The future of car manufacturing: new template required?

By: Dr Peter Wells, Tuesday, April 14, 2009,

AutomotiveWorld.com

As the bailout programmes, soft loans, bridging finance and market stimulation packages roll out across Europe, Asia and North America, so the questions being asked of the industry are getting harder. Those with the funding, which is to say governments, are digging deeper into the industry and beginning to ask fundamental questions of the business models employed. A number of scenarios are emerging that are potentially very threatening to the automotive industry, as follows:

Schisms developing along national lines, with rescue and recovery packages aimed at ‘national’ vehicle manufacturers with a possible ‘subsidy war’ emerging, and a looming threat of renewed trade barriers;
vehicle manufacturers colluding and abetting this resurgent nationalism by targeting satellite production facilities for closure even when those facilities are more productive and lower cost than the ‘home’ facilities;
schisms within the industry itself, notably between those companies that have needed assistance, and those that have not;
retrenchment in global supply chains as many low-cost, emergent locations are seen as both risky and politically less favoured;
market distortions caused by various stimulus packages, often under the less than convincing veil of ‘green’ initiatives; and
the protection of inefficient plants and overcapacity, chiefly under the rubric of ‘temporary’ transitional assistance, when in reality nobody knows how long the recession will last.

Beyond the immediate crisis, however, the dimensions of a longer game plan are emerging and it is here that the traditional manufacturing locations are most under threat. As the economic viability of car manufacturing collapses in these locations, so the political support for the industry becomes harder to sustain. Meanwhile, environmental and social pressures on the car grow remorselessly. For an industry whose business model is predicated on manufacturing in very high volumes and with relatively long product cycles, these developments threaten to be disastrous.

Market recovery to something like the volumes prevailing prior to the current collapse does not seem very likely, and even optimists consider that it will be 12-18 months before growth starts again. In this context, the industry needs some or all of the following:

A significant reduction in product variety, with smaller model and variant ranges staying in the market for longer periods in order to gain some economies of scale;
a reduction (yet again) in the cost base to make ‘value car’ manufacturing profitable;
a step change in production flexibility such that the vehicle manufacturers are better able to absorb both changes in model demand and aggregate demand; and
much lower break-even volumes at a per-plant and a per-model level.

Some outside the industry are already talking about the end of the car itself within the next 20 years, let alone car manufacturing in the traditional locations. These are perhaps gloomy predictions, but the industry has to start to act as if it might be true. The basic template for car manufacturing has not changed much since the 1920s, and the same is true of the business model that has developed around that template. It cannot be assumed that either the manufacturing system or the business model will survive this crisis intact. Now, more than ever, the automotive industry needs to look at the alternatives.

Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Published on Tuesday, April 14, 2009