Current speculation concerning how GM’s loss-making Opel division will not only sustain its annual €265m cost-saving target but meet the ambitious targets of €1 billion profit by 2016 (from Q3 operating loss of 202m in 2011) is expected to end when a new plan for making the division profitable again is released this month.
Until then questions continue to be asked about a possible shift of Chevrolet production from South Korea to Europe, as the German unions are urging, to restore that profitability through increasing plant utilisation, securing jobs as well as saving on logistics costs. At the moment vehicles sold in Western Europe are imported mainly from South Korea, as well as from the US and Canada.
Chevrolet recorded sales growth in 20 Western and Central European markets in 2011, with unit sales up 1,600 to 206,400 from 2010 figures. GM currently builds Chevrolets at its factory in St Petersburg, Russia (a factory that is expanding production). It also builds Chevrolet at its factory in Uzbekistan, a share of which is also exported to Russia.
While Opel’s new works council head, Wolfgang Schäfer-Klug, believes that a shift in production from South Korea to Europe would be “sensible”, the company would not comment on plans for any such reintroduction. What it has said is that it will look for cost savings in a number of areas, including product, commercial and logistics costs.
It would seem on the one hand to be a common sense approach for a carmaker chasing cost efficiencies to produce vehicles where they are being sold, not least from a logistics point of view. GM’s recent push to converge global platforms, so that a larger amount of cars share the same component architecture, would also help to ease such a transition. The Opel Astra and Chevrolet Cruze are based on the same compact car architecture and share a number of the same components for example, but the vehicle interiors and exterior design is very different.
However, the savings generated by inbound and outbound logistics are unlikely to be the deciding factor in such a shift. The potential profits that could arise from a better utilisation of Opel’s European factories would have to be weighed against South Korea’s competitive manufacturing base, as well as its excellent deep sea shipping links for car carriers. There would also be a strong opposition from South Korea’s unions.
Added to this is the thorny issue surrounding South Korea’s free trade agreement with the European Union (and the US). South Korea has been considered as a market closed to imports from Europe and North America, in particular, and should GM move its production back to Europe, exporting those cars to Korea could be hindered by snapback clauses designed to ensure that South Korea does not abolish import incentives.
“For GM, South Korea is not only an offshore location to produce inexpensive cars, but also a market which thrives as well,” said Prana Tharthiharan Natarajan, automotive and transportation analyst at consultants Frost & Sullivan. “At this juncture, when GM Korea is trying to penetrate into a staunch ethnic market which favours homegrown brands such as Hyundai and Kia, GM may not be able to achieve manufacturing economies of scale.
“Furthermore,” Natarajan told Automotive Logistics News, “emerging markets such as South Korea possess a better demographic scenario for passenger car demand with a few decades ahead in purview. The decision of shifting the production base is one of strategy. As long as producing in and exporting from Korea provides a clear cost advantage, GM could consider other counter-measures to handle labour problem.”
GM also has to consider population demographics and the vulnerable economic conditions in Europe compared with the booming market in Asia.
“What GM needs to consider is also the other cost components that may increase, while reducing logistics cost of ocean-freight from Korea to EU,” said Natarajan. “In moving back operations to the EU, labour cost, material sourcing costs and the very running cost of a production facility in Europe may be much greater the savings from logistics.”
GM is pushing for a convergence across its vehicle platforms and component sharing with existing production models which could reduce the problems of a move of Chevrolet production to the company’s existing plants in Europe; alternatively the import of major imports from South Korea or the US would negate the advantages.