Smart Quote
Axalta SEP 2021
BMW SEPTEMBER 2021

For decades vehicle manufacturers have hoarded factory space, so that very few have more demand that the total of the maximum manufacturing facility output. Some factories have vast empty spaces inside, while others simply spread-out operations inside the buildings or invite third parties to set up their own manufacturing operations “on site” to reduce the cost of just-in-time logistics. Every single square metre of land, and especially if it’s a building, costs to operate even if almost nothing takes place.

In addition, all automotive manufacturers are stuck with four immense problems:

  1. The product has to be fashionable, and to remain so for as many years as possible.
  2. Tied to this, the product requires huge investment (circa $2 500 million for an all-new model family, through to circa $500 million for a life extending facelift).
  3. The product typically takes around 1.5 days to build from raw sheet metal to assembled vehicle, yet it can take between one and two months to get it to the consumer. The cost of asset depreciation before each vehicle has started its service life is significant.
  4. Once a manufacturing facility is established, it typically has a growth period of around 10 years followed by a long, slow decline – unless yet more investment is made. A good example is the BMW plant in central Munich, which has been rebuilt and reconfigured more often than a Hollywood actor. The alternative is a sad decline to oblivion.

The cost of servicing the accumulated debt across these factors (models which don’t sell, which then don’t pay back investment, which still depreciate during distribution, and bring questions over the assembly plants as well as the many suppliers) has reached breaking point. Like an alcoholic, the vehicle manufacturers with operations located in North America, China and Europe have often talked about reducing excess capacity over the past four decades yet have almost without exception, done the opposite.

Each vehicle manufacturer knows if a vehicle fails to launch properly and achieve target sales volumes without significant discounting, the effect will be to force the company to seek more investment or to cut back /delay future plans. Often, to secure the funding, the company will do both. Tesla just keeps borrowing.

The game is up

Thanks to the banking sector based in Silicon Valley and its close relationship with investors all over the world (yes, Silicon Valley is wrapped in a cloak of tech but lest one forgets, it’s all about the share price) the idea of big returns on investment by the day have become expected. Vehicle manufacturers with very few exceptions simply cannot compete. The issue is a “tech” story can go from start-up to initial fulfilment of promise within months, whereas a vehicle manufacturer needs at least two years before the product is ready for market by which time the lion’s share of the investment is spent.

Now that every vehicle manufacturer is looking straight down the gun barrel, they need to do something to mitigate this situation. These actions range from joint ventures to buy-outs.

Lack of supply

All vehicle manufacturers only make a relatively small number of parts, and typically these would be the highest investment items such as the body and parts of the powertrain. Everything else comes from suppliers.

Not one manufacturer operates the system that Unipart had with what eventually became MG Rover, where there was a contract to make and supply components for new vehicle builds, and Unipart took care of supplying the aftermarket – including manufacture of those parts.

The biggest disruptions have already started:

  1. The merger or take-over: This frequently tears up existing systems and causes a hiccough in supply until the replacement systems are working. A prime example of this is the support of the Peugeot SA-sourced Vauxhall models and the so-called “legacy” models. Right now, Peugeot SA is operating a system based on the familiar Citroën/DS/Peugeot aftermarket systems, and the old Vauxhall Opel aftermarket systems. It’s not pretty, it is getting better, but there is a nagging doubt about how vehicles sold brand new today will be supported once integration is complete.
  2. Model sales volumes don’t achieve target: Many suppliers invest in the new models, so they don’t get paid for all tooling/development up front. If the model does not sell strongly, they get reduced revenue and so have to make commercial decisions – including an “all time” production burst before ending manufacture of a component or sub-assembly.

Welcome to the new world

The economic depression initiated during 2020 will have ramifications, not least in consumer confidence. It is a matter of fact that the internal combustion engine, often in concert with electricity, will power vehicles for decades to come. Equally, some, not all, vehicle manufacturers will still exist by 2030.

That lack of confidence will be evident in 2021, as manufacturer after manufacturer will have to take action – merge or go out of business. These are immense organisations, and the aftermarket will be affected by premature cessation of component supply, well ahead of normal term, along with chaos caused by the adoption of revised component distribution systems.

This is where our sector, the lithe, agile entrepreneur, will make significant profits and ensure safe repair of vehicles.

 

 

By Andrew Marsh