New Domestic automakers such as Honda, Nissan and Toyota are faring better than the traditional Big Three, with sales so strong that some companies can’t keep up with the demand. “Imports are up 16 percent from a year ago,” says analyst Mark Cornelius, president of Morgan & Co., West Olive, Mich. “That is because the New Domestics are running full out. What they can’t produce in the United States, they need to import.”
At the same time, Detroit’s Big Three—GM, Ford and Daimler Chrysler—continue striving to retrench their operations, cutting capacity to bring it more in line with demand and freshening their products to entice consumers with new designs and features rather than “fire sale” prices.
Eli Lustgarten, president of ESL Consultants and senior vice president at Longbow Research in Independence, Ohio, noted at a recent Metals Service Center Institute conference that auto production is under considerable pressure. While the New Domestics expect to increase their output by 5 to 10 percent this year, the Detroit Three project a 3 to 5 percent decline. In the aggregate, he forecasts U.S. production in 2007 at around 14.9 million units, followed by a slight rebound in 2008 to around 15.3 million cars and trucks.
“While overall auto sales and production might be off a little, that will just bring it down to a decent year, as we have just gone through several years of extraordinary sales,” says Doug Richman, vice president of engineering and technology for Kaiser Aluminum Corp., Foothill Ranch, Calif. “We aren’t talking about a bloodbath, just a little mid-course correction.”
Meanwhile, with gasoline prices still relatively high and mileage standards likely to become more stringent, carmakers on both sides of the cultural aisle are scrutinizing their product mix and the materials they use in order to bring lighter, more fuel-efficient vehicles to market. This may be good news or bad news for individual metals suppliers, depending on the products they sell and the automakers and vehicle platforms they support.
Negative views of the economy are contributing to a bearishness toward the automotive sector, says Erich Merkle, director of forecasting for IRN Inc., Grand Rapids, Mich. The slowdown in the residential housing market is coloring people’s perceptions, and having a direct effect on demand for pickup trucks among individuals in the construction trades. In general, the economy has been softening, consumer debt is high and banks are tightening their lending standards in the wake of the subprime mortgage collapse. “That could create more softness going forward,” he says.
Emily Morris, Ford Motor Co. economist, admits that Ford continues to plan for challenging economic conditions this year, with below-trend GDP growth around 2.5 percent. However, she adds, consumers remain resilient. “Vehicle sales have remained relatively steady with the six-month moving average hovering at about 17 million units (for total vehicles including medium and heavy duty trucks).”
But auto production began the year on a weak note, observes Bob DiCianni, marketing manager, sales and marketing, at Mittal Steel USA in Chicago. First quarter production levels were down about 6 percent. “The first two quarters of the year are normally the best quarters. It is difficult to make it up later on. I just hope that the next three quarters will be better.”
Inventories at dealerships, though still on the high side, have declined and are now at a more comfortable level for the automakers, notes Paul Traub, assistant corporate economist for Daimler Chrysler.
Charles Bradford, metals analyst for Bradford Research/Soleil Securities in New York, reports that as of March 1 the average dealer inventory was at 67 days of supply, down from 75 days at the beginning of February. That ranged from General Motors with 82 days to Toyota with only 48 days.
Declining inventories are a positive sign for new-vehicle production in the second half, says George Pipas, Ford’s U.S. sales analysis manager. Excess unsold vehicles on dealer lots force automakers to cut production, as they did last year.
“The Big Three showed more discipline last year than they have in the past, cutting production instead of having wild sales,” adds DiCianni.
New Domestic automakers are likely to start increasing production levels as several new capacity additions come online, says Cornelius. Some of that new capacity has already come on stream.
In November, Toyota began operation of its San Antonio, Texas, facility, where it will eventually produce up to 200,000 Tundra full-sized pickup trucks each year, says Ernest Bastien, vice president of the vehicle operations group at Toyota Motor Sales USA, Torrance, Calif. The trucks were engineered and designed in North America and will be built exclusively for the North American market.
Starting this spring, Toyota also will produce up to 100,000 Camry passenger cars at Subaru of America Inc.’s Lafayette, Ind., manufacturing facility. Opening in fall 2008, Toyota’s Woodstock, Ontario, plant will produce up to 150,000 Rav4 crossover utility vehicles, while its newly announced facility in Tupelo, Miss., will build up to 150,000 Highlander CUVs starting in 2010.
In early 2008, Honda of America Manufacturing Inc. will open a new facility in Greensburg, Ind., where it will produce up to 200,000 small passenger cars. Kia Motors America will build a facility in Westpoint, Ga., to assemble midsized cars and a CUV beginning in late 2009.
With new physical plants and equipment, more nonunion workers and no pension or legacy costs from union contracts of the past, the New Domestics have a decided advantage in terms of their cost structure. And they’ve also done a better job of product development and marketing, says DiCianni. “They have outperformed the Big Three in making attractive vehicles that U.S. consumers like, which are high quality and very dependable. The Big Three are getting better, but it takes years for consumers to change their perception.”
“The automotive industry needs to build products that people want to buy, to keep up with advancements and changing trends. The car manufacturers that do that best will win in the end,” agrees Buddy Stemple, vice president and general manager of Novelis Specialty Products in Atlanta.
“Domestic manufacturers have not done a very good job of building small cars,” Pipas admits. “Over the last few years, we have made efforts on the small-car end and have fallen short.” Companies like Ford are now making moves to strengthen their participation in that marketplace, he adds.
They were also slow climbing onto the crossover bandwagon, says Merkle. “The Japanese brands were the first to get into that market and have been riding the wave. The Big Three are now playing catch-up, but that has really hurt them.”
“I don’t think there is any silver bullet,” Pipas concludes. “Most domestic OEMs have come to the recognition that they want to be smaller, more profitable companies. We are purposely reducing our participation in the daily rental market [which tends to be less profitable business for the automakers] and building more products that people want to buy. We can’t just win market share. We need to earn it one customer at a time.”
Paul Ballew, executive director of global market and industry analysis for General Motors, shares a similar philosophy. “We don’t spend much time talking about market share. We spend more time talking about volume, sales, performance, capacity, the restructuring plan and so on. If we hit our numbers in terms of retail sales, the market share side of the business will take care of itself. If not, we’re going to have a problem.”
Steel suppliers are rooting for both sides to succeed. “The Big Three are very important to us. We have the closest working relationship with them and would dearly like their share to increase. But all automakers and parts producers are good customers of U.S. steel mills, and we work enthusiastically with them. They are all buying our products,” says Ronald P. Krupitzer, vice president of automotive applications for the Washington, D.C.-based American Iron and Steel Institute.
Approximately one-third of the 30 million tons of steel shipped to the automotive industry goes through service centers, according to Dick Schultz, project manager for materials at Ducker Worldwide LLC, Troy, Mich. (A much smaller percentage of automotive aluminum passes through distributors.) Construction of the new production plants in the South by the New Domestic companies won’t benefit metals suppliers proportionally, however, since some still source components produced in their home countries, notes Kaiser’s Richman. “But as the New Domestics that have been here for a while become more confident about their domestic suppliers, they should be using more and more domestic content over time.”
Already the domestic content in Toyota and Honda’s North American-made vehicles is very high—80 to 90 percent. Relative newcomers, such as Korea’s Hyundai, which just started producing vehicles in North America in 2005, source less domestic material. “As time goes on, Hyundai will probably shift purchasing to domestic steel as well,” says DiCianni. “In some cases, the New Domestics have higher local content than GM or Ford, who are increasingly buying parts made in China and elsewhere in the world.”
American metals suppliers must understand that the New Domestics’ foreign management makes them a “a different kind of customer, with different, sometimes more demanding requirements. They are more into relationship building,” says Ted DiGuiseppe, Kaiser’s vice president and general manager of automotive and industrial products. “Because of that, qualification can take longer. You have to be committed to the business and committed to them,” he adds.
Last year, skyrocketing gasoline prices caused a significant segment of consumers to switch from large sport utility vehicles and pickup trucks to passenger cars and smaller SUVs, DiCianni notes. If this trend persists, mills and service centers could see a dip in their order books, as large SUVs contain considerably more steel and other metals than passenger cars. Observers offer differing opinions on whether this trend will slow or even reverse if gas prices moderate further.
“During the first two months of this year, we have seen a recovery back toward a more traditional mix of 55 to 60 percent light trucks and 40 to 45 percent passenger cars,” says DaimlerChrysler’s Traub.
DiCianni expects no such turnaround to persist. “Sales of large SUVs and pickups are down 14 to 15 percent, and I see this as a long-term trend. I think that consumers are convinced reasonably high gasoline prices of $2.50 to $3.00 a gallon are here to stay.”
“I wouldn’t hang my hat on the return of higher SUV sales,” agrees Pipas. “While gasoline prices have moderated compared with $3 a gallon, they are still volatile. It wouldn’t take much of an event to get them rising again, even just seasonal driving.”
Much of the shift away from SUVs has increased purchases of crossover utilities, which are classified as light trucks even though they are designed with unibody construction like passenger cars vs. the ladder frame of a traditional truck. In fact, Healey at Burnham Securities predicts truck-based midsized SUVs may eventually disappear altogether and be replaced by CUVs.
CUVs have the space and image of an SUV, but are lighter so they offer better gas mileage and performance. “The popularity of CUVs is based on other factors than just gasoline prices,” says Pipas. “The baby boomer generation is aging, and empty nesters don’t need a vehicle quite as big. Also, CUVs drive more like cars; older people generally prefer a ride that is more car-like.”
This shift is not necessarily bad for steelmakers, says DiCianni, as unibody structures tend to contain a higher percentage of high-quality steel—both coated steel and high-strength steel. This will continue to push the growth of advanced-high-strength steels in vehicles, which currently account for about 9 percent of the materials in an average vehicle. “We expect that could increase to 20 to 25 percent in the next seven to eight years,” he says, which is positive news for companies that make higher-end steels.
The move to CUVs could also be a good one for some aluminum producers. “Many models of CUVs use aluminum. For example, both the BMW X5 and the GMC Arcadia use aluminum hoods,” notes Novelis’ Stemple.
In the end, 2007 may be most remembered as the year Toyota surpassed Ford as the No. 2 automaker in North America.
Steel, Aluminum Both On Board
for the Long Haul
Not only is the automotive market in a state of transition, so are the materials automakers are using. High gasoline prices, environmental concerns and a national drive to increase vehicle fuel efficiency are all increasing the pressure on automakers to lighten their vehicles. That does not necessarily mean that steel will lose out to lighter-weight materials, however.
“The steel industry is reinventing itself, replacing itself in many cars with better grades of steel, including a new arsenal of advanced high-strength steels,” explains Ronald P. Krupitzer, vice president of automotive applications for the American Iron and Steel Institute. “With these steels, autos can either support the same loads at lower weights or increase loads while keeping the weight the same.”
For sure, aluminum and other light-but-strong materials are also making inroads into automotive designs. Aluminum use in cars and trucks has grown at a 3 to 5 percent annual rate, says Ted DiGuiseppe, vice president and general manager, automotive and industrial products, for Kaiser Aluminum Corp., Foothill Ranch, Calif. This growth rate could accelerate if corporate average fuel efficiency standards are made more stringent. Light truck CAFE standards are already set to rise about two miles per gallon by 2010, and Congress is currently considering similar moves for passenger cars.
“If there is a significant increase in CAFE, one strategy that will likely be implemented is the use of lighter materials,” says Ron DeFore, spokesman for the Washington, D.C.-based SUV Owners of America trade association. “There are not a lot of non-material gains still to be made. All the low hanging fruit has already been picked.”
According to Dick Schultz, project manager for materials at Ducker Worldwide LLC, Troy, Mich., the 4,050-pound average curb weight of a North American vehicle in 2007 is up from 3,982 pounds in 2005, largely because of added content such as DVD players, navigational systems, safety equipment, plusher seats and bigger engines. Because of the increased consumer demand for such features, weight savings is more critical than ever, he adds. Rising to the challenge, however, carmakers are expected to reduce the average curb weight to 3,908 pounds by 2015 without significantly reducing vehicle sizes.
Auto industry data shows that use of advanced and ultra-high-strength steels jumped to 149 pounds per vehicle in 2007, up from 111 pounds in 2005, and is expected to eventually top 400 pounds. On top of 315 pounds of more conventional high-strength steels, this will put the industry close to its goal of 90 percent high-strength steel in vehicle structures, says Krupitzer. Even now it isn’t unusual for vehicle structures to contain 50 to 75 percent high-strength steels, especially in the front end.
Greater use of high-strength steels reduces the weight of the vehicle without sacrificing size or performance, and also gives the vehicle a stiff body that results in a quiet, smooth ride, says Bob DiCianni, marketing manager, sales and marketing, for Mittal Steel USA in Chicago.
Aluminum content has also increased significantly, says Schultz, to 327 pounds in 2007 vs. 307 pounds in 2005. Much of that gain has been in power train castings and aluminum hoods. By 2015, aluminum content per vehicle is forecast to hit 374 pounds.
Virtually all heat exchangers and anti-lock brake systems are already aluminum, as are about 60 percent of engines, 98 percent of cylinder heads and 65 percent of wheels, says Doug Richman, Kaiser’s vice president of engineering and technology. Today, much of the aluminum industry’s focus is on bumpers, sub-frames and such structures as engine cradles, instrument panel supports and control arms.
The aluminum industry is also trying to make inroads into body sheet. Buddy Stemple, vice president and general manager of Novelis Specialty Products in Atlanta, says demand for closure panels, hoods, deck lids, fenders and exterior body panels has been good, although he admits that steel is holding its own. “It is a multi-material world with several options for automakers. They are using the right material for the right application.”
