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Automotive Industry

Flexible production crucial to OEM future - Supplier Insight - Brief Article

Automotive Industries, July, 2002 by Michael Robinet

All this fuss about production overcapacity. Most industry articles citing the ails of Detroit and the global industry place overcapacity front and center-- blaming OEMs and governments alike with their reckless abandon to building incremental capacity. While the industry has the ability to produce more vehicles than are demanded (up to 19 million units this year), overcapacity's issues lurk under the waterline.

The classic questions of who, what, why and where need to be posed. Production overcapacity is more than just atop line issue, it is regional, specific to an OEM, teeters on a union contract or hinges in the inherent flexibility of a facility to quickly adapt to a new vehicle or build process. 'The devil is in the details as they say.

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While there is overcapacity in the aggregate, the real issues lie in who controls or owns the capacity. What good is GM's full-frame production capacity in Baltimore to their quest to increase unibody capacity in China or SE Asia? None. Overcapacity is a decentralized problem with certain OEMs such as Honda and Toyota seeking greater capacity in both mature and emerging markets but usually not willing to assume someone else's older, less efficient facility with legacy contracts. Those industry simpletons who view capacity as fluid and transferable don't understand the issues.

What type of production emanates from the site (full-frame vs. unibody or CKD vs. full assembly) is crucial GM's chive to increase production flexibility and standardization of processes and production formats will pay significant dividends with a better ability to react to the market, higher utilization of fixed assets and enhanced quality as fewer processes exist While this manufacturing panacea has yet to be reached, several of the Japanese and a handful of European OEMs already look to flexibility in their production system as an advantage--and should In North America, Ford and DCX are finally getting the message as they devote more lime and resources to flexible bodyshops.

Why overcapacity exists can have its own history. As the competitive landscape shifts in both developed and undeveloped markets, the industry's warts begin to show The "no closure" clause in the recent UAW/CAW contracts outline the barriers to optimum capacity utilization. In some cases, it changes the economics of the business as several vehicle lines are extended to accommodate local/national contracts. The same happens in Japan and Europe as OEMs feel an obligation to stretch the production equation to allow a facility to stay alive. As our world gets smaller, these initiatives will become increasingly transparent.

The economics of production and site location 50 years ago may make little sense in today's fluid environment Note the ongoing shift of production from the U.S. Northeast as OEMs strive to lower transportation costs -- moving closer to the supply hub in themed-West and the emerging south or Mexico. Just as water runs to the point of least resistance -- so does new automotive investment as states in right-to-work areas flash incentives at the few investments still up for bid. The shifting sands of demand will see an increasing movement to the U.S. South and Mexico in NAFTA but more importantly, increasing demand in Southeast Asia, Central/Eastern Europe and other pockets in the Middle East, Africa and South America will pull investment dollars in those directions.

Lastly each OEM is seeking to better spread the fixed costs of production through better utilization and more flexible production processes Through the last decade several production locations instituted three crew or three shift formats to raise capacity. The ambivalence of OEMs to add new brick and mortar to the balance sheet is justified. This trend will continue in the more developed markets of NA and Europe. Placing the blinders on and looking only at the straight time production capacity of a location or the ability to only produce one vehicle is old school.

Michael Robinet, Director of Forecast Services CSM Worldwide Inc.

MichaelRobinet@csmauto.com

www.CSMAuto.com

Automotive Industry

Flexible production crucial to OEM future - Supplier Insight - Brief Article

Automotive Industries, July, 2002 by Michael Robinet

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