Automotive Coatings Market

By Christine Esposito | August 11, 2005

With production numbers down in North America and Western Europe, automakers are finding it harder to maintain profit levels, and are seeking new growth in emerging markets.

Regardless if the automaker is Japanese, Korean, German or American, OEMs are trimming costs throughout the production process. This news comes as no surprise to major manufacturers of automotive OEM coatings, as they change their way of doing business.

"Meeting the continuing price-down expectations from all OEM automotive manufacturers-where raw material content of the finished product is made up of non-commodity type materials, making up 80-plus percent of the final coating product cost-is a huge issue," said Dennis Taljan, global technical director with PPG's automotive coatings business.

Coatings companies are not only making the paint, but also finding more efficient ways of applying it. And all this at a time when coatings makers have taken on larger roles in the production process even as vehicle makers are searching for new ways to use less paint.

According to Chemark Consulting Group, Southern Pines, NC, auto paint consumption fell four percent in North America from 79.2MM gallons in 2002 to 76.2MM gallons in 2003, with a net one percent efficiency gain by the automakers. The gallon-based loss stems mainly from the use of higher solids, more efficient spray applications, lower film rates and fewer rejects. For 2004, Chemark is predicting a volume increase of just 1.2%.

"In today's automotive market, most automotive coating manufacturers, and suppliers to automotive in general, are faced with what has been to referred to as 'unprofitable prosperity,'" said Taljan. "In that, even when overall economic factors are positive and automotive sales are strong, the amount of coating products used per vehicle is shrinking due to improved application efficiencies and alternatives to conventional coating systems in conjunction with the continuing price-down pressure."

These dynamics mean coatings manufacturers have been forced to expand their expertise, carving out positions in the value chain that make them an indispensable part of the process.

"Such opportunities can range from service contracts where a coating supplier assumes total responsibility and is paid for complete management of an OEM paint process, to support type functions of managing OEM customer logistics and purchasing," Taljan said. "This of course requires investment in and development of new skill sets and competencies for an automotive coatings supplier in order to be successful in these new areas of opportunity."

Emerging Markets
While North America and Western Europe still represent two-thirds of the global OEM market, activity in these markets remains relatively flat aside from slight shifts in market share as Japanese and Korean auto makers jockey against Ford, GM and Daimler Chrysler. The 2003 North American automotive OEM coatings market was valued at $2.056 billion, with an annual growth rate of just 2.7% through 2008, according to Chemark.

Photo: DaimlerChrysler
J.D. Power and Associates reported that 2003 sales of cars and light trucks in the NAFTA region totaled 15.9 million units, down from 16.4 million in 2002. High inventory levels were partly to blame for the lackluster market, according to Bob Schnorbus, chief economist with the market research firm.

So far in 2004, U.S. auto sales remain in low gear. According to the U.S. Commerce Department, slacking auto sales managed to drag down U.S. retail sales for the first time in four months. Vehicle sales dropped 3.9% in January, most likely a result of harsh weather conditions in parts of the U.S., and fewer incentives such as low or zero percent financing offers which lured buyers at the end of 2003. For 2004, J.D. Power is predicting a slight rise in car/light vehicle sales to approximately 16.3 million units.

In seeking new avenues for growth, vehicle manufacturers are hitting the road, traveling to emerging markets that offer new revenue streams, such as Eastern Europe, Asia-Pacific and India.

What markets are hot? Specifically speaking, anywhere in the Asia-Pacific region, including India, Thailand and China. According to forecasts made by CSM Worldwide, a Farmington Hills, MI organization that offers competitive and strategic information services for the global light-vehicle industry, production in Thailand will rise from 770,384 units built in 2003 to more than one million built in 2005. In India, a rising middle class will most likely fuel demand, as production will rise from 935,559 units in 2003 to 1.4 million by 2008.

China's numbers are even more staggering. CSM reports that calendar year production was 3.65 million units in 2003, and that number is expected to double, reaching 7.07 million units, by 2009. In North America, production numbers will hover between 16.1 and 17.1 million units.

Paint suppliers such as PPG, BASF and DuPont are eyeing-and moving into-countries that are adopting the "car culture."

"Growth in India, China, Thailand and Eastern Europe represents some export production to Europe and North America, but in most cases represent new automotive market growth," commented Robert White, director, substrates protection systems, PPG. "Growth predictions for the automotive market in China have received the most recent attention of automotive suppliers, who are moving quickly to establish the necessary manufacturing and technical infrastructure to capitalize on these growth opportunities."

DuPont Performance Coatings is doing just that. In July 2003, the company inked an accord with Beijing Red Lion Coatings Company Limited, Beijing, to form a pair of automotive coatings joint ventures. Operating as DuPont Red Lion, the JVs will have an annual capacity of 20,000 tons (DuPont has since increased its stake in those operations; see p. 10 in this issue.).

"As one of the fastest growing automotive markets in the world, China will play an increasingly important role in our future business plans," John R. Lewis, vice president, DuPont Performance Coatings Asia Growth Initiatives, said in a press release.

"Almost all international automotive manufacturers are planning major investments to increase production in China, which already has exhibited stable, double-digit annual growth rates. A major share of this growth will be generated by the Chinese operations of our current global customers such as Volkswagen, Ford Motor Company, General Motors, Citron, Toyota and Nissan that are seeking reliable local production of high-quality paint systems," Lewis added.

As DPC was tweaking its strategy for China, the company was ending a long-term relationship with Japanese paint maker Kansai.

In December 2003, DuPont and Kansai Paint, Ltd, terminated their automotive coatings joint venture relationships due to what both companies said were incompatible global strategies. The firms operated three joint ventures that provided coatings to Japanese auto makers in North America and the UK-DuPont Kansai Automotive Coatings in Troy, MI; Pinturas Automotorices DuPont Kansai in Mexico City; and DuPont Kansai Automotive Coatings in Hemel Hempstead, UK.

But since the breakup, Kansai hasn't sat idle. Just as this issue was heading to press, Kansai was negotiating with PPG for a similar type of alliance.

According to Jeff Worden, a spokesperson for PPG, talks revolve around the creation of marketing and sales operations in North America and Europe in which Kansai and PPG technology would be produced at PPG facilities for Japanese OEMs. While no timetable had been set, plans could include expansion to other regions.

Fragmentation and Individualization
In addition to the keen interest in emerging markets, there are other factors affecting auto coatings consumption.

First, in an effort to attract buyers, carmakers are pushing individuality, albeit on a mass scale. Long gone are the days when one could buy any color Ford as long it was black. Smaller production runs and special and limited edition vehicles are becoming more commonplace in the industry.

"We see an increasing demand for individualization of the automotive industry to meet customer needs. This individualization is affecting colors and technologies," said Rainer Blair, group vice president for BASF automotive OEM coatings.

"There has been a feverish attempt by automakers to stay competitive resulting in constant and more frequent design changes, demanding various types of coatings systems," commented Phil Phillips, founding partner and president, Chemark.

In addition, assembly plants are churning out a variety of body types and styles. In terms of substrate protection/corrosion prevention, such as metal pretreatment and electrocoat, the impact of this is minimal. But for topcoats and decorative applications, there is more at stake.

"First there are usually additional colors in the paint shop since different vehicles have different color needs and market position," said Taljan of PPG. "Next, the variation in vehicles includes additional sources of add-on parts that have to be managed for overall color harmony."

Taljan voiced another significant concern. "The equipment must be able to cover the variation in body designs efficiently and effectively. This means that the process must be closely managed to ensure all vehicles are coated correctly. This leads to a further issue in coating formulation. The coatings used must be able to be applied effectively to the variation in body styles that exist in the plant. There are plants today that produce minivans and cars together. The coatings used in the facility must work on the long vertical surface of the van and still look good on the horizontal hood surface of a car," Taljan said.

Taking Back Business?
While outsourcing has been a trend for some time, there has been talk that OEMs are looking to reclaim control of various aspects of manufacturing processes.

Photo: Ford
According to Michael Robinet, vice president, global forecast services at CSM, "some OEMs have felt they have gone too far," and are opting to bring certain processes back in house. OEMs want to have more control, especially when dealing with warranties, cost structures and new materials, he said.

Chemark's Phillips said he hasn't seen evidence of this in the paint business so far, but admitted that there has been some talk. "There is a faction of the OEM automakers who would want the coatings suppliers out of their plants and back to selling paint, not systems," said Phillips.

If OEMs decide to reclaim certain aspects of their operations, coatings companies that have taken on the additional workload and responsibilityand invested millions of dollars to do so-aren't going to like it.

"Some, like PPG, relished the opportunity and appeared to be the most aggressively involved," said Phillips. He said due to its success, PPG will "most likely resist moving back to the good ole' days of simply supplying paint."

Technology: Still the Driver
As the auto industry continues to evolve, one thing remains constant when it comes to automotive coatings: technology remains in the driver's seat. Automotive OEM coatings need to look great, perform and meet environmental standards.

Coatings makers have been in hot pursuit of new formulations that offer improved scratch- and mar-resistance and higher gloss, and companies are exploring and implementing nanotechnology and UV in OEM coatings.

Mercedes-Benz recently debuted a nano-particle clearcoat on metallic and non-metallic paint finishes that it says offers significantly greater scratch resistance and improved gloss. The clear lacquer went into production at Mercedes at the end of 2003 on the E, S, CL, SL and SLK-class series. Other models will be added this year.

How does the nano-based lacquer perform? Following tests in a laboratory car wash, Mercedes engineers noted an approximate 40% improvement in paint gloss compared with conventional clear lacquers. After 10 wash cycles in the laboratory car wash (which equates to some 50 to 100 regular car washes), nano-painted sheet metal emerged with approximately 40% higher gloss than samples with conventional clear lacquer, according to Mercedes.

The Mercedes clearcoat is a PPG product called Ceramiclear. According to Taljan, PPG has a next-generation nanotechnology product in the pipeline.

UV is another technology making an impact on automotive OEM coatings. "UV technology will be the next step in clearcoat technology," said Blair of BASF.

Even so, he and other proponents of UV are aware that for it to become mainstream, limitations of the curing process have to be addressed.

"UV curing will provide outstanding scratch resistance, but the car body is so complicated, that there are shadow zones that will not be reached by the light," Blair added.

BASF's solution is a dual-cure system called TwinGloss, which will be available at the end of 2005. TwinGloss is a dual-cure clearcoat system that combines thermal baking for shadow zones and UV curing. The result, according to BASF, is improved scratch- and mar-resistance and reduced baking temperatures, delivering energy and cost savings to the OEM, according to Blair.

Additionally, the continued growth of plastics and other competitive materials pose a threat to paint consumption.

"There are a variety of new approaches being researched; these range from colored plastic to in-mold painting to painted films," said Bill Michael, director, global color technology, PPG. "To the extent that one of these materials is used for parts, this is just one more challenge in color harmony for the final assembled vehicle. In the big picture, each of these new technologies claims to have specific advantages over painted substrates, but none has yet been shown to have the full complement of requirements to be favored for overall body design."

Still, automakers continue to use more plastics in their designs, both for interiors and exteriors, and OEMs continue to experiment with different substrates.

"Changing plastic substrate generics continues to be a problem for coatings suppliers," said Phillips. "Adhesion to more expensive ABS is easier than taking the same approved paint system and getting it to adhere to a less expensive polypropylene, for example."

According to Phillips, outsourcing to Tier suppliers, especially when dealing with these materials, makes the waters tougher to navigate. In some cases not only is the plastic molding or forming responsibilities outsourced, but so are decisions related to the coating process.

"This by itself wouldn't be too bad in terms of logistics," said Phillips. "However, when the authority to select a coating system is transferred to the Tier, the market becomes congested, confused and expensive to deal in. Being 'in-on' the changes in a proactive manner would help."

Opportunities Exist
To remain competitive and profitable in today's automotive market, coatings suppliers must be agile and adapt quickly to changes in market and economic dynamics.

According to White of PPG, while internal cost reduction must remain a part of the overall strategy, there is a need to push coatings technology further. He insists customers will be willing to pay for those innovations-if they affect the bottom line.

"There is still a need and an opportunity for the introduction of new and innovative technologies into the automotive market, but any new technologies must result in an overall reduction in cost for the OEM customer," said White. "This requirement drives innovation and creativity on the part of a coatings supplier to consider new purposes, new values and multi-functional purposing for coatings technologiesThe result may be a savings in material and capital investment for the OEM, which would support a price premium for these innovative technologies."

David vs. Goliath in the Automotive Coatings Market

If your company is far from a global giant, don't give up hope. Chemark Consulting Group says small and mid-size companies can compete with the PPGs, DuPonts and BASFs in the automotive coatings market.

According to Phil Philips, president and founding partner of Chemark, small- and mid-size companies need to get specific, focus and differentiate to succeed.

"Form a true joint venture or an 'arms-length' JV aimed at specific core target segments of the market, such as fascias or outside rearview mirrors or cowl vent grills. Also, license your technologies to the regional channel captains-again aimed at specific segments," Phillips told Coatings World.

Need a real-world example? Red Spot is one company that has had major success employing this type of strategy. The privately held company has annual sales of over $100 million-a high percentage of it coming from its coatings for critical plastic parts in automobile industry.

Based in based in Evansville, IN, Red Spot has successfully reached out to other regions through global alliances with Sonneborn & Rieck in England and Fujikura in Japan.

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