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Automotive: Putting on the Brakes?

Economic doldrums, demographic shifts, and climate change are among the factors forcing new realities on automakers.

Steve Stackhouse-Kaelble (Feb/Mar 08)
Like a lot of industries, the automotive business faces a time of turmoil and uncertainty - bringing opportunity to some and giving heartburn to others.

On the manufacturing side, the wave of American factory building seen in recent years has slowed decidedly, as vehicle producers in many cases are finding they have more than enough capacity for now. Market forces are making them more careful than ever when it comes to meeting demand with the right supply. "The end of overproduction is pretty much at hand," says Dave Cole, chair of the Center for Automotive Research in Ann Arbor, Michigan. "You're going to see everybody trying to balance production with profitable sales."

Though automakers such as Toyota are ramping up production, the companies known these days as the Detroit Three - General Motors (GM), Ford, and Chrysler - have promised big production cuts for the first part of 2008 at least. Chrysler intends to produce 15 percent fewer vehicles in the first quarter, compared with 2007's first quarter, while GM's cuts are pegged at 11 percent and Ford's at 7 percent.

Not only are automakers inclined to put the brakes on runaway production, they are also realizing that they need to adjust their product offerings to be sure they're offering what consumers really want, according to Daniel Sperling, Ph.D., director of the Institute of Transportation Studies at the University of California, Davis. "There's been little change in the vehicle mix, largely because car companies have rejiggered their incentives," he says. "They've kept sales going by reducing their profit margins. But they can only do that for so long."

Problem is, for the Detroit Three, the term "profit" margin is a bit of a misnomer at the moment. Quarterly financial results have often been breathtakingly dismal, and in some cases dealers have bailed out and switched to foreign makes that are selling better.

Last year may have seen perennial industry leader GM land in second place behind Toyota. Indeed, Automotive News in January called the sales race in favor of Toyota. The headlines had been talking of a dead heat for 2007, with both automakers tallying sales of about 9.37 million vehicles. But the trade publication determined that GM was counting sales of about a half-million Chinese vehicles carrying the Wuling brand, of which GM is only a minority owner; industry practice counts only majority-owned subsidiaries.

Times have certainly been tough for American automakers and their employees, who are becoming more accustomed than they would like to the prospect of a shrinking work force. It's not just GM - Ford, too, has been facing some unpleasant music, and Chrysler last year returned to dancing solo, ending the decade-long DaimlerChrysler marriage and giving thousands of workers new job jitters.

Already, employment is down in the U.S. automotive industry, with some 25 percent fewer workers on automaker and supplier payrolls than back in 2000. Foreign-owned automakers have generated lots of great headlines building American plants in recent years, but the unfortunate truth according to Center for Automotive Research statistics is that the Detroit Three have shed about six jobs for every one created by import plants.

And now, it seems, the supply of new import plants is slowing as well. Toyota has been quite active with its American plants in recent years, building or expanding operations from Texas to Indiana to Mississippi, and some of those projects are still ramping up and hiring. But the company now says that once those projects are up and running, it probably will have enough capacity for the time being.

There continues to be some positive import news, though. Volkswagen, coming off a record 2007, is scouring North America for an assembly plant site, with North Carolina rumored to be among the states seen as top contenders. Engine and transmission plants would also be needed, not necessarily next door but somewhere on the continent. Meanwhile, BMW is adding jobs at its plant in Spartanburg, South Carolina, and some economists believe other European automakers will also want to take advantage of the weak dollar and boost U.S. production.

The future remains bright in Ontario, too, with many positive headlines generated recently as after effects of Toyota's new Woodstock assembly plant, announced in 2005 and due to open soon as the first built-from-scratch Canadian auto plant in two decades. For starters, Toyota decided to expand the plant before it even opened, upping investment to about $1 billion, increasing projected employment to 2,000 and growing assembly capacity to 150,000 RAV4 sport utility vehicles.

To that, add the announcements of Toyota suppliers that are locating or expanding nearby. Maple Automotive Corp., a subsidiary of Toyota Tsusho America, is building a plant in Woodstock to assemble wheels and rims for the RAV4. Takumi Stamping Canada is investing in a new manufacturing plant in the Ontario community of St. Thomas that will stamp metal vehicle parts for Toyota's Woodstock and Cambridge plants. Aisin Canada's new manufacturing plant in Stratford will produce door frames for Toyota's Ontario plants. And Hayashi Canada's new parts plant in Stratford will supply automotive interior trim and acoustical products to Toyota.

Meanwhile, Chrysler announced last year that it is investing $1.2 billion in its assembly plant in Brampton, Ontario, where it will build the next generation of the Chrysler 300 series, Dodge Magnum and Dodge Charger. Honda Canada is investing $100 million in a new head office in Markham, Ontario, for sales, marketing and customer service operations along with research and development, engineering, training and parts distribution. DENSO Manufacturing Canada is investing $68 million to expand its auto parts manufacturing plant in Guelph, and DYNA MIG Manufacturing is expanding its Stratford facility.

Technological Revolution?
Unpredictable as the times are now, one thing that seems certain is the march toward technologies that require less petroleum-based energy. It's a move being driven by market forces that are guided both by climate change concerns and gasoline price realities. Regulatory forces also are weighing in, with recent moves - including congressional action - that would boost fuel-economy standards some 40 percent by 2020. "We're going toward a much more innovative future for the automotive industry because of climate change concerns," says Sperling.

How will automakers respond? The answer is not completely clear just yet, but the move toward greener vehicles could have an impact on manufacturing operations, says Cole. For example, there's likely to be significant demand once automakers release their promised "plug-in hybrids"-gasoline/electric hybrids that also can be plugged into a wall outlet in the garage when they're parked. With these hybrids, gasoline consumption could be as low as zero for people with reasonable commutes, with an average well over 100 miles per gallon for those who travel farther.

Cole notes that a move toward hybrids in a big way could result in substantial changes to automotive power trains - and the factories that produce them. "Those are significant facilities around the industry," he says. "If in 15 years we're looking at 20 percent plug-in hybrids, what does that mean for the industry?" Hybrids in general, not just the plug-in kind, are quite the big deal for all concerned: Audi has one on the way next year, Honda has a brand-new model in the works, and both Hyundai and Nissan are working on them.

"The forces of climate policy are going to provide a lot more incentive to make vehicles more efficient," says Sperling, "not only from consumption directly but also in areas such as the kind of paints." He foresees growing use of "cool paints" - not a cool paint job in the slang sense but a coating designed to help the air conditioner operate more efficiently.

The changes will likely yield both winners and losers, and while it's a little hard to predict the future, one winner already has been Toyota, whose hybrid Prius models have been selling like hotcakes. "Honda has not been as successful in selling hybrid vehicles yet, but they've got technology as good as Toyota's," says Sperling. "And Honda also specializes in fuel efficiency, so Honda might be in the best position of all the companies. At the other end of the extreme is Chrysler, which doesn't have as much of the technology. They've relied on Daimler."

As matters shake out, automaking communities may want to take stock of the state of their big employers, suggests Cole, and regions big in such businesses as pickup trucks may be in for a bumpy ride: "It's imperative for people to look at the assets in their area."

Climate change isn't the only culprit clouding the industry's future - so is the graying of Baby Boomers. For one thing, says Sperling, aging Boomers are beginning to turn away from bigger sport-utility vehicles, not just because of fuel economy but because the kids have grown and smaller, sportier vehicles are becoming more appealing. Plus, says Cole, "because of demographics and the retirement of Baby Boomers, we're going to have a shortage of a lot of folks" on the assembly lines.

Given that automakers are currently worried about overcapacity and having too many people on the payroll, it seems ironic that before long they'll be worried about not having enough workers, but that's where things are headed. "One of the key factors for where companies are going to build or keep a facility is the number of appropriately educated people," says Cole. "The minimum education for autoworkers in the future is a two-year community college degree." That factor ultimately could trump wages, he adds. "The reality is that we're getting to the point in productivity where the threat of cheap labor is less and less in automotive assembly."
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