Given the myriad of industry changes over the past decade, what similarity is there between today and the ‘60s? Back then, OEMs thought nothing of building several nameplate/bodystyle combinations at an assembly plant, choosing to bandage the complexity of multiple platforms and build processes via more labor and large facilities, which meant less efficiency. Today, we have many facilities that build multiple nameplate/bodystyle combinations with less labor, assembly space, inventory - all enabling better quality.
Global OEMs completely understand that maintaining flexible production capacity in the right sourcing location (within the regions of highest sales volume) with an equally nimble supplier network is the winning ticket to reaching the customer quickly, with less risk and better downstream profitability. A well-structured global production network impacts the bottom line faster than ever before.
A look back is in order to fully understand changes in how North America has approached production capacity and build complexities. Before 1965 and the onset of the Canada-U.S. Autopact which established a free trade zone for vehicle production, output in Canada was a tale of many platforms and bodystyles with too little volume to enable efficiency. There were times when there could be up to 10 nameplate/bodystyle combinations being built on one assembly line—all sourced for demand in Canada. Thinking about the math of volume per combination is not a pleasant thought: on average, volume could average 15,000 to 20,000 units per year. Low volumes led to quality issues and the inability to learn lessons from other facilities if issues occurred. The industry was ripe for rationalization of the production/supplier network to a regional one and not just national.
Rationalization at the region-plant level was the order of the day through the ‘70s and ‘80s. Vehicles and parts flowed freely between the U.S. and Canada. Volumes per vehicle at the plant level grew as fewer platforms built at any one location allowed for less complexity and improved standardization. These initiatives drove upstream and downstream savings. At the time, Mexico was still interested in building its own industry and not integrating with others; it would take several more years for their government to understand the benefits of regional and global integration.
There were lessons to learn from the Japanese and Volkswagen when global vehicles and the subsequent expansion of their production to newly established facilities in North America were concerned. Instead of designing completely new offerings to build in a new market, these OEMs looked to homologate existing platforms in their new plants. This meant suppliers could be carried over, production tooling could be copied, and established build processes deployed. Consequently, the number of variables was reduced and controlled to ensure a smooth launch.
Virtually every Detroit-based OEM “explored” the idea of going beyond a regional framework to combine efforts with colleagues in Europe to raise economies of scale. Both Ford and General Motors also had relationships with Japanese OEMs to share platforms. Nearly every effort fell short of the mark. Designing within a structure where requirements, consumer needs, regulations, suppliers, timelines and even demand timing between Europe, North America, South America, and Australia would be herculean today; it was impossible three decades ago. There were occasions when one of the Big Three would “borrow” a platform from a partner then highly customize and alter it for their own use; many times, little component sharing or cross-production could occur. There were some positives. GM’s lessons with Toyota (NUMMI) and Suzuki (CAMI), as well as Ford’s joint arrangements with Mazda, sowed the seeds for future globalization efforts.
What does this history lesson have to do with today’s global production capacity and flexibility? The shift to global platforms and fewer build processes have ushered improvements throughout the industry which are now evident in how OEMs approach sourcing decisions. Today’s concerns center upon having the optimum level of production capability in a region to either build a natural exchange hedge (same revenue exposure level between two currencies) or centering as much production and component sourcing in the highest region of sales to limit exchange impact and lower inventory exposure. Going forward, OEMs will look at vehicle production capacity as a resource to build the bulk of their global portfolio and thus optimize the mix of vehicles required for local sale and global sourcing opportunities within the capabilities of the local supply base.
Evidence of this holistic view of production capacity is apparent. Global utilization rates will rise from 76% in 2001 to 83% in 2019, even in the face of restructuring in the Japanese and West European footprints. The number of vehicle/nameplate combinations per plant will rise 16% from an average of 3.7 to 4.3 over the same period. Lastly, the emerging flexibility of the labor (both union and non-union) is apparent in that by the end of 2012, fully 40% of all vehicles manufactured in the U.S. will be built on a 3rd crew or shift production format.
The days of being restricted by the platform structure or the build process (at least within unibody or body-on-frame formats) required are being eliminated with every successive major investment at the plant level, adding flexibility each time. Although tariffs and sourcing restrictions still exist in some regions, the ability to optimize sourcing on a global basis is now real. The ability to “flex in” a new bodystyle or add incremental volume through the use of a third shift enables every OEM the ability to pull more levers to profitably meet the needs of global customers.
Michael Robinet may be reached at: Michael.Robinet@ihs.com