How can we address the huge imbalance between stated car manufacturing capacity worldwide and actual production, are the estimates anything like accurate, and does it really matter if globally we have the capacity to make many more cars than we can sell? Is car production irrevocably moving east, and do we want that?

Car manufacturing plant location is just one factor in the complex worldwide car manufacturing model - no car maker operates in isolation as the real world imposes great pressures in terms of intense competition, political interference, and most importantly local and world economics – all predominant influences in the West.

Manufacturing Concerns

European and American manufacturers are operating with something they’ve had for many years and in most cases has grown like topsy. Old methods die hard. Conversely, a start-up manufacturer can design from scratch - not only the car itself, but manufacturing methods, the supply and distribution chain and also marketing and learns very fast how to optimise every process – processes largely denied to entrenched Western car producers.

On a simple manufacturing plant basis here are three example scenario’s;

1. The product is considered ‘hot’ by retail and fleet customers. The plant is operating to full capacity, and even including a less productive shift system customer demand cannot be satisfied and consequently transaction prices are high, enabling the car maker to take high profits per unit to fully absorb all plant costs, marketing, distribution and retail, then provide a high contribution to his bottom-line profitability,
2. The product has consumer acceptance but is supported by keen prices and indirect discounting to keep volume going. There is recognition that medium term production volume is insufficient to pay for all the factory costs, and adequately contribute to administrative, marketing, distribution and retail costs of this product. But there is a contribution however small, and all attempts are made to minimise the pain by ‘leaning’ production and product actions designed to kick-start customer interest,
3. The product is generally unwanted by consumers and is pushed into the retail chain using extreme discounts and all available selling mechanisms to the utmost. In the short term, provided direct production costs can be covered with minimal contribution to direct costs, the factory can exist and support the distribution and retail chain by keeping numbers of cars flowing to customers. But if no replacement car is in the pipeline, it is surely under threat of closure.

Thus, while some plants are “operating at 120% efficiency” there will be others operating at 50%. But these figures are illusory - simplistic estimates ignore the effects of multi-shift-working, progressive ‘leaning’ of production, new machinery/methods and influence of supplier parks bolted onto the side of the car-maker’s factory for instance. In fact, probably not even the car maker has an accurate understanding of just how many cars he can make.

Probably every car manufacturer can recognise plants and car models falling into all three main categories. In the end, the sum of the overhead contributions from each individual car will enable bottom-line operating profit and as each plant/model slips resolutely towards condition 3, actions are taken to re-use the plant to make the next new ‘hot’ car, hoping it will take the market by storm. Thus, in the precious world of the car maker there is very little incentive to put a JCB through any plant which cannot be expected to pay it’s way anytime soon.

Competitive Factors

As recently as 40 years ago, there was a wide choice of domestically produced cars from a handful of UK car makers, with ‘foreign’ cars of any kind generally quite expensive and thus selling in very small volumes. Yet today in Europe we have over 40 nameplates and increasing almost annually as the new far eastern market entrants make some impact upon the world-wide stage. Manufacturing costs are clearly low – centred upon labour rates and efficient new plants – that the high cost of shipping a car half-way round the world can be absorbed and still under-cut European car prices.

Historically European responses have centred upon improving quality and increasing complexity in an attempt to justify our higher prices – simultaneously increasing unit production costs! But the far eastern car makers have recognised this and are making strides to meet this challenge and no doubt will eventually succeed. Thus inter-maker car wars will increase and there are already signs in 2012 that further European makers will find themselves forced out of the mainstream markets – or out of business.

There is always the suspicion that certain far eastern producers will endure operating losses in the short term to buy their market penetration and maybe even to intentionally cripple other car producers. The last clear example of that was Daewoo, who over-cooked the whole process and gave a valuable management lesson to other ambitious car producers.

It’s easy enough to understand that if many European makers are taken out of circulation, that price competition between car makers will diminish and that prices of vehicles entering Europe and America will inevitably increase to the excruciating level of pain the consumer is able to suffer. For the moment, it is my belief that the car wars are centred upon the far east where many new market entrants are looking to emulate the Japanese producers, but at a lower retail price to the west. Then perhaps the next business failure will be in the far east?

Political Influences

Even the raw economics student rapidly learns that old Indian proverb “white man speaks with forked tongue” and this is a prime factor in Western Europe when votes are to be won and lost. We have for instance seen the inexorable rise of ‘green’ with politicians jumping on the band-wagon as this may be seen to win votes. This pressure is felt by European carmakers in every corner of their business – whether from putting a smog filter on their chimneys. Or investing billions in alternative technologies which the average (fickle) consumer in general understands very well is not ‘value-for-money’ and therefore will not invest in buying for himself.

Manufacturing particularly encourages political duplicity. On one hand in the UK we have the spectre of politicians in general believing that manufacturing is somehow ‘dirty’ and ‘commerce’ is what we should be doing, while at the other extreme local politicians threatened with a plant closure on their ‘patch’ will campaign to keep it open. The ruling parties in their naïve attempts to balance the country’s accounts, use motor taxation at the manufacturer and consumer level as a cash cow. There is an innate failure to understand that increasing taxation throttles innovation and stifles consumer demand and that the gross government tax income may actually fall.

From time to time, informed British politicians have the insight to understand why we need the contribution of vibrant car manufacturing (Vince Cable being the current example) but are often branded ‘mavericks’ so their reasoned arguments don’t tend to become absorbed into the national psyche.

Economic Realities

In the real world, supply and demand will never stay in balance as long as people (nations) want to get rich and cars are just one example of the dynamics of world economies.

Car manufacturing does tend to be a low-cost operation in the far east. However, as these countries become more developed in the Western sense and their workers unions become more savvy, their costs will irrevocably rise. It is likely that their costs will remain lower than Western producers for long enough to cause Western manufacturer failures.

While in the UK – and to a lesser extent in the rest of Europe – we produce more cars than ever before, we do not benefit from the profitability of those plants, the profitability is being repatriated to the far east. Thus the benefit of profit from those plants is non-existent.

And we should not kid ourselves that car ‘transplants’ on our soil are a permanent fixture. The bean-counters in each car manufacturer will be making regular reviews of the viability of producing cars in the UK and inevitably make hard decisions to close plants, as happened with Peugeot a few years ago and only the intervention of politicians with wads of cash, may slow that process.

Yet every country needs to add value to whatever processes it undertakes. That can be mining raw materials, manufacturing, service industries, international trading or tourism. Deprived of the major pillar of the economy – manufacturing – and a heavy reliance on one sector such as banking and finance as has happened in the UK, is the recipe for total failure. The UK and Europe needs vibrant manufacturing to survive.

Conclusions

Wholesale ‘pulling the plug’ on western car factories is politically unacceptable to almost everybody. Car wars are intensifying and will naturally cleanse the markets in due course. The battle-ground for car volumes will merely shift eastwards and while any car maker believes they can make more cars in the future than they can today, a large measure of building over-capacity is likely to remain endemic.

The solution to over-capacity in Europe is for each surviving European and American car-maker to find the ‘magic bullet’ whether this be a quantum leap in manufacturing and distribution costs, in product innovation, or in protectionism.

The buying public is becoming more cosmopolitan, more promiscuous, less patriotic and eager to try something new. Perhaps that is the one over-ridingly important final lesson to be learned.

By Mike Wattam, Industry Expert