Supply Chain Matters has been observing how U.S. automotive producers continue to fall back on what we view as a bad habit- a reliance on big-ticket, larger margin trucks and SUV’s for profitability and hence manufacturing strategy. Perhaps you have noticed this same trend.
These past few days have featured troubling news that points to the same tendencies. It is like an unhealthy habit that does not seem to abate and it reflects on both product demand as well as supply strategy aspects of the automotive supply chain.
These past months of an unprecedented global oil glut has led to sub two dollar per gallon pricing for gasoline, although that trend is changing with the spring fuel composition conversion. As reflected in past history, it has apparently motivated many U.S. consumers to once again buy shiny new automobiles and trucks at a very healthy pace. According to The Wall Street Journal, nearly 57 percent of vehicles sold in the U.S. were classified in the light truck category. Many of these consumers are seeking out the biggest and most feature laden pick-up trucks and luxury SUV’s. Why not! With the occurrence of such low prices of gasoline, it’s like suddenly reverting back to a bygone era, and doing so before it is too late. Perhaps we can choke that up to short-term memory loss.
At the same time, other consumers (we will keep the term generic), foresee the continuing overwhelming implications of climate change and the need for the global economy to substantially reduce dependence on fossil fuels. They perhaps have the insight that the era of sub $2 per gallon gasoline is temporary and much more dependent on ongoing geopolitics among oil producing and consuming nations.
As noted in a prior commentary, last week Tesla Motors unveiled its latest Model 3 all electric powered SUV with a declaration that the vehicle achieves 215 miles of operating range per charge, delivering superior performance with a starting price of $35,000 before incentives. Immediately, the Model 3 has garnered over 200,000 customer reservations, and yes, it will produced in Tesla’s California assembly facility with the now infamous gigafactory producing lithium-ion batteries in Nevada.
A glance of this week’s business headlines indicates a confirmation from Ford Motor on investing $1.6 billion for a new auto assembly facility in Mexico to produce the Ford Focus and other smaller sized vehicles. This is incremental to prior announcements to invest $2.5 billion in other Mexican based factory and supply chain facilities.
Fiat Chrysler Automobiles, which previously touted that it could competitively produce smaller cars in U.S. factories, indicated it plans to cut upwards of 1600 jobs this summer at its existing Michigan based auto assembly facility which produces smaller vehicles. Overall, Fiat Chrysler is reportedly investing upwards of $1 billion to re-align manufacturing capacity towards larger vehicles.
Conversely, General Motors indicates that it will continue to build its smaller car models in the U.S. including the newly designed 2017 Chevrolet Bolt with an estimated 200 plus mile range and $40,000 price tag. That is in addition to the current hybrid powered Chevrolet Volt that provides 420 miles of driving range for a base price of $35,000. The Volt is assembled at GM’s Detroit Hamtramck production facility.
Beyond the current rhetoric of these announcements reverberating in the current U.S. Presidential Election cycle, it is important to focus on what is occurring. These are not, from our lens, solely temporary adjustments in existing manufacturing capacity to reflect near-term changes in product demand brought about from consumer buying euphoria from dramatically lower fuel prices. Instead, the level of new investments implies strategic shifts in manufacturing capabilities towards non U.S. sites, perhaps a reflection of pending new global trade agreements such as the Trans Pacific Partnership and NAFTA that view North America as a contiguous trading, supplier and production zone.
Business strategy pragmatists will probably view these events as smart moves to insure larger margins on smaller, lower-margin vehicles. This is the consistent strategy of lowest cost direct labor but the tradeoff is often in product design and management more than likely residing a plane ride away. The counter-argument is that with so much of the production process now highly automated with robotics and additive manufacturing techniques, shouldn’t direct labor costs be manageable regardless of location?
Organized labor likely views these moves as a betrayal of prior agreements made during the 2008-2009 bankruptcy crisis that surrounded the bulk of U.S. automotive OEM’s. Chrysler and GM subsequently sought government bailout funding with assurances that there would be a continued U.S. manufacturing presence in small and larger car production alike.
From the sustainability strategy lens, we submit it is yet another fallback to an old and troubling habit, trading-off direct labor savings with added logistics and transportation costs.
Larger vehicles with higher fossil fuel consumption are added to the nation’s byways while added surface transportation movements are required to transport smaller vehicles from Mexican supplier and final assembly facilities to various U.S. and Canadian consumption regions. The net result is more greenhouse gas emissions and an industry where certain producers view product strategy solely as a facilitator of near-term financial results vs. integrated product strategy and regionally based manufacturing flexibility that can produce either small or large vehicle models in any plant.
And so the habit of certain producers lives on, along with the overall implications. Short-term memory loss perhaps applies to certain consumers and producers.
Praise to Tesla and GM for continuing efforts toward broader strategy that insures sustainability for both the business and the planet.
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