Report: Mold making industry strong, but smaller shops may struggle

The mold making industry is going gangbusters, and now is the time for smaller shops to strengthen their operations, advises a study commissioned for the auto industry focused Original Equipment Suppliers Association.

"With the bubble we are in now, smaller shops need to position themselves for the future," said Laurie Harbour, president and CEO of Harbour Results Inc., the Southfield, Mich., market research firm that complied the study.

The OESA-commissioned study, called the Q2 2017 Automotive Tooling Barometer, is the latest version of a quarterly study of tooling suppliers to North American automakers. The second quarter survey included 61 respondents, 72 percent of which were mold shops and the rest die makers. Shops with sales between $5 million and more than $40 million were represented.

Smaller mold shops should develop relationships with primary shops, the study advises. Primary shops as defined by the study are large firms with the resources to take on project management for automotive OEMs and Tier 1 and Tier 2 companies. Secondary shops, typically with annual sales of less than $10 million, are often called to do work for primary shops when primary shops have overbooked their capacity.

Secondary mold shops need to plan their sales to fit what they do best, seeking higher margins and developing niches, according to the study.

Advice for primary shops includes establishing a strong tooling supply base with secondary shops and then to help those shops develop into stronger suppliers. The big mold makers should focus on becoming preferred suppliers to OEMs and large Tier 1 firms. They need to drive efficiency in their shops and make capital investments to keep them competitive, the study advises.

Laurie Harbour said several years ago, auto OEMs typically worked with hundreds of tool shops as they pushed to get the best price for tooling. About three years ago that landscape began changing.

"Now OEMs need to work with 50 to 100 of the best shops to keep competitive," she explained.

Many large mold makers have developed special niches to compete, and their size means they can take on whole tooling packages for as many as 50 parts for OEMs. They can provide a higher level of project management because they have a lot of resources. Harbour said there are only about 25 primary shops able to do all that.

Mold makers can look forward to continuing strong demand for their services, the study predicts. This year, auto OEMs plan 42 product launches and redesigns. Launches in 2018 and 2019 will be fewer but still high, at about 35 per year. Updated styling on existing products, or "facelifts," will help even out the workload for some mold shops. Some 21 facelifts are expected this year and 28-29 per year in the next two years.

Not all mold shops are sharing the industry's current good fortune. The study found the smallest shops are running at only 60 to 70 percent of capacity. Primary shops with sales exceeding $40 million, however, are posting capacity utilization rates as high as 95 percent. On average, U.S. shops were running at lower rates than their Canadian counterparts. Of the study respondents, 68 percent are based in the United States vs. 32 percent in Canada.

The study found a major difference on how the two types of shops approach sales. Primary shops generally oversold their capacity because they are more susceptible to order delays and work being put on hold. When they landed more business than they could comfortably handle, they outsourced to other mold shops.

"Each supplier has distinctly different approaches in the marketplace," said Julie Fream, OESA president and CEO, in a news release. "As a result, primary shops typically oversell to maintain revenue size and turn to outsourcing to help level loads during particularly business periods."

Booked but unfilled orders dropped in the second quarter, the study found. The average shop had 44 percent of sales booked, down by more than 20 percent.

Work on hold was about 11.5 percent of projected sales, indicating delays in OEM projects, mainly among Detroit's big three automakers. Primary shops were more vulnerable to experiencing work on hold. Primary shops also were less likely to get progressive payment terms. About 52 percent of primary shops reported good terms versus 70 percent for secondary shops.

"Secondary shops are more adamant in getting favorable payment terms from the primary shops," Laurie Harbour said. Primary shops "have a constant churn of cash" that can help tide them over while waiting for payment from OEMs. Their lines of credit with banks can help smooth out cash flow.

Overall averages for profitability are relatively healthy in the mold building industry, the study found. Earnings before interest, taxes, depreciation and amortization were about 17 percent of sales for primary shops, while secondary shops had EBITDA averaging 7 percent. The difference was mainly due to better control of overhead. Primary shops curtailed general administrative costs to about 7 percent of sales versus 17 percent for their smaller counterparts. Manufacturing costs accounted for about 75 percent for each group.

The fragmented nature of the secondary shops, of which there are hundreds in North America, makes them ripe for consolidation, Harbour said. Many of their owners are nearing retirement ago and often find the next generation of the family is not interested in carrying on the business.

"Larger tool shops will buy smaller shops," she predicted.

Private equity firms won't be interested in owning small mold shops, but consolidation is not occurring at the same pace as what is happening in other supplier sectors, partly because small shop owners want to work as long as possible. This love of work is why many of them started businesses.

Shops were mainly optimistic about future business, with 83 percent indicating they were very or somewhat optimistic about the next three months.

Southfield, Mich.-based OESA is one of four divisions of the Motor and Equipment Manufacturers Association.

Harbour Results, also in Southfield, is a consulting firm for the manufacturing industry and offers operational and strategic advisory expertise.