Even as the financial markets ricochet up and (mostly) down the prognosis for the motor industry and its supply chain in North America and Europe looks more to be one of caution rather than outright alarm.
“We are seeing the return to caution,” said Christophe Stürmer, director of OEM research for IHS Automotive. “The first half was characterised by euphoria but with trouble in the financial markets and growth not catching on in major economies, there are worries that the recovery projection scenario needs to be corrected.”
Arthur Maher, head of European forecasting for JD Power, now predicts light vehicle production some 670,000 units lower than originally anticipated for 2012 across wider Europe (including Russia and Turkey) and for Western European output to fall around 400,000 units between 2011 and 2012. “September will see the sector commence its budget planning process for 2012, and typically OEMs will plan on relatively cautious numbers which, given the disruptions suffered over the last three years–and more recently in August–is a strategy we would concur with,” he said.
But all plans won’t be equal. Maher suggested premium carmakers caught out in parts shortages earlier this year–some even before the Japanese crisis– may opt for a more aggressive budget stance in 2012, as might Japanese producers.
The prospect of another slowdown has also prompted talk once again of production overcapacity, particularly in Europe. Michael Gartside, senior automotive analyst at PwC, said that while North America used bankruptcy and plant closures to reduce its cost base in 2009, European OEMs took measures such as banking hours and temporary reductions in shifts rather than cutting capacity.
Some argue, therefore, that Europe is more exposed to overcapacity in another downturn, not least with governments unlikely to renew incentives (with Russia perhaps the exception).
But such fears may be overblown. Both Gartside and Stürmer agreed that European capacity levels, while below 2007, are fairly healthy.
“I don’t think there is an overall capacity problem in Europe,” said Stürmer, although he acknowledged a “mixed picture”, whereby some carmakers–notably VW, Mercedes and BMW–could not build enough cars to meet demand, whereas other carmakers, such as Opel/Vauxhall and Fiat, had certain under-used factories.
He suggested the industry still suffered from “structural issues” where political pressures might prevent reducing capacity at a plant, however Stürmer said manufacturers face more problems linked to underinvestment in flexible manufacturing and logistics rather than too much capacity.
“Carmakers tend to underinvest and then are typically confronted with a problem, such as that they didn’t make the plant flexible enough and the single product they build there is not a hot seller but they cannot move quickly to change production,” he said. “It’s a question of planning, intelligence and investment in flexibility.” Stürmer pointed to flexibility as vital in the success of BMW, for example. “BMW has an extreme flexibility and most of its products can be built in two places at short notice, some even at three locations.” Crucial to such flexibility is logistics capacity, Stürmer added, as providers might need to haul welded bodies-in-white or kits in huge numbers to previously unplanned locations. Carmakers that haven’t planned for this flexibility could be stuck with factories churning out the wrong product for too long; likewise, a similar underinvestment could prevent output of the right car. Stürmer said VW usually has high flexibility for its products, but to save money the company decided to build the Tiguan only in Wolfsburg. Today, however, it cannot build enough of them. “If the Tiguan had been built, like other models, in mixed production then VW could just breathe it out.”
Other OEMS have moved toward such flexible manufacturing, but a question is whether the supply base can keep up, as some have avoided investing since the downturn and hence have struggled to meet demand, as Gartside pointed out. If logistics providers are also unable to keep up with demand, such flexibility will be thwarted. Any approach to keep the assembly line agile will have to start further down the supply chain.