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Auto Industry's Road to Recovery

After emergency government intervention, auto manufacturers are shifting strategies to push the sector forward.

November 2010
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."

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