Articles
Analysis - how West Midlands suppliers are adapting to stay alive
Author: John Reville
Source: Birmingham Post & Mail
Publication Date: 18th August 2006
Battered and bruised after the MG Rover meltdown, the Midland components industry is still in the driving seat for a bright future.
Longbridge, Ryton, Ellesmere Port.
The names may have hit the headlines, but the fate of these car factories has often masked a hidden cost. As the giant car factories they fed with fasteners, panels and widgets wane, so do the fortunes of suppliers. Seven UK companies went into administration after MG Rover, whose collapse caused an estimated loss of £600 million in West Midlands business.
In an ever more competitive world, with cheaper imports from China and India to the fore, it is getting tougher. Add rising energy prices and steel and other raw materials which have surged through increased Far East demand, and it is fair to say the lot of a components supplier is getting harder every year.
But still it is a vibrant sector with 7,000 UK manufacturing sites supplying the automotive industry. And companies are not lying down, with significant new business won by Midland firms such as WH Smith Tools (£4.5 million), Cobra (£7 million) and Sertec (£4.4 million) recently.
Graham Broome, chief executive of the SMMT Industry Forum, said: "Sadly for some in the supply chain the world has changed greatly and negatively because they have found themselves part of a supply chain to a vehicle manufacturer who either no longer exists or they are on a platform in a manufacturer struggling to hit volumes and command a price in the marketplace.
"Intriguingly, however, what we find is that at the highest level, people say simplistically, oh, too much capacity, too few customers. Try telling that to someone on a very successful platform and the volumes keep on and on going up because you are fighting different challenges. You have to recruit more people, install capacity. So it is very much a curate's egg."
The industry is changing as firms band together to increase capabilities and export into newer markets. David Malpass, senior operations manager at Accelerate, the supply chain initiative, said: "Companies have restructured as a result of MG Rover, while some are looking for new business. There is still quite a lot of flux in the market, with takeovers and mergers. True, some companies are finding the going harder than others, but investors are coming in and out and doing business."
Recently Lloyds TSB Commercial Finance backed a management buyout of Sertec Plastics, which makes moulded components for the automotive sector. This is far from an isolated example.
Mr Malpass said: "It is a good sign if investors are putting in money. Venture capitalists don't get involved if they don't think they can make a profit." As well as outside money, components companies are looking for new customers - abroad and in different sectors. Indeed the global market, which has exposed Midland components makers to cheaper Far Eastern products, offers Midland firms opportunities as well as threats.
"Our companies may not be able to compete with China and the Far East on cost, but they can on flexibility and reliability," said Mr Malpass. "Once something has been produced in China, it takes six weeks to get here. That means extra logistics and holding costs, while the manufacturer has to hold buffer stock. There are all sorts of hidden costs. In the UK, while something may be more expensive on the surface, you can usually have it in days."
While the Rover collapse undoubtedly hit the suppliers, the end of Peugeot production is likely to have a far smaller impact, with about 90 per cent of the components being sourced in the UK.
The looming threat to Ellesmere Port, with a decision over the plant's fate, linked to the location of the new Astra, is far greater.
Although the factory has already lost another shift, General Motors has insisted production levels will be about the same. But the sourcing of components will be European-wide exercise, and when a decision is announced in the autumn, Midland companies are expected to enter the fray to win work for it. A more European-wide emphasis on winning work has evolved, with £500 million of projects already identified for firms to go after.
With more than 267 new models and platforms set for launch in the next five years, there will be opportunities for firms to develop business in the new hotspots such as Slovakia, Germany, Poland and the Czech Republic. In total, twelve car manufacturers and more than 420 tier one customers have been identified and Accelerate is now in the process of enlisting a group of suppliers who are keen to forge new working relationships.
Back in the UK though, there are still some good projects.
Mr Malpass said: "Some of the models our manufacturers are working on are very good models. There is a lot of work going on for Toyota, Mini and Land Rover which are all doing really well." He added that it would be interesting to see how the Freelander fared when the new model was produced at the Halewood factory on Merseyside, while even more work was promised from BMW with the increased production at Hams Hall engine plant and extra capacity at Oxford later this year to take Mini production past 250,000.
On top of this, firms were looking to set up facilities overseas to be near to the new car factories being set up across eastern Europe and the Far East, while also taking advantage of some of the lower costs themselves.
Mr Malpass said: "Soon there will be one million cars per year produced in Slovakia, making it the biggest per capita car producer in the world. Many of our firms are setting up operations over there to make the most of this, and be near to the big car makers who are moving eastwards. Sertec for example is investing in a new factory in Estonia, which is not a bad place to be if production starts increasing in Russia."
As well as diversifying within the automotive sector, many companies were also diversifying out of it completely, using their skills in m edical technology and aerospace. Some are using their expertise in plastic injection moulding to produce high quality finished goods where the margins are better than in the automotive sector.
Five years ago Machined Component Systems in Redditch was dependent on the automotive sector, but it successfully diversified to the medical and petrochemical sectors. It has done so without losing staff or sales, although managing director Jim Gray admitted the switch was difficult at the time.
"When BMW pulled out of Rover in 2000 we decided to move out of automotive", he said. "We just couldn't see Longbridge carrying on for much longer." Mr Gray looked at areas where his investment in CNC machinery could be used, before deciding to enter the medical and petrochemical sectors. The company now produces surgical implants from titanium and specialist steels, and valve parts to help fluid movements in the petrochemical industry.
Elsewhere companies have begun pooling their resources and expertise in a string of virtual companies. The Midland Assembly Network, supported by Accelerate, is one. Its ten members work together as one business, employing more than 700 people with a turnover in excess of £44 million counting most of the global automotive industry as customers.
Mr Malpass said: "Sharing abilities is absolutely critical. These companies cannot solve problems on their own. Trust is a problem, but a number are working together on projects where they are either not big enough on their own, while bigger customers may be attracted to packages of services and abilities bundled together.
Innovation remains paramount however, with companies like BMW looking further down the supply chain at 2nd and 3rd tier companies for firms with new and interesting ideas. As the automotive industry becomes less uniform, with an ever greater variety of models on offer, this will become increasingly important.
"OEMs are looking beyond their big tier one suppliers, because there tends to be a lot of innovation in smaller companies," said Mr Malpass. In larger firms sometimes, the amount of processes that projects go through can stifle creative thinking, whereas in smaller operations people can think outside the box a lot more."
So, overall how is the components industry faring?
"It has taken a blow with Rover and others, and it has a been hard, hard time. But behind the scenes there are some firm foundations," said Mr Malpass. It is important we still control the manufacturing but become more innovative and design conscious.
"Owning manufacturing facilities in low cost countries is not a bad way to go, while keeping the smart and lean manufacturing over here. The fact the UK is close to the market place means we know what the customers want. That will give us an advantage, if we are flexible and adaptable. We have to take a leaf out of Tesco's book and know everything about the customer."
Mr Broome said: "Always more needs to be done in terms of added value to the customer. We must be alert each day and every day to what is happening not only with your local competition but with your global competition as well. It is fundamental and the challenges that we face are profound."
Added to the database on
18th August 2006
Useful links
Aerospace industry
http://www.accelerate.uk.net/
