Automotive coating market: under increased price and margin pressure, automotive OEM coatings suppliers face the challenge of lowering costs while providing environmentally-friendly products that perform more efficiently. Spurred on by these challenges, paint companies are evolving, finding avenues for growth through investments in emerging markets and innovative technology.

While automakers continue to trim costs throughout the production process, automotive OEM coatings manufacturers are evolving to meet the demands of the market.

"Overall conditions in today's automotive OEM coatings market are challenging as paint companies face unprecedented raw material increases and price-down expectations from all OEM automotive manufacturers," said Marty McQuade, vice president and general manager, DuPont Automotive Systems.

The increasing lower cost demands of the OEM's fall mostly on the supplier base starting at the tier one level, according to Nicolas Messin, automotive manager, Rohm and Haas Powder Coatings. "Component suppliers are finding ways to automate their processes and eliminate labor from assembly operations," he said. "Painting is one of the operations that is relatively easy to automate with existing technology that is readily available to lower unit costs or increase part through put. Component suppliers are looking for companies that can provide on-going service and products that have a wide process window that are approved to the OEM specifications."

While globalization and consolidation continue to reshape the landscape of the automotive market as well as the suppliers to the market, there is also a movement for cooperation between OEMs.

"It seems that at least once a week you read about collaboration between OEMs to jointly develop or manufacture complete vehicles," said Robert L. White, global director of substrate protection systems, automotive coatings, PPG Industries. "Given the over-capacity of OEM manufacturing in both North America and Europe, I expect that this trend will continue, with one OEM manufacturing and assembling vehicles for one or more other OEMs. This will mean that a coatings supplier must be able to offer coating technologies with a broad color palette as well as a broad-workability and performance range to meet the performance and quality requirements for each OEM involved."

EMERGING MARKETS

While North American and Western Europe still represent approximately two-thirds of the global OEM market, activity in these markets remains relatively flat.

However, as the automotive markets in China, South East Asia, India and Eastern Europe continue to expand production capability and the level of quality grows, these markets are becoming strategic for export production for many global OEMs. As the economies in such developing parts of the world continue to grow, wages are expected to increase, allowing more consumers the opportunity to purchase vehicles.

The Wall Street Journal recently reported that auto sales in China jumped by more than 70% in January, putting the country on track to widen its lead over Japan as the world's second largest vehicle market after the U.S.

When it comes to paint companies considering where to invest their dollars for growth, there is really no choice but to look towards these emerging markets.

"Paint companies must invest in and co-locate an entire infrastructure in these emerging regions if they are going to be successful and profitable," said White. "You cannot profitably supply and compete globally by shipping product and supplying services to these regions from North America or Europe. The smooth transfer of technology and 'Best Practices' is a major key to success in these emerging regions."

On the heels of announcing it will consolidate two of its coatings laboratories in the U.S.--a decision driven by automotive industry conditions and the continued, unprecedented escalation of raw materials costs--DuPont Automotive Systems signed a joint venture agreement with Russkie Kraski Corp. forming DuPont Russian Coatings LLC. The joint venture is aimed at supplying automotive coatings to manufacturers of automobiles and commercial vehicles in Russia and some countries in Eastern Europe, including Belarus and Ukraine.

Although Russian GDP growth is beginning to soften one of the country's major growth markets will be the rapidly growing automotive industry as foreign carmakers invest on Russian soil, according to a new report profiling the Russian paint industry released by Information Research.

The report said that car output in Russia is expected to soar from 165,000 units in 2004 to 900,000 units by 2010 and that demand for automotive OEM coatings will multiply rapidly, possibly by as much as 30% per annum from the present level of approximately 40,000 tons.

STAYING AHEAD OF THE CURVE

Technology in today's automotive OEM coatings market is focused on two primary areas--reducing automakers' costs and meeting environmental requirements. However, even as paint suppliers continue to experience price down pressure from all OEMs on all coatings products, the cards are not in the OEMs' hands entirely. As OEMs are increasingly in need of new and innovative coatings technology in order to add value and differentiation to their finished products and to meet evolving environmental requirements, the dynamics of the relationship between OEMs and their paint suppliers are shifting.

Historically, the automaker ruled, according to Phil Phillips, president and managing partner, The Chemark Consulting Group. "In the past, whatever the major OEMs demanded, paint suppliers were forced to comply," he said. "This is changing as technology evolves. In the years ahead, OEMs are going to have to rely on the paint supplier that offers the best coatings systems."

These coatings innovations can only come from the continued investment in research and new technology development on the part of coatings suppliers.

However, technology is a double-edged sword. Due to the increased effectiveness in the transfer efficiency of coatings, which has resulted in a reduced amount of coatings used per vehicle, global sales of automotive coatings continue to shrink. As a result, sales of coatings applied to each new automobile are down about 30% over the past five years, according to White.

"To combat these trends, coatings suppliers are focused on reducing the overall cost of an applied gallon of paint on a finished vehicle. This opens up the opportunity for a coatings supplier to bring new and innovative coatings technologies to an OEM customer focused on the reduction of both the direct and indirect cost of coating an automobile," White said. "These new coatings will allow an OEM to reduce or combine the number of steps in the coating process, reduce capital investment requirements for new paint shops, reduce energy, labor and maintenance costs associated with the coating process, and lastly, reduce C[O.sub.2] emissions to meet current and future air emissions standards."

The brave new world of nanotechnology is another area coming into sharper focus for paint companies. It holds a lot of promise for a number of reasons, according to Phillips. Through nanotechnology paint companies will further be able to eliminate steps in the coating process as well as be able to make thinner coatings, which will reduce the total weight of coatings needed for the average car.

"There is a big race on right now for nanotechnology inclusion in automotive coatings. Paint companies have a chance to reduce coating thickness and increase the cost efficiency of applying them," Phillips said. "However, the question remains, 'Why would paint companies race to provide a product to the automobile business if the price and margin pressures are going to be so great?' The answer is, the first one to the winner's circle with an advantage of nanotechnology in their portfolio of offerings is going to be able to ask for a premium for a period of time."

OFFERING A BROADER PALETTE

At a time when paint suppliers are devising strategies to maximize function, they are focused too on advancing color technology to meet demands coming from the consumer but also to offer a point of differentiation for their customers in a very crowded market.

In January, Sherwin-Williams Automotive Finishes Corp. launched Planet Color, a collection of optically enhanced coatings. Utilizing state-of-the-art technology in a multi-coat application system, the finishes are easier to apply and faster drying than previous generations, according to the company.

"We've created vibrant coatings with metallic and shimmering tones and other special effects," said Bob Fritz, manager new business development-OEM color specialist. "New technology gives our Planet Color finishes a radically new visual appearance. Additionally, these coatings are based upon OEM-approved technology for proven durability, plus they have brilliant, mirror-like finishes that are easy to apply and repair."

Planet Colors' portfolio was designed to reflect several moods and attitudes including Sinister, Tuner Tones, Bikini Brites, Rugged, Northern Lites, Classic Muscle, Jewel and Alloy.

Silver's six-year reign as the top vehicle color choice worldwide is being challenged by gray, now infused with an array of colors, and a stronger, bolder blue, according to color experts at DuPont Automotive Systems. The company's new 2005 Color Popularity Report shows an increasing trend toward mass personalization as a growing number of vehicle buyers are seeking colors.

"The auto market is further pushing the envelope in color, recognizing that as many as 40% of consumers are likely to switch brands if they can't get the color they want," said Karen A. Surcina, color marketing and technology manager for DuPont Automotive Systems.

DuPont recently developed 100 new colors, including a coating technology that glows in the dark for safety, to present to automotive designers under the theme "Appetite for Color."

FORD UNVEILS ITS "PAINT SHOP OF THE FUTURE"

Ford Motor Company has unveiled its "paint shop of the future," which reduces VOC emissions by ten percent and C[O.sub.2] by 20%, and cost savings are estimated between $7-11 per vehicle.

Traditionally automotive paint operations have represented the industry's biggest manufacturing-related environmental challenge. Industry-wide, 70 million pounds Of paint fumes annually are collected and destroyed by expensive pollution abatement systems around the world before they are emitted into Me air while another 24 million pounds of paint over-spray are captured in spray booths, treated and consolidated into nonhazardous sludge that eventually finds its way to landfills, the company said.

"Painting vehicles is arguably the auto industry's biggest challenge," said Mary Ellen Rosenberger, manager of paint strategy, Ford Motor Company. "Ford thinks it has found, the solution. The new concept is environmentally sound, cost-efficient t and it produces beautifully painted vehicles with long-term durability

Ford's Pain shop of the Future consists of three major technological solutions including an advanced chemical paint formulation, a three-wet application process and patented waste management technology that converts paint fumes into electricity and recycles paint sludge into ear parts.

The new paint shop is being piloted at Ford's Ohio Assembly Plant.

SOLIANT WINS ENVIRONMENTAL AWARD FOR AUTOMOTIVE PAINT FILM

At GPEC 2006, the annual Global Plastics Environmental Conference and Awards Program, Soliant, LLC received the Environmental Award in the Emerging Technologies category for their paint film process that reduces emissions to the environment by 98% when compared to traditional vehicle painting. The 98% reduction in emissions is based on an analysis of the production and use of this product compared to traditional vehicle painting conducted by the environmental consulting firm MM & A, LLC.

Another environmental and cost benefit realized through the production and use of Soliant paint films is no management and disposal of the solvents and chemicals associated with conventional painting or plating processes is necessary. Environmental compliance costs associated with the use of Soliant paint films are minimal, according to the company

"We're changing the way we're coloring our world," said John Cupstid, Soliant sales and marketing director. "We're making the world greener from an environmental standpoint and more colorful, brighter and interesting aesthetically."

Soliant has a 20-year history as a producer of paint film products for automakers and is now capable of covering the entire surface of an automobile or light truck, except for windows and plastic lenses for lamp surfaces. Their paint film products are used by many OEMs on numerous vehicle models. Honda, through its tier one supplier, Green Tokai Company, is currently the largest user of Soliant paint films, with applications on injection-molded parts on its Odyssey minivan, Pilot sport utility vehicle and Acura TL. Toyota uses Soliant's paint film on three different exterior trim parts on its Avalon sedan also supplied by Green Tokai Company. General Motors is building a supplier network to provide thick-sheet thermoformed parts in high volumes with Soliant paint film products. Durakon Industries, Inc. is producing 250,000 rocker panels in 12 different colors for GM's Lucerne sedan. GM is also planning to use Soliant films for thermoformed bumper fascias on the Denali sport utility vehicle. Guardian Automotive supplies entire color palettes with film on the current Chevrolet HHR and Chrysler Cargo vans. European OEM's such as Audi, Volvo and Mercedes also use Soliant paint films in body colors and contrast color on exterior trim.

Soliant currently offers 140 colors under the Fluorex brand name for automotive vehicle interior and exterior applications. Fluorex Bright films provide a shiny chrome finish to plastic parts with different chrome finish options like black chrome, matte chrome and brushed chrome.

AUTOMOTIVE OEM COATING

Here is a look at regional automotive OEM coatings
Market and their percent AGR for 2004-05.
(* includes Mexico and Central America)

North America    $2.5 billion 2004-05 AGR (2.9%)
Western Europe   $2.3 billion 2004-05 AGR (1.9%)
China            $350 million 2004-05 AGR (11.2%)
India            $200 million 2004-05 AGR (7.1%)
Eastern Europe   $300 million 2004-05 AGR (5.0%)
Japan            $2.0 billion 2004-05 AGR (3.6%)
Australia        $150 million 2004-05 AGR (3.0%)
South America*   $400 million 2004-05 AGR (3.7%)

Source: CHEMARK Consulting Group

Note: Table made from bar graph.