global auto industry – The OM Blog by Heizer, Render, & Munson

OM in the News: The Auto Industry Embraces Vertical Integration

The auto industry is once again embracing elements of vertical integration (see Chapter 11), a strategy that traces its roots to its early days when manufacturers owned or acquired much of the supply chain necessary for production. Ford, at one point, owned mines and a steel mill. In recent decades, car companies had largely shifted away from vertical integration, spinning off parts-making operations and relying more on outside suppliers to provide components. Vertical integration can be capital-intensive and risky, and in the past, auto manufacturers have struggled to bring new competencies like software development in house, leading to delays and dented sales.

But now, auto makers are trying to control more of the supply chain for electric vehicles, forging new partnerships with raw materials producers and investing in facilities that make chemicals for batteries, writes The Wall Street Journal (Jan. 4, 2022). GM, VW, and other major car companies have already been spending heavily on joint-venture factories to ensure their own supplies of EV batteries. Now, they are also looking to expand further as they seek to lower costs, secure sought-after components and exert more control over battery quality and performance.

Tesla was among the first to insource more of its EV-battery making. The push by auto makers to control more of their supply chains also comes as a semiconductor shortage has hampered vehicle production. GM is investing in a new North American factory with a Korean firm to produce cathode materials, a critical component of the battery that accounts for a big chunk of its cost. VW has plans to build a similar cathode-material factory of its own with Belgian materials company Umicore. “Everybody wants to secure the supply chain and not repeat the very painful experience of the semiconductor shortage,” says Umicore’s CEO.

The change also comes as electrification threatens to disrupt the industry’s normal hierarchy between auto makers and their suppliers. Traditionally, auto makers have been able to improve profitability by pitting suppliers against one another. With just a handful of players making the highest-quality batteries and chemicals, auto makers have diminished pricing power. Relying solely on suppliers to develop their battery technology would be akin to not making their own engines.

Classroom discussion questions:

Explain the concept of vertical integration.
How has the move to EVs impacted supply chains?

OM in the News: Capacity Problems for Chip Makers

Semiconductor companies are asking their customers for patience as the industry works through a sharp increase in demand from makers of everything from cars to consumer electronics. But there is no quick fix to the situation. As we point out in Supp. 7, Capacity and Constraint Management, adding new chip-making machinery is expensive and slow. And some of the deepest supply problems are taking place with older production lines that are less lucrative for manufacturers. In the whole semiconductor industry there is very little spare capacity right now, reports The Wall Street Journal (Jan. 15, 2021).

Demand for laptops has skyrocketed, and remote work during the Covid-19 era has increased appetite for cloud-computing and their data centers. Plus a surge in demand for chips that go into new 5G phones has put a squeeze on capacity. This chip shortage will likely last through 2022.

Ford said it was idling a factory in Kentucky because of chip shortages

With chip plants effectively running all out already, auto makers and consumer-electronics manufacturers are competing for every bit of limited manufacturing capacity. The car industry was among the first to be hit. VW is reducing production at its factories in China, Mexico, Tennessee and Germany. And in the face of the shortages, GM just asked suppliers to stockpile a year’s worth of chips.

The auto industry bears some responsibility for failing to place orders early enough in anticipation of the demand recovery. Over the past 2 decades it has become one of the largest consumers of computer chips, rivaling the PC industry, as cars become increasingly powered by software. Chips now power everything from engines and emissions control to brakes, A/C, windows, and a growing array of sophisticated safety features such as automatic lane control and crash avoidance.

The production cycles for chips are long, and the development cycles are even longer. Lead times across the chip industry have risen to 6-10 months, from 8-10 weeks before the pandemic.

Classroom discussion questions:

Which time horizon in Figure S7.1 is impacting the chip industry’s capacity options?
What tactics might the industry employ to adjust capacity to demand? (Hint: see p. 312 in your Heizer/Render/Munson text).

Video Tip: Global Auto Production by Country

In this animated 6-minute infographic, we see the history of global auto industry competition from 1950 to 2019, spelling out the winners and the losers. As the moving bar graph clocks through the years and nations, we have these observations:

+ In global auto production, Japan surpassed the U.S. in 1975, earlier than many may remember. But, the U.S. retook the number 1 spot in 1995 and held it until 2006, when China swept past both countries to claim the top spot and the U.S. slipped back to second.

+ In 1957, twelve years after the end of World War II, Germany overtook the U.K. for second place, albeit a distant second with 1.5 million vehicles produced versus nearly 8 million for the U.S.

+ China did not enter the top 10 until 1998, but then it quickly leapfrogged through the standings, taking the top slot in 2008 at 12 million units. Today, China is by far the world’s most prolific auto producer with more than 27 million cars, trucks, and buses built in 2019, 2.4 times as many as the U.S., the next largest producer. Note that Mexico is making an impressive rise in recent years.

The major automakers of today are multinational corporations with numerous international joint ventures, so the auto industry of the 21st century is a small, but a complicated world. This is an excellent video to show when discussing Global Operations Strategy Options in Chapter 2 of your Heizer/Render/Munson text.

What patterns can your students point out?

OM in the News: Auto Manufacturers Start Flying in Parts

Auto parts shortages could soon hit North American factories

Did you know that cars and trucks are made of about 30,000 individual parts? And a finished vehicle doesn’t get off the shop floor until each of those component parts are in place. “It’s all or nothing,” says one industry CEO. The auto industry is preparing for supply-chain problems from the coronavirus outbreak in China to soon hit vehicle production in the world’s healthiest car market: the U.S., reports The Wall Street Journal (Feb. 29, 2020)

Auto parts made in China generally take several weeks to be shipped via ocean freight to the U.S., a lead time that has so far not had significant impact on U.S. vehicle production. However, with some critical components already in short supply, several car companies and auto-parts suppliers have chartered airplanes or booked space on commercial cargo planes to fly parts directly from China.

Nissan and Toyota are reserving space on commercial cargo planes to ship key electronic parts to their North America plants. Pinch points are even emerging for mechanical parts that have a broader supply base, such as brake pads and door hinges as many auto makers are scrambling to find backup supplies. Tensions over who will cover the cost of airfreight and other added expenses already have escalated, and often lead to months of wrangling between suppliers and auto makers.

Parts shortages already have forced some car factories to close or curb production in Japan and South Korea, and has threatened car output in Europe, where the coronavirus continues to spread. “There is a strong likelihood that there will be disruption of production” at car companies in the U.S. a Detroit exec said. “It will get more serious before it gets better.”

Classroom discussion questions:

How can manufacturers deal with such shortages in today’s global economy?
What is happening tp vehicle sales in China?

OM in the News: Nafta and the Global Car Industry

“Ending the 1994 Nafta trade pact is relatively easy,” writes The Wall Street Journal (Nov. 11, 2016). The U.S. legally can pull out of Nafta 6 months after notifying Mexico and Canada. But for the auto industry, such a change would be substantially more complicated because of the multilayered connections between U.S. and foreign suppliers and assembly points. The tens of thousands of parts that make up any vehicle often come from multiple producers in different countries and travel back and forth across borders several times.

This is a tenet of modern manufacturing: Where a product is ultimately assembled increasingly has little bearing on where its component parts are made. More than half the parts in the Ford Focus, for example, are made outside the U.S. and Canada, including 20% in Mexico. Ford also ships in some of the car’s engines from Spain and transmissions from Germany.

Similarly, only 10% of the parts that go into the 200,000 BMW luxury crossovers built each year in Spartanburg, S.C. come from U.S. and Canadian plants. The rest are imported from Europe and elsewhere. BMW in turn exports most of the crossovers around the world. By contrast, 70% of the components in the Honda CR-Vs assembled in Guadalajara, Mexico are currently made by U.S. and Canada-based factories. The parts that make up a car or truck, from bolts to motor blocks, window lifts to oil filters, account for 2/3 of its value.

“This industry, particularly in North America, has integrated a lot,” said a Federal Reserve economist. “You can’t buy an American-made car anymore. You can buy an American-assembled car,” adds a Ford veteran.

U.S. and Canada-based factories shipped $29 billion worth of parts to Mexico in 2015, while Mexican plants in turn sent more than $61 billion worth of parts to the 2 Nafta partners. About 1/3 of Mexico’s 1,300 suppliers, which employ some 720,000 people, are U.S. owned. Mexican, Asian and European parts suppliers provide jobs for nearly 600,000 Americans.

Classroom discussion questions:

Explain the purpose of Nafta.
Identify the 1st, 2nd, 3rd, and 4th tier suppliers in the attached seat graphic.

Teaching Tip: Explaining NAFTA to Your Students

Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.

Your students have undoubtedly been hearing about Donald Trump’s threat to “break” the North American Free Trade Agreement. Auto industry workers offered up some of his loudest cheers. But there are still more than 800,000 jobs in the U.S. auto sector, and The New York Times (Mar. 30, 2016) makes the case that without NAFTA (see Chapter 2), there might not be much left of Detroit at all. To be sure, the deals to reduce trade barriers threaten the livelihood of workers in the industries exposed most directly to foreign competition. NAFTA put them in direct competition with Mexican workers earning 1/5 of their compensation.

The American trade deficit in autos and parts tripled in the 2 decades after the NAFTA deal took effect in 1994, to about $130 billion in 2013. The industry lost 350,000 jobs, 1/3 of its workers, a massive shift in a flagship industry. Still, NAFTA itself had a relatively modest impact on the size of the U.S. trade deficit with Mexico. And autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the union-averse South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers.

The integration of production across countries with complementary labor forces — cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the U.S. — turned out to play a central role in reviving our auto industry. The Honda CR-V assembled in Mexico, for example, uses a U.S.-made motor and transmission– and 70% of its content is either American or Canadian. This regional integration gave the U.S.-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry supply chain would develop across Asia, including China and Taiwan and Southeast Asia. Now, as Chinese wages rise, almost every car manufacturer is setting up shop in Mexico.

Classroom discussion questions:

Explain the purpose of NAFTA.
Why is this an OM issue?

OM in the News: Honda’s Rigid Parts Sourcing Leads to Massive Recalls

About 12 million cars have been recalled for defective airbags over the past 6 years and at least 2 people have died

Honda is re-evaluating its relationship with Japanese air-bag maker Takata, which is behind Honda’s biggest series of safety recalls, reports The Wall Street Journal (Oct.2, 2014). The moves follow the discovery that defective air bags from Takata—some dating to the early 2000s—could send metal pieces into a car’s cabin, injuring drivers and passengers. Car makers are only now considering a change in how and where they buy their air bags, highlighting how entrenched and inflexible some automotive supply chains are, with a few companies supplying large swaths of the industry. Honda declined to disclose specific information about any of its supplier relationships, saying that such information is proprietary.

At issue is the inflater component. Takata’s inflater uses a different propellant than most of its rivals, which is cheaper but can be particularly volatile. Takata said it makes the safest and most environmentally friendly products available. Honda is now ordering some of its inflaters from Daicel Corp. instead of Takata. But switching parts suppliers in the middle of an automotive production run is difficult and costly.

Honda also holds a 1.2% stake in Takata, which now has about 36,000 employees and 46 factories in 17 countries. To serve its far-flung customers, many of whom had shifted to JIT parts delivery to limit inventories, Takata kept plants in locations ranging from Malaysia to Morocco to Uruguay. It struggled to integrate those far-flung operations, and communication between the Japanese, European and North American divisions was poor.

Classroom discussion questions:

1. Why is it hard to switch airbag (or other auto parts) suppliers?

2. What tier suppliers are the inflater manufacturers?

OM in the News: The New Push for Standard Auto Parts

Volkswagen's modular set of underpinnings, code-named MQB, is an example of efforts to standardize modules and systems. — Volkswagen’s modular set of underpinnings, code-named MQB, is an example of efforts to standardize modules and systems.

“Automakers have long sought standard parts that can be used in various cars to cut costs,” writes Automotive News (Aug. 6, 2014). Now they want standardized modules and systems. “The requirement that we face is clearly to develop products from the outset in such a way that they can be used in all the platform derivatives without the expense of making changes,” said one German exec. But with mass standardization, a part with a quality problem can now be supplied to millions of vehicles. That puts a premium on quality.

The growth of global platforms is accelerating the trend of standardized parts. Currently, 24% of all manufactured vehicles are built on the 10 biggest platforms worldwide, with the figure expected to rise to 30% by 2020. In the process, the need for common parts that can be swapped in and out of various models will grow substantially. Why are car makers moving in this direction? First, building multiple models off one basic platform saves money in product development, tooling, and facilities. Second, manufacturers benefit from risk pooling; if one model is not selling well, it may be offset by another that can be built at the same plant.

Meanwhile, internationalization complicates the job of making standard parts and systems. To exploit regional cost advantages, automakers are pushing their system suppliers to make parts purchases in local markets. But the quality standards of suppliers in different markets vary greatly. “When there are new product launches, we train our suppliers in the appropriate methods and processes when necessary and go into their factories to make sure there is a stable production process,” said a parts supplier. Common parts with the same specifications from various countries and on different tools may have to be manufactured in a way that they are absolutely identical in quality so that they can be installed at any other factory at any time.

Classroom discussion questions:

1. Why are standardized parts and systems so important?

2. Why are global platforms becoming the norm?

OM in the News: The Mercedes-Renault Alliance

The New York Times (June 28, 2014) brings us a great example of today’s alliances as a strategy for product development, a topic in Chapter 5. Daimler and Renault-Nissan just significantly expanded their automaking alliance, with plans for a production plant in Mexico that will build a new generation of compact Mercedes and Infiniti cars. The companies will invest $1.4 billion in the factory 300 miles north of Mexico City. While the vehicles produced at the 50-50 joint venture will carry different brand names and look different from one another, they will share many components.

The companies will also share some of the costs of developing the new vehicles. But they said they were not worried about cannibalizing each other’s sales. There is virtually no overlap between buyers of Mercedes cars from Daimler and Infiniti cars from Renault-Nissan. Mercedes has been cooperating for 4 years with Renault-Nissan, itself a longstanding French-Japanese alliance. Among other things, they produce 4-cylinder engines together at a factory in Tennessee. They also shared the cost of developing major components for the next generation of their flagship small cars, the Renault Twingo and Daimler Smart.

The alliance is part of a trend for car companies and, in some cases, competitors to share the enormous costs of developing and producing new models while maintaining separate brand identities. When the Mexico plant reaches capacity, it will be able to produce 300,000 vehicles a year and will employ 5,700 people. The factory will begin producing Infinitis in 2017 and Mercedes in 2018. While the companies will initially maintain separate production lines, both lines will eventually be able to produce either brand, making it easier for the companies to respond to fluctuations in demand.

Classroom discussion questions:

1. Why do competitors enter into alliances?

2. What are the risks to Mercedes and Renault-Nissan?

OM in the News: Outsourcing Auto Workers at Nissan

Nissan's truck line in Tennessee — Nissan’s truck line in Tennessee

Nissan, the first of many foreign automakers to set up shop in Tennessee, is leading a trend, writes The Washington Post (March 9, 2014). Companies from Amazon to Asurion to Dell have outsourced their warehouses and call centers to the hundreds of staffing agencies that have cropped up in the region. Tennessee went from having 51,867 temporary workers in 2009 to 80,990 in 2012, while median wages have stayed flat. Temps make up 3.1% of all jobs in the state.

Tennessee holds its low unemployment rate up as a shining example of success in the global economy — the return of American manufacturing after decades of decline, and the future of work for those left jobless by globalization and technological change. Nissan was Tennessee’s first major investment by a foreign automaker, and has since attracted a constellation of suppliers that support thousands more jobs. Since the plant opened in 1983, the town of Smyrna has grown from 8,000 to 41,000. In the plant’s first 2 decades, getting a Nissan job was like winning the lottery.

But Nissan’s brush with bankruptcy in 2001 and a turnaround plan that involved new models and much lower production costs led to using temps into front-office functions. In 2007-2008, Nissan reduced its permanent workforce by 1/3. As demand returned, it started to backfill production jobs with contractors, too — first on the “pick line,” where workers run parts up to assembly, and then throughout the plant. Now a majority of its 7,000-person workforce is supplied by staffing agencies.

Many work for Yates Services, an in-house contractor that’s hired thousands of people over the past few years to ramp up production. Yates is like a company within a company, with separate bulletin boards, rules and procedures. The bona fide Nissan employees are easily recognizable through their logoed shirts, which Yates workers don’t receive. Yates pays between $10 and $18 an hour, which is about half what Nissan employees make. The gap in benefits is equally wide.

Classroom discussion questions:
1. Will Nissan’s outsourcing lead to a plant unionization?

2. What are the advantages and disadvantages of this move by Nissan?

OM in the News: Japanese Auto Makers Drive Into Mexico

Mazda's new Mexico plant will churn out 230,000 vehicles a year by 2016 — Mazda’s new Mexico plant will churn out 230,000 vehicles a year by 2016

When three-tiered car haulers packed with Mazda3s pulled out of the dusty Mexican rail yard here last month, they did more than mark Mazda’s return to North American manufacturing after pulling the plug on Michigan production in 2012. They represented the latest volley in a south-of-the-border blitz by Japanese automakers. Within four months, Nissan, Honda and Mazda have opened assembly plants in what is becoming one of the world’s hottest auto hubs. Mexico is on pace to become the world’s No. 1 auto exporting country to the U.S., thanks largely to the addition of 605,000 units of capacity by those three Japanese automakers, reports Automotive News (March 10, 2014).

Japanese manufacturers are poised for a new assault from Mexico because they can:

• Reap fatter margins from lower cost manufacturing, largely a function of cheaper labor.

• Avoid tariffs on car and truck imports into the United States.

• Mitigate exchange rate losses from yen-based Japanese exports.

• Improve product availability with a shorter pipeline to dealers.

With all this new Japanese capacity, Mexico will eclipse Canada and Japan as the No. 1 exporter to the U.S. next year. Labor and logistics savings are expected to be substantial compared with building cars in Japan and shipping them across the Pacific Ocean. Mexican labor costs are 1/9th those in the U.S. But any savings are initially offset by the upfront costs of the new factories. Honda, for example, sank $1.2 billion into its assembly plant and a new transmission line. And successfully building an export hub in Mexico means developing a network of high-quality local suppliers.

Classroom discussion questions:

1. What reasons are driving the massive Japanese investment in Mexico?

2. What are the advantages and disadvantages of this move from an operations perspective?

OM in the News: Trying to Shutter a French Auto Plant

peugeot plant At Peugeot’s soon-to-close car factory just north of Paris, writes Barron’s Business (Sept.9, 2013), management is grappling with an ambitious year-end production quota: finding jobs for the factory’s nearly 3,000 workers. This was the promise Peugeot made to win government and union approval for closing the largest French auto plant in 2 decades. The job placement effort, costing $749 million, underscores how expensive and time consuming it is to close even a single factory in Western Europe, when it is politically feasible at all.

Peugeot joins companies, including GM and Ford, that have begun the process of closing plants in Western Europe, where a glut of excess production capacity has made many factories unprofitable. But even though more shutdowns are necessary to adapt to depressed European sales, tough experiences for all 3 car makers may give others pause.

“It can cost a billion euros ($1.31 billion) or more to close a vehicle-assembly plant in Western Europe,” said one expert, who said companies have put off closing plants because of the cost. “That’s not an environment that encourages investment.” (U.S. factory shutdowns were quicker and cheaper to pull off. In the U.S., auto makers culled 24 factories during the 2008 economic meltdown.)

Peugeot has been through a year long wringer, with political obstacles followed by union protests that at times turned violent. In the end, the company agreed to give its workers a package of retraining, job placement and severance benefits that are generous even by French standards. As an example, a dozen auto workers were taking shifts driving a bus in a parking lot to train for future jobs Peugeot has lined up for them at Paris’s transit agency. Peugeot is paying for the $13,000-a-person training. “It is the least they can do,” said one worker.

“The alternative to shutting down capacity is being more flexible with capacity,” said Peugeot’s HR chief.

Discussion questions:

1. Why do European governments prevent plant shut downs?

2. What capacity options exist for an auto plant (see Supplement 7)?

OM in the News: German Auto Makers’ Major Capacity Expansion Outside of Europe

For a bit of good news regarding manufacturing jobs in North America, The Wall Street Journal (Nov.26, 2012) writes that VW, BMW and Mercedes are all ratcheting up capacity investments beyond the troubled European market.

Taking the lead, Volkswagen announced last week that it would invest $65 billion in its global operations over the next three years; this as Germany’s robust auto industry seeks to limit its exposure to Europe. The move cuts a contrast to the belt-tightening of cash-strapped rivals such as France’s Peugeot and Italy’s Fiat which have shed assets or shelved model and technology changes this year as plummeting European sales push those companies deeper into the red. VW’s plan marks its efforts to step on the gas in its bid to dethrone Toyota as the world’s largest auto maker. Billions will go to a new Audi plant in Mexico. VW is likewise pouring money into Russia and China.

“Despite the challenging economic environment, we are investing more than ever before to reach our long-term goals,” says Volkswagen’s CEO.

BMW, which opened a second plant in China this year, is investing an additional €500 million with its Chinese joint-venture partner to boost production there. Meanwhile, it is spending $900 million to expand capacity at its plant in Spartanburg, S.C., and last month finalized plans to build a $261 million plant in Brazil.

Mercedes, which expanded into China later than rivals BMW and Audi, made plans last year to invest €2 billion in its venture with Chinese partner and a further $2.4 billion in expanding its Alabama plant.

Discussion questions:

1. Referring to Chapter 8’s discussion of Mercedes’ selection of Alabama for its 1st overseas plant, what are the benefits to the US of these expansions?

2. What are the dangers of major capacity expansions?