Carriers confront GM shutdown

General Motors Fabricating Plant in Brookpark Ohio (Photo: Shutterstock)

General Motors Fabricating Plant in Brookpark Ohio (Photo: Shutterstock)

The General Motors (GM: NYSE) announcement made on November 26 to shut down five auto-assembly plants has broadly affected the market to support auto-manufacturing.

Many carriers in the Michigan, Ohio, and Ontario regions have concentrated their freight services in auto-part transport. This has put them in a volatile position as the auto-market expands and contracts with changing consumer preference and the economic climate. Auto-manufacturing leverages the just-in-time supply-chain model and is reliant on third-party logistics to service original equipment manufacturers.

Among those who are financially exposed to changes in the auto sector, Universal Logistics Holdings (ULH: NASDAQ), an asset-light transportation provider based in Warren, Michigan, stands out, with as much as 42% of its operating revenues stemming from automotive activity.

Universal offers value-added services for manufacturing focused clients which is comprised of lean inventory control, sequencing, kitting, and sub-assembly. Sales for value-added services regularly increase in the second calendar quarter due to the automotive industry’s spring selling season and decreases in the third quarter as OEM plants shutdown for vacations and changeovers.

Universal’s third quarter earnings conference was heavily focused on changes to the automotive industry and regular plant shutdowns were mentioned. CEO and Director Jeffery Rogers explained that the company also recognized the shift in consumer preference in favor of smaller cars.

“The beauty for us is we support every one of the largest automaker manufacturers, everyone on their pickup truck and SUV plants. That’s where we do their inbound logistics.”

However, he did mention that the auto market softening had impacted Universal at one of the plants it supports. The company previously struggled in 2016 with their exposure to the steel industry due to a strong dollar favoring foreign imports.

Universal’s operating ratio for Q3 2018 was roughly 94% with income from operations amounting to $22,530,000. From its June 18th report written by J. Bruce Chan, Stifel considered the company to carry a degree of risk with its vertical concentration and advises investors to hold stock rather than buy.

“The Value-Added-Services division has seen strong growth in Class 8 truck demand, which is benefiting its Westport business, but any fall-off in that business or the company’s legacy automotive business could put pressure on growth.”

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Universal first went public in 2005 before undergoing acquisitions of LINC Logistics in 2012 and the Westport Axle Corporation in 2013. These acquisitions enabled Universal to gain value-added, third party logistics supply chain contracts with General Motors. Recently the company stock surged in price from $27.36 on July 26 to $34.21 on August 2 before falling from $34.73 on October 16 to $25.99 on October 29.  Since then the stock slightly improved before falling in October. News of the GM shutdown saw the price decline from $24.14 on November 21st to $20.29 on December 12th.

Universal did not respond to FreightWaves inquiries on the GM shutdown.

The Moroun Family owns a 71% controlling stake in Universal and is also invested in major transportation assets such as the Ambassador Bridge connecting Detroit with Windsor.

But Universal isn’t the only company with exposure to GM’s latest moves.

Team NEO, a non-profit organization which promotes job creation in Northeastern Ohio, has found there are between 580 and 1,100 companies in Ohio which are considered part of the automotive supply chain.

Still, Universal and others like it still have the opportunity to diversify to reduce exposure to automotive volatility.

A transportation equities analyst reported that logistics carriers such as XPO (XPO: NYSE) might pursue final mile delivery to fill demand for bulky goods being delivered from warehouse stores like Home Depot (HD: NYSE) and Lowes (LOW: NYSE) since courier companies like FedEx (FDX: NYSE) and UPS (UPS: NYSE) are not oriented or interested in this market. Universal already operates a final mile delivery service and has a fleet of straight trucks suitable for this market.

Team NEO has advised carriers to expand to add more platforms within the auto supply-chain as well as into the growing aerospace and defense markets. In 2016 the United States was the largest exporter of completed aircraft and aircraft parts as well as military equipment. At the end of 2017 Boeing had orders for almost six-thousand commercial planes, a backlog of seven years-worth of production. Boeing’s (BA: NYSE) new aerospace plant in Charleston and Airbus’s (AIR.FP: Euronext) new plant in Mobile can drive demand for carriers. However, sales cycles for these markets are long and the ability to enter new verticals is slow for carriers.

GM’s interest in electronic and autonomous vehicles could provide suppliers with new opportunities to contribute to the automotive manufacturing market. Members of Congress have considered lifting the manufacturer cap for the electronic vehicle tax credit to extend the incentive to 2022. The lithium-ion battery industry alone is currently worth $23 billion and is expected to grow to $93 billion by 2025. Honda (HMC: NYSE) and Softbank (SFBTF: OTC US) are investing roughly $5 billion in General Motors’ automation subsidy. The prospect of “on-demand” fleets of vehicles is positioning material suppliers to establish forward-looking programs for future automotive preferences.

There is also the promise of competing auto-manufacturers buoying the market for suppliers and carriers. Fiat Chrysler (FCAU: NYSE) has already shifted away from producing sedans in favor of SUVs and pickup trucks.  U.S. sales for FCA were up 8% in November and their plant utilization stands at 92%, well above Ford’s (F: NYSE) 82% and GM’s 72%. This has incentivized the Italian-American automaker to open a new Jeep factory in Detroit. Other foreign car companies including Hyundai (HYMTF: OTC US), Toyota (TM: NYSE), and Mazda (MZDAY: OTC US) have made similar announcements or expressed interest in new developments in the United States. However, it will be very difficult to compensate for GM’s immense absence.

Tesla (TSLA: NASDAQ) has reached out with proposals to fill GM’s absence in the logistics market. Elon Musk suggested he might buy one of the five GM plants in the Great Lakes region scheduled for shutdown. The original Tesla Factory in Fremont, California was once a General Motors assembly plant. Musk has also hinted at buying trucking companies to expedite sourcing batteries for manufacturing and delivering the Model 3 to consumers.

The U.S. auto-market demonstrates how volatile industry can be for logistic operations. It’s vital for carriers to find loads for their owner operator contracts to prevent them from going elsewhere.