Academic journal article
By Andrea, Dave
Business Economics , Vol. 41, No. 4
My career has taken me from academic researcher developing position papers on health care, trade flows and value chains, to equity analyst following small- and mid-cap stocks, to forecaster creating sales and production outlooks and performing general management with a trade association. While the positions are varied, there are two common denominators: the auto industry and business economics. The complexity, dynamics, and scale of the auto industry have provided the need for analyzing and forecasting industry trends from a wide range of perspectives. My grounding in business economics has given me the ability to question, model, and interpret these trends for use by a wide range of final customers.
First, let me describe my job. I currently apply business economics that I learned at Miami University (Ohio) and my professional experiences with the Original Equipment Suppliers Association. OESA was created in 1998 and is a market sector association of the 101-year old Motor Equipment Manufacturers Association. In eight years, the Association has grown to represent nearly 400 members who supply components and services to the companies that manufacture passenger cars and light trucks. In a typical calendar year, the nine other professionals I work with coordinate 12 quarterly peer group councils, organize some 20 additional educational meetings, conduct dozens of surveys, and facilitate three or four major research projects.
The core need for OESA is that the auto industry is a monopsony. That is, there are relatively few buyers (the vehicle manufacturers and the global system integrators) for the some 3,000 to 5,000 core suppliers that make up the automotive supply chain. This places tremendous commercial power with the buyers. Increasingly, there is also consolidation occurring in the raw material sectors, such as steel and plastics, which feed the auto suppliers. This consolidation provides greater commercial leverage for these raw material companies, again, over the multitudes of suppliers in the middle of the value chain.
As I will explain below, my economics provides a solid grounding as the Association takes on the commercial issues that emerge from the lack of commercial power balance throughout the automotive supply chain. In addition, the Association has grown to provide a significant value proposition for any company selling into the industry. These services include benchmarking operational performance improvement, creating primary information through surveys, analyzing secondary industry and national statistics, and providing industry information to outside constituents.
According to financier Wilbur Ross, an estimated 20 percent of the supplier industry assets are "up for sale." Analysis that OESA has performed shows that some $20 billion of U.S. automotive auto industry revenue is in companies that are under Chapter 11 restructuring or that are undergoing major restructuring outside of bankruptcy court. Helping our supplier members make sense of these structural changes and dynamic business conditions--and helping them to make decisions to deal with them--draws heavily on my economics background.
For example, when I joined OESA in January 2004, hot rolled steel--a common industry benchmark--was selling for $400 per ton. By September 2004, that same ton of steel was selling for more than $700 per ton on the spot market. Steel mill consolidation, scrap prices, China demand, coal mine fires, energy prices, and transportation constraints were all likely contributors to the situation. Given that some suppliers can have 30 to 60 percent of their cost structures linked to materials, and steel in particular, and that many operate with earnings-before-interest-and-tax (EBIT) margins as tight as five to six percent, there is no room for the cost of a major input almost doubling within nine months.
What were the causes and effects producing the record spot prices? …