Our industry’s globalization and marked improvement in production flexibility over the past 25 years has enabled several benefits beyond the factory floor. A more nimble production and supply network acts as a catalyst to bolster the bottom line and more efficiently align production sources with the correct sales destination.
A history lesson is necessary to frame the discussion. Several OEMs grew global volumes through exports from a single country hub to regions outside their own. Most prominent is Japan – functioning as a base for Toyota, Honda, Nissan, Mazda, Suzuki and others to fuel their growth since the mid-1960s. In some years, exports accounted for close to 60% of all Japanese production. The end results were strong economies of scale and low per-unit costs allowing for reinvestment in product and process to further fuel success over the next 30 years. A similar route, though not as direct, underscores the story of Hyundai/Kia in South Korea and the luxury brands from Germany. In essence, these OEMs use an integrated production hub to spoke out to the various markets.
Changing production economics, calming trade tensions, and the need to move closer to the customer to cut inventory would drive new strategies from the heady “hub-and-spoke” days. Enter the production co-location initiatives to shift output of high-volume mass market offerings nearer or within the core sales markets. The routes for Volkswagen locating production sourcing in Mexico or the Japanese OEMs adding output to North America and Western Europe were different though driven by essentially the same factors. The decades of the 1980s and the 1990s witnessed the tremendous co-location of capacity to new markets—all focused on serving local demand. These OEMs utilized existing, high-volume platforms with an experienced co-located supply base to reduce the number of variables impacting these fledgling operations.
This brings us to the present-day structure, one which is increasingly interconnected with sourcing links never imagined years ago. Recent shifts in currency (and the resultant relative production costs) and trade relationships require swift reactions to ensure the best competitive position for all OEMs. The surge of new capacity to Mexico, Thailand, Southern U.S., Eastern Europe and India is almost entirely fueled by high-volume, flexible platforms focused on production for local markets—this time with a twist.
Reverse sourcing back to home markets and beyond is part of the equation. The classic case is increased capacity in Mexico by several Japanese OEMs to escape a rising yen. In the past, cost reductions would mask the impact of negative currency shifts. The new reality reflects cost and competitive changes which require the shifting of sourcing out of Japan to stay competitive. Increasingly, new production hubs are being developed in Mexico and Thailand for several Japanese OEMs, India for Hyundai, and Eastern Europe for European OEMs. The thought of Nissan or Mitsubishi sourcing core B-segment hatchbacks for Japanese consumption from Thailand would previously been unthinkable, though now it is an economic necessity. OEMs which are shifting capacity and broadening the scope of new facilities beyond local markets has allowed for sourcing lanes to emerge.
Alternative sourcing connections are enabled through trade agreements and increased plant-level flexibility. A classic case is new investment by the Renault/Nissan alliance in the Renault-Samsung operations to source a portion of Nissan Rogue sales requirements for the U.S. Without the recently approved South Korean-U.S. trade agreement, this link would have previously been uneconomical in Nissan’s eyes. Conversely, volumes back to South Korea from the U.S. are starting to rise.
In the end, traditional trade lanes will continue to exist though their role has changed. Volume out of Japan will increasingly be focused on luxury and niche offerings requiring a single production site due to economies of scale. Although the flexibility will continue to exist, the days of sourcing high volume of mass-market offerings from Japan are likely over. The industry is conforming to this reality and the experience of Japan is not lost on other export superpowers—the Koreans and the Germans. In the case of the Koreans, production flexibility is already at a state where shifts can quickly occur if required. The German OEMs have made strides in adding production capability in North America, India and Eastern Europe—all intended to have exports as a critical cog. While global “interconnected” volume will rise through the balance of the decade, the share of global volume shipped to another region will slowly decline. Shifting of production sourcing will drive new “source to destination” connections going forward. No single mass market OEM can depend upon their home market for all sourcing requirements; it is too risky. Tomorrow’s criteria for shifting sourcing of vehicles will depend less on OEM production capability and more upon natural currency hedging, building units closer to the end customer and trade enablers.