The automotive industry was built around engines, but
now anyone who makes parts for them is facing a harsh
future. Revenues for internal combustion engines
and fuel and exhaust systems are all expected to
decline 44% through 2027.
Meanwhile, revenues for electric drivetrains and
batteries or fuel cells are expected to rise 245%.
But there is another problem. An internal
combustion engine powertrain has about 2000
parts. Battery electric vehicle powertrains have
about 20, sometimes less.
Beyond the major automakers, there are
actually thousands of parts in cars that come from
companies all over the world.
A whole branching supply chain of firms, each
dependent on the success of the others.
Many of those companies are small family owned firms
that have been around for decades.
A typical car contains about 30,000 parts sourced
from hundreds of suppliers.
In North America alone, there are about 100
suppliers of varying sizes that together generate half
$1 billion or more worth of revenue.
Stauch magnetics in Livonia, Michigan, is one of
those suppliers.
We've been in this building for about 50 years, and the
trees that are out front weren't there.
When I pull in, I see that and that's the history for
me that that makes me excited and reminds me just
how long we've been around and that we've got a duty,
especially in my role as president, to make sure that
we can continue.
Today they are threatened.
And if you can't adapt, then you're going to be again on
the outside looking in as the industry moves towards
battery electric.
The Storage was founded in 1952 by Edward Stauch, His
wife Ruth, and daughter Marjorie.
Really built the business from the early 60s all the
way up until just a few years ago.
So we were women, owned and operated, and the ladies
really cut their teeth heavily into the automotive
sector by selling magnets and magnetic bases to all of
the top three automotive companies that were here in
Detroit at the time. We're involved with lots of
different magnetic applications globally.
We've done about $7.5 million last year.
It was our banner year.
It has about 30 full time employees.
Alexis Zukowski, a welder and fabricator, is one of
them.
I'm really into mini bikes and cars and stuff, so it
kind of just started at home. And then I went to
school at MIT and learned through their welding
program and then Stauch is actually associated with
MIT. And so I applied here and I got the job on the
spot.
75 to 80% of its business revolves around serving the
automotive industry.
About half of its business is in making a machine that
is used in the manufacture of internal combustion
engines. The magnetic slide conveyor belt.
Like so many other companies, Stauch's fate is
closely tied to the fate of the fuel burning engine.
I think the internal combustion engine supply
chain might be somewhat stunned right now.
There is there's this big movement heading towards EV.
A lot of us are waiting to see what that really pans
out to be. And I'm seeing some hesitation on orders
and large programs that take years for development,
if you would, in order for them to get into the lines.
As we don't spend money on redoing new engines or
revising engines, then there's less reason for the
vehicle manufacturer to say, well, I need to buy a
new conveyor. Well, if it still works, they're
probably just going to keep fixing the old one or maybe
just revamp it slightly.
It's only when you spend money on a brand new
facility, then that's when the vehicle manufacturers
say, you know, I probably want all new equipment in
here just to make sure that I've got the latest.
And those are the opportunities to spend
money.
On the other hand, electric vehicles made up about 8% of
new sales in the United States in 2022.
That was a 55% increase over the previous year, but
still, 92% of cars sold are either hybrids of some kind
or are strictly gas burning.
Many questions around the viability of EVs don't
deliver simple or certain answers.
The Automobile Association of America or Triple A,
surveyed about 1000 people in 2022 on electric cars.
60% of them were still concerned about the
relatively high price of EVs, worried there are not
enough places to charge and fretted about running out of
battery while driving.
Among other things.
There are other concerns about the availability of
the minerals needed to make the batteries, about the
longevity of the batteries and the cost of replacing
them, about how well EVs can compete without
government support.
Looking back at solar as an example, there was a lot of
solar plants in Michigan that were brought online
because it was a big push by the government and I
watched a lot of those get shuttered and closed.
So it makes a lot of us think, I think internal
combustion engines, is this for real?
Does this stick around?
Is this something that's going to be our path?
The market will ultimately dictate that.
And I think the technology is exciting.
I think that there's absolutely change coming.
I just hope that it's paced more so this time.
All of these factors kind of weigh on suppliers and they
say, well, if if, if there's not going to be
enough of this or not enough power or whatever the
case might be, I'm just going to keep doing what I'm
doing. But yet the vehicle manufacturers are moving
ahead. And as they move ahead, the suppliers, if
they don't follow them, they're going to be
increasingly without new opportunities to sell more
product into those vehicle manufacturers.
The surge is coming.
The problems are affecting firms much larger than
Stauch. Even many of the largest publicly traded Tier
one suppliers such as Bosch, Denso, Magna and ZF.
I think that we're in a period now of heavy
investment, either through R&D or through M&A.
So I think it's actually very difficult to invest in
this group. I the companies that we like are companies
that really don't face this issue at all.
Larger suppliers are pivoting toward EV
components.
A lot of these suppliers are uniquely positioned to make
them. They already do stamping and they already
have relationships with the OEMs.
Some of the products they're making are
different, no doubt.
But I think that's really the answer for a lot of
these suppliers is now the issue is EVs obviously use
less parts than ICES do.
So in aggregate, there will be probably less to feed
more mouths, so to.
Speak, in a traditional internal combustion engine
drive line. You've got everything from the radiator
back to the rear axle. You've got not just the
radiator, there's the motor, and the motor
consists of a typically a cast iron engine block.
There's cast iron heads or aluminum heads.
You've got all of the internal combustion engine
pieces that are literally hundreds, if not thousands
that are part of that bill of material.
As you advance to the transmission, same sort of
scenario through the drive shaft to the traditional
rear end. There's also a lot of gears and a lot of
hard metal parts.
Most of all of that gets removed in an EV.
In addition, about 70% of the parts in an EV might be
different from those in an internal combustion vehicle.
That is a big problem if you are a small supplier
whose business relies heavily on making a few
highly specific components.
The size of the transmission market in 2019
was $93 billion.
Engine systems reached 73 billion by 2035.
Both are expected to be fractions of that same with
aftertreatment and fuel systems.
Automakers frequently launch a new engine family,
a group of often several engines with similar traits
to put in the company's different cars and trucks.
New engineering, new design, new features, and
new business for the countless suppliers that
make the parts going into it.
But that is disappearing in 2015.
There were 15 new automotive engine families
launched in North America.
By 2025, just ten years later, there will be only
two. There are even deeper, more profound changes coming
to automotive manufacturing.
Battery electric is more than just, Hey, we're going
to use a battery and electric motor to propel the
vehicle. It's given the vehicle industry a chance to
rethink how they put cars together.
And it's going to have a monumental impact on the
supply base.
Vehicle components have become simpler and
streamlined. Tesla introduced the concept of
Gigacastings. That is the process of making parts of
the car, say, part of the vehicle chassis out of a
single, very large casting rather than many smaller
ones that need to be welded together.
This means fewer parts, less labor all the way down
the line.
Just the mere the sheer fact of what that does to the
tooling industry, to the number of parts that are
required to build that, you know, basically mechanisms
to hold the parts together to weld it properly, all of
that changes.
Automakers want to bring more EV production in-house
than they did in the days of the engine.
Some of these OEMs are really good at making
e-motors and inverters, for example, or power
electronics. So that becomes a headwind for some
of these suppliers.
And they're all basically chasing the smaller pie of
EV components than they once had and that they're
competing against their very customers, the OEMs.
And everybody's trying to make the same fewer parts
and the concern would be that this creates a pricing
war which benefits the OEMs or they just basically
market share. They get a smaller piece of a pie than
they once had before.
It's hard to find an auto supplier that isn't
threatened by this.
Frankly, it's been a really crummy three and a half
years for the for a supplier and in some
respects for a good part of the of the vehicle industry.
The whole global auto industry long relied on
China as a reliable profit source as the country grew
into the world's largest market.
But declining sales in 2019 and other factors have put
car makers and their suppliers under pressure.
Also in 2019, a labor dispute between General
Motors and the United Auto Workers Union dealt a blow
to demand in North America.
The Covid 19 pandemic hit in 2020 first, shutting
production down entirely for nearly two months and
then slowing it for several more.
Production fell 20% for the year.
That we had 22 or 27 employees laid off.
Then came all kinds of supply chain shortages, raw
materials, semiconductors and so on.
Then Russia invaded Ukraine.
Then inflation.
Shipping costs saw an unprecedented rise during
the pandemic. So did oil prices.
Raw material costs shot up by the end of 2020.
For hot rolled steel is expected to rise 14% from
the price it was in fall of 2022.
Wages and rising interest rates also put pressure on
suppliers. Against this backdrop, these companies
are now going to have to figure out what they're
going to do about EVs.
They have four basic options, says a report from
S&P Global Mobility.
They can switch from serving Ice vehicles to EVs.
They can just milk the cash cow dry before shutting
down. They can double down buying competitors,
consolidating and becoming the biggest player in their
industry. Or they can sell out storage.
Magnetics is leaning into some other areas where it is
strong.
The biggest growth opportunity for us is to
continue to double down and to continue to offer the
expertise that we've had over all these years to
other manufacturers that are looking to incorporate a
magnet into their product.
They're not just magnets.
There's more to it.
There's heat, there's shock and vibration and all sorts
of things that many manufacturers don't know.
And to eliminate the potential for recall, that's
where we shine. We're able to do third party testing
and make sure that the magnets that come from mills
in China are exactly what they're expecting.
But the company is also testing out new ideas.
They have several products.
If you're going to survive, you have to be creative.
You have to be innovative, but you can't let it
overtake your business.
That's been a hard lesson for us here and me in
particular, as I've come up through the rankings here at
Stork. The biggest pivot that we've had here at Stork
was creating an entirely new brand and a division of
this company.
During the Covid 19 pandemic.
They found themselves for unrelated reasons, trying to
figure out a way to keep the dust from the shop out
of the building's front office.
Being a magnet, people, we decided that we would create
a filter and an apparatus that would stick to the
ceiling. Real simple design. And as the people
came back that were laid off from Covid, they asked
to have it above their head for the Covid reasons.
They've also developed supermac.
It's a magnet put on the front of a truck that is
used to pull iron and metal off of a road surface.
The pitch is that it will save people from tire
blowouts, especially at high speed.
Departments of Transportation are buying
these magnets now from us and they're driving over the
road surfaces.
And by keeping all that metal debris up, most roads
agencies report back that within the first month that
the magnet has paid for itself just in the cost of
tires to that one vehicle.
The impact that they make to that region is something
that no one's been able to put numbers to yet.
The company also came up with an especially offbeat
idea.
I had an employee come to me and he wanted to buy a
fishing magnet. He'd seen it online, wanted to do it
with his son.
This isn't a magnet for catching fish.
It is a magnet for fishing pieces of metal out of
waterways. So the company set the employee up with a
magnet and a rope and then got the idea of building a
submersible that could do underwater.
What Superman does on roads.
I don't know that we fully understand who the customer
is for that product yet.
I think that potential customers in the future will
be large areas like Daytona Beach or Myrtle Beach.
In Florida. It would be the larger municipal beaches
where they want to make sure that fishing areas that
are right adjacent to swimming areas are protected
for those that are using it. And I think that those
will be people that will be ultimately buying these or
using them from a rental fleet to take care of their
areas on a periodic basis.
Pivoting to an entirely new business is not easy.
Number one, you don't have the connections outside of
traditional automotive.
So maybe you might say I need to sell more into the
medium and heavy truck space. Well, that's great,
but it's a different set of customers, number one.
Number two, the scale is different.
They build less than a 10th of the number of vehicles
that they do in in what we call light vehicle or
smaller vehicles that you and I drive.
So the scale is different.
The customers are different. The size of the
parts are different. The way you manufacture them are
different. Different, different, different.
About a year ago, there was an airborne pathogen control
program that was put forth by our governor here in
Michigan. $10 Million was set aside for a product that
could potentially eliminate particles settling inside of
the top ten hospitals by count of Covid.
Patients here in the state of Michigan seemed great.
Air Trust was a perfect fit for that.
It was on us over a 30 day time frame to reach out to
all of the hospitals that were identified on a piece
of paper. To us, it was easy pickings and we
thought, This is great.
This is a home run. This is our dream.
We're going to make a lot of aero trusts.
The truth is, after 30 days, we couldn't get one
hospital to write a single page letter request that
they would have interest in the grant program that was
set forth and it expired without one being taken by
any of the hospitals.
Storage has also had trouble selling Supermag products to
some state transportation agencies.
Even though it's seems like such a no brainer from a
budget standpoint that a 15 to $20,000 product can have
a one month of return of investment and over a 25
year cycle in the case of Michigan here, could make a
massive impact.
Upwards of almost $100 Million in Savings of Tires.
But budgets are established, we've learned,
for the replacement of tires, not necessarily for
new equipment.
So getting this through the state and federal levels has
proven to be one of the most challenging.
Things of my career. It's what keeps me up at night.