Times have been tumultuous for the U.S. auto industry. From December 2008 to March 2009, the Treasury Department initiated programs to bring financial relief to the auto industry and prevent economic disruptions of a potential industry collapse. The government extended bridge loans of $4 billion to Chrysler and $13.4 billion to General Motors as part of the program. While the industry is recovering, it faces challenges in the coming years.
The auto industry represents a sizeable portion of the American GDP. The saying, "As the Big Three go, so goes the economy," alludes to the ties that bind the auto industry to the country's overall economy. Now, new factors will influence the auto industry of the future.
Changing Face of an Industry
The auto industry is a significant job and capital source for the national and local economies. The sector has rewarded many business owners and employees with prosperity.
Industry growth was once concentrated in the southern states, where local governments provided attractive incentives and labor pools were mostly nonunion. Large auto facilities have arisen in Mississippi, Georgia, South Carolina, and across the South.
"There's no question that the focus in the U.S. has shifted to the southern states, and it's likely to continue that way for the foreseeable future," says Robert Geolas, executive director of Clemson University's International Center for Automotive Research in Greenville, South Carolina. "Certainly, there are opportunities for other regions of the country, as there would be in any emerging industry. But there are so many positive factors already at play here in the South - a skilled and affordable work force; excellent infrastructure, including ports and highways; outstanding private and university-affiliated research facilities - that it appears this region will remain extremely competitive for years to come."
But facilities are spread across the country. The Midwest continues to be the industry's nucleus. In Ohio and Michigan, vendors have worked to make supply chains efficient. In Honda's Marysville, Ohio, plant, Civic model components funnel in from many locations. A component may remain within the plant for only 45 minutes before leaving in a finished good. Inventories are lean, timing is swift, and costs are tightly controlled.
Focusing on supply chain logistics provides a strategic advantage to compete globally, and is likely to gain importance as the industry struggles. Vendors and manufacturers continually target efficiency in inventory levels and delivery times while improving quality. These factors affect their profitability, and their customers' profits.
Site location is a longstanding consideration in the auto industry. Location decisions consider proximity to railroad and highway infrastructure, state tax structure, and the labor market. Location strategy is one of the most important decisions a company makes, says Paul Myerson, president of Logistics Planning Associates. "There are many aspects to this decision, including costs; labor availability and productivity; distance from suppliers; customers and competitors; political risk; and local values, to name a few. The overall objective is to optimize the benefit that the selected location has to the company."
In many cases, while costs may most significantly affect the bottom line, they may not be the most critical part of the decision, and may even mislead. What seems like a good short-term decision may harm in the long term.
"There is also a micro trend of nearsourcing that started a few years ago when energy costs skyrocketed, resulting in large increases in transportation," Myerson says. "This had many U.S. companies re-thinking outsourcing to Asia and looking closer to home again in places like Central America. In the case of the recent Toyota quality issues, some have said that they are at least partially a result of the outsourcing by Toyota of components, which was something relatively new to them, not to other automakers, however. So perhaps Toyota will look a bit more closely at the total costs of outsourcing the next time they consider the location and make-or-buy decision."
Location decision is especially critical for supply chain vendors, according to Ed Burghard, executive director of the Ohio Business Development Coalition. "This is an industry that tends to operate on thin margins," he says. "An optimal location allows for just-in-time production where a supplier can carry little inventory and minimize logistics costs."
Transportation vendors such as railroads also play a key role in the auto supply chain. Much of their availability depends on infrastructure and accessibility.
"The automobile manufacturers we have recently worked with have all been interested in multiple factors, but their specific needs basically fall into the categories of transportation, the availability and cost of utilities, ongoing local educational and training opportunities, taxes and incentives offered by the various governmental entities, and the demographics of the local labor force," says Richard Kiley, group vice president of automotive for the Norfolk Southern railroad. "A perceived shortfall in any of these areas can remove a site from consideration by a potential client. With the increasing cost of energy and the associated impact to our environment, it will become increasingly important for almost all major industrial and warehousing sites to have access to rail transportation."
Inside the Location Decision
In a competitive environment, several location decision facets should be evaluated.
"Location becomes a strategic advantage based upon what is in the location," says Sandra Pupatello, Minister of Economic Development and Trade for Toronto, Ontario, home to an auto cluster that can produce more than 2.5 million vehicles annually. "Having an assembly plant within your jurisdiction increases the chances of obtaining related investment. Having a major engine or transmission plant may increase your chances of obtaining related investments. The issue becomes not just location per se, but being close to major auto investments is a strategic advantage. With all else being equal, the lower transportation cost can be a contract maker."
Accessibility to resources, such as research and development, can also sway the decision. "One impact of the current economic climate is that manufacturers are looking for suppliers to do a lot more in the area of research and development," says Clemson's Geolas. "But many suppliers can't afford the up-front capital investment, which puts them at a significant competitive disadvantage. Location can overcome this hurdle by tapping into resources shared by a broader automotive community." Clemson has facilities, equipment, and employees with technical expertise to collaborate with suppliers on research and testing initiatives, which can be expensive. Collaboration also encourages a faster turnaround on innovation.
Vehicle fuel demonstrates location's influence on research and development. "In the past, there was a universal approach to where automotive companies located their operations because gasoline was far and away the predominant fueling option," says Daniel O'Connell, director of Fuel Cell Commercialization for General Motors. "Now and in the future, with more fueling options available, location may be based on the availability of a specific fuel in a particular region. For example, in Brazil, ethanol is the fuel of choice, so E85 vehicles represent nearly 95 percent of the cars that are produced there. Electric cars may be made in California because the state has a high number of electrical charging stations."
In New York, General Motors currently has nine hydrogen filling stations, and Niagara Falls provides abundant hydroelectric power. These characteristics could spur the manufacture of fuel cell cars in the region. Access to research and development at the Rochester Institute of Technology, Cornell University, and Delphi attracted General Motors to open an R&D campus in Honeoye Falls as the base for its fuel cell operations. The company expects to sell fuel cell cars beginning in 2015.
The Road Ahead
As the industry rebounds, will location continue to play as important a role in its recovery?
"The automotive industry will rebound, but it will present a business platform and product strategy that is much more flexible, agile, and even more focused on global markets like China and emerging markets where the U.S. industry can export in R&D prowess," says Robert Hess, managing director of Newmark Knight Frank.
Agility and flexibility will be buzzwords as companies adapt to the economic climate.
"Going forward, successful automotive OEMs will be those that can flex their manufacturing capacity to respond to changing consumer demands, whether related to changes in consumer tastes or, more likely, changes in vehicle size driven by volatility in gasoline prices," says Dan Cheng, partner and head of A.T. Kearney's automotive and transportation practice. "To achieve this, auto OEMs must make future location decisions based upon the ability to flex their existing manufacturing footprint, including their trusted Tier 1 suppliers and their assessment of how quickly they can adjust their output so as to minimize lost sales."
Most analysts are optimistic about the road ahead, although it may be long and winding. "Our projections have the U.S. market achieving the pre-recession sales of approximately 16 million cars and light trucks as soon as 2013, or as late as 2015," says Stephen Spivey, program leader of Frost & Sullivan's automotive and transportation group. "We forecast U.S. vehicle sales to increase by 5 percent to 7 percent annually over the next five years."