In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s. Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.
This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles.
Obviously, such a trend implies that a global production strategy is at-play within these moves. Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.
As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations. Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.
The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.
The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models. Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence. Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.
Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.
There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.
This is a follow-up commentary related to Tesla Motors, specifically this electric powered automotive manufacturer’s efforts in supply in deploying a broader supply chain vertical integration strategy. In our Supply Chain Matters commentary in February, we noted Tesla’s announcement to build its own $5 billion electric battery supply facility which is termed the “gigafactory”, capable of supplying up to 500,000 electric vehicles per year. That level of supply commitment exceeds Tesla’s current planned output and implies providing a U.S. based manufacturing presence for electric batteries that would be available to other automotive and vehicle producers. Tesla currently supplies batteries for the ToyotaRAV4 EV and the Mercedes B-Class electric.
We noted that the strategy savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Tesla Motors Model S powered automobile, the batteries are indeed the highest portion of material cost. Tesla expects that the new factory would reduce its current battery costs by 30 percent in its first year,
In late July, during its second-quarter earnings report, Tesla executives made a side announcement indicating that the company had reached a final agreement with Panasonic Corp. as the supplier partner in the construction and operation of the planned gigafactory. Five western U.S. states continue to be cited as potential sites for either one or two linked supply facilities, although site work has actually begun in an area near Reno Nevada. Other potential U.S. states in the running are Arizona, California, New Mexico and Texas. The western portion of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries.
Journalist Michelle Quinn pens in a report posted by the San Jose Mercury News that the potential for landing this new battery factory with upwards of 6500 manufacturing continues to fuel a massive wooing and lobbying effort among each of the potential states. State legislatures are rushing through incentive packages to sweeten prospects in their individual states and Governors and city mayors have resorted to novel efforts in demonstrating enthusiasm and keen interest. One example, Texas Governor Rick Perry drove a Tesla Model S to California and taunted California officials about the overwhelming advantages of locating manufacturing in the Lone Star State. Quinn describes these lobbying efforts as a ‘beauty pageant” and: “if a song and dance could help (California), let’s do it.”
Readers should recall that Boeing launched a nationwide RFP bidding effort among potential U.S. states for selection of component and final assembly facilities for its new announced 777x commercial aircraft program. In our January posting, Collaboration According to Boeing, we noted that Boeing’s ultimate objective was to secure the most lucrative economic incentives related to production sourcing. Boeing was in-essence conducting a reverse auction, seeking the lowest economic bidder. In the end, a package of incentives described as the largest of its kind in U.S. history assured that new generation 777 production would remain in the OEM’s current Seattle area.
One of the learnings from the deep economic recession of 2008-2009 is that state, local and provincial governments will do all that is required to secure needed jobs and an economic future in times of uncertain economic growth. If that requires massive incentives in tax breaks, site location subsidies, workforce training and infrastructure developments, so be it. Current efforts among local and state governments to top one another only adds to the reality that manufacturers can hold out for the sweetest deal available with lucrative benefits. Appearances, stunts and lobbying add more leveraging power for the manufacturer.
In the specific case of Tesla, a company well known for its innovative and bold thinking. When the company announced that it would manufacture autos in California, many auto industry observers scoffed at that decision. California is not known as a low-cost manufacturing region.
The ultimate selection of its U.S. based battery gigafactory will accomplish four objectives:
- Bold supply chain vertical integration
- Proximity to key commodity supply and transport networks
- A well trained and technically savvy workforce
- Subsidies that may well defray the overall cost burden.
At this point, Tesla has more than likely honed its selection list based on the above objectives. The thinking is bold and timing is exquisite. It’s time to move beyond the politics and to the objective at-hand.
Volkswagen announced today that the company plans to add a long awaited 7 passenger mid-sized SUV to the U.S. auto market in late 2016 and that the design and production of this vehicle will originate from VW’s current facility in Chattanooga Tennessee.
The German based automaker indicated that it plans to invest $600 million to both establish a new research center to be named National Research& Development and Planning Center to help design this new SUV and expand the existing Chattanooga to accommodate a new SUV production line. The new research center is expected to employ upwards of 200 engineers while an additional 538,000 square feet of capacity and an incremental 2000 factory jobs will be added to the U.S. facility. With this new incremental investment, annual production volumes at Chattanooga would rise to 250,000 vehicles.
The company re-iterated that from 2014-2018, it will be investing more than $7 billion in capital resources in both the U.S. and Mexico in order to fulfill its goal to deliver 800,000 vehicles in U.S. and North America sales volume.
This new model is to be based on the CrossBlue concept, developed specifically for the North American market and unveiled last year at the Detroit Auto Show. According to a posting by Car and Driver, the model is designed to compete with the likes of the Honda Pilot, Ford ExplorerJeep Grand Cherokee, Nissan Pathfinder and Toyota Highlander. Emphasis is on style and very high fuel economy including a diesel powered version. This Car and Driver article published in January 2013 declared that it was almost a certainty that the SUV would be produced in Chattanooga. So much for hype, drama and speculation.
Business media has widely reported that efforts by VW to broaden its penetration of the U.S. auto market continue to stall. According to a published report from Bloomberg regarding the latest announcement, VW’s U.S. sales declined 22 percent in June, accelerating an overall annual decline of 13 percent for the first-half of 2014. That is counter to a reported 4.2 percent increase in the overall U.S. market during the same period.
Readers may recall that in mid-February an effort to have workers at Chattanooga represented by the United Auto Workers union was narrowly defeated. The Chattanooga production facility was one of a very few Volkswagen global based facilities not having a formal Works Council and thus the German based IG Metall labor union advocated to Volkswagen’s senior management to encourage the formation of such a structure in the U.S. The ultimate vote failed to win a majority, but the vote was close, with a final reported tally of 712 to 626 indicating rejection of labor union organization. Leading up to the vote, a highly charged campaign by local legislators and activists alleging that union representation would jeopardize any future work being sourced at the plant, including the pending SUV model. Today’s VW announcement includes statements from many of the same politicians echoing the positive implications for the local economy.
However, VW may also be addressing the need for more open worker input to decisions. Today’s VW announcement additionally indicates that Bernd Osterloh, head of VW’s General and Works Council will join the Board of Directors of Volkswagen Group of America “to play a more concentrated role in shaping our U.S. strategy in the future.” In the press release, Osterioh indicates that he is “determined to uphold the interests of Volkswagen employees in Chattanooga. Previous media reports have quoted Osterloh as indicating that having a Works Council was an important factor that would play into whether another product would be made in the U.S. facility. Of more interest, four days ago, the UAW also announced that it will open a branch office close to the Tennessee facility.
Obviously, VW is late to the party in introducing a U.S. model SUV, and two years is a long time in today’s consumer’s markets. This is a high stakes effort that requires total collaboration and succinct decision-making. Engineering, product management, supply chain and production teams will have to highly synchronize efforts to assure the 2016 milestone will happen. For its part, VW corporate will have to shed its centralized decision-making model and let the new North America based research center carry the ball.
According to media reports, BMW is expected to announce sometime today that the German luxury automotive producer will invest upwards of $1 billion to build its first auto assembly plant in Mexico. Informed sources are being cited as indicating that the proposed new facility, BMW’s second in North America, will be designed to produce upwards of 150,000 vehicles per year. Speculation is that the plant will be located in San Luis Potosi, about 250 miles northwest of Mexico City. An announcement is expected from a ceremony being planned today with the President of Mexico. The Mexican plant investment follows an earlier announcement to invest $1 billion to increase production capacity by 50 percent at the automaker’s existing production facility in the U.S., raising capacity to upwards of 450,000 vehicles annually.
With this announcement, the automaker will join other global based OEM’s that have announced major investments within Mexico. Last week, Daimler and Nissan jointly announced a $1.4 billion investment in a proposed shared auto assembly plant to produce smaller luxury vehicles. The plant, planned for upwards of 300,000 vehicles per year, will be built nearby an existing Nissan factory. Plans currently call for an initial Nissan Infiniti model to be rolled off the new assembly line by 2017, followed by a yet to be named Mercedes-Benz model in 2018.
The news follows last-year’s announcement by Volkswagen’s Audi division in building a $1.3 billion plant in Mexico. Volkswagen is also working on a design for a new smaller SUV model for the U.S. market, and with that model, will have to make an additional decision regarding augmenting North America based production. The Wall Street Journal further indicates that Hyundai is also expected to unveil plans for its first auto assembly plant in Mexico.
Why the attraction to Mexico as a North America automotive production hub?
The first and foremost answer is direct labor costs. Media is quoting a recent study conducted by KPMG indicating that labor costs are currently 60 percent lower than those in the United States. This week, the Wall Street Journal made reference to a study conducted by automotive industry consultancy AlixPartners indicating that 57 percent of the top 100 Europe based automotive assembly plants are operating at less than 75 percent capacity. This is the obvious overhang from the recent severe recession that impacted Europe, where auto sales declined rapidly. Yet, in the midst of this excess capacity, European OEM’s are augmenting capacity in other lower cost regions.
The second factor involves other costs. Under NAFTA, factories in Mexico have tariff-free access to U.S. and Canadian consumer markets, while having the ability to leverage lower costs in other areas such as domestic transportation. Mexico also provides a considerable currency and labor cost advantage over European based auto plants. That leads to the third factor, global logistics. Mexico has invested in both its Gulf and Pacific west coast ports which provide added opportunities to export auto production to other global markets including Europe, Latin America or even Asia.
From our Supply Chain Matters lens, European automotive OEM’s are exercising the same strategies that major Japanese OEM’s Honda and Toyota had previously embarked on, investing in North America production as a platform to support evolving export markets. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013.
With the new attraction of Mexico, global OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations.
In the end, U.S. manufacturing resurgence is not a lock-in as OEM’s continue to discover other lower-cost options.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain matters blog. All rights reserved.
Across the United States, besides the U.S. team’s accomplishments in the World Cup competition, another dominant traditional and social media based news headline reflects of the incredible number of automobiles and trucks being subject to product recall.
The primary story focuses on General Motors, which after intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, is recalling all sorts of models that are believed to have been exposed to a component design problem, faulty ignition or otherwise. Thus far in 2014, GM has announced 44 product recalls involving nearly 18 million previously sold vehicles. Today’s social and business media buzz blares that the vehicles been recalled thus far is more than the total number sold in the U.S. in 2013.
In a previous Supply Chain Matters commentary, we called attention to product recalls involving airbags supplied by Japan based Takata Corp. that were expected to expand and involve millions of affected vehicles. Today, both Honda and Nissan recalled close to an additional 3 million vehicles worldwide to repair the subject airbag problem, bringing the total number involved with the airbag defect to roughly 5 million vehicles.
An article syndicated by the Washington Post News Service features the headline: More than 1 in every 10 vehicles on the road has been recalled since January. That articles notes that the defects range from rather serious (faulty ignition switches, overheating exhaust parts, power steering problems) to other problems where automakers are now highly sensitized to any potential liability problem. This article goes on to note that in the spirit of crisis bringing opportunity, that there may be an upside of this extraordinary situation: “ … meaning that dealers get to have their old customers back in the showroom. There, they can show off the new models and, at minimum, be in a position to sell drivers on some repairs they previously were not considering.”
This author, for one, was completely floored by the above statement. Are you kidding me! One in every ten vehicle owners being inconvenienced to have to make a service appointment and bring their vehicles for service, and dealers have the “blank” to try an upsell these consumers?
Beyond the lunacy of such statements, there is a parallel and very critical challenge about to happen.
Automotive service focused supply chains are going to be exercised to their biggest stress test, ever. All of the subject recalled vehicles will require some form of a repair part, one that has hopefully, been correctly modified to remediate a suspected problem. The sheer numbers imply that some inventory will have to be re-allocated from those destined to support ongoing production schedules for newer vehicles. In some cases, necessary repair parts will not be able to meet overall demand, and dealers will have to be very careful in scheduling service appointments and setting customer expectations. During Toyota’s past product recall crisis process involving unattended sudden acceleration, Toyota worked directly with its dealer network to coordinate extended service hours for consumers, including nights and weekends. Coordinated round-the-clock efforts among certain component suppliers and respective dealers were directed at insuring repair parts were adequately distributed and vehicles were scheduled for repair based on availability of necessary parts.
In short, the folks that do necessarily receive all the hero badges, those directly supporting service focused supply chains will be called upon in the coming weeks to literally save brand focused reputations.
Last week, Supply Chain Matters was invited to attend the PTC Live Global 2014 customer conference held in Boston. One of PTC’s product suites is technology focused on Service Lifecycle Management (SLM) which has been amassed from previous acquisitions of vendors such as Servigistics, MCA, Kaidera, Xelus and others. In one of the sessions, PTC executives noted that expectations have never been higher on the customer and business side of service management. Yet, service management tends to suffer from immature business processes, not from a lack of dedication and effort, but rather a lack of broader understanding to the importance of service management. Mingling in the hallways and networking sessions, we once again had an immediate sense of how dedicated these people are, and also how unappreciated and frustrating their efforts can sometimes be.
Across automotive, the service focused supply chain will be put to its largest and most expansive stress test from the scope of sheer numbers of vehicles and information required to coordinate service scheduling needs. Some will rise to the task at hand. Some will not.
One fact is very clear- auto dealers are advised to take-off their sales hats and concentrate on service and customer satisfaction efforts, in all dimensions. That includes a very close, almost intimate relationship with those dedicated professionals who plan, manage and fulfill service parts planning and order fulfillment. Forget for the time being, the algorithms and calculations related to mean time between part failures. It is going to be “all hands on-deck” augmented by information coordination and supply chain intelligence that separates the best in class performers.
It’s the end of the work week and we continue with our news update series related to previous Supply Chain Matters posted commentaries or news developments.
Another Bombardier C-Series Program Delay
Supply Chain Matters has featured past commentaries concerning Bombardier and its efforts to make its presence as an aircraft provider in the single-aisle market and compete with the likes of an Airbus or Boeing. The company’s C-Series of aircraft were designed to offer prospective air carriers an technologically advanced single aisle aircraft at perhaps a more cost competitive option for airlines. However, like many other commercial aircraft programs, the C-Series has suffered a series of milestone setbacks. The first maiden flight of the C-Series was in September 2013, nine months behind its original schedule. In December, the aircraft and diversified transportation equipment provider replaced its head of aviation sales due to lagging booked orders.
There are reports of continued setbacks regarding the C-Series program. This month, Bombardier re-started ground tests following a test failure of the aircraft’s innovative geared turbofan engines designed and produced by Pratt & Whitney. The company further announced that it will not feature the C-Series at the Farnborough International Airshow that occurs in July, forgoing a major sales opportunity. The revised plan is to introduce the smaller CS100 version of the C-Series in the second-half of 2015, with the larger version six months later. Thus far, about 15 percent of test activity has been completed.
The company has scaled-down its expectations of orders to a number of 300 expected orders by the time the aircraft enters operational service. Air Canada had been evaluating the C-Series as a potential replacement for 25 existing Embraer aircraft has now indicated it will not order any of the aircraft.
Airbus Loses Huge A350 Order
An update to our ongoing Supply Chain Matters commentaries regarding Airbus’s A350 supply chain which completed its maiden flight in June of 2013. A major new program development includes some disappointing news.
Business media reported last week that Airbus suffered one of the industry’s largest plane cancellations. Emirates Airlines elected to walk away from a previous deal to acquire 50 A350-900 and 20 A350-1000 aircraft after the airline reevaluated its long-term capacity needs. Emirates is apparently concerned that capacity at its Dubai hub could be an impediment to long-term growth, and that larger capacity aircraft should be part of its fleet strategy.
According to a published report by the Wall Street Journal, the A350 order was placed in 2007 and had a list price value of $16 billion. The cancellation represents a 9 percent hit to the A350 current order backlog. That will add some sting to the A350 supply chain ecosystem.
According to the WSJ, Emirates is the most influential buyer of Boeing’s 777 and Airbus’s A380 super jumbo aircraft. In November, Emirates boosted its A380 order commitment to 140 aircraft.
The order cancellation also effects engine provider Rolls Royce who indicated that its order book would fall by about 3.5 percent or $4.4 billion as a result of the Emirates decision.
UPS Appoints New CEO and Other Senior Management Changes
Earlier this month, UPS announced that David Abney, currently the company’s Chief Operating Officer, will be the transportation provider’s new Chief Executive Officer. Scott Davis, who has served as the company’s Chairman of the Board and CEO since 2008, will retire from UPS and will assume the role of non-executive Chairman. Both appointments are effective September 1, 2014.
In conjunction with the appointment of a new CEO from the ranks, UPS announced further senior management appointments. Alan Gershenhorn was appointed Executive Vice President and the company’s first Chief Commercial Officer, effective immediately. Gershenhorn will lead development and implementation of broad strategic growth and innovation initiatives focused on creating distinctive customer value. These include new market development, innovative future products and solutions, increased speed-to-market and stronger customer engagement across the entire UPS portfolio. Gershenhorn, a 35-year UPS veteran, previously served as chief sales, marketing and strategy officer.
UPS also announced the addition of Kate Gutmann to lead the provider’s global sales solutions and customer engagement strategy. Her new role as Senior Vice President of Worldwide Sales and Solutions was created to further market penetration through broader customer relationships. Gutmann is a 24 year UPS veteran.
Mitch Nichols, a 27-year UPS veteran and current president of UPS Airlines, was promoted to a newly created position on the Management Committee as Senior Vice President of Transportation and Engineering. His responsibilities will include UPS Airlines, transportation, engineering and sustainability.
Brendan Canavan, currently president of UPS Asia Pacific, will replace Nichols as president of UPS Airlines. Nando Cesarone, a 24-year UPS veteran, was promoted to President of UPS Asia Pacific.
Rhonda Clark will become the company’s Chief Sustainability Officer (CSO). Amy Whitley was named as the company’s first Chief Diversity & Inclusion Officer. Whitley will oversee global strategies to ensure that UPS leverages the talents and unique perspectives of a diverse workforce. She will also serve as vice president overseeing strategic human resources programs.
Tesla Motors Releases its Patents to Industry Rivals
Tesla Motors announced that it is offering open access to its patents related to its electric car technology to other automotive providers. CEO Elon Musk indicated that the offer is intended to spur wider development of electric powered vehicles that currently only make-up less than one percent of the new car and truck market. BMW is already interested, confirming that it has met with Tesla to discuss the success of electro-mobility on the international level.
Musk hinted at another reason for this announcement. Readers will recall tesla’s bold announcement to build a “gigafactory” in the U.S. to produce the company’s smaller battery packs for the industry. A sharing of Tesla developed IP can insure that the planned U.S. battery factory can be a potential supplier for other manufacturers.
Kinaxis Completes its IPO
Supply chain planning technology provider Kinaxis announced that it has completed its public offering of the company’s stock in Canada. Kinaxis issued 5,000,000 common shares and an aggregate of 2,739,715 common shares were sold by certain selling shareholders at a price of Cdn$13.00 per share. Canadian business media reports identified the selling shareholders as Boston based HarbourVest Partners and Alberta Trust of Montreal, both of which retain a 30 percent ownership stake.
The initial public offering and secondary offering resulted in aggregate gross proceeds of Cdn$65.0 million to Kinaxis and Cdn$35.6 million to the selling shareholders, for total aggregate gross proceeds of Cdn$100.6 million. Kinaxis’ common shares will be traded on the Toronto Stock Exchange under the symbol “KXS”.
Kinaxis CEO Doug Colbeth indicated to media that proceeds from the IPO will be utilized to pay down $30 million in debt and strengthen the company’s balance sheet. He did not rule out acquisition of other companies if that makes sense for Kinaxis’s business. Kinaxis reported a net loss of Cdn $9.7 million in 2013. In the first quarter of 2014, the company reported revenues of Cdn $15.6 million and a net income of Cdn $2 million.