Strategy Review - Expert Interview Climate change, Corona, Tesla and the Consequences for the Foundry Industry
Since the 4th quarter of 2018, the aluminum foundry industry has changed noticeably. After years of permanent growth (worldwide cast aluminum production in 2000 was approx. 8 million t → in 2017 approx. 18 million t), there was a decline in production figures in the 4th quarter of 2018 for the first time in 50 years (except for the crises 1994/95 and 2008/09).
At this point, the ever-increasing discussion about global climate change had a significant influence. The automotive industry with its classic combustion engines was generally quickly identified as a major root cause. E-mobility was suddenly on everyone's lips. As a result, the production figures of the previous bread and butter parts (powertrain) of the aluminum foundry industry declined sharply.
Favored by the discussions on climate change, the American automobile company Tesla increasingly became the focus of global interest. The politically and socially increasing pressure to reduce CO2, the resulting economic successes (share price, company results) and the partly existing technology dominance (battery, software, and hardware technology) were the main pillars of the new Tesla success.
With Tesla's success, processes and technologies used there attracted new attention. A well-known development in the automotive and foundry industry for years towards ever larger structural parts and thus larger casting machines reached a new dimension through the "courageous" Tesla strategy. Gigacasting was born and was accepted and "copied" surprisingly quickly by the entire automotive industry as a guarantee of success.
Even if the improvement in the sales and earnings situation that has started in the meantime has eased the situation of the foundries somewhat, the environment and the challenges have not changed. The current “calm” does not protect foundries from the consequences of climate change , Corona, and developments at Tesla.
Expert Interview with Johannes Messer from Johannes Messer-Consulting GmbH
Your statements on climate change, Corona, Tesla and the consequences for the foundry industry, on the one hand, they arouse hope, but also clearly show the risks for foundries. The change process is not yet complete. From your point of view, what does a current interim conclusion look like?
JMC: From my point of view, an interim conclusion looks as follows:
- The financial figures in the foundry industry during Corona were bad, but not as bad as expected.
- The corona pandemic has given many foundries a break, but not the necessary technological and economic development.
- The transformation to new drives (e-mobility) has increased the trend towards lightweight construction and the opportunities for cast aluminum, but not facilitated it.
- The castings, machines, investments, and opportunities are getting bigger, but so are the risks.
- The OEMs and Tier 1 are (again) investing in the aluminum foundry industry (giga-casting), the traditional customer foundries are still very cautious.
- Speed and flexibility beat tradition. Asia beats Europe?
These are statements that arouse interest in learning a little more in detail. In your opinion, what is the current economic situation of aluminum foundries in Germany?
JMC: The question can certainly not be answered in a general way, as there are of course large individual differences. What we can basically see, however, is that, on the one hand, our productivity advantages are permanently diminishing, but at the same time the general framework conditions in Germany, especially for SMEs, are getting worse. Operating a die casting foundry economically in Germany under the current conditions is becoming increasingly difficult. As a result, nowadays German foundries predominantly invest abroad. The frequently cited proximity to the markets was not always the reason for this development. The real reason was in most cases that only foreign locations could also "save" the foundry locations in Germany.
If we want to reverse this trend, everyone must do their homework. The politicians, the trade unions, the associations but also the foundries. Increasing productivity must become a top priority.
You complain about the lack of, but necessary technological and economic development of the foundries during the pandemic. What do you mean exactly?
JMC: I often feel that many foundries still believe that a future without change is possible. The transformation in the automotive industry will come. The latest surveys show that it is coming faster than most of us are expecting. Our previous bread and butter parts of the powertrain are a thing of the past. Our product portfolio will change and with it many of the previous economic and technological guarantees of success along the entire casting value chain. As an example, I would like to mention mechanical processing. In the past, I believe that many foundries have built up complex machining know-how. As a result, the foundries were able to supply (partially) finished castings (e.g., engine and transmission parts) to the OEMs. As a result, the total value added of the castings was significantly increased, for the most part, the price quality.
This competence will no longer be needed in the future in its previous form. The "new" castings (chassis & structural parts) require different competencies. In the casting process, topics such as micro spraying, rheocasting or vacuum are required. In the subsequent processing, processes such as heat treatment or joining techniques are required. Here I see an urgent need for action in many foundries.
Where do you see the main opportunities for foundries if the trend towards lightweight construction, as you say, continues to grow?
JMC:We need to further reduce the delta at global benchmark prices. Competitive prices will continue to be an essential award criterion in the future. The foundries receive some support in the awarding of new orders from the topic of sustainable supply chains (reduction of CO2 emissions).
I see chassis and structural parts as the main market for the future of aluminum foundries. In this segment, developments are currently taking place at all OEMs. Due to the material and the process, the aluminum die casters have a good starting position, but are in competition with other materials (e.g., steel) and other production processes (e.g., Al extrusion, Al sheet metal forming).
If the foundries manage to use the existing technological and economic potential, the foundries can offer the OEMs pioneering solutions. However, I am convinced that these solutions can only be created through the real cooperation of all the companies involved in the process. Europe has by far the best foundry network (tool makers, foundries, machine manufacturers and customers), and we should finally make greater use of this remaining advantage.
You say the castings, machines and investments are getting bigger and bigger. Do you derive this from the current hype about giga casting triggered by Tesla?
JMC: The trend towards ever larger castings and thus also towards larger casting machines has been around for many years. Tesla was a catalyst here. What Tesla did was brave and came at just the right time for the foundries. At the end of the day, it helped the aluminum foundries.
To build on the successes of the past in the future, however, more than just copying is required. Together we must find the right technologically and economically correct solutions. If the solutions are reduced solely to the size of the castings and the casting machines, I think we are making a mistake.
The OEMs and Tier 1 are investing in aluminum die casting. How do you explain this trend?
JMC: This trend is not new either. The OEMs recognized 10 years ago that the long-term demand for chassis and structural parts would increase dramatically. At the time, the OEMs worried that the increasing demands could not be met by the customer foundry. For this reason, German OEMs such as Daimler, VW, Audi and BMW reacted years ago and again invested in their own foundries or built new ones. Technologically, the in-house foundries are well positioned today, especially for the important future products of chassis and structural parts.
When it comes to giga-casting, as we are currently defining it, the OEMs will have no choice but to integrate casting into the assembly process. With the size of the parts, there is no real alternative. To achieve an economic and technological optimum, in my opinion, the OEMs should strive for shop in shop solutions with benchmark companies along the entire value chain.
Above all, foundries, tool makers and machine manufacturers urgently need to position themselves at this point. Strategically, the course must now be set for the future.
Your interim conclusion ends with a question: ”Speed and flexibility beats tradition. Asia beats Europe?” What do you mean by that?
JMC: For some time now, I have been observing how essential guarantors of success are changing and shifting with a corresponding concern. Consequently, we can see that technological milestones in the foundry industry are no longer necessarily set in Europe.
With regards to the automotive industry, it should be noted that it will be much less complex to build cars in the future than in the past. The powertrain in its previous form as a lighthouse of competence and thus an entry barrier for new providers will disappear.
The OEMs will be confronted with new competitors in the future. Tesla is just one example. In this “new” market, success will be defined a new and, in the future, more strongly in terms of speed than in the past.
In this changing environment, I see the foundry industry as particularly vulnerable. Speed and flexibility have never been the strength of the foundry industry. Unfortunately, this has not changed, as current trends show. The first Giga-Casting machines were partly built in Europe, but unfortunately mainly sold in Asia. Even if I don't believe that the future will be exclusively “GIGA”, this point goes to Asia in terms of speed.
Looking to the future, what is your advice to foundries in Germany / Europe?
JMC: I continue to see the extraordinary foundry network as a significant advantage in Europe. If we use this network and jointly tackle the opportunities that currently present themselves, we will be able to offer the most technologically and economically attractive solutions in the competition for chassis and structural parts. In my opinion, success in Germany/Europe will be defined by the ability to work together in the foundry network.