GM, Ford and DaimlerChrysler are finally retrenching in an effort to stem the loss of market share to New Domestics like Toyota, Honda and Nissan. What are the implications for automotive metals suppliers?

By Myra Pinkham,
Contributing Editor

Sidebars and Tables:

• Aluminum Reaches No. 2,
  But Cost Still Too Weighty
• The Ups and Downs of Domestic Content Sourcing
• Shifting Shares of the 'New Six'
• North American Vehicle Production

Despite the dramatic headlines on plant closings and job cuts at GM and Ford, North American production of passenger cars and light trucks is projected to increase slightly this year and next. Growing vehicle output from New Domestic automakers such as Toyota, Honda and Nissan, and low dealer inventory levels, are helping to prop up production.

This is good news for automotive industry suppliers of steel and aluminum, who expect stable shipments to the sector despite the waning popularity of metal-intensive sport utility vehicles. According to industry data, the automotive market consumes 30 million tons of steel each year, roughly 25 to 30 percent of steelmakers’ total demand. Similarly, about 5 billion pounds of aluminum is consumed by automakers each year, an average of 319 pounds per vehicle.

North American auto sales and production in the past few years have been very steady, by historical standards, and should remain so for the next year or two despite cutbacks by Big Three carmakers, says George Pipas, sales analysis manager for Dearborn, Mich.-based Ford.

Ford has announced plans to reduce its assembly capacity 26 percent by 2008 with the closure of seven assembly plants. Ford’s announcement came a few months after GM said it plans to cut its vehicle assembly capacity by about 1 million units in the same timeframe as part of a major effort to reduce manufacturing costs, revitalize its product line and improve the profitability of its North American business.

While these moves will significantly decrease the North American production capacity of the two automakers starting this year, it won’t necessarily mean fewer vehicles will be produced, as the facilities involved are now substantially underutilized, Pipas explains. For example, Ford’s St. Louis and Louisville, Ky., assembly plants both make the Ford Explorer and Mercury Mount-aineer. Last year both facilities operated with substantial and frequent downtime. By idling the St. Louis facility and moving its production to Louisville, the automaker can operate much more efficiently and achieve the same output.

By getting capacity more in line with demand and better utilizing assembly operations, year-over-year production should decline only modestly. Ford expects production to dip 3 percent in the first quarter and 2 percent in the second quarter compared with last year, Pipas says. “In the scheme of things, these reductions are insignificant. For all of last year, our production was down 6 percent. So this is half of last year’s decline.”

Though some automakers are closing certain production plants, others are beefing up other locations. In mid-February, GM announced that it was also investing more than $545 million in five of its Michigan manufacturing facilities.
New Domestics continue to add production capacity. Notably Toyota Motor Manufacturing NA plans to produce 2 million vehicles in North America by 2008, up from 1.55 million units last year.

Toyota will achieve this growth with several different investments including the opening of a new assembly plant in San Antonio, Texas, this fall, where it will build about 150,000 Tundra full-sized pickup trucks per year. The company also plans to begin annual production of 100,000 vehicles—probably Camry passenger cars—starting early next year at Subaru of Indiana Automotive Inc.’s facility in Lafayette, Ind. This move was enabled by Toyota’s recent acquisition of an 8.7 percent stake in Fuji Heavy Machinery, Subaru’s parent company, previously held by GM. In 2008, Toyota will open a new plant in Woodstock, Ontario, that will produce 150,000 Rav 4 small SUVs annually.

In addition, Toyota officials say they will expand production capacity at certain existing North American manufacturing facilities, including the West Virginia and Alabama engine plants, the British Columbia alloy wheel plant, the Bodine Aluminum cast aluminum engine parts plant and the Baja truck plant in Tijuana, Mexico. This summer, Toyota will also add a Camry hybrid to its Georgetown, Ky., product line.

Other New Domestics have also been increasing their North American output. Nissan reportedly has started to produce certain entry-level vehicles in Mexico.
In mid-March, Korean automaker Kia Motors Corp. announced plans to build its first manufacturing plant in North America. To be located in West Point, Ga., the new Kia plant will begin producing up to 300,000 vehicles per year in 2009. In addition, Kia is opening a new North American sales/service headquarters in December, and a design facility next year, both in Irvine, Calif.

Despite all this investment and retrenchment, North American light vehicle production has been, and will continue to be, relatively flat, says Mark Cornelius, president of Morgan & Co., West Olive, Mich. Last year, auto production declined about 0.1 percent to 15.768 million vehicles. Both this year and next, output should tick up slightly to 15.783 million units and 15.805 million units, respectively, he forecasts.

While production by the Big Three automakers decreased 4.6 percent last year, New Domestic production increased 11.2 percent, allowing the New Domestics to increase their market share to 31.5 percent of the domestic market, up from 28.3 percent in 2004.

Cornelius predicts that output by the Big Three will decline another 3.2 percent this year, while production by New Domestics will increase by 7.3 percent. In 2007, Big Three production will dip a further 2.2 percent, while New Domestic production will increase another 4.7 percent—giving New Domestics more than a 35 percent share of the North American market.

Among the Big Three automakers, the Chrysler Group of DaimlerChrysler is doing the best. Last year, its vehicle production increased by 2.3 percent, though it is expected to fall back 1.5 percent this year and another 0.4 percent in 2007, Cornelius says.

Compared to its two major competitors, Chrysler has scored more points with consumers for the freshness and innovation of its vehicle designs—much like the New Domestics. Kevin L. McCormick, spokesman for DaimlerChrysler, says the Chrysler Group plans to launch 10 completely new products this year—the most in the company’s history—including several more fuel-efficient models in response to current high gas prices. Ford and GM also have announced plans to freshen up their product lines.

Inventory levels are not a drag on demand, as they have been in the past, notes Pipas. Most auto brands—Big Three as well as New Domestics—have come to market in 2006 with inventories quite a bit lower than a year ago.

While not having much effect on overall North American vehicle production, the restructuring of Ford and GM’s manufacturing assets could hurt metals suppliers serving the facilities to be closed, says analyst Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. “It will cause disruptions and will likely have an effect on the whole supply chain.”

Some metals suppliers already report the effects of that disruption. “While we haven’t seen a tremendous decrease, there has been some decline in orders,” says Bruce Markowitz, president of Rusal America, Harrison, N.Y.

Overall, however, the additional output by the New Domestics is expected to offset the cutbacks by the Big Three. “We look at the New Domestics’ new manufacturing plants as a great opportunity,” says Ron Krupitzer, vice president of automotive applications for the American Iron and Steel Institute, Washington, D.C.

Generally, upon opening a U.S. manufacturing facility, New Domestic companies buy their metal domestically, though in some cases they continue to source certain components from their home countries, says Dick Schultz, consultant for Ducker Worldwide, Troy, Mich.

“We believe in localizing vehicle production,” says Victor Vanov, a spokesman for Toyota, “and that involves using local content.”

Ian Beavis, vice president of marketing for Kia Motors America, Irvine, Calif., says that the bulk of Kia’s content will also be sourced locally once its new Georgia assembly plant is up and running.

Also affecting metal consumption is the shift in product mix in North America away from large and mid-sized SUVs and toward lighter-weight passenger cars—a flip-flop of the consumer preference of the past decade. In fact, Ford’s Pipas notes, car sales gained market share from light trucks and SUVs last year for the first time since the mid-1990s. “I think that will continue to be the case for the next few years,” he adds.

Some doubt was cast on this shift, however, by unusually strong sales of new-model light trucks reported by GM in February. “We are heartened by the movement of the new SUVs hitting the market,” says Deborah Silverman, a GM spokesperson.

A sustained shift away from SUVs would be a disturbing trend for metal suppliers serving the auto market—especially steelmakers—because light trucks use from 50 percent to over 100 percent more steel than passenger cars, notes Plummer.

North American production of SUVs declined 6.4 percent last year to 3.878 million vehicles, with the largest declines coming from large SUVs (down 27.3 percent to 691,000 units) and mid-sized SUVs (down 12.7 percent to 1.296 million units), reports Morgan & Co.’s. Cornelius.

What is causing consumers to turn away from SUVs? High gasoline pricing is the conventional wisdom, but demographics are actually play a bigger role, experts say. “We saw that SUVs were starting to decline in annual sales long before gas prices started to rise,” Pipas says. “The gasoline prices just escalated the rate of decline.”

The majority of baby boomers are now 45 to 60 years old and more interested in a comfortable ride without the climb into a high-ground-clearance truck. “Their households are getting smaller so they don’t need as large of a vehicle as they did when they had a house full of children,” Pipas adds.

Such attitudes have spurred the popularity of CUVs—crossover utility vehicles—which are smaller SUVs built on a car unibody rather than a truck frame. “People like the functionality of the ride and handling with the car-based architecture. It suits the lifestyle of a lot of people,” Silverman says. Today, every manufacturer has dedicated a significant portion of their truck portfolio to new-generation CUVs.

Last year, North American CUV production increased 13.9 percent to 1.575 million vehicles, Cornelius says. This year, for the first time, CUV sales are expected to exceed other SUV sales.

AISI’s Krupitzer downplays the impact of the shift from large and medium SUVs on steel suppliers. “I don’t believe it will be very major, just a few percentage points,” he says.

Pickup truck sales, including full-sized pickups, also remain strong, says Sam Butto, spokesperson for Toyota Motor Sales USA, Torrence, Calif., despite high gasoline prices. Pickups will also be popular among the segment of the population that needs the attributes of a truck, including its high clearance, for their livelihood.

The high gas prices have generated increased interest in hybrid vehicles. “Hybrid sales should continue to increase in coming years,” Butto says, noting that Toyota’s Prius continues to be popular with over 107,000 units sold in 2005, making it the company’s third-best-selling passenger car after the Camry and Corolla.

Hybrids originally were considered a stopgap between zero-emissions vehicles and what is being driven now, but they are finding their own market niche, albeit a small one, Cornelius says. “I think we’ve all been pleasantly surprised by the consumer reaction to hybrid technology and the willingness of consumers to pay a premium for the associated fuel economy and environmental benefits,” admits Martha Brooks, chief operating officer of Novelis Inc., Atlanta.

Schultz of Ducker Worldwide agrees: “Buying a hybrid says you are environmentally conscious. There is no way to justify it on a cost basis.” Yet a significant segment of consumers are willing to make a statement, Cornelius says. “Hybrids are really selling well. Consumers are becoming aware of the danger of our reliance on oil and are willing to pay a little more to use a little less.”

Observers remain concerned about the financial health of the Big Three, as well as parts suppliers such as Dana Corp., now operating under Chapter 11 bankruptcy protection. Nevertheless, Krupitzer expects 2006 to be a reasonably good year for both the auto and steel industries. “Consolidation is sometimes painful, but it is necessary to be competitive. Everyone in the supply chain has to do it.”

Aluminum Reaches No. 2, But Cost Still Too Weighty
Aluminum continues to make inroads into the automotive industry, recently surpassing cast iron to become the No. 2 material used by carmakers. However, the light metal has not eaten into steel’s position as the No. 1 material of choice and it’s not expected to in the foreseeable future.

“With today’s sky-high fuel prices, rising global warming concerns and increasing safety demands, aluminum is a proven solution today with even greater promise for tomorrow,” says Misha Riveros-Jacobson, president of advanced transportation systems for Pittsburgh-based Alcoa Inc., during a press conference announcing a new report commissioned by the Aluminum Association, Arlington, Va.

North American passenger cars now contain an average of 319 pounds of aluminum, up 16 percent from about 275 pounds in 2002. This is still far below the level of steel in the average passenger car—about 2,000 pounds of mild steel and 420 pounds of high-strength steel, according to Dick Schultz, aluminum project consultant for Ducker Worldwide, Troy, Mich., the research firm that conducted the study. For the first time, however, aluminum exceeds the amount of cast iron in the average passenger car, which is about 280 pounds.

“The battle has been more with cast iron than with steel,” Schultz says. A big chunk of aluminum’s gain has been in the engine compartment; 52 percent of engine blocks are now made of aluminum vs. 40 percent in 2002. “There has also been some increase in wheels, drive lines, drive shafts and control arms, as well as a little more in closures, such as hoods, doors, etc., although not as much as aluminum producers would like,” he adds.

Ron Krupitzer, vice president of automotive applications for the American Iron and Steel Institute, Washington, D.C., acknowledges that the aluminum industry has been trying to promote the use of more aluminum sheet products in auto bodies, “but they haven’t really been able to penetrate the market. It is a high-cost material and involves a complex manufacturing process.”

However, Bruce Markowitz, president of Rusal America, Harrison, N.Y., believes that people shouldn’t write off the use of aluminum in body component parts, structural parts and auto extrusions. “Aluminum’s use in the frame of vehicles is just starting, but there is a tremendous opportunity,” he says. “Design and development takes time, but I think there will be more aluminum sheet applied to vehicles in the future.”

Schultz predicts that aluminum use, whether in sheet, extrusions or castings, will likely continue to grow by eight to 10 pounds per vehicle for the next few years before plateauing at about 400 pounds. A major factor driving that increase, he says, is efforts by automakers to save weight and decrease fuel consumption.

Riveros-Jacobson estimates that a 10 percent vehicle weight reduction increases fuel efficiency by approximately 8 percent, “and I think that’s important to all of us.”

Aluminum can provide a 30 to 45 percent weight reduction with the equivalent strength of steel, but it carries a significant cost penalty, Schultz says. Steelmakers have also been working on ways for automakers to lighten up their vehicles while continuing to use steel. “With the use of high-strength steel, vehicles could be lighter weight and have better performance,” Krupitzer says. Using high-strength steels could provide a 10 to 20 percent weight savings vs. mild steel.

John P. Surma, chairman and chief executive officer of U.S. Steel Corp., Pittsburgh, recently told the Detroit Economic Club of collaboration between his company (with other steel mills) and carmakers to better meet the needs of the auto industry. This includes the Ultra-Light Steel Auto Body (ULSAB) series of projects, whose concepts are being incorporated into current new vehicle designs.

“This global initiative grew out of an environmental imperative to create a lighter, stronger vehicle with fewer emissions, without sacrificing or increasing cost,” he explains. Among other technologies, that program has resulted in the development of new grades of advanced, high-strength steels that are redefining the next generation of steel-intensive cars and light trucks.

In addition, Surma says, the steel industry is on track toward a sustainable future by reducing the steel industry’s use of energy. “Working with the Department of Energy, we are developing new technologies to improve energy efficiency. In 2003 steel reached a new milestone, reducing energy intensity per ton of steel shipped by 7 percent, for a total of 23 percent since 1990. Because of the interplay between energy use and greenhouse gases, our industry reduced aggregate emissions of carbon dioxide by a comparable 23 percent during the same period, far ahead of any Kyoto-inspired objectives.”

That challenges another stated advantage of aluminum in vehicles—the ability of aluminum-intensive vehicles to reduce greenhouse gases. Ninety percent of all automotive aluminum is recovered and recycled. Surma maintains, however, that automotive steel recycling is close to 100 percent and that steel’s recycling rate overall is about 71 percent, which exceeds by four times the sum of recycled aluminum and plastic.

“We recycle enough steel from cars each year to produce over 13.5 million new vehicles. In fact, today’s auto bodies typically contain a minimum of 25 percent recycled steel,” Surma adds.

Steel’s biggest advantage in maintaining, and perhaps growing, its share of vehicle material content remains its low cost relative to aluminum and other alloys.

The aluminum industry challenges the notion that steel is the low-cost solution to automakers’ needs, however. Citing a study conducted by IBIS Associates, an independent consulting firm that specializes in economic analysis of materials in manufacturing technology, Martha Brooks, chief operating officer of Novelis Inc., Atlanta, maintains that cost-effective solutions exist with high-volume, mass-produced aluminum-intensive cars and trucks. Currently, Schultz says, 42 vehicles are produced worldwide using more than 500 pounds of aluminum, about a dozen of them made in North America.

A more practical view, Schultz says, is a future that incorporates close to the current ratio of materials in the average passenger car, with about 2,200 pounds of steel, 400 pounds of aluminum and 200 pounds of iron per vehicle.