Times are hard for car manufacturers and their suppliers. Over-capacity is hitting margins and competition from the East is fierce, and yet OEM’s in the West are having to look to new eco-friendly models to cater for a more environmentally conscious consumer market. With strong political resistance to plant closures in the West, can the sector turn the corner on profitability without radical structural change? CHRIS LEWIS
These are not easy times to be in car manufacturing in the West. Profitability is hard to come by, there is over-capacity and increasing competition from low-cost operators in distant parts of the world. Surplus assembly capacity in western Europe and North America is growing; and yet the car industry is seen as ‘political’ so complete closure of plants and assembly lines is not an option in many cases.
As the director of Honda Logistics Centre UK, Ray Runza, told an automotive logistics conference in Montreux last March, ‘the industry could stop producing cars for one complete year and there would still be enough stock to satisfy global demand.’
However, the industry in Europe is still churning out cars, although it is trying to cut costs wherever it can. We are seeing the beginnings of what could turn into the long-distance supply chain. Western-based manufacturers are becoming more willing to source from China or India; just one example is the recent deal between China Automotive Systems
to supply steering components into VW’s global supply chain.
Suppliers in financial distress
Small wonder, then, that the report by international business advisory firm BBK found that over a fifth of suppliers to automotive OEMs were in some sort of financial distress. In fact, a third of such firms in North America are in trouble, and 14 per cent in Europe, according to BBK – but, significantly, none in Asia.
OEMs themselves are scarcely happier. The demerger of DaimlerChrysler – which goes against the grain of recent trends towards amalgamation and increased partnership in the industry – is symptomatic of an industry in serious crisis. Ford’s recent decision to divest itself of Jaguar and Land Rover is another example.
Peter Kelly, senior director of JD Power Automotive Forecasting Europe, says: ‘The global car market has certainly taken off since 2003, but all the growth has come from emerging markets.’ Much of the growth in demand was in Asia, ‘but there is also scope for optimism in Europe, though mostly eastern Europe.’ In fact, manufacturing capacity in the east has tended to displace that in the west, which does of course have implications for car industry logisticians as much as the transport infrastructure, such as storage compounds and inspection centres, will have to be duplicated there. The only factor that has slowed that trend has been the political difficulty of closing car manufacturing plants in western countries. Fiat, for example, was forced to back-track on its attempts to shut plants in Sicily.
The global migration of car manufacturing capacity is still continuing, adds Michael Storey, commercial director of automotive at NYK. Some of the logistics giant’s work is in moving complete factories or production lines to new locations most usually, naturally enough, to China or India.
But the majority of NYK’s activity in the sector are movements of components and materials to plants, though this is increasingly taking place over longer distances. Again, more componentry is coming out of East Europe, though again many OEMs are sourcing from Asia. ‘There has been a trend in sourcing from Western to Eastern Europe but now they’re moving to China and India.’
Brad Brennan, managing director of Evolution Time Critical, a transport company that specialises in ‘catch up’ movements for the car industry, says that he is increasingly called upon to move shipments from the Czech Republic, Hungary, Poland, Romania and Turkey to car plants in western Europe. ‘In fact, our business from there has tripled compared
with 2003/04,’ he says.
He also sees a further trend towards ‘intercontinental’ supply, mostly from China and India. While the majority of components ‘will always come from the same continent where assembly takes place, he does see the long-distance element balancing out at around 30 per cent,
OEMs and suppliers have to make a trade-off between increasing inventory or more reliance on ‘emergency’ logistics the further the source of supply is from the point of production. In general, the higher-tier the supplier, the more likely they are to opt for the emergency logistics solution. ‘In fact, one OEM said to me that if a supplier is moving eastwards and is not increasing their use of emergency logistics, they probably aren’t lean enough.’
Unipart, which supplies sequenced assemblies such as complete exhaust systems to a wide range of OEMs in the UK, including Land Rover, Jaguar, Aston Martin and Honda, is typical of many suppliers in that it has a long chain of supporting suppliers behind it. Some parts, like catalytic converters and rubber assemblies, come from as far afield as
Japan and Canada, respectively.
‘Lead times can be as long as six months in some cases,’ explains logistics manager, Andrew Dryden. ‘That isn’t simple to manage.’ Unipart does at least get reasonably accurate forecasting and scheduling information from its own customers’ scheduling system and it can deal with a certain level of fluctuations by holding around a couple of weeks’ stock. If that isn’t sufficient, it can use airfreight; there are agreed, laid down processes with the manufacturers for doing so.
There has been a move towards supplies from low cost countries, though things have to be kept in perspective, adds his colleague, manufacturing operations general manager, Darren Witcomb. ‘If we can find a supplier down the road in Walsall who can do the job, we will do. However, some technical skills are disappearing in the UK – for example the ability to make some types of rubber mouldings.’ It’s all very well saving on the cost of the components themselves, but with such long supply chains, if there is anything like a quality control
problem, ‘not only can it be expensive and complicated to sort out, but you might also have ten weeks’ of supply chain to deal with.’
Delivery of new cars has always been one of the more fraught areas of the European logistics market and the sector is going through another of its periodic crises. Many factors have conspired to create the current problems. The introduction of EU Working Time rules to transport hit car delivery operators especially hard because drivers spend so much of their time loading and unloading vehicles as opposed to driving the truck (and hence came under the category of ‘other work’ under the new rules). Drivers were getting scarce anyway, but the new directive has limited their overtime earning opportunities and encouraged many of them to find other jobs.
However, many car transporters are locked into existing contracts, CEO of Werner Egerland Automobillogistik, Kay Edwaldsen told the ECG conference in London this May. Spot market operators, seeing an opportunity, have pushed up prices – in some cases enormously. There have too been serious capacity shortages in Germany, and trucks and drivers have at times been brought over from the UK and Ireland to meet the demand, adds Edwaldsen.
Unattractive rates of return had discouraged investment in new capacity, he said and what had happened was that, faced with the periodic surges in demand that are a characteristic of the car market, manufacturers had been forced to go to the spot market. But while prices in the spot market have been very high, operators with regular contracts with the car makers
have been suffering and some operators in Europe have gone out of business.
Partnership in action
This situation cannot continue, of course, and ECG representatives have been invited to the car manufacturers’ purchasing meetings. While such an example of partnership in action would go unnoticed in many industries, this move has been hailed as something of a breakthrough in an industry not exactly noted for its willingness to divulge market or operational information.
Another ECG board member, Wolfgang Goebel and director of sales, marketing and logistics at Horst Mosolf, elaborated that the group had ordered a study of how best to integrate manufacturers’, importers’ and logistics service providers’ processes. One particular problem, he said were varying contracts, terms and durations, which made it very difficult for the logistics industry to give a coherent response. John Merry, CEO of specialist transport firm Autologic said that he had to consider seven different environmental reporting standards from various car manufacturers, ‘plus more from the Government and others.’
Also, sharing of forecast production and sales data has yet to be achieved, adds Goebel. However, tentative talks with OEMs on this sensitive topic were going ahead. ‘Getting them to a working group in Brussels is a significant step,’ said ECG executive director, Mark Morgan. Elaborating on the partnership theme, one problem is that individual car manufacturers themselves do not always speak with one voice. ‘The logistics departments at the manufacturers listen to us, but the problem is that the importance of the logistics department may not itself always be recognised within the manufacturer.’ This was a mistake, he argued. Being able to satisfy the customer’s wants promptly and accurately is in itself an important selling tool.
Nevertheless, continued Autologic’s John Merry, great strides had been made in areas such as car transporter optimisation, eliminating empty legs wherever possible. Leading car transporter Gefco, part of the French PSA (Peugeot-Citroen) group points out, though, that this is not always easy because operators must take great care in loading vehicles to not only ensure that no space is wasted, but also that height limits and axle loadings are not exceeded. It can mean that vehicles criss-cross between different points in a very complex pattern, because that’s what gives the best loading of the transporter.
However, again the OEMs’ traditional mistrust of data sharing could make it hard to produce truly integrated traffic flows across different manufacturers. ‘I’d like to halve the number of vehicles delivering the same amount of product, and if you look at the number of empty ones, those opportunities are there,’ said Merry.
The car manufacturing process has been at the forefront of attempts to develop practical RFID solutions, and it’s hardly surprising that attempts have also been made to use RFID to track the movement of completed vehicles through the chain. Seat has been especially active, says Morgan.
Frits Mehrtens, general manager at car handling specialists, Broekman Automotive, has been involved in a pilot RFID project at his company’s Botlek terminal in Rotterdam which, with its 40,000-vehicle capacity, used by 15 different manufacturers, is clearly a complex operation. The ‘Brains’ (Broekman Automotive Identification Networking System) has overcome many of the unique problems of using RFID out in the open (antennae can be affected by wind, or snow and ice) and cars have been successfully tracked using a device hung from the interior rear-view mirror.
While the tags are currently removed once the cars are handed over to the land transport company, the system clearly has wider potential and has already drastically cut time spent searching for vehicles.
The sheer size and complexity of the car means that the reward of any waste-cutting technology could be immense, adds Steve Jones, managing director of vehicle logistics software company, Vehnet. But at the moment, the accuracy of electronic messaging in the industry left a lot to be desired, he said.
The old pattern of cars being fully assembled in a factory and then trucked, railed or shipped to the customer is meanwhile changing. Customisation is king in the automotive industry. As Honda UK’s Runza says, ‘We have to build to order, that’s the only way I see car making retaining profitability.’ Thomas Spitlbauer, project leader, order-to delivery
for Audi adds: ‘In the premium vehicle sector, delivery time and price are not differentiators: customers expect a premium price. Variety, amendment flexibility, and delivery reliability are critical factors for success.’
The interesting question is how, and where, to introduce the processes that customisation and building to order imply. These days, there is a good chance that it will not be at the factory where initial assembly takes place, and it might not even be by the same company.
For instance, Gefco is building up a network of technical centres across the world, one of the latest being its Sandtoft site near Doncaster in the UK. The range and sophistication of work that can be carried out by such facilities is growing all the time and the Sandtoft site can produce paint finishes to factory standards.
Intriguingly, Gefco has also introduced an e-Catalogue tool that allows dealers to select a complete range of modifications and customisations on-line, including accurate pricing. While aimed initially at dealers rather than the general public, who knows what the limits of such tools might be, said Gefco’s managing director in the UK, Phil Shankley. The e-Catalogue is being rolled out across Gefco’s European and worldwide network.
Customisation is becoming important in the automotive industry, particularly for light commercial vehicles – which is currently one of the fastest growing segments of the market in the United Kingdom.
Specialised bodies and other facilities have always been important in this segment – and even more so in the heavy commercial sector – but they are becoming increasingly important in the passenger car market too, as customers become less and less willing to accept the standard model off the production line. Gefco’s facility can add a whole range of accessories like spoilers, fins and stripes to transform a standard Peugeot into a ‘sports’ model.
The company has also developed clever techniques for repairing the sorts of minor dents that occur during transport without having to put the vehicle into a conventional bodyshop. Such work can be done at car factories, of course, and some of the more sophisticated dealers can
also sometimes take on some tasks, but it depends what works best from a strategic point of view, says Shankley. ‘We can be very effective for smaller volumes, for example. It can sometimes make sense to do these operations in the supply chain, particularly where you want to do operations at the last possible moment.’