I’ve seen a lot of articles in trade presses this year about the latest challenge hitting some in the automotive industry – constrained capacity. It seems it was just a few years ago that constrained capacity was the last thing on any automotive executive’s mind, especially in the U.S., where many manufacturers were awash with severely under-utilized component manufacturing and assembly plants. Fifty percent capacity utilization was not uncommon.
U.S. vehicle sales volumes steadily declined in 2008 and all but collapsed in 2009 to levels not seen in almost 30 years (see Fig. 1), as the global economy tanked and vehicle financing became unavailable to even the highest-credit borrowers. Faced with a global recession and plummeting demand, these auto makers and suppliers went into full “survival” mode. Manufacturing plants were closed and many people were displaced … a lot of them permanently. Some companies took a painful trip through bankruptcy while some will never be heard from again!
Interestingly, in other geographic regions such as China, demand and production didn’t decline as dramatically (and even steadily increased), so their “capacity cycle” was on a different trajectory.
Yet, through this dire and painful process, a long-overdue correction within the U.S. auto industry has been realized. Both OEM’s and suppliers were forced to rationalize their production capacity against far lower demand projections with the imperative of driving far greater profitability. So what couldn’t be accomplished at vehicle sales volumes of 16.5M – 17M (profitability) is now being done at a market size 30% – 40% smaller. Astonishingly, two of the domestic Big 3 were profitable in 2010 despite annual sales volumes remaining at historic lows of about 11.5M units.
North American plants are now starting to run over-capacity on two shifts, and are adding a third shift. At this point, the domestic U.S. industry is providing both short-term profits as well as long-term hope for prosperity across the industry. In Europe, however, the automotive capacity rationalization has not occurred at the same level as in the U.S. There are many reasons for this, not the least of which is the complex relationships that exist between the auto industry and the individual European nations.
Even more striking is the situation in China. A recent KPMG survey of global automotive executives indicated that a quarter of them believe that China will have 20% more automotive production capacity than demand dictates within the next five years. For both Europe and China, the pain of aligning production capacity with demand would appear to be waiting in the wings.
The new reality is that the auto industry needs to be focused on maximizing efficiency and throughput within their existing facilities. This can be accomplished by maximizing product and operational flexibility. The adoption of advanced, next generation manufacturing execution systems are at the core of a number of these successes. One global Powertrain manufacturer documented a 25 percent improvement in their manufacturing throughput after deploying such a system – this improvement was accomplished without expanding existing facilities.
Are you launching a new product? Whereas a new plant might have been the strategy in the past, today the goal is to leverage flexible manufacturing lines and processes, supported by advanced software technology. Benefits include bringing new products to market more efficiently, faster, and with higher quality.
Yes, it has been a painful couple of years for the automotive manufacturing industry. But, we have grown stronger and smarter as a result, despite having been given a basket of sour lemons. Look for more lemonade to come!