Contract, Expand, Adapt: The Auto World's All-at-Once Imperative

Today’s auto industry is getting a very mixed message: Contract and expand and adapt . . . quickly.

On one hand, sluggish North American and European sales have made retooling and streamlining imperative. Simultaneously, emerging auto markets are sounding a siren song of opportunity, with almost every major player rapidly building plants and forming joint ventures.
But industry strategies aren’t solely driven by potentially huge global payoffs. Many other factors are prodding automakers’ look abroad, including high labor costs, currency fluctuations and the ever-present threat of trade sanctions.
Here’s a look at how dominant players’ strategies are playing out.

Supplier Ranks Thin

Part of the industry’s streamlining is evident in the sharp reduction in auto suppliers’ ranks, with surviving suppliers taking on substantially increased roles.
General Motors, for example, retooled its factories for cars and trucks with fewer parts and simpler assembly. Similar strategies have been embraced industry-wide, stimulating a flood of supplier locations alongside auto plants to meet just-in-time (JIT) manufacturing demands.
That streamlining, though, is accompanied by world-class manufacturers’ decidedly global mindset.

Ford, for instance, has restructured manufacturing, merging operations scattered across five continents in 34 countries into one global organization. The goal is to design and manufacture a “world car,” which suppliers around the globe can assemble using common parts tailored for local tastes. That means lower-priced parts can be purchased from fewer global suppliers.

Emerging Markets Dominate

Leading emerging markets’ auto expansion’s hotbed is Latin America, a spectacular profit center. China, India and Southeast Asia trail close behind as expansion epicenters.
Ford is positioning itself in China, Vietnam, Thailand and India. “We clearly want an Asian presence equal to Toyota, if not higher,” says W. Wayne Booker, Ford’s executive vice president for international auto operations. By 1999, Ford will also have invested $4 billion in Argentina and Brazil.

GM is constructing $2.2-plus billion in new factories in Poland, Argentina, China and Thailand, all identically designed to save money and streamline processes. “Our near-term goal is to have 50 percent of capacity outside North America,” says Mark Hogan, a supervisor of GM’s Argentine and Brazilian operations. “Not too long ago, it was 20 percent.”

GM has also committed $2 billion to expand manufacturing based in Brazil, which has landed a whopping $19 billion in direct foreign investment in recent years. In 1997, GM will begin full operations at its new $300 million assembly plant in Alvear. GM will soon build a new small car in Brazil selling for $9,000, one of the world’s lowest sticker prices.

Chrysler is investing heavily in its Parana, Brazil, plant, and mounting a $65 million expansion in Argentine production.

The Coming of ‘China Cars’

With 2010 production forecast at 6 million units, China will soon be one of the world’s top five automakers. Though investors in big Chinese factories are betting on big dividends, some analysts warn of market overbulding.

Next year, GM will open its $1.6 billion, 100,000-unit-capacity plant, part of Shanghai GM, a joint venture with Shanghai Automotive Industry. Shanghai GM’s Pan Asian Technical Automotive Center will be headquartered in Shanghai’s Pudong New Area.
Ford has set up four auto-parts plants near Shanghai and has a truck/van joint venture with Jiangling Motors in Yangtze province. Chrysler’s largest CKD (“knock-down kits”) market is China, where it’s operated a Beijing joint venture assembly plant with Beijing Jeep for nearly 15 years.

Thailand Tops Southeast Asia

Southeast Asia’s Thailand, though, rules the region’s auto race, with Mitsubishi, Toyota and Mazda/Ford its three leading investors. GM is spending $470 million on its Opel Assembly Center in Rayong province, with 1999 production scheduled.

The Ford/Automotive Components joint venture’s new $30 million Thai components plant will open in early 1998. Ford is also joint venturing with Halla Climate Control in a $23 million Halla Climate Control component plant. Ford/Mazda’s $500 million joint venture factory southeast of Bangkok will open in 1998.

Toyota has spent $4.6 billion expanding its Bangkok plant. Aiming to boost 1998 regional production by 30 percent, Toyota is building a supplier web in Malaysia, Indonesia and the Philippines, plans a Tianjin, China, engine plant, and has established a presence in Vietnam.
With $3 billion-plus in auto investments since 1993, India will soon rival China as a rising global auto giant, some analysts predict. Ford has sunk $800 million into an Indian joint venture.

Europe’s Car Wars

With lackluster market demand, U.S. and European industry competition is fierce.
The UK leads Europe’s auto ranks, with seven major automakers. Most are in Coventry and Birmingham’s auto centers, including Jaguar, Rover and Toyota.

Rover recently invested $50 million expanding its 1,500-employee West Midlands design/engineering center. Jaguar also invested $1 billion expanding its UK X200 factory.
Boasting sea, air and highway connections and low-cost skilled labor, Northeast Britain has lured Nissan, which spent $500 million expanding its County Durham factory. Toyota is also doubling its UK Burneston plant production.

Though high labor costs, strikes, and stringent environmental rules have somewhat dulled its auto location luster, Germany still offers a long history of auto manufacturing excellence. Audi and Alcoa Aluminum have joined to develop an aluminum car in North Rhine Westphalia.
“We wanted to build our first body structure plant in the place that best provided all required critical elements,” says David Schlendorf, president of Alcoa Automotive Structures & Technology. The state of Baden-Wurttemberg, where BMW was invented, hosts a wide mixture of high-profile suppliers and manufacturers, including Bosch, Porsche and Michelin.

France’s Low-Cost Lure

With strong incentives, France has attracted manufacturers who want German proximity, and lower-cost skilled labor. Since early 1995, nine U.S. firms have expanded or set up French auto-related facilities. One auto center is Western France’s Ouest-Atlantique area on Belgium’s border. Its 440-plus firms include Citroen, AlliedSignal, Fleetguard, Michelin, TRW, Renault and Valeo.

With 150 auto-related firms, Lorraine is becoming a major manufacturing center. Lorraine made headlines several years ago when Mercedes-Benz chose it for the $447 million Swatchmobile plant.

Lorraine’s Vosges region, though, is France’s largest U.S. auto concentration. AlliedSignal Fibers chose Lorraine over 50 worldwide sites for its $210 million plant “because it was ideally situated,” says AlliedSignal’s Tom Jacobs.

The Auto Reign in Spain

Mercedes, Citroen, Peugeot, Renault, Fiat, Ford and Nissan are reengineering Spanish plants. Manufactures like Spain’s rising auto demand, wide supplier network, labor costs below most EU nations and high assembly-plant productivity.

Ford is investing $201 million to build subcompact cars in Valencia. “Spain has one of the world’s highest productivity levels and a quality standard on a par with other European factories.” says Albert Caspers, Ford Europa president.

GM Spanish subsidiary Opel Espana recently invested $200 million upgrading its Aragon plant.
Portugal hit the big leagues in 1990, landing AutoEuropa, the $2.8 billion Ford/Volkswagen joint venture, which could’ve been built near VW’s lower-labor-cost German or Eastern Europe plants.

Ford Electronica Portuguesa, which is investing $230 million in its Palmela plant making auto air-conditioning compressors.

Many observers see Europe’s emerging auto haven as Poland, with its 38-million market and attractive incentives. GM is locating a $400 million plant producing 70,000 cars a year in Gliwice in Poland’s Silesia industrial region.

North America: Retooling Rules

Two recent factors have dramatically remade the U.S. industry: Japanese manufacturers’ production shifts to North America and consumer preferences shifting from cars toward light trucks.

In response, the U.S. Big Three are retooling factories for new vehicle styles, while trying to restrict Japanese imports. Most have also joined Japanese manufacturers in cooperative ventures and R&D coalitions. U.S. firms are also restructuring operations and supplier relationships for greater productivity.

While much attention has shifted to non-U.S. auto manufacturing, the USA captured the largest share of January-June 1997’s announced worldwide investment, with $2.8 billion of the $15.3 billion total.

Motown Momentum

Nearly half ($1.3 billion) the U.S. share is targeted for Michigan. Chrysler is Michigan’s largest ’97 investor, announcing investments at four plants.

Michigan remains the world auto capital, with 80-plus major Big Three facilities in the state, also the U.S. headquarters home of Toyota, Honda, Mazda, Hyundai, Nissan, Volkswagen, Saturn and Lotus.

Fifty-six of the top 100 suppliers are headquartered in Michigan, where 24 more have a manufacturing presence. More than 11,000 industry suppliers are located in Michigan.
Michigan has bolstered its business attractiveness by cutting taxes more than 20 times in the past five years and reducing the average business property tax burden by 33 percent.
Michigan’s success boosts Southwest Ontario, where many manufacturers find cheaper labor. Ford spent $1 billion retooling its Oakville Windstar minivan plant, and is investing $550 million in four Windsor plants. Chrysler also has invested $2 billion-plus in three Ontario assembly plants.

Japanese automakers also have a major Ontario presence. Toyota recently invested $630 million in two Cambridge plants, doubling local operations; Honda completed a $210 million Alliston plant expansion, upping capacity to 120,000 cars.

Ohio is the No. 2 U.S. vehicle-producing state, with 700-plus operations employing more than 150,000.

In the last three years, Ohio has landed major investments totaling $4 billion. The biggest players: Ford ($1.8 billion), Honda ($381 million), GM ($250 million) and Chrysler ($231 million), drawn by Ohio’s skilled labor force, excellent infrastructure and pro-business climate. Alcoa, for example, is building a $30 million parts plant in Northwood.

The Southern Auto Axis

North-south I-75 has become an automotive pipeline.
One of Indiana’s largest auto investments is rising in Kokomo, where Chrysler is completing its new $1 billion transmission plant and investing $447 million in two existing plants. Kokomo offered Chrysler a $94 million tax abatement and $14 million in infrastructure improvements.

Last year, Toyota chose Princeton, Ind., for a $700 million plant manufacturing T-100 trucks.
Kentucky is another major “Southern Auto Corridor” player. Since Toyota invested $3.3 billion in its Georgetown, Ky., manufacturing facility, parts suppliers have flooded the state. Recently, Toyota established its U.S. headquarters near Covington, Ky., and announced a $400 million engine plant in West Virginia.

BMW’s ‘Crown Jewel’

Worker training programs are a big South Carolina draw, as are utility incentives. Honda recently sited its $30 million all-terrain vehicle plant in Timmonsville, S.C.
South Carolina’s crown jewel, though, remains BMW, landed in 1992 with $130 million in incentives. Already, 18 BMW-related facilities have followed, creating some 1,800 new jobs and $300 million in capital investment.

North Carolina is also a significant industry player. Saturn Electronics & Engineering (SE&E), for example, is expanding its Rocky Mount, N.C., plant, Saturn’s largest, a first-tier supplier for Detroit’s Big Three.

In Alabama, Mercedes is manufacturing its new M-Class “all-activity vehicle” in Tuscaloosa. Mercedes reviewed over 150 sites in 30 states before picking Tuscaloosa (and getting $253 million in incentives) for its 1-million-sq.-ft. (90,000-sq.-m.) facility that will produce 65,000 vehicles annually.

“This plant is a major milestone in our globalization,” says Daimler-Benz’ Management Board Chairman Jurgen Schrempp.