Q&A: OESA's Julie Fream
We talk with Julie Fream, President & CEO of OESA about the impact of COVID-19 on the North American supply base.
The Original Equipment Suppliers Association (OESA) represents the interests of automotive suppliers to OEM customers, throughout the supply chain, and federal agencies in Washington, D.C. As the association’s President and CEO since 2013, Julie Fream knows how suppliers are weathering the impact of the coronavirus pandemic. We talked to her about the impact on the North American supply base.
Julie Fream, President & CEO, OESA
What is the mood of suppliers in North America today?
Fream says the region’s suppliers are cautiously optimistic that business will return to a level similar to pre-COVID. “But the question is, “when?”, she says.
She points out that the regional upturns in COVID-19 cases that began in June are influencing demand for new vehicles, which ultimately drives production. The outbreaks themselves, she points out, could “affect the operations of some suppliers and OEM facilities in some areas but not others.”
How strong was the supply base financially before the pandemic began?
The entire North American auto industry was stronger going into the coronavirus pandemic than it was ahead of the Great Recession of 2008-2009, Fream says. She adds that many suppliers were retained many of the efficiencies they made during the recession to better cope with the massive production shrinkage.
But Fream says OESA began detecting an upward creep in breakeven points as car sales grew steadily year over year. “Some companies got comfortable with how it seemed things were going to be,” she says.
Fream notes, suppliers were also dealing with the continuing pressure to spend more on technologies in such areas as safety and electrification. The sudden drop in sales caused by the pandemic has thrown off the industry’s ability to maintain financial balance.
The next big issue for suppliers will be determining how to restore their budgets for R&D. Fream notes that the supply base has traditionally provided about 70% of automotive innovations. Being able to generate the necessary funding to maintain that level will depend largely on a healthy new-car market.
That mission is being complicated by financial pressures on OEMs earlier this year that forced them to delay or cancel some of their product programs. “These decisions don’t have an immediate impact,” Fream points out, “but they will flow through the supply base over the next 2-3 years.”
So where does that leave suppliers now?
“We are very concerned about the Tier 2 and Tier 3 suppliers,” Fream says. “The rest of the year could be financially difficult for them, because receivables will be lean until car sales gain more traction.”
When the North American auto industry went back to work in May, the focus was on the immediate challenges of COVID-19 protection protocols. Now, months into the recovery, she says, “the hope is for stabilization by the fourth quarter.”
As for next year and beyond, Fream notes that the more demanding local content requirements of the new U.S.-Mexico-Canada Agreement put pressure on the industry to repatriate at least some overseas production to the U.S. But she believes such decisions will not come anytime soon.
“Companies make decisions in terms of costs,” Fream notes. “There is no point in uprooting production unless there is a competitive advantage for doing so.”
Certainly, the cost of physically moving production from another country is a difficult sell right now. “The coronavirus has put a severe strain on budgets everywhere,” Fream explains. That alone, she says, means most companies “won’t make big decisions about moving capacity until the industry stabilizes.”
How do you rate the industry’s plant-level response to the pandemic?
Fream notes that OEMs and suppliers with global footprints saw what worked in China and Europe, where the pandemic hit earlier, and learned from their experiences. “There was a lot of cooperation that enabled the industry to quickly determine which countermeasures are effective, she says.
Now the challenge is for companies to deliver on the measures required for virus protection and to help their workforces recognize what they must do to keep everyone safe. “There’s always some pushback, and change is hard,” Fream acknowledges. But she says most employees “recognize that new protocols are here to stay.”
Fream has been especially impressed with how quickly suppliers and OEMs swung into action to produce personal protection equipment (PPE) for medical personnel. Innovation continues at the employee level today, she says, as workers on the front line continue to come up with innovations to match work requirements with the realities of coronavirus containment. One example: Personal fans designed to keep plant floor workers comfortable without distributing the airborne virus as big industrial fans would do.
“There are fundamental changes from a societal standpoint that are going to redefine the auto industry and its work environment.”
What lasting effects will COVID have on the supply base?
“There are fundamental changes from a societal standpoint that are going to redefine the auto industry and its work environment,” Fream predicts. That means more employees will work at home at least part of the time. She also points out that a proportion of the workforce may be uncomfortable returning to work at all because a medical condition makes them more susceptible to the coronavirus.
How these proportions settle out remains to be seen. Certainly, an effective vaccine will have a significant impact on employee attitudes.
Even so, Fream says, the pandemic has pushed companies to make permanent changes. She anticipates “more flexibility about working at home and the dynamics of how teams operate.”
What is your advice to suppliers about the future?
Fream notes that the auto industry was already transitioning to a new generation of employees before the coronavirus arrived. The COVID-19 crisis accelerated that process.
Her recommendation is for companies to continue to bring in new people to their organizations, because she believes the most successful enterprises in the future will be those that recognize “a diverse and integrated workforce provides greater value than one without those characteristics.”
The companies that “own” this philosophy as part of their values, she says, will be the enterprises most likely to thrive in a world of redefined industry norms.