It doesn’t seem long ago that I was discussing how the U.S government was bailing out car manufacturers in order to protect their manufacturing industry, the associated supply chains and the thousands of people that rely on the manufacturing sector for their livelihood. GM and Chrysler accepted significant government bail-out funds however Ford decided to ride the storm by themselves. Manufacturing companies were trying to reduce costs as quickly as possible through restructuring, selling off business units, off shoring manufacturing and sourcing from emerging markets. There was a sense of urgency to try and keep the manufacturing industry afloat as the Government knew that the industry would be crucial to helping the U.S emerge, kicking and screaming, from the economic downturn.
2011 was the turnaround year for U.S manufacturing and especially the automotive industry with Fiat executing their plans for Chrysler and completely transforming their business into a much leaner operation. Fiat introduced their manufacturing processes and best practices to Chrysler’s operation and month by month during 2011, Chrysler was transforming themselves into a new force in the U.S automotive industry. GM went through a significant cost cutting exercise as they looked to sell off poorly performing business units. Unfortunately Saab was one casualty of this and Opel looked to be going a similar way but as the European automotive industry picked up speed in 2011, so Opel was able to increase their production and profitability levels. It was this sudden transformation that provided GM with an incentive to keep hold of their European operation and so retain a key stake in the European market. The other reason for GM deciding to retain Opel for now was that they have a number of small to midsize vehicle platforms that could eventually become key to GM’s future, especially as U.S consumers were looking to downsize to smaller, more economical cars.
The transformation in fortunes for the big three automotive manufacturers in Detroit proved to be a shot in the arm for the supply base in the region. Suppliers had been hit really hard during 2009 and 2010, decreasing orders from the big three had significantly impacted their sales and some suppliers went out of business and others were acquired by competitors. Fortunately many of the Tier1 suppliers at the top of the supply chain, for example Delphi, kept their head above water and used this period to restructure their own operations because they knew the market would pick up eventually. Increased production levels in the second half of 2011 led to further inward investment in not only Detroit but in the South East of the U.S where another automotive hub was emerging led by VW and Daimler. Jobs that were lost during the downturn were being re-introduced to the North American manufacturing industry and a new trend of near shoring or reverse globalization was starting to take place.
During the downturned economy many companies decided to outsource some of their manufacturing capacity, some even decided to build new plants in more stable economies such as China and even Japan. However natural disasters such as the tsunami, earthquake and floods that have recently hit the ASPAC region have completely turned global supply chain strategies on their heads. Manufacturing supply chains were severely impacted by the Japanese Earthquake, and combined with rising currency fluctuations with the Japanese Yen and increasing pay demands by workers in China, suddenly these regions were starting to fall out of favour with some western manufacturers. Don’t get me wrong, the Chinese market is potentially very lucrative for the western manufacturers looking to tap into increasing consumer wealth, but using these countries as a base for manufacturing goods for export back to North America and Europe was becoming more difficult to justify. So we have seen reverse globalization start to take place, one good example is Caterpillar who decided last December to move production of some of their smaller pieces of construction equipment back to North America. This is great news for the North American manufacturing sector as it has helped to boost manufacturing jobs and reassert North America as a place to invest in once again.
So one month into 2012 and what has been happening in the U.S manufacturing sector I hear you ask?, investment, expansion, increased profitability and new jobs ! In my six years at GXS I have never heard so much positive news coming out of the U.S manufacturing industry, it is certainly going through a renaissance and we are only into the second month of the year. So what has been happening over the last few weeks, well let me briefly summarise some of the more significant pieces of news for you.
On 2nd February 2012, a report highlighted how U.S factories grew in January at the fastest pace in seven months, boosted by a rise in new orders. The Institute for Supply Management, a trade group of purchasing managers, said this week that its manufacturing index rose last month to 54.1 from 53.1 in December. In simple terms, readings above 50 signify expansion. Consumers are essentially buying more cars and trucks while businesses started to increase capital expenditure and buy new machinery and equipment. Over the past couple of years many companies were simply buying spare parts to keep exisiting machinery in operation, but now they are able to invest in new machinery once again. Both new orders and order backlogs rose to nine month highs. Increasing backlogs suggest that manufacturers are lacking the capacity to meet demand. Which in turn means more growth in production and further employment in the near future. The report highlighted similar growth in China, Germany and the UK. So let me just summarise some of the key automotive investments that were announced in January alone.
Honda announced that they would be building their new Acura NSX supercar in Ohio. Not only building the car in Ohio but it would also be designed there as well. For Honda this is a key strategic decision which I believe was made due to the recent supply chain disruptions caused by the earthquake last March. Honda has got to spread its manufacturing and design capacity around the world and they are now entrusting the U.S manufacturing industry to build the car that will totally transform the image of Honda.
Maserati, part of the Fiat empire, announced that they would be building their new SUV at a Chrylser plant in Detroit from 2013 and it would be exported globally. This is a huge boost for Chrysler who have been entrusted to build one of the Fiat group’s premium or luxury SUVs. This could potentially transform Chrysler as once they get use to building luxury cars such as the Maserati SUV, this experience and production know how will pass down to other Chrysler cars. Will this then position Chrysler as a manufacturer of luxury cars ?, I am not saying that it will happen this way, but it is the first step and it will be up to Chrysler to decide how far they want to leverage the association with Maserati in future vehicle projects.
In the South East U.S, BMW will be investing $900Million to expand their South Carolina plant so that they can build their new X4 sports SUV. South Carolina has certainly become a major new automotive hub and BMW’s investment has led to billions of dollars of inward investment from the German suppliers such as Bosch and Continental who have had to establish a stronger presence in the region as well. VW Group announced that Audi was looking to build a new plant in either North America or Mexico, this is a key investment for Audi if they are to obtain the number one spot in the premium car segment.
The final example that I wanted to highlight is Nissan who plans to build a new $2Billion plant in Mexico. Many car manufacturers have become disillusioned with investing in the traditional emerging market nations such as China. Mexico offers a relatively cheap location to build a car plant helped by lucrative local government grants and lower tax incentives. This location also provides Nissan with a convenient way to get more cars into the North American market. Not only are the cars cheaper to produce in Mexico, their logistics costs for shipping new cars will be considerably reduced as they no longer have to ship from Japan. For Nissan, as with Honda in Ohio, it allows them to spread their production capacity around the world and minimize production disruption should another natural disaster occur in the ASPAC region in the future. It will be interesting to see how Mexico’s economy is transformed with this investment, especially as Nissan’s Japanese supply base will look to invest in the region as well. I will take a closer look at Mexico’s automotive industry in a future blog entry.
So I have highlighted a few examples of inward investment, I haven’t even covered other positive news such as GM reaching the number one sales position again, Delphi posting a 400% increase in profits in Q411, Chrysler announcing a $225Million profit for 2011, the positive news seems to go on and on! The recent Detroit Motor Show was one of the most talked about U.S motor shows of recent years and it helped to strengthen the image of the North American automotive industry and where it is heading in the future, ie seeing increased inward investment, increased profitability and more importantly, more jobs.
I think it is going to be an exciting year for the North American automotive industry :)