Bloomberg BusinessWeek reports that both domestic and foreign-based auto producers continue to build and subsequently bring online more auto production capacity across China. The report cites a projection that by 2017 there will be 140 auto production plants in China vs. the 123 existing at the end of 2014. The problem, however, is that China’s nationwide domestic auto consumption is far short of this capacity indicating that overcapacity is expected to worsen. Cited is an IHS Automotive chart indicating that China’s excess capacity has jumped 83 percent in the last two years. The article cites a JSC Automotive forecast that by 2017, auto plants across China will be able to produce 11.4 million more cars than are expected to be sold.
The report cites one Shanghai based consultant as indicating that some carmakers are regretting plans to expand plant capacities, but decisions have already been made. Once more, as Supply Chain Matters readers all well aware, China’s domestic market remains an open opportunity for future growth, but the continued battleground pits China’s domestic brands against foreign based nameplates. The obvious consequence is that there is not enough product demand to sustain all manufacturers, and that has the potential for industry consequences.
Production overcapacity is a common problem in China in many industry and commodity sectors and the results have been messy or sometimes ugly consequences. An ongoing overcapacity condition remains for the production of steel. According to Bloomberg, already, car dealerships across China are seeking more financial assistance and lower sales volume targets. China’s domestic consumers will obviously gain more buyer benefits over time.
Europe’s automotive industry has a similar overcapacity challenge since prior to the 2008-2009 global recession, there was already too much industry-wide capacity, and that remains an ongoing challenge.
With China and Europe reflecting overcapacity, global automotive OEM’s must continue efforts to balance global consumption and supply as well as protect margins. Currency headwinds are yet another challenge.
Supply Chain Matters would not at all be surprised by the entry of Chinese produced autos in the U.S. as well as other emerging markets over the next three years.
Last week, we were reading a recent report produced by the Chartered Institute for Procurement and Supply (CIPS) in the U.K. indicating that its risk index reversed in Q4-2014 and reached a nine month high. According to this report:
“The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs.”
Now, there are multiple business and general media reports of the severe toll that is cascading from the continuing backlog of ships destined to U.S. west coast ports that cannot be unloaded and reloaded on a timely basis. The latest news this weekend is that President Obama has dispatched the U.S. Secretary of Labor, Tom Perez, to California in an attempt to broker an agreement.
Today, a Reuters syndicated report featured on Business Insider provides ample evidence of the rippling effects beyond retail focused supply chains. Honda Motor now indicates that it is slowing production at certain North America auto assembly plants because component parts in the replenishment pipeline are now impacting the production of this OEM’s Civic, CR-V and Accord models. Similarly, Fuji Heavy Industries, producers of Subaru cars indicates that it is already air freighting parts to U.S. factories through at least the end of this month.
An AP syndicated report featured on business network CNBC indicates that in addition to car parts, imported furniture, medical equipment, bathroom tiles, shoes and other goods are all impacted. On the export side, meat, produce and other agricultural foods are not moving to Asia destined markets and are in danger of spoilage.
No doubt, the cumulative impact across industry supply chains will be in the billions of dollars if the current labor dispute is not resolved quickly.
Further reported is that the port crisis is impacting available capacity and shipping rates for both sea and air freight, making it even more expensive to implement contingency shipping and logistics plans. Air freight capacity originating from China and the Asia-Pacific region was reduced in 2013-14 due to declining demand and increased costs. Thus, the current surge in contingency shipping demand is chasing limited supply, and no doubt, bigger more influential shippers will be garnered preferential services.
As is often the case with these types of multi-industry supply chain crisis, small and medium businesses will bear the bulk of the economic burden.
Within the U.S. itself, a current period of severe winter weather featuring unprecedented snowstorms and extreme cold weather have paralyzed the U.S. northeastern and Midwest regions and its economies, adding more economic burden.
Tomorrow (Tuesday), west coast dockworkers are supposed to return to work. All industry eyes are affixed on a speedy and final resolution of the current crisis. Amen to that!
Industry supply chain teams do not need to concern themselves with supply chain risk indices for this quarter and beyond. They will be off the charts and indeed, the perception of global supply chain risk will be at an all-time high.
Today, sensing and real-time awareness across the end-to-end global supply chain network as to where inventory resides and the daily condition of global transportation networks and contingency plans is far more important. The current crisis will continue to worsen before it gets better.
Longer-term, once the current U.S. west coast port labor contract is resolved, shipping industry interests had better get their acts together and figure out solutions to a number of current industry choke-points and structural deficiencies. Larger mega container ships will not address the needs of shippers for reliable and efficient logistics and transportation.
The notion of the flexibility and/or cost effectiveness of global supply chains has reached a critical crossroad.
For the fourth quarter, the company’s loss widened to $108 million and reflected a shortfall in the delivery of 1400 vehicles along with described manufacturing inefficiencies related to the recently introduced Model S P85D as well as Autopilot functionality. Currency headwinds reflected by the current strong value of the U.S. dollar further weighted on earnings. The bulk of Tesla’s manufacturing supply chain is within the U.S.
Revenues in the quarter increased to nearly $957 million from $615 million recorded in the year earlier quarter. The electric car company sold 9834 vehicles vs. 6892 in the year earlier quarter. Operating expenses nearly doubled.
During the fourth quarter, production increased to a record 11,627 vehicles, meeting its target to produce 35,000 vehicles in 2014. However, deliveries in the quarter amounted to 9834 vehicles. Tesla has adopted a rather industry-unique finished goods distribution model electing to take more end-customer orders directly online and delivering new cars direct to consumers, shunning the need for a vast dealer network. As a result, Tesla could not deliver 1400 vehicles because of challenges described as either customers being on-vacation, severe winter weather and termed shipping problems. According to its 8K report, the 1400 vehicles have since been delivered in the current quarter, but weighed on revenues in Q4. Keep in mind that Tesla has invested in advanced technology to provide deeper visibility to overall delivery and customer fulfillment needs.
For the full year, Tesla recorded nearly $3.2 billion in revenues and an operating loss of $294 million, roughly three times the losses recorded for 2013. Inventories increased nearly $613 million. According to its SEC filing, about 55 percent of new Model S vehicles were delivered to North America customers while 30 percent were delivered in Europe and 15 percent were delivered to Asia Pacific customers. More vehicles were directed into Asia Pacific markets to support the initial year of deliveries for that region.
Looking toward 2015, Tesla faces a number of added supply chain challenges in order to support its global sales goal of 55,000 vehicles. A number of added investments in expanded manufacturing capacity are planned to increase production volume to 2000 vehicles per week by the end of 2015. Tesla entered 2015 with over 10,000 orders for its Model S and nearly 20,000 customer reservations for its new Model X, which is expected to begin customer deliveries in Q3 of this year. G&A expense growth is expected to be more modest with a particular emphasis on increased operational efficiency.
Added production capacity investments include a new state-of-the art automated casting and machining operation for various aluminum components and increased production volume investments to meet expected demand for All-Wheel Drive Dual Motor product demand. A new paint shop operation is further planned for combined painting of Model S and Model X models. Tesla additionally plans to further increase its sales and service resources in all existing markets including China.
One rather positive note is Tesla’s indication that steel fabrication is underway at the planned battery manufacturing Gigafactory near Reno Nevada. That new facility, being constructed in partnership with major battery supplier Panasonic, is reported as on plan to begin equipment installation later in 2015 and battery production in 2016.
Thus while showing some supply chain strains at the end of 2014, even more challenges remain for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and 2015 will be no exception to that trend.
In late December of 2011, Supply Chain Matters raised awareness to Japan based automotive OEM’s, specifically Honda, with plans to shift a major portion of export production capability from North America instead of from Japan. We have since updated readers on this strategy to include other automotive OEM’s. We did so because for our readers, it provides a valid example of a globally-balanced and flexible global manufacturing sourcing strategy along with proactive supply chain risk mitigation.
Last week, The Wall Street Journal featured a report on 2014 U.S. auto exports, one that confirms rather active evidence that North America auto production continues to be viewed for both domestic as well as global consumption.
The report indicates that U.S. auto exports in 2014 recoded a record for the third consecutive year. In 2014, approximately 2.1 million new cars and trucks were exported to other global regions, an 8 percent increase over that in 2013, according to the U.S. International Trade Association. According to the WSJ, about half of these exports are destined to Canada and Mexico with other countries of mention being China, Saudi Arabia and South Korea. Exported vehicles include brands such as BMW, Fiat-Chrysler, Daimler, Jeep, Ford, Honda, Nissan and Toyota. One cited example was the Jeep brand which shipped upwards of 316,000 of that maker’s Wrangler and Cherokee vehicles to export markets. A 50 percent increase from 2012 levels. BMW has plans to boost U.S. production of its X3 and other SUV line-up by 50 percent over the next two years.
The article further points out that while the U.S. dollar is currently strong, these exports efforts began when the dollar was weaker, and momentum has continued.
As we originally observed, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains now cater to the product-unique needs and product demand strategies of certain export markets and there lies the importance of global product platform development strategies. There is the added need to dynamically plan and respond to constantly changing and different geographic market scenarios. The U.S. automotive supply chain ecosystem therefore benefits and has the continued potential to be globally competitive in margins and consumer fulfillment. The U.S. automotive supply chain further serves as a backup strategy to any major supply chain disruption that might occur in another region.
Whether the growing export trend continues in 2015 is obviously dependent on shifting and highly changing currency trends. However, the strategy and capabilities invested upwards of five years ago appear to be paying off.
Last year, in what was billed by business and general media as the worst U.S. product safety crisis in recent memory, a series of large scale product recalls among multiple General Motors brands involving upwards of 2.6 million vehicles brought this company to crisis footing as it attempted to restore consumer confidence and establish a new footing for growth.
The defective ignition switch recalls involving thousands of vehicles triggered consequent increased regulatory and business media scrutiny. An additional response among GM’s product teams was to subsequently review all potentially harmful vehicle safety and parts quality issues and err on the side of caution with even more product recalls involving multiple parts issues.
In conjunction with its earnings reporting in October 2014, CEO Mary Barra assembled the company’s top 300 executives to declare that that the company must do what it takes to be the “world’s most valued automotive company”. That included a renewed more passionate emphasis on quality as well as reliance on an expected crop of planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. The goal is to have 47 percent of global sales to be fueled by these new models by 2019. Supply Chain Matters has also called reader attention to GM’s goal to further focus on the broader supply chain’s contribution to its renewed business goals.
This week, GM reported what is reported as better than expected financial results for the December-ending fourth quarter. While revenues slipped slightly, GM posted a noteworthy 91 percent increase in profit compared with the year prior quarter.
The full-year results also provided quantification of the costs of product recalls. GM reported $2.8 billion in costs associated with product recalls including the ignition-switch related recalls. According to reports, GM will likely pay $9000 in profit-sharing to its upwards of 48,000 U.S. hourly employees, somewhat more than actual North American operating results to compensate for the impact of the product recalls.
Thus, at the conclusion of GM’s fiscal year, there is quantification of the specific financial costs of a previous corporate culture that eluded accountability and fostered functional fiefdoms. In what appears to be an increasing global trend, GM is considering appeasing its stockholders with plowing some profits in stock buy-back or increased dividend actions.
Moving forward in the new fiscal year, GM has to strengthen its supplier relationships and foster a climate of joint innovation and accountability for quality. We trust that such efforts would include more financial consideration toward stronger supplier relationships and an increased emphasis on joint quality management monitoring and remediation practices.
Billions of dollars expended in product recalls is better invested in addressing the root causes of either product design or supplier quality practices.
An interesting news release came across our Supply Chain Matters news feed last week, one that perhaps demonstrates the broad capabilities of certain contract manufacturers within the automotive and truck sector.
Mercedes Benz’s U.S. entity and AM General LLC jointly announced that because of the increasing demand for the Mercedes Benz R-Class luxury vehicle, and the subsequent need for increased capacity, that the luxury sports utility vehicle would now be moved from the Mercedes U.S, Tuscaloosa Alabama facility and instead be manufactured at AM General’s commercial assembly plant in Mishawaka Indiana. Under this multi-year agreement, AM General becomes Mercedes first and only contract manufacturing operator within the United States. The R-Class vehicles manufactured and assembled by AM General are expected to roll-off its assembly lines this summer.
According to its web site, AM General designs, engineers, manufactures supplies and supports specialized vehicles for commercial and military customers. The manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company further provides support in service parts and integrated logistics as well as supply chain management.
AM General’s business units include three wholly owned subsidiaries, diesel engine manufacturer General Engine Products, automatic transmission manufacturer General Transmission Products, and Mobility Ventures which is the prime recipient of the contract manufacturing agreement. However, this manufacturer would best be known by U.S. and other military veterans as the original designer and manufacturer of the famous HMMWV (Humvee®) troop transport vehicle.
AM General’s Mobility Ventures produces the iconic HUMMER® H1 and H2 branded vehicles, along with specialized wheelchair accessible vehicles for public and private transportation. As a result of the new partnership with Mercedes Benz USA, the manufacturer further announced the hiring of two new senior executives, a new business unit President and an executive vice-president engineering, sales, distribution and dealer support.
The multi-purpose manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company additionally features specialized support in service parts and integrated logistics as well as supply chain management.
We at Supply Chain Matters could not help but think about the contrasts related to this announcement. Picture the Humvee or H1, (pictured above) the embodiment of rugged, tough and explosive-proof, being produced in the same facility as a luxury SUV with all the driver and passenger creature comforts. That is quite a contrast.
Then again, it could provide a testimonial to the notions that product design integration and contract manufacturing services can co-exist among various purpose-built vehicles.