Just five years after the global financial crisis brought the auto industry to its knees, General Motors Co. and Chrysler Group have freed themselves from federal ownership, their profits are growing, and buyers are lining up to trade in their used vehicles — which today average more than 11 years old — for shiny new metal.
There were 15.5 million new light vehicle sales in the U.S. in 2013, and based on the seasonally adjusted rate for April and May, the 2014 sales figures could top 16 million. In response to the demand, automakers are introducing 43 new models in North America in 2014, and are planning 213 more new vehicles through 2020.
On its face, the growth is welcome and encouraging. But when the impending product-planning puzzle is spread out on the table, a major piece is missing: The health of the tool and die industry.
Today, on average, each new vehicle is made from 7,000 separate tooling parts and that number is expected to grow considerably in the next few years. However, looming capacity constraints in the sector that makes precision parts from metal stamping dies, plastic injection molds, and other machines could delay future product programs or even turn back the clock on the Big Three’s hard-fought battle to achieve world-class quality. Foreign automakers may be affected, as well.
The Vendor Tooling Study conducted last fall by Royal Oak-based Harbour Results Inc. shows the tooling industry should reach $15.2 billion in volume by 2018, but the current capacity stands at $9.3 billion. The shortfall stems from a flood of new models, many of which will be built in North American factories, and the rising customization and complexity of product features.
“One of the major findings is that we have about a $6 billion gap in capacity when we look out to 2018. The number of tools per vehicle has grown about 20 percent since 2003, and the expectation is that it will grow another 25 percent by 2020,” says Laurie Harbour, president of Harbour Results. “If we rely on the current marketplace to build that many tools, there’s a huge capacity constraint. Nobody’s running out and building a new tool shop. It’s not a business model that anybody wants to go into.”
Added to the onslaught of new products are a shortage of skilled labor; the reluctance of many tool companies to make major investments; and entrenched, inefficient customer-vendor practices that Harbour says constitute a broken business model.
After contracting by one-third since the late 1990s due to competition from low-cost firms in China and Eastern Europe, the U.S. tool and die industry found a sweet spot that filled its shops with work. Costs and inefficiencies were weeded out to the point that the number of tools produced per person today is 50 percent greater than it was 10 years ago. Rising labor costs overseas also contributed to a resurgence of U.S. tool and die capacity. Still, structural problems persist. The North American tool and die industry is made up of 750 mostly small businesses in Michigan, Ohio, Illinois, and Ontario, where the average annual revenue per company is $15 million. Many of the companies date back one or two generations and, given the state of the industry, Harbour says dozens of shop owners are reluctant to make major investments in the latter stages of their careers.
“If I’m a 60-year-old guy and you’re telling me there’s a $6 billion gap in capacity, I’m not going to make any investment; I’m going to retire in five years, anyway,” Harbour says. “It’s a very tough business model to make that kind of investment in your shop and grow your capacity. Plus, there’s too much risk. You’re not signing deals that make you $1 million a year, so for you to sign up for a new piece of capital equipment that might cost you $5 million, that is very difficult to spread out over a period of time when you don’t know where your next deal is coming from.”
Even if the tool and die shops had money to invest in new facilities, experienced labor is scarce considering the average age of a skilled worker, according to Harbour, is 56.
“It’s a huge problem for the industry,” says Dan King, COO at Walker Tool and Die in Grand Rapids, which serves the automobile, appliance, furniture, and aerospace industries. “You just can’t just go off and start a new die shop because you can’t get the trained, experienced labor to do the work.”
Right now, the industry is made up of people in their 50s and older, along with apprentices in their 20s.
“During a recession, when there’s not much work out there, the first thing you cut are the apprenticeships and training programs, so all the pipelines were lost (during the global financial crisis in 2008),” says Jay Baron, president and CEO of the Center for Automotive Research in Ann Arbor. “We estimate that it takes 10 years to go from apprentice to journeyman tool and die maker. Even if you start your pipelines back up, you’ve got 10 years (to develop the talent). On top of that, there aren’t a lot of people who are trying to get in line for these jobs anymore. If you start apprenticeship programs today, people tend to jump out of them quickly (to get) into other jobs. In auto manufacturing, in general, you just don’t have people lining up to get the jobs like we did years ago.”
Jeannine Kunz, director of workforce and education at the Society of Manufacturing Engineers (SME) in Dearborn, agrees. “Toolmakers have a big challenge with the labor pool because it’s harder for them to compete for the talent. Some people might perceive it as a dirty or low-tech job, while the reality is you’re dealing with a lot of very sophisticated technology like computer numerical-control systems.”
What’s more, she says, smaller shops that invest in training and apprenticeships often lose their employees to bigger companies that can offer better benefit packages or more attractive environments.
To stem the tide, the SME Education Foundation, in recent years, has been strengthening its partnerships with industry players. The foundation sponsors scholarships to encourage young people to enter manufacturing programs, and it operates camps to introduce middle school students to science, math, and technology with the goal of changing perceptions.
The group’s Partnership Response In Manufacturing Education, or PRIME program, works with local employers to provide funds that high schools and community colleges around the country can use to upgrade equipment, train teachers, and purchase online courses.
“I’ve seen a much larger investment and more attention being put on human capital in manufacturing companies,” Kunz says. “If you’re not advancing your people at the same pace or greater than technology advances, there’s a big disconnect in their abilities to leverage that technology and be as productive as possible. Unfortunately, in some cases, we were a little bit behind the eight ball and we’re playing catch-up to keep up with the pace of technology.”
Macomb Community College is among several community colleges that tool and die shops rely on to offer training classes for new employees. Although enrollment in such courses has declined over the past decade, school administrators are cautiously optimistic about the future.
“Hiring individuals coming out of the community colleges turned the corner a year or two ago,” says Joe Petrosky, Macomb’s dean of engineering and advanced technology. “The industry has opened up to hiring younger individuals just coming out of college, with less experience. Most heartening for me is that we’re seeing the return of some of the traditional programs like apprenticeships.”
The college has a full-time faculty member who works with companies to develop customized apprenticeship curricula for their employees, while an employee-in-training program teaches shop math and provides instruction in basic and advanced machine tools, numerically controlled machining, and electrical discharge machining.
“We have classes that relate to plastic injection molding, although not as many as we used to,” Petrosky says. “They’re starting to come back and that’s something we’d like to continue to grow. Our machining classes have grown from where they were last year. Most of the machining students are employed and are looking to advance their skills and careers. For every student that’s not employed, we probably have three or four jobs that are listed in our career database that they can go out and get.”
For the tooling industry to get the greatest benefit out of its relationships with community colleges, parents, teachers, and counselors must encourage students to adopt a new mindset toward skilled trades. “Our high schools aren’t directing kids into manufacturing,” Harbour says. “The metric of performance for high school counselors is how many kids are going to a four-year university, but there’s probably a (good) percentage of those kids who have no business going there. The annual average wage (including benefits) of a toolmaker with 10 years to 15 years of experience is $77,500.”
Assuming the tooling industry clears the skilled labor hurdle on the road to greater capacity, many experts say it still must address some basic business issues with its customers — namely, the automakers.
Among the most nagging matters is how tool shops are paid, or not paid. For years, the policy of many car companies was to defer payment to the vendors until after the tooling had been designed, tested, shipped to the plant, and had passed the production part approval process, known as PPAP — a process that could stretch 18 months or longer. While such a practice by a multibillion-dollar automaker might be business as usual, it has an unhealthy effect on the cash flow and capabilities of a $15 million privately held tool shop.
For example, Harbour says, “A fascia tool could cost $1 million. If I have to buy the materials and pay my workers and I might not see payment for 24 months, why does the OEM think that’s a constructive, positive supplier relations business model that’s going to make me want to run off and do business with him?”
Deferred payment has been a huge problem in the industry for decades, says Baron of the Center for Automotive Research. “The issue has always been the car companies or the Tier 1 suppliers who are buying these tools want to defer payment as long as possible,” he says. “The (business) model that all the toolmakers would like is the one that has been established primarily in Japan — and, by and large, they adhere to it today. When you order the tool, the car company will pay one-third of the price up front before any cost is incurred, one-third upon shipping the tool, and one-third when the tool is tried out and operating in their home press line.
“The toolmaker is never very much in the hole, if at all. The U.S. method has always been to pay a certain number of days after PPAP. The shop may have been working on that tool for six to 12 months, and they’re not going to get paid until sometime after PPAP. We’ve seen some tools (that never make it to the PPAP process). That puts the tool supplier in a very vulnerable position.”
Harbour agrees. “As a toolmaker, cash is king. So if we just paid these guys one-third, one-third, one-third; 20-30-50; or anything else, we’ve completely changed the dynamic of the tool-making industry because you’re allowing them to fund their business.” Citing proprietary payment terms, many foreign and domestic automakers declined to address the issue, or paid it lip service.
But if cash flow and collateral problems persist, it could play havoc on the industry. Apart from working with an OEM on the issue, many tool and die makers have turned to other sources of financing.
“If companies aren’t able to get traditional bank financing, they can explore options like the Michigan Economic Development Corp.’s Collateral Support Program,” says Leo Kujawa, senior vice president and group manager of commercial lending at Flagstar Bank in Troy.
Under the program, the MEDC provides banks with state and federal funds that can be used to back loans of 50 percent of a company’s line of credit, up to $10 million. “The MEDC puts the cash in our bank,” Kujawa says. “That allows you to use half of the line of credit to finance receivables on comfortable terms because you have cash to backstop 50 percent of your loan.”
Kujawa also recommends Small Business Administration programs 7(a) and 504, which offer loans ranging from $150,000 to $5 million.
Another way to fix the “broken” relationship between toolmakers and automakers is to improve communication and coordination by reinventing how business gets done.
“Coordination is slowly getting better, but there are a number of ways where more is needed,” Baron says. “If we knew when (automakers) were going to release tooling for a new car we could begin saving the capacity now, for when those tools get released. This requires better communication and developing trusting relationships with suppliers.
“The customer has to have a long-standing agreement with the tooling supplier that we’re going to give these tools to you. Rather than bidding five shops against each other to get the price down, we’ll rely on you to be honest and to give us good prices and consistency. The old business model was always somewhat antagonistic. What you’re seeing today is more along the lines of partnerships. It’s healthier and not quite as ruthless as it used to be.”
Baron sees promise in what he calls the global tooling model, a joint relationship that takes advantage of each party’s strengths to achieve the lowest costs.
“Engineering is key to developing these complex tools. The vendors must work closely with the auto companies, otherwise it’s too expensive to fix mistakes later on,” he says. “Once the tool-maker completes the detailed engineering design, they would hit a button and send the math data over to China to let them machine it, to get the die close — maybe 80 percent. Then you ship the die back to Michigan and have a very good local tool shop put it in the press and zero in on that last 20 percent. That local shop also helps you launch the tool. I think as capacity gets tight, you’ll tend to see more tools being swhipped around for their machining and assembly and engineering and tryout, all to the places that make the most sense.”
For King, of Walker Tool and Die, the answer to the capacity dilemma lies in efficient processes and better relationships, not brick, and mortar. “The amount of capital it would take to build a 100-man die shop that does $20 million a year in tool sales just isn’t going to happen,” he says. “Who’s going to want to invest that kind of money when … you can’t explain how it gets funded by your customer? Nobody’s going to want to do that. The capacity out there today is what’s out there. In 10 years it’s not going to be a whole lot more than that.
“We have to get all the OEMs and the Tier 1s and the tool shops together to (figure out) how to shrink that chain link that goes through a typical tooling program. It’s the only way it’s going to work, because nobody’s going to spend the money. You’ve got to get all the smart people together … who are trying to make a difference and say the model’s wrong, it’s dysfunctional, let’s fix it — and watch the capacity just come back. Make the launch event at the tool shop predictable and on time, so you can shrink the lead time. That’s where you get your biggest pickup in capacity.”
By way of example, last year Walker boosted volume by acquiring Wolverine Tool and Engineering in Belmont, near Grand Rapids. By adding Wolverine’s $6 million capacity to its existing $24 million, and investing in additional equipment, Walker achieved total throughput of $32 million.
“Our push is to get faster and more efficient with design and manufacturing. That’s where our biggest pickup is going to be,” King says. “Thirty-two million is all we can do, and we’re only limited by our own speed — how fast we can design, machine, put a die together, and produce a part to the customer’s specification. If we can take a couple of weeks out of our typical lead time, that opens up capacity for us.”
Of course, there’s always the possibility that demand for tooling will outpace changes in the labor force, payment terms, cash flow, or company cultures. In that case, something’s got to give, says Michael Robinet, managing director of IHS Automotive, a large auto supplier in Southfield.
“Tooling prices will start to go up because there’ll be a focus on where to find the capacity, then the OEMs will try to find and qualify new sources for tooling that maybe had been questionable before in terms of quality or capability,” he says. “They’ll take more risk with tooling, bringing it in closer to the final start of production — which is risky if you haven’t proven the tooling or there are some last-minute changes that don’t get fully integrated. There’s no doubt it could change the competitiveness of our industry, and it needs to be addressed.” db