Among the automotive industry’s many shifts over the past decade are changes to the light vehicle sourcing framework. Though global light vehicle sales have grown by roughly 20-million units since 2003 (up to 82-million units today), volume in the developed markets of the United States and Canada, Western Europe, Japan, and Australia has declined by more than 4-million units. Since 2003, sales share in these developed markets has dropped from approximately 74% to less than 50%. By 2020, IHS predicts a further decline to less than 42% across the developed markets. As emerging markets have been the industry engine, a byproduct of this unbalanced growth has been a myriad of structural changes impacting location, scale, and interconnections within the global automotive value chain.
Beyond the demand generated from millions of new emerging market consumers with rising incomes allowing them to purchase vehicles are critical supply-side considerations including:
• Can existing vehicle and component supply networks efficiently adapt to feed these new markets?
• Where is the capital, trained workforces, and infrastructure to enable this production co-location?
• How do the countries grapple with the social costs of shifting capacity and varying utilization rates?
Tariffs and non-tariff barriers are the main decision driver for adding vehicle and powertrain production in emerging markets. Importing into a high-growth market with tariffs reaching 35% is uncompetitive in most cases. The only alternative is to build a domestic production infrastructure to satisfy demand, yet vehicle production networks, including component and logistics suppliers, require years to develop.
In the past, the industry would export vehicles from a home market, hoping to maintain strong utilization of these core facilities. Utilizing existing production and logistics structures was the easiest and most efficient mode to meet export demand. This model was employed by Japanese, German, and Korean vehicle manufacturers to varying degrees until economic, consumer, and political forces dictated otherwise. As recently as 2008, the vehicle sourcing interconnection between regions reached 19% of total global output. Today, this is declining steadily toward 15%. By 2020, this could amount to a swing of more than 4-million units essentially built within a region instead of shipped to reduce risk.
The onset of multi-region vehicle platforms, born from the competitive requirement to reduce development costs, speed time to market, and reduce tooling costs, enables this movement. Ford ‘s “One Ford” plan leverages the ability to design a single vehicle platform structure flexible enough to base a number of similar-sized vehicles on and to build those vehicles with similar processes. Since Ford implemented this strategy, virtually every global OEM has followed suit.
Fallout from these emerging markets capacity additions is startling. One major example is that the traditional model of satisfying export demand from the vehicle manufacturer’s home country is quickly waning. Since 2003, production capacity grew by more than 24-million units of production capacity globally. This reflects a growth of 29-million units within developing market production locations as well as a decline of more than 4-million units in developed markets.
Currency swings between key trading partners are also propelling vehicle manufacturers to shift vehicle and powertrain production closer to the sales destination. Over the past decade, the U.S. dollar (USD) to Euro exchange rate has had less than a 10% differential, though in the midst of this period there have been substantial swings—in one instance declining more than 20% in a two-year period. USD to Yen exchange rate shifts have been more pronounced. In a hyper-competitive environment, changes in vehicle costs driven by currency are difficult to absorb into sticky vehicle prices.
Other factors driving increased production co-location are escalating logistics costs, reducing in-transit inventory, and political leverage. Similar to the light vehicle market, emissions legislation is impacting deep sea shippers in a profound manner. The need to burn cleaner fuels is raising fuel costs substantially (reaching approximately 45% of total ship operating costs) through this decade. Lastly, as has been witnessed in Western Europe, Canada and Australia of late, the elimination of production capacity is a matter of national economic welfare as thousands of direct and indirect jobs are at stake.
Looking forward, increasing competitiveness driven by uneven market growth and the costs and exposure impacting importation will drive vehicle manufacturers to evaluate the risk of maintaining the status quo. Reducing risk throughout the vehicle sourcing value chain will continue to be a critical industry focal point, and how each country grapples with the economic fallout will be important to watch.
Michael Robinet has been a managing director of IHS Automotive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends. www.ihs.com