% 21% 21% 12% 2022/2023 Avg Mix 13% 46% 43% Non-Automotive Related Automotive Supplier Foreign-Parented OEM Asian-Parented OEM EU-Parented OEM Detroit Three OEM Suppliers expect a stable sales mix across OEM groups; Asian OEMs keep recent gains with tier supplier and non automotive shares under pressure 13
OESA Supplier Barometer: 2018 Planning Over the next 12 months, what is the likelihood that your company will make acquisitions and/or divestitures? Percent of respondents Acquisitions Overall 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 25% 35% 40% $150 million or less $151-$500 million $501 million-$1 billion More than $1 billion High Likelihood Moderate Likelihood Unlikely 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Divestitures Overall 4% 22% 74% $150 million or less $151-$500 million $501 million-$1 billion More than $1 billion High Likelihood Moderate Likelihood Unlikely Up from 2017 levels, suppliers are actively assessing acquisitions and divestitures; acquisitions from larger companies, divestitures from smaller (ref appendix) 14
OESA Supplier Barometer: 2018 Planning Rate each of the following strategies in terms of priority for acquisitions. Percent of respondents Accelerating access to new technologies Accessing new customers through expansion into new geo. markets Building market share Following an existing customer into new geographic markets Vertically integrating your supply chain or product offering Diversifying into transportation markets outside of light vehicles Diversifying into markets outside of all transportation 0% 20% 40% 60% 80% 100% 2017 Rating 2.90 3.51 3.88 4.73 5.20 6.41 6.03 2016 Rating 4.33 4.18 4.31 4.74 5.40 5.53 5.74 Highest Priority = 1 Rating = 2 Rating = 3 Rating = 4 Neutral = 5 Rating = 6 Rating = 7 Rating = 8 Lowest Priority = 9 Acquisitions are being driven by the need to gain technologies and access to new customers 15
OESA Supplier Barometer: 2018 Planning Rate each of the following strategies in terms of priority for divestitures. (New survey question for 2017, no comparison to last year) Percent of respondents 0% 20% 40% 60% 80% 100% Divest of non-core technologies or business No actions have an above neutral rating 2017 Rating 5.02 Obtain funds for other acquisitions 5.54 Obtain funds for operations 6.08 Contract geographic markets 6.45 Separate entities 6.69 Highest Priority = 1 Rating = 2 Rating = 3 Rating = 4 Neutral = 5 Rating = 6 Rating = 7 Rating = 8 Lowest Priority = 9 Divestitures are being driven by the need to consolidate core business, selling off non-core technologies 16
OESA Supplier Barometer: 2018 Planning When considering the next 10-15 years, rate each of the following risks in terms of impact to your business. When considering the next 10-15 years, rate each of the following risks in terms of difficulty in mitigating. 7.0 Rating scale for both impact and mitigation is 1-9, with 9 being very high impact and very difficult to mitigate Difficulty in mitigating 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Limited supply of skilled labor Customer purchasing/planning complexity Affordability of cars/light trucks Quality management Electrification of powertrains Managing cybersecurity Emergence of autonomous vehicles Growth in car sharing Strengthening of emission regulations Emergence of connectivity 3.0 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Impact to your business Skilled labor shortage remains the highest rated risk in both impact to business and difficulty in mitigating while the concern over emissions regulations is subsiding (appendix) 17
OESA Supplier Barometer: 2018 Planning Considering the last industry downturn and the steps your organization may have taken in response to the impact on your business, how prepared is your organization to adjust the enterprise should another downturn occur in the future? 2017 17% 4% Much more prepared Somewhat more prepared 2016 21% 1% 2015 18% 3% 3% 38% 41% Equally prepared Somewhat less prepared Much less prepared Comments: Much more prepared Increased our global manufacturing footprint, so we are now less reliant on the North American market. better balance sheet playbook in place after 2008-2009 have started discussions/scenarios 42% 36% 36% Somewhat more prepared consolidation plans are available. we have not forgotten 40% Suppliers feel better prepared to address challenges due to an industry downturn. 18
OESA Supplier Barometer: Financials Considering the last 12 months, for your U.S. customers representing the top 80% of your business (by dollar volume), what is the average number of your Days Sales Outstanding (DSO)? Upper Quartile 2015 2016 2017 Median Lower Quartile Upper Quartile Median Lower Quartile Upper Quartile Median 57 48 45 60 50 45 60 50 45 Lower Quartile On average, over the past 12 months, has this DSO number increased, stayed the same or decreased? (Percent of respondents) Increased 2015 2016 2017 Stayed Same Decreased Increased Stayed Same Decreased Increased Stayed Same Decreased 27% 63% 10% 23% 72% 5% 18% 78% 4% Note: not all respondents provided a DSO value, but did select a change value. Suppliers continue to bank customers with days sales outstanding receivables 19
OESA Supplier Barometer: Financials Considering the last 12 months, for your U.S. customers representing the top 80% of your business (by dollar volume), what is the average number of your Days Payable Outstanding (DPO)? Upper Quartile 2015 2016 2017 Median Lower Quartile Upper Quartile Median Lower Quartile Upper Quartile Median 60 45 37 60 48 43 57 45 36 Lower Quartile On average, over the past 12 months, has this DPO number increased, stayed the same or decreased? (Percent of respondents) Increased 2015 2016 2017 Stayed Same Decreased Increased Stayed Same Decreased Increased Stayed Same Decreased 18% 79% 3% 9 52 3 18% 80% 2% Note: not all respondents provided a DPO value, but did select a change value. Days payable outstanding is better but still pushed through the supply chain 20
Survey Methodology OESA Automotive Supplier Barometer is a survey of the top executives of OESA regular member companies. The OESA Automotive Supplier Barometer takes the pulse of the suppliers' twelve month business sentiment. In addition, it provides a snapshot of the industry commercial issues, business environment and business strategies that influence the supplier industry. www.oesa.org. Data collected the week of October 9 via invitation to online survey. Executives of OESA supplier companies. 84 survey responses were received. Contact Mike Jackson Executive Director Strategy and Research 248.430.5954 mjackson@oesa.org Kathy Reiss Director Research and Industry Analysis 248-430-5960 kreiss@oesa.org The information and opinions contained in this report are for general information purposes. Comments are edited only for spelling and may contain grammatical errors due to their verbatim nature. Responses to this survey are confidential. Therefore, only aggregated results will be reported and individual responses will not be released or shared. Antitrust Statement: Respondents/participants should not contact competitors to discuss responses, or to discuss the issues dealt with in the survey. It is an absolute imperative to consult legal counsel about any contacts with competitors. All pricing and other terms of sale decisions and negotiating strategies should be handled on an individual company basis. Original Equipment Suppliers Association 25925 Telegraph Road Suite 350 Southfield, Michigan 48033 21
Appendix 2: 2016 Barometer time-series comparative data for charts without multiple years shown 22
OESA Supplier Barometer: 2017 Planning (survey asked in 4Q 2016) Assuming constant 2016 production volumes for 2017, what is your budgeted percentage change in USD from 2016 in each of the following metrics for 2017? Percent of respondents 0% 20% 40% 60% 80% 100% Utilities Customer specific product development Transportation/Logistics Purchased components Tooling Direct material inflation-metalics Direct material inflation-resins >6% Increase 5-6% Increase 3-4% Increase 1-2% Increase No Change 1-2% Decrease 3-4% Decrease 5-6% Decrease >6% Decrease Not applicable 23
OESA Supplier Barometer: 2017 Planning (survey asked in 4Q 2016) Over the next 12 months, what is the likelihood that your company will make acquisitions and/or divestitures? Percent of respondents Acquisitions 2016 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 22% 36% 41% $150 million or less $151-$500 million More than $500 million 15% 41% 44% 22% 39% 39% 31% 28% High Likelihood Moderate Likelihood Unlikely 41% Divestitures 2016 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6% 11% 83% $150 million or less $151-$500 million More than $500 million 6% 6% 88% 6% 11% 83% 7% 17% 77% High Likelihood Moderate Likelihood Unlikely 24
OESA Supplier Barometer: 2017 Planning (survey asked in 4Q 2016) When considering the next 10-15 years, rate each of the following risks in terms of impact to your business. When considering the next 10-15 years, rate each of the following risks in terms of difficulty in mitigating. Difficulty in mitigating Rating scale for both impact and mitigation is 1-9, with 9 being very high impact and very difficult to mitigate 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Emergence of autonomous vehicles Emergence of connectivity Strengthening of emission regulations Electrification of powertrains Growth in car sharing Limited supply of skilled labor Managing cybersecurity Customer purchasing/planning complexity Affordability of cars/light trucks Quality management 3.0 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 No. of Responses = 81-85 Impact to your business Comments: Domestic manufacturers remaining competitive; building a global footprint is paramount. Move away traditional powertrains will effect our business greatly. 25