FASTEN YOUR SEATBELT

Area Development Site and Facility Planning, Oct/Nov 2005 by Stackhouse, Steve

Today's automotive industry is a thinning version of its older self, and the decades to come promise major reconstructive surgery.

Take a good look at the auto-manufacturing industry as it is today, because it may never look the same again. Industry analysts have varying views of what the future holds, but they agree that radical changes are in store.

On the one hand, manufacturing capacity is significantly ahead of demand right now, leaving some automakers badly overstaffed and in financial straits. On the other hand, economic growth in some parts of the world seems likely to create staggering new demand in the not-so-distant future. Add in uncertainties about energy supplies and the effect of internal-combustion engines on the global environment, and the automotive future is murky, to say the least.

"We're in an extraordinarily turbulent period, more so than we've ever seen," says Dave Cole, chairman of the Center for Automotive Research in Michigan. "It makes forecasting impossible. There's so much turmoil. One thing we know is that the industry is not sustainable in its present configuration."

Too Many Cars, Not Enough Buyers?

"There are about 80 million units of capacity worldwide, with about 60 million units of sales," Cole says. Overcapacity can be found in many places, including the United States.

The extent of the American oversupply problem was obvious to anyone who watched any television this summer. Broadcasts were filled with commercials from the Big Three, advertising generous incentives including employee-discount pricing. "Clearly, the Big Three have overcapacity problems," says Pat Hammett, associate director of the Office for the Study of Automotive Transportation, part of the University of Michigan's Transportation Research Institute.

Though automakers can certainly choose to deal with declining demand by making fewer cars, the Big Three's labor contracts force them to keep paying workers even when they're idled, and they still have retiree pension and healthcare obligations to meet. Their car-building machine is simply too big for now, and, as Hammett notes, it's not easy to make it shrink. "Attrition rates are not keeping up."

Needless to say, the troubles facing domestic automakers are too big to solve through a lengthy sales promotion. "We're looking at rationalization of the industry and major restructuring that will take down capacity to something that's a little more manageable." Cole predicts.

Among other things, that restructuring will require some flexibility on the part of organized labor. "In the next year we'll see a great deal of things falling into place," Cole says. "We're at the threshold of a major agreement with labor."

It certainly sounds like a gloomy forecast for site selection professionals interested in landing an auto plant, but the reality is not so simple. That's because, despite the Big Three's woes, many nondomestic automakers continue to enjoy greater demand than supply.

The auto-making future, therefore, is likely to involve more shuffling than shrinkage. "We're going to see some facilities added but some removed, too," Cole says.

Such shuffling has already been apparent in recent years, as Southern states have been on the rise as automaking centers even as the traditional clusters have weakened. In Alabama, for example, Mercedes-Benz and Honda have already expanded the assembly plants they opened not that long ago, Hyundai has recently begun building vehicles, and Toyota is making engines. Nissan builds in Tennessee and Mississippi, and might soon be joined in Mississippi by Kia. BMW makes vehicles in South Carolina, and Toyota will soon assemble trucks in Texas.

These foreign-owned plants in the South join somewhat more established international operations to the north and west. Honda has been building vehicles for some time in Ohio, like Subaru in Indiana, Mitsubishi in Illinois, and Toyota in Kentucky, California, and Indiana.

The result of this global influx: one in four American-made cars now rolls off a foreign-owned assembly line. Just five years ago, the international share was less than one in five.

There's also some shuffling to the north of the border, as the Ontario auto-building industry continues to grow. Last year, assembly plants in Ontario produced more cars than did plants in Michigan, by about 100,000 units. Industry analysts the difference can be attributed in part to model-changeover shutdowns in Michigan, and they expect Michigan to reclaim the title in 2005. But Ontario's gains also have to do with Canada's lower healthcare costs and the fact that Ontario is home not only to Big Three plants but also international transplant operations. Ontario is expected to re-emerge within a few years as the vehicle-building leader in North America.

Toyota Rolls Along

Toyota offers the most dramatic example of the dichotomy between the automotive haves and have-nots. While the Big Three suffer, the Japanese leader continues to build capacity, with a truck plant due to come online in San Antonio next year and a new Canadian assembly plant in the works.