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Shifting Gears

Light-vehicle production in North America reached 17.2 million units in 2000, plummeting to 8.58 million units in 2009, a result of the Great Recession. After 2009, the footprint of North American production changed, with fewer plants operating more efficiently to reach pre-recession production levels.

Looking ahead, North American light-vehicle production is forecast to increase by 8 percent between 2015 and 2023, from 17.4 million units to 18.9 million units. IHS does not forecast a significant uptick in new plant construction through the close of this decade or early next to support the production increases. Aside from the greenfield investments already announced, the increases in North American vehicle production will be the result of investments into existing facilities designed to increase efficiency and capacity.

According to Joe Langley, production analyst for IHS Automotive, light vehicle production is set to play out differently for the traditional domestic manufacturers (the Detroit Three — General Motors, Fiat Chrysler Automobiles and Ford), compared with production from the foreign-owned transplants (including Daimler AG, BMW, Hyundai, Honda and Toyota, among others).

Production by the transplant automakers is forecast to jump 24 percent, from 8.2 million units in 2015 to 10.2 million in 2023. At the same time, production by the Detroit Three is forecast to fall by 6 percent, from 9.3 million units to 8.7 million units.

I Guess I’ll Have to Go

Regardless of the manufacturer’s home country, however, automakers are shifting production of compact cars to new or existing plants in Mexico. In so doing, automakers are maximizing production of lower-profit-margin vehicles in plants with a lower cost base as well as production of higher-profit-margin trucks and utility vehicles in higher-cost plants in the US and Canada.

GM Abbott GB

GM Program Manager, Warren Technical Center Transformation Project, Candace Messing (left center) and Vice President, Global Vehicle Components and Subsystems, Ken Kelzer look on as executives announced GM would invest $1 billion and create 2,600 new jobs at its Warren Technical Center campus; and Texas Gov. Greg Abbott and GM Financial officials break ground on a new service center that could bring 700 jobs to San Antonio.

Images courtesy of GM

GM Warren

Several foreign-owned companies are investing in North American greenfield production sites, with two primary strategies playing out. Some firms are looking to localize production of models for which the US is their primary market, while other investment is driven by product-line expansion that requires new capacity — the latter particularly with German automakers looking to add Mexico production that will service the US and also as an export hub for existing or new vehicles.

Mexico offers lower labor cost, established infrastructure and skilled workforce, as well as extensive free-trade agreements. GM, Ford, FCA, Nissan and Volkswagen have each been producing vehicles in Mexico for decades, and will continue investment into facilities there, as well as into existing US plants. Honda and Mazda both opened new plants in Mexico in 2014, Hyundai (for its subsidiary Kia) is set to start production at an all-new facility in 2016, and BMW’s new Mexico plant is scheduled to see production start in 2019.

In 2017, a new joint-venture plant between Nissan and Daimler AG will begin building Infiniti and Mercedes-Benz products in Aguascalientes, Mexico, specifically for compact cars and utility vehicles. Ford recently announced a new greenfield plant, in San Luis Potosi, set to begin production in 2018, and focusing on C-segment small cars. Volkswagen AG has built a new plant in the country as well, set to begin production of the Audi Q5 in 2016.

Detroit Three Imports

Investment into US and Canada production is focused on product changeovers, with some expansion in the US from transplant automakers adding new products or expanding production capability. While production in Mexico is forecast to increase by 46 percent from 2015 to 2023, US production is expected to increase only 3 percent. Automobile production in Canada is forecast to decline by 30 percent, however, offsetting some of the gains in Mexico.

Mexico offers lower labor costs, established infrastructure and a skilled workforce, as well as extensive free-trade agreements.

IHS Automotive forecasts production from the Detroit Three will see year-over-year declines in North America from 2016 to 2023. While automakers are strengthening production of popular (and profitable) utility vehicles and trucks, some programs are delayed. The production footprint is being impacted by a global emphasis on luxury vehicles, and there is expectation for some Detroit Three products to be imported as these companies manage global production footprints.

GM begins importing the Buick Envision from China in mid-2016 and Ford plans to import the next-generation Fiesta, rather than continuing to build the low-margin vehicle in Mexico. Fiat Chrysler Automobiles has announced that it will end production of the Dodge Dart and Chrysler 200 compact and mid-size sedans in the US, converting those plants to production of trucks and utility vehicles.

East and West

The top four Asian manufacturers (Toyota, Honda, Nissan and Hyundai) will grow North American manufacturing footprint by nearly 14 percent collectively, enabled by investment in greenfield plants between 2014 and 2019. Attractions for the investment include the opportunity for global scale, flexibility to adjust production to demand and the opportunity for exports, particularly from Mexico. In some cases, these automakers are reinforcing or expanding production of trucks and utilities, responding to both demand and increasing model flexibility.

US Light Vehicle Product Graph

These automakers also are shifting their production mix within existing plants. Toyota is adding production of the RAV4 in Canada with the next generation in 2019, while shifting Corolla production to Mexico. Hyundai will use the Mexico facility for C-segment cars, while new investment into its US production will increase production of the Santa Fe utility vehicle, currently in short supply; Hyundai will instead import more Elantra and Sonata sedans from South Korea, offsetting the reduction in US production of those cars.

The North American production footprint has also been positively impacted by investment from the traditional German luxury automakers, with production from Volkswagen, BMW and Daimler forecast to increase through 2023. For these manufacturers, the benefits are in localization, with some production increase a result of portfolio expansion. However, these automakers also have aggressive sales and production targets and risk of over-proliferating their product ranges.

The ABCs of B-C-D

Most North American vehicle production continues to be in the US, which accounts for at least 65 percent of North American production through 2023, followed by Mexico and then Canada. However, the mix of vehicle classes produced in each country is shifting. Production of smaller cars is set to increase as a share of light-vehicle production in Mexico, while decreasing as a share of US light-vehicle production.

Production of subcompact (B-segment) vehicles is growing in Mexico, while accounting for only a fraction of US production and none in Canada. The compact (C-segment) class sees a smaller swing, though production of vehicles in that size is forecast to be a larger portion of production in Mexico, while shrinking as a share of US production. Mid-size vehicles (D-segment) will play a larger role in US production and take a shrinking share of Mexican production.

New plants in Mexico going online between 2014 and 2019 are largely aimed at production of B- and C-segment products, including investments from Mazda, Honda, Toyota, the Daimler/Nissan joint venture, and a new plant for Kia set to begin in production in 2016, as well as the new Ford plant. IHS forecasts the new Ford plant will see C-segment vehicle production, an evolution of the Ford Focus platform, while the Michigan Assembly Plant, which currently produces the Focus, will be repurposed for truck and SUV production. (At press time, Ford announced a $1.4-billion, 500-job investment in its Livonia, Michigan, transmission plant, where it will build a 10-speed rear-wheel-drive transmission.)

Honda has been producing vehicles in Mexico since 1995 at its plant in El Salto, while the Celeya plant opened in 2014 produces the B-segment Fit and related HR-V utility vehicle. Production in the existing El Salto facility is forecast to shift from C-segment CR-V production to HR-V production in 2017, while Honda is also investing $52 million in its plant in Indiana to boost production of the CR-V beginning in 2017, shifting production of the higher-profit-margin vehicle to a higher-cost plant.

Stephanie Brinley

Overall, the North American vehicle market is a mature one, as compared to an emerging or high-growth market, both in terms of production and sales. The market maturity is among the reasons why investment frequently focuses on improvement of current facilities, and greenfield investment is expected to be minimal going forward.


Stephanie Brinley is Senior Analyst-Americas, IHS Automotive, covering North and South America for the IHS World Markets Automotive service.

International Update

Shifting Gears

DougDonahue_EntradaGroup

W hy is a Mexico manufacturing presence important to automotive suppliers hoping to reach markets beyond North America and Europe? Why is North American automotive production catching up to that of China? What is the current availability of incentives in Mexico for automotive industry players?

These are among the topics covered in a recent podcast hosted by the Entrada Group, a leading US-based provider of manufacturing support services in Mexico, primarily in the Zacatecas and Bajio region. Following are excerpts of that conversation between Entrada Group Vice President Doug Donahue (on the left in photo) and Luis Lozano Soto, Legal and Tax Service Partner, and the lead partner of the automotive industry group at PricewaterhouseCoopers Mexico. Mr. Soto recently authored a PwC report entitled “Doing Business in Mexico, Automotive Industry,” which looked at how the automotive industry globally — and particularly within Mexico — has changed in the wake of the economic crisis.

Doug Donahue: Your report says the automotive industry has been able to make a comeback from the 2009 crisis. But it had to make some severe adjustments in the way in which cars were produced and sold. Could you outline some of those adjustments?

Luis Lozano Soto: Yes. This industry went through very severe times, and because of that it had to apply certain adjustments. For example, companies learned that they cannot have production facilities to supply one market only. In the past, they had production facilities for the American market, one in Europe for the European market, one in Asia, etc. Now they know that they not only [have] to have one production capacity that will supply on a worldwide basis, but they also have to define unified platforms in which they will be able to produce several vehicles at the same time. [Those] were some of the adjustments that they did in the production capacity.

They also learned that they cannot compete in all the markets. They have to focus on being in the markets in which they have the best possibility to gain market share. Also, they reduced the portfolio of vehicles. We learned from the American companies that creating batches of the same model was not the best way to go to market. They were required by the government to cut the portfolio of vehicles they were producing in order to be more productive and efficient and, in the end, to have profits.

Technological advances also drove change. Manufacturers learned that large cars should be replaced by smaller vehicles because of specific issues, such as oil and gas prices. Consumers asked for smaller vehicles as well as other innovations such as hybrid vehicles, electric vehicles and other new types of technologies to reduce the consumption of gasoline. As a result, companies have had to change the way they do business, the markets in which they compete and the portfolio of vehicles they produce.

DD: In terms of whom they’re selling to and not just being dependent upon the US market, Entrada’s clients tend to be smaller, first-tier, second-tier or large third-tier suppliers, not the big OEMs. And they are looking to diversify, to expand their client base. This isn’t necessarily reflected in your study, but have you seen the automotive parts manufacturers in Mexico follow this diversification? Are they also producing in Mexico and shipping to other countries?

LLS: Yes. In fact, there are close to 200 auto parts companies established in Mexico. This is not only because the OEMs request local content, but also because production in Mexico represents cost reductions and efficiencies that allow them to produce for the local market and also for export. In 2000, the market for the export of auto parts in Mexico was about $5 billion. In 2012, it was around $19 billion. Annual growth in auto parts production in Mexico has been around 13 percent. And we have received a lot of investment not only from US and Canadian companies, but also from Asia and Europe. Those entities are looking for new markets. Growth in the emerging American markets is now quite good compared to the European market. A lot of Asian companies are establishing in Mexico in order to supply new business from Honda, Mazda, Toyota and Nissan — and to establish an export base. Production of auto parts in Mexico is a huge activity.

DD: It’s a very interesting point. We’ve seen with our clients that once they have the Mexican operation established, they’re being requested to quote projects in Brazil or Colombia or even Europe.

LLS: Yes. In the past, they were only producing exports for the US and European markets, but now they have gone to other places like Brazil, China, India, Africa, Argentina and Venezuela. The auto parts industry in Mexico is comparable now to the automotive industry not only in large vehicles but also in heavy trucks.

DD: Your report indicates that China remains the largest market, or producer, of cars. But the percentage is decreasing between China and North America. Is this just a statistical change or is there a larger reason why production in China is dropping?

LLS: There are several issues. There have been a lot of problems — increases in salaries, cost of transportation, logistics, and so forth. So in the end, China has become a market at risk. Most of the producers there intend to produce for the internal market. They produce and sell in China because of the huge market that they have and the wealth of the economy. In the meantime, the US has been recovering. In 2012 for example, growth [in the US market] was 13 percent. Sales went up 14.5 million units. They are trying to recover to the maximum sales of around 17 million. This year, they have also witnessed 8-percent growth, so that gives us — Mexico — a lot of opportunity. Production in Mexico has also increased. Local sales have increased around 9 percent. About 63 to 65 percent of our production goes to the States, and it is recovering, so production capacity in Mexico is recovering as well.

Ten percent of the cars that are being sold in the US, a mature market, are produced in Mexico. Mexico is an emerging market, but every time the US has growth in sales, it represents maybe half of the production total in Mexico. We have a lot of opportunities, not only because we are so close to the States, but also because of all of the investment that the government and companies have made to ensure that Mexico is a good place to invest.

DD: Companies evaluating Mexico always ask what incentives are available. My advice to them usually is, unless you’re a large OEM looking to establish a new operation, there isn’t anything really available at the federal level in terms of established incentive packages. At the state level there may be some incentives, but even those are now minimal in the automotive industry. Is this correct, or are incentives out there that new-to-market companies can take?

LLS: That’s a fair statement. Local governments try to compete with each other to gain investment. There are clusters in certain regions of the country where OEMs are investing, and auto parts companies invest nearby. The government has not only tried to attract automotive investment but also investment from other industries — aerospace, technology and food processing for example. The Mexican government is trying to diversify. The government has some incentives. Some of them promote investment in fixed assets, such as technological research centers, and they try to support employment in Mexico. Some incentive programs already in place, like the Maquila, are intended to increase employment in Mexico. On the tax side, the government has reduced the income tax rate and the flat tax for production facilities for export. The Mexican government is trying to handle federal industry programs, not only for the automotive industry, but also for other industries.

We have a lot of challenges. The Mexican government is now looking to attract investment for the energy industry. The results of that effort will have a huge impact in the economy. It would put us in a position in which the government would be able to invest in infrastructure, and by doing that, other industries, like the automotive industry, would benefit.

DD: Your report alludes to how important the Mexican automotive industry is to employment in Mexico. For those who are not familiar with Mexico and its labor force, can you talk about the benefits to the Mexican labor force?

LLS: The government and the private sector have been working together with private and public schools to put in place the proper knowledge that employers require to participate in this type of industry. In the past, companies had to invest a lot in trying to increase labor skills in Mexico. Now I would say that one of the attractions, one of the advantages of investing in Mexico, is that we now are not only a cost-competitive country when it comes to labor, but we also have a young work force, and much has been done to ensure they have the proper skills and knowledge for industry. We have invested in research and development centers. Companies now are not only interested in having production facilities, but are also investing in R&D programs and resources, and governments are offering incentive programs to attract investment in that respect.

Within the entire automotive industry, including large and heavy trucks, vehicle assembly, production, commercialization, maintenance, and the auto parts market, there are at least 1.7 million people working. At least half a million are working on assembly and production of vehicles, and another half a million work in the commercialization of vehicles, which includes not only working with dealers, but also with respect to parts and replacement. So it’s a huge market offering a lot of employment for the Mexican people.

DD: In summary, what are the key points an automotive parts supplier considering a manufacturing facility in Mexico should be thinking about?

LLS: Being near the clusters where other automotive manufacturers are is one important consideration. Asian companies have gone mainly to the center of the country, American manufacturers to the north, although some of them are also in the center.

A new company investing in Mexico should really look for accessibility to large markets. As we were discussing, in Mexico export is one of the main activities, so the Mexican government has signed free-trade agreements with a lot of countries, not only in the region but also in Africa, Asia and Europe [Editor: In addition to NAFTA, Mexico is a party to 12 free-trade agreements].

Economic stability and a favorable business environment are also advantages in Mexico. The government has been working to maintain economic stability; we are not facing financial issues, we are not facing devaluation or integration issues. The economy is very stable, so companies will find that financial risk associated with investing in Mexico is one of the advantages that we enjoy.

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Shifting Gears

With major overcapacity still in place across Europe, major new investment in the automotive sector is rare. As one analyst puts it, what little “fresh” investment there will be will likely come in low-cost eastern countries while investment in western European plants is confined to upgrading of facilities. Still reeling from the global financial crisis, the industry is also adjusting to the influx of new technologies, which are dictating upgrades at many auto builders and their suppliers.

Benjamin Körber, CEO of Körber GMBH, a Berlin-based supplier of complex, machined parts to Tier One automotive suppliers, says the automotive industry is slowly recovering from a dramatic downturn caused by the global financial crisis. He believes the industry will have lost three to four years in its development by the time a recovery takes hold in 2011 or 2012.

“The crisis has changed the business relationships between customers and suppliers enormously,” Körber says. “Although price and quality are still the predominant success factors, financial stability of the supplier is becoming more and more important. This will worsen the already difficult situation of unstable suppliers and accelerate the current consolidation process.”

Körber says the move to “hybrid-type” cars is also having a big impact on the sector’s supply chain.

“Although the improvement of combustion engines is the more efficient and more promising way to lower the impact on the environment, it has become unfashionable to promote the technological truth. Thus, this shift in technology will not only have an impact on the OEMs, but also on their suppliers, as both have to adapt to this.”

Körber believes the industry’s migration towards Eastern Europe has already slowed, but will likely never stop. He says that, aside from expansions related to new technology, the entire industry in Europe will only grow marginally in the long run. He says his company, which opened a plant in Laurens, S.C., in 2008 to serve the U.S. market, has no plans for new facilities in Europe, but will likely see moderate growth at its plants in Germany and Italy.

“The industry is spread a little wider than it used to be, and more and more investment is coming in Eastern Europe,” says Tim Urguhart, senior automotive industry analyst with IHS Global Insight in London. “Poland is gradually building up as a powerhouse, and it has one of the biggest and most efficient plants in Europe with Fiat, which is on target to make 600,000 cars this year.”

Richard Gadeselli, spokesman for the Fiat Group, says the company’s plant in Tychy, Poland, has rapidly expanded, more than doubling production since 2005, and was scheduled to reach 600,000 cars in 2009. The plant employs about 1,800. The massive 426,000-sq.-m. (4,588,020-sq.-ft.) plant produces about 2,320 cars daily. The plant was enlarged each year from 2003 to 2008 to implement new car models, he says.

Gadeselli says Poland offers well-trained, highly efficient labor with competitive production costs. Fiat has experienced good cooperation with local colleges, too, he says.

“Many of the OEMs are moving into production of electric cars,” Urguhart says. “Again, that won’t be brand new investment. There is massive overcapacity in Europe. That is the issue, and it’s almost like the industry doesn’t want to face it.”

Urguhart cites as an example two projects announced by Renault in November 2009. Renault will manufacture the future electric vehicle based on the Twizy Z.E. Concept at its facility in Valladolid, Spain, about 150 km. (93 miles) northwest of Madrid. The mini-compact car targets inner-city dwellers. Renault says it chose the Valladolid plant to simplify logistics to its target market of Western Europe. Production is due to begin in 2011.

Renault also announced it will manufacture the electric, zero-emission version of its Kangoo Express LCV at its Maubeuge Carrosserie Automobile factory in northern France beginning in the first half of 2011.

Mercedes’ Maneuvering

Mercedes-Benz has two major projects under way in Europe which management says create a coordinated network aimed at cutting costs in the production of its new compact car. It is expanding its center of excellence for compact vehicles in Rastatt, Germany, with a US$900-million investment, which the company says is part of a $4.5-billion total investment in Germany in 2009 and 2010. The new vehicles will succeed the current A- and B-Class vehicles and are due to roll off the assembly line at the end of 2011. The company also broke ground in October on a $1.2-billion plant in Kecskemét, Hungary. Production ramp-up is set for 2012.

“Production costs are a key factor in the competitiveness of the price-sensitive compact vehicle segment. The coordinated production network of the Rastatt and Kecskemét plants will make a key contribution to this,” said Rainer Schmückle, COO of Mercedes-Benz Cars. “In the future, three of four vehicles of the successor generation to the A- and B-Class will come from the Rastatt plant location, which will remain a central proven component of our production network.”

In December, Mercedes-Benz announced the shift of C-Class sedan production from its plant in Sindelfingen, Germany, to its factory in Tuscaloosa, Ala. The announcement sparked major protests from workers at the company’s plants in Germany. The move will occur in 2014 and will result in the loss of 1,800 jobs at the Sindelfingen plant and the creation of 1,000 jobs in Alabama. The company said the move is being made to make the company more independent of exchange rates. Production of the C-Class sedan for markets in Europe will be concentrated at the company’s Bremen plant in the future.

Mercedes-Benz says the 1,800 Sindelfingen employees affected by the move will be offered “attractive” positions within the company.

“Due to the tough competition in the C-Class segment, it is extremely important for us to optimize our production costs for the future,” Schmückle said. “This applies not only to our direct production costs, but also to the import-duty and logistics advantages of each production site. But it is just as important for us to be able to offer alternatives to the Sindelfingen C-Class employees affected by this decision in order to maintain their employment. We are convinced that our concept fulfills this criterion.”