Date May 2018
Gordon Brothers by the numbers
- Strong light vehicle sales for March 2018 (+6.2%) were offset by declining sales in April (-5%), resulting in flat year-to-date totals over last year
- The market for stamping presses in general is stable to slightly down, depending upon equipment specifications
Industry snapshot: The automotive industry is a mature market experiencing limited growth. The post-recession industry has adapted to a wide variety of changes including, but not limited to, government bailouts, environmental initiatives, government legislation, and the appreciating U.S. dollar. After rising for seven straight years, domestic light auto sales dipped in 2017 (-1.9 percent). After a slow first two months of 2018, the “Detroit Three” all saw U.S. sales increase in the month of March over last year. However, April sales were disappointing, declining 5 percent over last year. Building on positive momentum for electric vehicles, Tesla Inc. reported the most productive quarter in its history for Q1 2018. After the “March boost” the overall auto industry has been upgraded from negative to stable. Automakers are now expected to sell 16.9 million light vehicles in the United States in 2018, up slightly from early first quarter forecasts.
Supplier expansions driving machinery demand: To meet complex OEM requirements and tighter production schedules, automotive suppliers are expanding and investing in operations. In March 2018, Tier I supplier Yorozu Corp. opened its advanced metal stamping facility in Alabama at the cost of more than $100 million. DENSO announced plans in February of this year to invest $190 million to expand operations to boost the production of fuel pumps and gasoline injectors. This followed its 2017 announcement of plans to invest $1 billion in its main Tennessee plant to meet growing demand for electric vehicle parts. Magna International announced plans to build a new facility in South Carolina to help supply parts to BMW, and in late April, SMP opened its $150 million facility to supply door panels, bumpers, and running boards to Mercedes Benz. These recent examples of expansion and investment are an indicator of a rapidly growing market for machinery used to manufacture automotive parts and assemblies.
Technological advances lead to increased efficiencies: Due to the historically labor-intensive nature of automotive production, technological changes are rapid as companies look to reduce labor costs and increase overall efficiency. The late model nature of the subject assets makes them more marketable as they possess current technology and capacity and allow for OEMs to continue their focus on streamlining production processes, reducing labor requirements, and increasing efficiencies. This further allows the industry to increase revenue growth at higher rates than wage growth, which has largely been achieved over the last few years. With this industry picking up, many suppliers have also changed the way they finance their operations. The market is seeing companies take advantage of low interest rates and higher used machinery values to find competitive, affordable financing to expand operations.
Stamping press values are mixed: Recent market research indicates that the market for stamping presses in general is stable to slightly down. Within the metal stamping machinery market there can be distinct value trends based on equipment specifications. As an example, in the current market, values for higher tonnage machines (1,000+ ton capacities) are slightly depressed as demand from the automotive segment, which drives a significant percentage of manufacturing demand for larger presses, is down relative to demand from 2011 through 2016. However, these values are still well above market lows from 2008 through 2011. While demand has fallen for these presses, there are very few of these available on the used market.
Alternatively, current values for medium tonnage machines (100- to 400-ton capacities) are stronger as that equipment is typically in higher demand for smaller, precision stamping piecework used in a variety of industries. In all press sizes, late model machines 10 years and newer are the most desirable, while those built prior to 1970 are less desirable. The values for these older presses have been soft for the last few years.
Market for die cast equipment is stable: Industry participants report that there is currently a healthy balance of supply and demand of die casting equipment in the secondary marketplace. Late model machines are selling well, particularly those with shot end and control advancements. Certain manufacturers, such as BuhlerPrince, are particularly desirable because used machines are not readily available and new machines are subject to long lead times. Older machines and machines in poorer condition are not as marketable. The most popular size machines are between 400- and 800-ton capacity. Machines with larger than 1,200-ton capacity require a longer market period due to a more limited user base. Lenders should discuss appropriate liquidation timeframes with appraisers for these sizes of machines.
The current market for die cast machines is for late model or new equipment. Most buyers are currently looking for machines that are less than 10 years old. If the equipment is 15 years or older, the machinery is perceived as needing a rebuild. In these cases, users will take into account the cost of rebuild and compare that to the cost of a new machine.
Maintenance critical to maintaining value: The age, maintenance practices, and utilization of machinery are all key value considerations. Newer equipment is generally more desirable as the market seeks the most modern technology. Maintenance practices are important as proper care can extend the useful life of equipment beyond what is normal and expected. Poor maintenance can shorten the life of machinery and lead to production issues. Utilization is important since a machine being run on a single shift will have a longer chronological life than a machine running multiple shifts. These multiple shifts increase the effective age and reduce the remaining life, thereby affecting value. Lenders should expect appraisers to consider these factors when estimating value.
Lenders should be wary of certain collateral: Custom assembly, sequencing, and single purpose automotive production machinery is generally expensive to purchase due to high design and engineering costs. These machines will have very limited resale value unless sold to an end user making the exact same part. In liquidation scenarios, these machines generally only have component or scrap value. Other equipment with potential for limited value return include painting equipment, part-specific test and measurement equipment, and installation intensive equipment, which can be cost prohibitive to remove. Standard metalworking and plastics equipment, which remain common in many types of manufacturing, are typically widely marketable and represent good collateral.
Gordon Brothers is closely monitoring several key issues including the recent announcement by Ford to eliminate its Fusion, Taurus, and Fiesta models over the next few years, as well as any potential changes to federal regulation, such as the recent attempt to overturn Corporate Average Fuel Economy (CAFE) standards by the Trump administration, which was halted in the Second Circuit Court of Appeals in April 2018. Changes to state and federal regulations should be routinely monitored as significant changes may have an impact on future equipment values.