Despite Slim-Down, Automakers Still Hung with Too Much Capacity

By Bill Visnic August 27, 2010

Auto-industry executives keep talking about how they've trimmed down in order to bulk up profits, but that's only partially true. Many indeed are profitable at today's sharply reduced global sales rates - but they've still got some work to do in cutting the fat from their manufacturing empires.

capacity trends - northern U.S. Oliver Wyman Harbour.JPG The latest data from Oliver Wyman's prestigious Harbour Report that tracks the auto industry's manufacturing trends shows that there remains an enormous amount of excess assembly-plant capacity in the U.S. and Europe, despite the fact major automakers such as General Motors Co. Ford Motor Co. and Chrysler Group LLC have shuttered more than two dozen plants in North America alone since 2000.

Regardless of that seemingly major downsizing, the report indicates that in the northern U.S. and Canada, automakers still are tied to the capacity to manufacture more than 3.5 million more vehicles than they currently need - or another 14 more assembly plants of unnecessary capacity.

And alluding to the rapid shift to more-flexible assembly-plant tooling and co-located associated operations such as stamping, Harbour said that if and when U.S. auto sales return to rates of 15-16 million annually, "it will be a much different landscape than before."

Ron Harbour, the Oliver Wyman managing partner of global automotive manufacturing who originated the highly-regarded Harbour Report that documents industry manufacturing capacity, efficiency and other metrics, recently presented some of the report's 2010 findings at an industry conference in Michigan. He said that although automakers have moved to reduce capacity, because of politics and union contracts it remains "almost impossible" to actually close an assembly plant in the U.S. or Western Europe - and that current capacity utilization rates still stand at a dismal 58 percent in North America, although Europe's utilization rate is a better 81 percent.

In western Europe, automakers collectively have about nine full assembly plants of overcapacity, Harbour said.

Enough Still Isn't Enough

Large investors interested in General Motors Co.'s pending initial public offering undoubtedly are poring over the financial numbers that may or may not reveal that, according to Harbour's metrics, GM still is shackled with 30 percent more manufacturing capacity than it needs, although the company shuttered 14 of its assembly plants since 2000.

In that same timeframe, Ford has closed eight assembly plants and Chrysler four plants.

In 2000, GM had the capacity in North America to build 6.2 million vehicles; that number has been cut to 3 million, according to data from Harbour and Ward's Automotive Group. Ford has downsized from a North American manufacturing footprint capable of building 4.5 million vehicles to 2.8 million and Chrysler from 3 million to 2.2 million.

North American capacity 2000-2010 Harbour Report.JPG Meanwhile, Toyota, Honda and Nissan all have added significantly to their North American capacity from 2000 to 2010. Toyota went from five plants to nine and nearly doubled its capacity to 1.5 million vehicles. Honda went from five plants to six and from 1.1 million vehicles' worth of capacity to 1.7 million. And Nissan went from five plants to six and added 700,000 units of capacity, to current total of 1.5 million.

Yet with more than 3.5 million units worth of overcapacity in North America, something still has to give, Harbour said in his recent presentation.

One Word: Flexibility

The change that's already underway is increased flexibility, Harbour said.

The domestic automakers, in particular, are underway with a concerted shift towards plants that are as flexible as their Asian counterparts, which long have held an advantage in this crucial area. This is one reason why the domestic makers have increasingly shuttered older plants or those installed with dedicated assembly lines or paint shops incapable of accommodating a variety of vehicles.

The "assembly plant of the future," Harbour contends, will have fewer workstations, integrated stamping operations and will be capable of building 800-1,500 units per day. Staffing will be 2,500 or fewer and be mixed with union and non-union employees working with fewer classifications and at more globally-competitive wages.

In all, he said, expect the future auto-manufacturing landscape to be comprised of still fewer assembly plants and fewer lines - but those lines will be running at higher speeds.

Capacity, Harbour adds, will be "generic" in almost all plants as automakers will be forced to become more efficient in distributing production to where it can be best utilized. Plants of the future also will require less capital investment as automakers strive for a balance of people and technology.

Charts by Oliver Wyman

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