While sales on automobiles are down around the globe, investments by
car manufacturers and their subsequent suppliers have not yet hit the
skids. With M&As between original equipment manufacturers (OEMs)
and assemblers still in the fast lane, attempts to carve out market
share are pitting manufacturer against manufacture as each seeks more
cost-effective production pastures, tighter margins, and better
logistics management from suppliers. Expansions and new assembly plants
for everyone involved continue to surge ahead.
In the US, the world’s biggest vehicle market, the stakes are high. Up
against Asian and European manufacturers, American car markers continue
to offer discounts and zero financing to boost sales. In the pickup
truck category – largely driven by Detroit’s Big Three, General
Motors(GM), Ford and DaimlerChrysler – GM’s Chevy pickup is a market
leader but Nissan has now joined the stampede.
Nissan has rolled off its first Titan pickup trucks at its expanded
factory in Canton, Mississippi. This is tough competition for the Big
Three, which have been accused by Business Week magazine of having
trouble staying ahead of the innovation curve. And now, with Nissan’s
$1.4bn plant employing more than 5000 workers and with an increased
capacity from 250,000 vehicles to 400,000, GM and others can no longer
keep their gears in neutral.
Adding fuel to the fire, Toyota Motor Manufacturing North America Inc.
recently broke ground on 2000 acres outside San Antonio, Texas, for its
second US pickup truck plant – its sixth North American vehicle
assembly plant. When the $800m factory is in full production in 2006,
it will employ 2000 people and produce 150,000 Tundra full-sized trucks.
“San Antonio had a great available workforce, and access to the North
American Free Trade Agreement (NAFTA) corridor was a positive influence
on our decision,” says Dan Sieter, Toyota spokesman. “We want to sell
more trucks in Texas and we see an advantage to having our trucks built
by Texans,” he says.
Nissan and Toyota together will add 300,000 trucks to the slow-growing
US truck market, in which approximately 2.3 million are sold annually.
Saul Rubin, auto analyst at UBS Warburg, expects “an all-out price war”
in pickups – something that has been seen before with sports-utility
vehicles (SUVs) and minivans.
US incentives
Despite the rocks in the road, auto makers continue to push margins
and grab opportunities. Many US economic development agencies entice
these companies with attractive incentives and workforce training
schemes. Take the Toyota deal in Texas: Toyota received a $133m
incentive package, almost 17% of its total investment in the state, by
agreeing to locate in San Antonio. Its package came with job training
funds, utility infrastructure and tax incentives.
Economic development agencies also know that with the assemblers come a
host of suppliers that pour as many, if not more, jobs and tax revenues
into the community. Locating close to their customer is important for
these suppliers because the delivery of modules and systems must be
made in a just-in-time (JIT) environment. In the case of Nissan in
Mississippi, by June 2003, the auto maker had already attracted 26
suppliers to the state.
The contest to attract this business continues to be most heated in the
US’s southern states. The precedent was set in the early 1990s when
Mercedes-Benz began looking for investment options around the globe.
After looking at 170 sites, Mercedes-Benz finally pitted North
Carolina, South Carolina and Alabama against each other in the
high-stakes contest. The kicker came when Mercedes asked the finalist
states to pay its workers’ salaries for the first years. Alabama said
yes, and proceeded to not only pay the salaries, but also provide
workers’ training programmes, clear and improve the site, upgrade
utilities, and buy 2500 Mercedes vehicles itself. The state could not
afford the investment, however, and was forced to backtrack on the
offer – the state legislature voted the incentives illegal. Everyone
shook hands, and the plant was built in Vance, Alabama.
Mercedes has recently completed a $600m expansion of that plant – the
largest in parent company DaimlerChrysler’s history – which will double its production and employment.
Alabama expansion
Capitalising on the deal, today Alabama is also home to Honda,
which expects to open its new $425m assembly line facility adjacent to
its existing plant in Lincoln. The expansion raises Honda Manufacturing
of Alabama’s investment in the state to $1bn and its total workforce to
about 4300. It will add 1.1 million square feet to its existing 1.7
million sqft.
Pushing to become the Detroit of the south, Alabama is handing a
$252.8m incentive package to Hyundai Motor Co (HMC) to create the
biggest economic development project in the state’s history. The $1bn
US automotive assembly operation will encompass two million sqft upon
completion, produce 300,000 cars and trucks annually and generate up to
$250m a year in wages for its 5000 direct and indirect employees. The
first cars are due to be produced in 2005.
“By 2010 we plan to reach an annual production of five million cars and
trucks, consisting of 3.5 million units in Korea and 1.5 million
overseas,” Hyundai Motor Manufacturing Alabama President Yang-Soo Kim
projects.
HMC executives say they selected Montgomery for its first US plant
because of Alabama’s high-quality workforce, strategic location,
available automotive parts supply chain and the state and city
commitment to the project. About 14 more Tier-1 Hyundai supplier plants
are locating in Alabama as a result of the announcement.
Detroit accelerates
Until now, Detroit largely held the monopoly on automotive R&D, with much design work being done in southern California.
In some ways, the southern US appears to have outpaced Detroit and the
auto centres of the mid-west, with at least one-third of vehicles
manufactured in the US today having southern roots. Tennessee, which
produced no vehicles in the 1980s, is now ranked third among the US’s
auto-making states.
But Michigan, and its Michigan Economic Development Corp, is stepping
on the peddle and offering a programme that includes a business tax
credit for companies that expand or relocate to the state. The
programme pulled Brose North America to Auburn Hills in Michigan
instead of Ontario, Canada, for its $25m facility for manufacturing
window regulators, door systems and set adjusters. In exchange, Brose
is getting a local tax abatement worth more than $1.1m over eight years.
Similarly, Nissan Technical Center North America decided to expand its
location in Farmington Hills rather than move its worldwide technical
headquarters to Atsugi, Japan, thanks to its being awarded a local tax
abatement of $15.7m over the next 17 years.
European alternatives
In Europe, the world’s leading automobile producer, there has been a
fierce battle among the 15 or so major car manufacturers. Contention is
not waged with incentives, though; instead, OEMs face over-capacity
issues resulting from the slow global economy, which in turn has
resulted in a series of M&As. OEMs and their subsequent suppliers
find they are cutting margins extremely tight, and therefore must make
any move that will secure their bottom line.
“Consequently, car manufacturers are increasingly looking at low cost
locations such as central Europe,” says William Pijpers, of BCI Global
in Nijmegen, the Netherlands. “Car makers and first and second tier
suppliers are making about 10 to 15 cross-border manufacturing
relocations per year.”
Turkey also shows promise for auto manufacturing due to tax
concessions. Among the companies holding a presence there are Renault,
Hyundai, Ford and Toyota.
Spanish fortunes
Spain, once Europe’s low-cost manufacturing location for OEMs, has
felt the impact of the shifting tide to central and eastern Europe. The
threat hit home when Volkswagen decided late last year to move 10% of
its SEAT Ibiza volume from its Mortorell plant near Barcelona to
Bratislava, Slovakia.
Still, Spain offers advantages such as low-cost labour, top-notch
engineering capabilities, a developed supplier network and proximity to
customers. Among this year’s announcements, Japanese multinational
Bridgestone is investing more than E100m on its lorry tyre
manufacturing plant in Basauri, just outside Bilbao. Sources at the
company said that the investment was designed to increase production
capacity by 35%, taking current levels of 3500 tyres a day to nearly
5000 by the end of 2005.
Extension work at the factory – which is due to include the renewal of
machinery and the installation of new production lines – is part of a
E400m investment that the Japanese group announced recently for its
European interests.
The group’s Polish factory at Poznan and the creation of a
high-performance tyre development testing centre in Rome are part of
that investment. The ongoing consolidation of the automotive industry,
however, has resulted in a reduction in the number of first and second
tier suppliers and mounting pressure on costs for high volumes and low
margins.
“This leads to a vertical integration of suppliers in the manufacturing
process of car manufacturers,” says Mr Pijpers. “People are being laid
off and/or plants are being closed with production switched to reduce
over-capacity.”
Ford, for example, will soon be laying off 3000 workers at its
operations in Genk, Belgium, despite the fact that the plant is a
highly modern, flexible facility. Operations in Plonsk in Poland and
Azambuja in Portugal are being closed. Ford’s Dagenham factory in the
UK has stopped making cars and is now only producing engines. Plus, at
its Halewood plant in the UK, the company has stopped making Ford cars
and now is producing Jaguars.
“Every new Jaguar is designed, developed and styled in Coventry at the
company’s Whitley Engineering Centre,” comments Colin Cook, Jaguar
spokesman. “Over 2000 engineers work in this high technology
environment, ensuring that Jaguar’s premium saloons and sports cars are
designed and engineered to the highest international standards, and
meet the demanding quality requirements and aspirations of customers in
over 60 markets around the world.”
UK attractions
Despite Ford’s woes in the UK, the country still provides a
manufacturing base for seven leading volume vehicle manufacturers, nine
commercial vehicle production facilities, 17 of the top tier one
suppliers and about 20 leading independent automotive design firms. The
UK is home to the world’s most successful motorsport industry and is
increasingly becoming a centre for engine production.
Peugeot manufactures its 206 model in Coventry, a hot seller in the UK.
Toyota expanded its Burnaston plant and in January began manufacturing
the new Avensis, alongside its Toyota Corolla. The UK-built Avensis
will be the first Toyota to be exported from Europe to Japan. Toyota
Motor Manufacturing UK (TMUK) currently employs about 4600 people.
In an aggressive effort to tap market share in Europe, Toyota announced
in May that it will be increasing production capacity in Europe by
moving from two to three work-shifts at its plants in Burnaston, UK,
and Valenciennes, France, starting second quarter, 2004. Annual UK
production capacity will increase from the current 220,000 Toyota
vehicles to around 270,000. This will create about 1000 new jobs at
TMUK. The additional shift at Toyota Motor Manufacturing France (TMMF)
could increase its current annual production capacity from 184,000 to
240,000 Yaris models. Toyota executives believe that the increased
production at TMMF and TMUK will lead to improvements in capacity
utilisation and will increase Toyota’s profitability in Europe.
As in the US, most suppliers locate close to assemblers. But in Europe,
emphasis has been given to the development of state-of-the-art supplier
parks as an incentive for location. For example, Barcelona-based
automotive supplier Infun announced in July that it would build “the
world’s most advanced facility for the pressing of light-gauge metals”
in the Automotive Supplier Park in Hof, Germany.
Logistics centres are also being developed throughout Europe for the
automotive sector because suppliers now must cut costs as close to the
bone as possible. DaimlerChrysler exemplifies this effort in its new
18,000 square metre logistics centre
at the Port of Stuttgart in Untertürkheim, Germany, which will serve as
a central shipping department for all exports. The project is expected
to open in April 2004.
DaimlerChrysler produces about 100 million engines, 1.2 million
transmissions and one million axles a year at Stuttgart sub-plants.
“With this project, we create the framework conditions for achieving
ever greater flexibility in response to an expanding model range,” says
Volker Stauch, who heads the DaimlerChrysler Untertürkheim plant. More
significantly, shipments will be made primarily by barge, which is more
cost effective than trucking and eliminates the new truck tariffs on
Germany’s highway. From the valley of the Neckar River, the
Untertürkheim plant distributes major components and parts kits to
Mercedes assembly plants throughout the world.
Agency aid
Germany is a high-cost location. To retain this key sector,
industry executives – with the help of their state economic development
agencies – are carving out niches in specialised areas. The agencies
help to facilitate the site selection process while acting as a bridge
between public and private entities. They also promote industry
clusters worldwide.
The European Institute for Transport Management, based in the UK city
of Birmingham, recently recognised Bavaria for its effort by naming it
Europe’s Automotive Region of the Year for 2003. The institute paid
tribute to the successes achieved by Bavaria’s automotive industry, its
excellent infrastructure, and to the way Invest in Bavaria, the state’s
international business development arm, has managed and marketed these
assets.
Much of the industry’s high quality comes from the sub-systems and
components manufactured by the 130 Bavaria-based suppliers: 72% of each
BMW leaving the company’s finishing line was produced by one of its
suppliers.
Suppliers are found throughout Bavaria but all of them work under a
platform for the development and dissemination of technologies via the
Bavarian Innovation and Co-operation Initiative of the Automotive
Supply Industry (BAIKA). BAIKA stages dedicated congresses and
seminars, and facilitates events for its 1400 member companies.
Globalisation
Economic agencies in Mexico cannot compete with US incentives, but
this Latin American neighbour has attracted significant investments
thanks to NAFTA, cheap labour and large consumer population.
Volkswagen (VW) is the country’s third largest car manufacturer after
GM and DaimlerChrysler. Mexico is the only country in the world where
VW produces its affordable, well-known Beetle. Now the company has
plans to invest $180m in its Puebla plant to produce its Bora model for
export to Europe. Some 1500 jobs will be created by 2005.
Toyota is also adding capacity to its Tijuana plant in the north
Mexican state of Baja California. The unit increase will bring total
annual capacity to 30,000 Tacoma pickup trucks and 180,000 truck beds.
Toyota is also planning an on-site supplier park.
But trouble could be on the horizon when a new law takes effect in 2004
that will end an import quota system that has protected the Mexican
retail market. The lowering of import barriers and the trade agreement
Mexico has signed with the EU and Mercosur trading bloc countries also
results in lower duties and easing imported cars from Europe and
elsewhere in Latin America to Mexico.
A bigger worry is the industry’s globalisation, which is forcing car
makers to cut manufacturing costs. Mexico’s higher labour costs and
lower productivity intensifies competition from other low-cost
countries, such as Brazil, Thailand and China, whose auto industry is
export-driven. The high population base in China and Brazil builds in
another attractive element to car manufacturers: opportunity to sell to
the domestic market.
Brazilian benefits
Trade liberalisation in the early 1990s exposed domestic
manufacturers to foreign competition, thereby benefiting Brazil’s
automobile industry. Brazil’s currency devaluation and economic
slowdown resulted in a slamming of the brakes for its domestic market
but made the country even more attractive for global auto makers.
Brazil’s economy is now recovering. However, the automotive industry is
being hit by the same trends occurring elsewhere in the world: a
reduction in the number of tier one suppliers. JIT delivery,
simultaneous engineering and system integration have improved.
Distribution networks have been modernised. With the automotive
component business undergoing structural transformation, automotive
production is being decentralised. Consequently, new centres for the
industry are being developed, such as the cities of Campinas and Juiz
de Fora, and the States of Parana, Rio Grande do Sul and Bahia. Imports
are expected to continue to fill gaps in sales that are left empty by
domestic consumption.
Domestic market
In China, the market for domestic sales is staggering. According to
the China Association of Automobile Manufacturers, domestic sales of
passenger cars made in China exceeded three million units in 2002.
Anxious to grab part of the market, Japan’s Nissan Motor Co Ltd has
invested about $1bn to manufacture vehicles there with Chinese partner
Dongfeng Motor Corp. Soon to be introduced is Nissan’s Sunny. Six new
Nissan models will be localised in China by 2006, with annual
production capacity expected to reach 900,000 within 10 years. The
company joins VW, GM, Ford and Toyota in what is seen as a market prime
for opportunity.
To position itself better, Dongfeng Motor Corp, one of China’s largest
car makers, moved its headquarters in September to the Economic and
Technological Development Zone of Wuhan, the capital of central China’s
Hubei province and one of the leading industrial and commercial cities
in China.
In August, Honda Motor Co Ltd also began a new automobile production
joint venture with Dongfeng Motor Corp for the production of Honda
vehicles. An existing plant in Wuhan will be upgraded to serve as the
production site for Honda’s small SUV, the CR-V, with production slated
to start during the first half of 2004. The annual production volume
has been set at 30,000 units.
An indication of the maturing of China’s automotive industry is that
the country’s biggest automobile producer, the Shanghai Automotive
Industry (Group) Corporation, which manufactures and distributes
passenger cars, buses, tractors and motorcycles, has set up a R&D
centre. The first of its kind for a Chinese auto manufacturer and known
as the Automotive Engineering Academy, the centre signifies the
beginning of China’s efforts to develop auto technology independently
rather than relying on imported technology and joint R&D.
Industry trends
What do these developments mean for the auto industry at large?
This can be predicted. One known fact is the Chinese obsession with
brand-name products, hence the success of overseas auto makers in the
Chinese domestic market. For auto manufacturers and suppliers operating
with unbearably tight margins, the wholesale contracting and licensing
of the production of models to Chinese contractors offers an
alternative strategy with large savings.
But there are risks. Quality, patents and copyright issues are a
concern. Lacking high-tech advantages, the Chinese auto part makers are
still not well matched with foreign competitors. Enormous pressure from
joint partners is certain to abound. Yet more than 1400 manufacturers
make up the bulk of the Chinese auto part industry with most located in
Shanghai municipality, and the provinces of Zhejiang, Jilin, Jiangsu
and Hubei.
Some labour-intensive and raw-material auto parts have been
batch-exported from China and the number of locally-made parts being
used in Chinese cars is increasing. For example, more than 80% of auto
parts in the Chery car manufactured by the Shanghai Motor Corporation
are made in China.
Perhaps the biggest wild card for the industry as a whole on a global
level is the fact China is now a member of the World Trade
Organization, and therefore tariffs on imported auto parts will be
reduced from 25% to 10% in four years. With that, relevant import
licences will be cancelled.
US beauty parade
The tales of automotive investment in other states may pale against Alabama’s but are in no way less significant. In Georgia, the industry gainfully employs more than 46,000 workers at about 265 automotive parts suppliers and seven automotive company headquarters across the state, placing it sixth among US states in the automotive cluster.
Georgia offers advantages, including its deep-water Port of Savannah, which handles cargo for Honda’s Alabama manufacturing plant. Many of the steamship lines that call there designate Savannah as their “first-in” port of call, thus proving advantageous for just-in-time deliveries.
Italy’s Pirelli Tire recently opened its $140m, 400,000 sqft facility in Georgia’s coincidentally-named Rome to serve as its North American headquarters. Pirelli is basing its corporate staff, R&D centre, and Modular Integrated Robotized System manufacturing operations there. “We looked at numerous states and communities and determined that Rome offered the best strategic fit for our company,” says Carlo Bianconi, the recently retired president and CEO of Pirelli Tire North America.
Other southern states are benefiting from the growth of the US south’s auto industry. BMW recently announced a $400m expansion to its North American facility in Spartanburg, South Carolina. The state will construct a $35m interchange and ancillary roads to accommodate its further growth.
South Carolina’s port city of Charleston has developed a growing automotive supplier industry, mostly due to foreign investment from Germany. The Robert Bosch Corp facility, which manufactures diesel and gasoline fuel injector products and ABS brake systems, has expanded six times since 1973.
Especially significant for South Carolina is a deal struck with Clemson University to develop an automotive research park in Greenville. “This has the potential to put South Carolina on the map as a leading place for automotive research,” says Harry Lightsey III, president of BellSouth’s South Carolina operations, who headed a panel to explore ways of developing the high-tech sector.
Doug Woodward, research economist at the University of South Carolina, says the research park, dubbed the International Center for Automotive Research, “goes beyond just providing incentives for the next branch plant that comes along”.
BMW, which manufacturer cars in Greer, South Carolina, is offering a $10m gift to endow professorships at the proposed graduate school. Also, BMW helped to secure $25m to construct the graduate school by making that amount part of what it got from state officials in exchange for a 400-worker, $400m expansion at its Greer plant.
Central and Eastern Europe
In the past seven years, the largest greenfield projects have occurred in Romania, Poland, Slovakia and the Czech Republic. BCI expects this trend to continue.
PSA Peugeot Citroën is investing nearly $800m in a new assembly plant in Trnava, Slovakia, slated for completion in 2006. The factory is expected to employ 3500. Some 300,000 units are expected to come off the line. Peugeot says it chose Trnava to be closer to promising markets in Croatia, Hungary, Poland, the Czech Republic, Slovakia and Slovenia. It sold some 113,000 vehicles in these countries alone in 2002. Geographically, Slovakia is also near key markets in Germany, Austria and Italy.
Already on the start-up list are Delphi Automotive Slovakia sro, which opened a plant in 2002 in Senica, Slovakia, to manufacture wire and harnesses. Germany’s Leoni will start operations in 2003 in Styri, Ukraine, to manufacture wiring systems for cars.
Ernst & Young’s study The European Investment Monitor – 2003 indicates that 152 auto component investment projects were created in Europe in 2002, an increase of 22% from 2001 investments. Most significantly, the Czech Republic attracted 18% of such projects, placing it number one for component investment. By comparison, the UK ranks second with 13% and France third with 12%.
Today, the car industry is the most important industrial sector in the Czech Republic with 85% of production exported. “The sector on its own represents 21% of Czech exports,” comments Dita Martisova, spokesperson for development agency CzechInvest.
Volkswagen has been operating in the Czech Republic for more than a decade as a result of its purchase of Skoda Auto, the third oldest car manufacturer in the world. Skoda exports to 78 countries worldwide. The Czech Republic’s largest foreign investment on record, however, came from Toyota and PSA, which together are constructing a E1.5bn factory in Kolín on 120 hectares.
