Of the 102 new factories planned from 2013 to 2020, 67 will be located in Asia, according to PwC’s ‘How to be No. 1: Facing future challenges in the automotive industry’ report produced by the Autofacts team.
After a slight increase in 2011 and healthy 7.1% growth in 2012 to 15.5 million units, China’s new car sales roared ahead into the double-digits in 2013, with annual growth over 15%.
PwC Autofacts anticipates growth of 53% from 2013 through 2020 to 29.6 million light vehicles – that equates to 10.3 million additional units. That magnitude of growth will only be possible in China, with its huge population of potential first-time car buyers. Chinese automotive producers will benefit from some of the growth, but so will Japanese and Korean auto-producers, as well as European and US-based producers.
But while the Asian car market is booming, Europe has an excess of production capacity. A PwC Autofacts Analysis showed that 13 different European automobile factories with a minimum capacity of 100,000 vehicles per Europe were operating below 50% utilisation – far lower than the normal profitability threshold of 75-80%. That represents approximately two million units of excess capacity and significantly negatively impacted the cost structure of the affected automotive producers.
The number of factories operating at below 50% utilisation went down to 9 in 2013. And while the names on the list changed, some plants have been facing issues for years. And even if pent-up demand pushes healthy sales in the future, there’s no escaping the fact that Europe – especially Western Europe – is a saturated market. European production capacity should be adjusted accordingly. Some European automotive producers have pushed through factory closures – with expected reactions from employees and unions. Another strategy is actually shifting some production back to Europe. While that may seem counter intuitive, it’s nothing other than the classic ‘build where you sell’ strategy. Measures like these should have an impact. PwC Autofacts expects that by the end of the decade capacity in the remaining European automotive factories are expected to again reach the 80% level.
“A key trend in the industry is ‘build where you sell. Automakers continue to have their sights on the Chinese market where sales and assembly are forecasted to grow to approximately 30 million by 2020. Each market has different customer preferences that automakers are producing to meet those local demands. The level of that customization varies in complexity from market to market, impacting production costs”, said Ionut Simion, Tax Partner, automotive industry group leader, PwC Romania.
PwC analysis indicates that an estimated 400 trillion possible variations are offered in a typical German mid-class vehicle model. This is compared to just 1,500 variants offered in a comparable vehicle in the Chinese market.
“Planning is critical for automakers. While demand for different models and variants continues to change, automakers need flexible suppliers who are able to deliver the required modules and components reliably and on-time. And the Original Equipment Manufacturers (OEMs) should to be able to install the right parts and produce their own customized versions where necessary. That means flexible assembly lines, ideally those that can produce vehicles across different segments”, added Ionut Simion.
In addition, shorter production cycles create other challenges, such as increasing the need to modify production processes. That means it’s important to plan ahead for future vehicle generations and work to integrate a high-level of standardization into platforms and vehicle architecture.
From 2007 to 2012, new car registrations decreased almost uniformly across Europe with only a very few exceptions – but there were big differences in the order of magnitude. Germany declined around 2%. Contrast that with a drop of 80% in Greece and 53% in Portugal. Spain plunged 57% too, while Italy dropped 44%. And while the French drop of 8% was modest in comparison, the total decline in these three markets was 2.1 million unit sales, compared to Germany’s drop of around 60,000 units.
These regional differences over the past several years are one of the primary reasons for OEM’s differing levels of resiliency to the crisis. Italian and French automakers have suffered more from the sharp drops in their home markets than their German competitors have. A further disadvantage has been their reduced engagement in the two biggest growth markets of the past several years – the US and China.