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USA: "Optimize Your Contract Labor" article

USA: "Optimize Your Contract Labor" article. Article by A.T. Kearney.

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back to index backAMERItalk April,  2005

Auto manufacturing changing drivers

In spite of the auto industry's general overcapacity, the planning and building of assembly plants continues.

Everyone except daredevils and gamblers cherishes comfort and certainty; but when it comes to automotive manufacturing, those appealing traits are in short supply.
      "I think we're going to see a high level of turbulence and uncertainty in the industry," predicts David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan. "This is an industry with 80 million units of capacity but 60 million units of sales."
     One major component of this turbulence is the fact that the traditional Big Three aren't as big as they used to be, says David Healy, an automotive analyst with the Wall Street firm of Burnham Securities. "I think as a general rule, the Big Three are shrinking," he says. "As a result of the loss of market share, they're winding up with excess capacity and are closing plants. The larger Asian makers are expanding their capacity in the United States."

Capacity Shuffle
The consequence is that, despite the industry's general overcapacity, the planning and building of assembly plants continues. "In Europe and North America that situation has been there as long as I've been following the industry," Healy notes. "Companies are always yakking about too much capacity," but many of them keep on building. It's a global game of musical chairs, with new capacity in one place replacing older capacity somewhere else.
     For communities across North America and elsewhere, the goal is to be on the positive end of that game. Though there are exceptions, most of the winners lately have had southern addresses. "The hot spots will still be in the southern states," notes Haig Stoddard, manager of industry analysis for
     Hyundai, for example, has a new plant in Alabama, an up-and-coming auto state, Stoddard reports. "Honda is increasing capacity at its plant in Alabama, and Mercedes is increasing capacity in 2005 in Alabama." Elsewhere, he says, "Nissan is up to full production at its new plant in Mississippi," and Toyota is making good progress on its new truck plant in Texas.
     On the other side of the game, "General Motors and Ford have been closing plants fairly aggressively," Healy says. "DaimlerChrysler is probably not going to close a plant; they've actually been gaining market share."
     "Ford and GM each have closed a plant in the last year, and Ford will be phasing out a plant in St. Louis," Stoddard agrees. "GM will be closing a plant in Michigan but will be replacing it with a new plant." Both Ford and GM have announced plans to trim their U.S. production, at least for the first part of 2005.
     One exception to the southern rule is Canada, he says. "Ontario is still a good spot and probably will see some expansion by Toyota and Honda." Also, some southern locations are not as hot as they once were, Cole adds.
     Moreover, "Mexico is an interesting situation, because (the United States) lost a lot of fairly labor-intensive stuff to Mexico, but now Mexico is becoming a higher-labor region and it's moving to China or the Philippines," he says.
     While the Japanese automakers are clearly faring well, their home country is not a real hot spot for new development. "Part of the reason that Japan's production hasn't been growing is because major players are adding capacity in the markets where they sell their vehicles," Stoddard says. "They're actually moving some things built in Japan to the United States."
     Meanwhile, "China will probably be surpassing Japan in the next three or four years as the number-two–producing country in the world, behind the United States," according to Stoddard.
     And as for Europe, "the general trend is that Western Europe is going to be losing capacity to Eastern Europe, where labor is less expensive," he says. "But capacity overall in Europe will stay about the same."
     There's another factor that may be playing an increasing role in the capacity shuffle, according to Healy: "It's partly because of currency," he says. "The weaker the dollar gets, the more it's going to squeeze the profitability from building cars in Japan and selling them in the United States."

Where capacity is growing, or at least remaining in place, it's becoming more flexible, according to Cole. "There's a headlong rush to build flexibility into facilities, so there could be some redevelopment in some areas. Automotive manufacturing is much leaner, much more flexible than we've seen in the past. There's more focus on the re-engineering of existing plants."
     A prime example of this kind of manufacturing flexibility is at Honda's plant in Alabama. One line there has been building Odyssey minivans, while another has been turning out Pilot sport-utility vehicles, but just after Thanksgiving the second assembly line turned out an Odyssey just minutes after building a Pilot.
     Among those scrambling to keep up with the changing landscape are companies supplying components to automakers, Cole observes. "Pity the poor supplier. A great many are keeping their noses barely out of the water."
     Still, the shakeup may result in the creation of some new supplier plants in some places. "[There's] less of a focus on large, central supplier plants [and] more on smaller plants," Cole says. And gains in productivity are reducing the pressure to move additional supplier capacity to overseas addresses. "As the supplier industry gets more productive, you're less likely to move because of inexpensive labor," he adds.
     Turbulent as the present and future may be, automotive jobs are still highly coveted among economic development professionals. "The economic value of an auto-manufacturing job in a manufacturing plant is roughly four times the average job," Cole says. "These jobs are really important, and the economic multiplier is 10. With that kind of economic significance you try really hard to keep what you have and try really hard to get more."
     How can communities do that? Keep current with the changing times, says Cole. "Become as deeply knowledgeable about the industry as possible."
     As for automotive companies, the best bet is to keep boosting productivity, adding innovation, and planting assembly capacity in the most sensible places. "There's no easy money in the auto business," Cole says. "It's an extremely competitive era."

U.S. & Canadian Hot Spots
Continuing through 2004 was the migration of auto production toward the U.S. South, though it also was a good year for automakers assembling in the Canadian province of Ontario. Also ongoing in the past year were cuts in auto-producing capacity by the Big Three, while automakers based overseas continued to add to their North American production capabilities. And though production appeared to decline somewhat, sales seem to be on an upward trend, with American car and light truck sales totaling nearly 16.9 million in 2004, the best year since 2001.
     Some 22 American states plus Ontario are significant motor-vehicle producers, though a pair of states will see their production disappear this year. U.S. and Canadian auto manufacturing can be grouped into five clusters: the area surrounding the Great Lakes, a swath cutting across the nation's midsection, several southern states, locations along the East Coast, and California.
     Following are the highlights from these automotive clusters:

The Great Lakes Cluster
This is, by far, the auto-manufacturing capital of the continent, if not the world. Though much is written, quite legitimately, about the rise of the South, the top-producing region remains the area surrounding the Great Lakes.
     According to the latest annual report from Ward's AutoInfoBank, automakers produced a total of 8.9 million vehicles in the region in 2003, the latest full-year figures. That includes 2.8 million assembled in the automotive mecca of Michigan, 2.6 million in Ontario, and 1.9 million in Ohio. Indiana and Illinois were significant players, turning out 680,792 and 500,698 units, respectively. Assembly plants in Wisconsin added 261,568, while Minnesota tallied 185,642.
     Though full-year 2004 figures were not available at press time, industry analysts speculate that Ontario's production may have pulled ahead of Michigan's when the counting is finished. That's because demand for the Big Three products made in Michigan has softened somewhat, while Ontario is blessed with a number of currently hot products. On the other hand, Michigan plants have significantly more capacity, and a few new products are ramping up production there, so any swap may be short-lived.
     Michigan is dotted with assembly plants serving the Big Three. General Motors, for example, builds nearly three quarters of a million cars in Michigan, everything from the Pontiac Grand Am and Chevy Malibu to a variety of Cadillac models, plus several others in-between. It also builds a half million trucks, including the popular Chevrolet Silverado and GMC Sierra. Though Michigan has had its share of tough news, it also is the site of a new GM plant. The Delta Township plant is to begin assembly tests later this year and start producing vehicles in 2006. The company hasn't yet announced what will be built there, though observers expect Delta Township to make crossover utility vehicles. On the other hand, GM is cutting a shift at its Pontiac truck assembly plant this year, shedding some 900 jobs.
     Ford, too, is highly active in Michigan, assembling nearly half a million cars a year, such as the Ford Mustang and Focus along with Lincoln models. Its quarter-million Michigan-built trucks include the Ford Expedition. Ford recently announced plans to spend $300 million growing its Michigan truck plant in Wayne, retooling the plant's body shop so that it will be able to build several models on the same line. The company in recent years spent some $2 billion upgrading its aging Rouge River compound and creating the Dearborn truck plant, which builds F-150 pickups.
     Michigan auto workers also turn out more than 200,000 Chrysler and Dodge cars and half a million Jeep and Dodge trucks for DaimlerChrysler. The company is part of a joint venture with Hyundai Motor Co. and Mitsubishi Motors Corp. to build a pair of new engine plants in the Dundee area. Global Engine Manufacturing Alliance's first plant is to begin production this year, with the second facility coming online in 2006.
     Ontario, meanwhile, also serves the Big Three in a big way, along with Honda and Toyota. GM facilities in Oshawa turn out both cars and trucks, nearly a million a year. Ditto for both Ford and DaimlerChrysler, each of which has car and truck assembly operations in Ontario and each of which builds nearly half a million vehicles there annually. Honda's Civic is built at the company's Alliston plant, along with Honda and Acura SUVs and minivans. Toyota's Cambridge operations build both Toyota cars and Lexus SUVs.
     Though demand for many of the vehicles built in Ontario is high, there have been some fluctuations. An Ontario Ford F-150 truck plant closed last summer, and the company's minivan plant in Oakville is seeing slower demand for its products. On the other hand, the GM-Suzuki plant in Ingersoll makes up-and-coming crossover utility vehicles and is likely to boost production. And DaimlerChrysler last year announced plans to add a third shift in 2005 at its Brampton plant, which makes the Chrysler 300 and Dodge Magnum.
     Ohio, the second-busiest vehicle-building U.S. state, is home to operations of all Big Three players along with Honda. Jeeps are born in the Buckeye State, along with Chevy cars and trucks and Ford vans, although Ford plans to close its Lorain plant later this year and move some production to another Ohio plant and some to Kansas City. Honda has used its Ohio facilities to assemble cars and trucks, most notably its flagship Accord. Potentially positive changes are in store for Honda in Ohio, as the company plans to move production of U.S.-destined CR-V sport-utility vehicles from Britain to one of the Ohio plants in 2006. Honda also wants to build a new Acura SUV in Ohio in 2006.
     Indiana-made vehicles are built to go anywhere. GM's plant in Fort Wayne makes Chevy and GMC pickups, while Toyota builds pickups in Princeton, along with Sienna minivans. The Subarus made in Indiana are all-wheel-drive, and the H2 Hummers built in northern Indiana are the ultimate off-road vehicles, as are their Humvee military siblings. The Subaru plant in Lafayette was originally built as a joint venture with Isuzu, but the last Isuzu rolled off the line there last summer. The plant, however, is to begin making crossover models for Saab as well as for its own brand.
     The assembly business in Illinois includes a Mitsubishi plant in Normal built to assemble both cars and trucks, carrying Mitsubishi brands as well as Dodge and Chrysler brands. Last spring, DaimlerChrysler announced that it would move production of its Chrysler Sebring and Dodge Stratus to other Illinois plants, but Mitsubishi models will continue to be produced there. Ford's operations in Chicago have long built the Taurus and have added the Ford Five Hundred, among others. DaimlerChrysler's Neon emerges from a factory in Belvidere, a plant that is expected to begin making a new small SUV and perhaps take over some production from the Mitsubishi Normal plant.
     Wisconsin lands on the map thanks to a General Motors truck plant in Janesville that turns out Chevrolet Suburbans and Tahoes and GMC Yukon models. The plant, like many other Big Three operations, is feeling the pain of overstocked inventories, and began the new year with plans for a few weeks of shutdown to let demand catch up.
     Minnesota also is a truck state, turning out Ford Rangers in St. Paul. That plant, too, has felt some pain lately, with recent furloughs of some 1,600 workers in order to slow production. Sales of the Ranger were down 25 percent in 2004.

Middle America
Five states across the nation's midsection built 3.4 million cars in 2003, according to Ward's AutoInfoBank. The cluster leaders were Missouri and Kentucky, with 1.3 million and 1.2 million units, respectively. Tennessee added 691,373, with another 144,255 in Oklahoma and 67,364 in Kansas.
     Missouri's been a big player in trucks and vans. DaimlerChrysler's St. Louis facilities have been turning out significant numbers of pickups and minivans, and GM's Wentzville plant to the west has been making GMC and Chevy vans. Ford makes SUVs at plants in St. Louis and Kansas City, along with F-Series trucks in Kansas City. Last summer Ford produced the world's first gas/electric hybrid SUV in Kansas City, but more recently Ford cut its St. Louis-area Hazelwood plant to one shift.
     Ford builds even more trucks in Kentucky at its Louisville and Kentucky truck facilities that make SUVs and pickups. The state's auto-making rankings climbed significantly when Toyota came to Georgetown in the late 1980s. The plant builds the Camry, Avalon, and Solara, and also made the Sienna minivan before the automaker moved production to Indiana. GM, meanwhile, has a relatively small operation in Bowling Green, but it's a head-turner, building the Chevy Corvette and Cadillac XLR.
     Tennessee is Nissan and Saturn territory. Nissan's Smyrna plant turns out both car and truck models, including the Altima and Maxima cars and the Frontier and Xterra truck-based models. The state was on the forefront of the industry's southward moves, landing a Saturn plant nearly two decades ago. Though there had been some concern that GM was considering closing the Saturn operation, the automaker instead has promised to spend as much as half a billion dollars retooling and adding technology there.
     To the west, Oklahoma City is the home of a GM operation that turns out the Chevrolet TrailBlazer, GMC Envoy and Envoy XUV, and Isuzu Ascender. More than 2,000 are on the payroll there, though GM has idled some in recent months as demand has slowed. The automaker also has a facility in Fairfax, Kansas, which has been making Chevy Malibus. Last August GM announced plans to invest about $200 million in the plant to begin building a Saturn sedan.

The Southern States
The South is clearly on the move in the automotive industry, and its continued growth will surely be reflected when Ward's AutoInfoBank releases its 2004 production figures. In 2003, states in this cluster combined to build 1.2 million vehicles. That tally includes 380,281 vehicles in Georgia; 252,025 in Alabama; 238,396 in Texas; 166,090 in South Carolina; 122,583 in Louisiana; and 68,255 in Mississippi.
     Atlanta is one of Ford's assembly locations for its Taurus as well as the Mercury Sable, and the automaker has been making plans to move some Lincoln sedan production there from its Wixom plant in Michigan. GM also is active in Georgia, building minivans at a plant in Doraville under a number of different brands. And Honda recently announced plans for a $100 million transmission plant in Tallapoosa. The state, meanwhile, is one of those vying for the new assembly plant that Toyota has said it will build at some point in the future.
     Another Toyota contender is Alabama, which is taking off as an auto-making state. The latest entry is Hyundai, which plans to open a Sonata assembly plant in the Montgomery area this spring. Honda continues to expand production of its Odyssey minivans and Pilot SUVs at its plant in Lincoln, and intends to reach full annual capacity of 300,000 units as early as this year. First in the state was Mercedes, which picked Alabama a decade ago to build its M-Class SUVs. In the business of parts, Toyota's engine plant in Huntsville is growing through a $250 million investment that will add 300 jobs and boost capacity by 150,000.
     Texas also is ready to make a bigger splash in automotive production. Already home to a GM truck plant in Arlington, the state in 2006 will welcome the opening of a Toyota truck plant in San Antonio. The company is now in the process of hiring up to 2,000 people who will assemble more than 150,000 Tundra pickups a year. Texas was Toyota's choice for a number of reasons, not the least of which was the fact that one in four Texan drivers has a pickup in the driveway.
     South Carolina earned its spot on the production map when BMW decided to build in Spartanburg. The production home of the X5 sport-utility vehicle and Z4 roadster, the plant built the first American-made BMW in 1994.
     General Motors assembles Chevy Colorado and GMC Canyon midsize pickups at its plant in the Louisiana community of Shreveport. The community got a boost last fall with the announcement that GM will pump a quarter billion dollars into the facility so it can build the next generation H3 Hummer, a trimmer and more fuel-efficient version of the SUV. The H3, touted by GM executives as an "almost guilt-free Hummer" because of its improved fuel economy and lower price tag, is to hit the showroom floors later this year.
     Trucks also come off the line in Canton, Mississippi, where Nissan has a facility. The $1.4 billion plant, which opened in 2003, was the state's first assembly plant and has a capacity of 400,000 units a year. It builds the Nissan Quest minivan, Pathfinder Armada SUV, Titan full-size truck, Altima sedan, and an Infiniti full-size SUV.

The East Coast
Automakers have been building vehicles along the East Coast for a very long time, thanks in large part to the size of its auto-buying population. But much of the recent automotive news from the region has been sour.
     The latest count from Ward's AutoInfoBank shows 568,611 vehicles produced along the coast in 2003. That includes 201,916 in Virginia; 159,227 in Delaware; 158,837 in New Jersey; and 48,631 in Maryland. Those numbers, however, will be down significantly when new figures are tallied.
     Ford builds F-Series trucks in Norfolk, Virginia, where the company has been making vehicles for some 80 years. In Delaware, GM has made the Saturn L-Series in Wilmington, but announced a year ago plans to add production of its Pontiac Solstice roadster, set to launch as a 2006 model. Chrysler, meanwhile, builds Dodge Durango SUVs at a Delaware facility.
     The automaking tradition in New Jersey appears to be fading into history. Ford has been building vehicles in Edison for more than half a century, most recently assembling pickups. But that plant closed its doors in 2004. GM, meanwhile, makes pickups and SUVs in Linden, but the automaker trimmed production there to one shift in 2002 and had been planning to idle the plant entirely in the summer of 2005. GM recently announced plans to cease production even sooner.
     The same fate awaits GM's van plant in Baltimore, which has been threatened with shutdown for years. The operation has made the Chevrolet Astro and GMC Safari vans, but GM recently announced its intention to stop making those two models and shut down the plant in 2005. Not all is lost in Maryland, however: Volvo is bringing truck-engine assembly to Hagerstown and may move even more business to the United States if the dollar continues to slide.

The West Coast
All alone in the West on the auto-cluster map is California, where Ward's AutoInfoBank counted 395,083 vehicles built in 2003.
     California's automotive production takes place at the NUMMI plant in Fremont. Short for New United Motor Manufacturing Inc., NUMMI opened in 1984 as a joint venture between GM and Toyota, replacing a GM plant that had closed two years earlier. Today, NUMMI makes the Toyota Corolla, the Toyota Tacoma, and the Pontiac Vibe.

The Global View
On the international front, automakers continue to trim production here and add it there, hoping to ride the latest growth trends. Following are some of the highlights:

China remains the place getting the most attention from automakers. It's a vast market, with seemingly nowhere to go but up when it comes to future vehicle sales.
     By the end of the decade, non-domestic automakers will have pumped about $13 billion into China, hoping to triple its vehicle-making capacity to about six million units a year. Investment continues in spite of the fact that sales are not growing as fast as some had hoped, having slowed in 2004 following a couple of gangbuster years. Results for the various automakers have varied in China, with GM enjoying gains but VW watching sales decline.
     Among the latest plans come some from Ford, which has a joint-venture manufacturing facility in the works in Nanjing. The Chinese government recently approved the project, which also involves Mazda Motor Corp. and local partner Changan Automobile Group. The plant will produce a variety of Ford and Mazda vehicles and will start with an annual capacity of about 160,000 units.
     With all of the new capacity, some analysts fear that China may soon suffer the kind of overcapacity that is plaguing automakers elsewhere in the world. It's not stopping plant construction, but it's putting buyers in the driver's seat when it comes to pricing. Auto analyst Lin Wenjun of Capital International Holdings in Shanghai told industry follower that "the price wars are set to rage for at least the next two to three years. Nobody is going to be immune."
     Cars produced in China are increasingly making their way to other places, and the United States may be next on the list. The Chery Automobile Co., a government-owned automaker formed in 1997, has signed a deal to sell its cars in America starting in 2007. A New York company called Visionary Vehicles is the American partner; its CEO is entrepreneur Malcolm Bricklin, known for bringing the Yugo to the United States in the 1980s, and Subaru vehicles before that.
     Toyota is targeting China not just with manufacturing but with marketing as well. It recently received approval to start offering new-car financing in China, a move intended to boost sales there and, in turn, increase production.
     India, which is the fourth-largest economy in Asia, remains a hot spot as well. Car sales are strong for many automakers, including GM, which saw its sales climb by 73 percent in 2004. Foreign automakers with production facilities in India include Hyundai, Ford, Toyota, and Suzuki, and Volkswagen is increasingly interested. The company recently confirmed that it's considering a plant in India, but says a final decision has not yet been made.
     Hyundai, meanwhile, is on a quest to become one of the top five global automakers by 2010. Among other things, it has its eyes on vehicle assembly in Vietnam, signing a deal with Vina Star Motors Corp. to supply mini-trucks to be assembled in Vietnam. The plan is to ship complete kits to Vietnam for assembly, an arrangement similar to Hyundai operations in Malaysia and Indonesia.
     Renault also has shown interest in Malaysia. It began making its Kangoo in Segambut, Kuala Lumpur, in December.

Auto-assembly transformations continue in Europe, with the eastern parts of the continent generally hot and the western nations somewhat cooler.
     General Motors is leading the way, negotiating with major unions to cut as many as 12,000 jobs in Europe. Early-retirement buyouts could cost the automaker a billion dollars, but the moves are expected to save GM two thirds of a billion dollars a year.
     Times are tough for GM in Europe for some of the same reasons the automaker has felt pain in North America. Most significant, Japanese and Korean competitors are on the rise. Hyundai, for example, expects to increase its European sales this year by 15 percent, to 400,000 units.
     Taking the brunt of the GM cuts will be its Adam Opel AG division in Germany, slated for job losses totaling 10,000. The rest are to come from GM plants in Spain, the United Kingdom, Sweden, and Belgium.
     On the other hand, Germany may be spared rumored cuts involving one of its own automakers. The industry publication Automobilwoche turned heads in late 2004 when it reported that BMW had plans to shift some production from Europe to its American plant in Spartanburg, South Carolina. That plant will be modernized over the next few years, and the publication speculated that the move would allow production to shift there from Germany. BMW, whose sales have been on the rise in Europe, replied in a statement that the report had no basis.
     Interest is building for auto-making in Russia. Toyota is said to be making plans to build an assembly plant in the St. Petersburg area. In addition, Russian media have reported plans by Volkswagen to build an automotive plant in the Moscow region in 2006. Earlier in 2004, VW was said to be pondering a truck-assembly plant in the area around Leningrad.
     Among the central and eastern European nations, the Czech Republic is second to Russia in auto production, with 500,000 vehicles produced each year. About 300,000 vehicles will be added to that total when the TPCA (Toyota-Peugeot-Citroen Automobile) operation in Kolin begins production. The plant will employ 3,000 people.

Auto-industry news from south of the border is mixed. Though some production has been moving from the low-cost region to even lower-cost places elsewhere, many manufacturers continue to view Mexico as a prime place to build vehicles.
     The latest tallies from Ward's AutoInfoBank show production in Mexico down in 2003, but there were some bright spots. Production of Dodge Ram trucks at Saltillo, for example, was up significantly; production also increased at the GM truck plant in Silao and the Freightliner operation in Santiago.
     And the Ford expansion project keeps growing in Sonora, with numerous supplier companies coming to the state. Additionally, two tunnels are being built to connect the suppliers' industrial park with the Ford plant there.
     Volkswagen, meanwhile, is ramping up production at its central Mexican plant. It expects its Puebla operation to churn out 320,000 units in 2005, up 39 percent from 2004, when its U.S. sales were slow. VW's Jetta, to be sold in Mexico under the name Bora, is to be produced at Puebla, using parts shipped up from the company's Brazil operations.
     Mexico also is gaining from the recent moves by Japanese automakers to increase North American production. A number of Japanese suppliers have taken up residence in Mexico, and existing firms are expanding operations. Most hope to supply lower-cost parts to U.S. factories or those within Mexico.

Source: Area Development magazine - GAI
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