History Is a Great Teacher
It can be easy to boil overall industry utilization to single number, but you shouldn’t.
History is a great teacher. There are lessons from the past that we should never forget. Lessons that are often the difference between success and failure in business. In the auto industry, some of the oft-forgotten constructs are capital intensity and long lead times. History’s lesson is that optimizing capacity utilization and flexibility are core to survival.
Back in 1989, this author worked on the first detailed compilation of a North American light vehicle production capacity study. Researching the JPH (jobs per hour), shift structures and labor constraints in addition to each plant’s production capacity was ground-breaking. At the time, it was becoming apparent that the Detroit Three's North American production was being augmented by Asian OEMs locating new capacity (solely or through joint ventures). As the domestic players were losing market share, adding capacity was going to pressure profitability. Understanding utilization rates by each OEM and vehicle build structure (unibody vs. full frame) was key to early identification of emerging issues.
Many vehicle and powertrain facilities closed before and after the 2009 GM and Chrysler bankruptcies. Iconic though underutilized facilities such as Chrysler-St. Louis, Ford-Twin Cities, GM-Shreveport and more were taken offline. The ability to strengthen the core and ensure any capital investment was better focused on raising productivity and manufacturing flexibility was key.
Rising demand and the ability to employ three-shift and three-crew setups allowed OEMs to improve productivity with fewer facilities. The chart below utilizes the SP Global Mobility North American Light Vehicle Production Forecast to understand utilization rates. Examining capacity utilization at a normalized level (assuming the highest possible line rate of two shifts and five days per week), levels eclipsing 100% were reached over the last decade. Additionally, higher capacity utilization enabled the industry to focus elsewhere, placing utilization concerns on the back burner. Several years of record production levels of over 17 million units diverted our attention.
The onset of COVID-19, chip scarcity and other supply-driven constraints lowered capacity utilization., cratering utilization rates to the point where they have not yet rebounded to pre-2020 levels. As the industry invests billions to electrify vehicle portfolios, capacity utilization will face new challenges.
It can be easy to boil overall industry utilization to single number. The reality is that beneath the topline, OEMs are often dealing with capacity focused solely on BEVs or ICE propulsion offerings or unibody versus full-frame architectures with little to no ability to flexibly build these in the same facility. As fleets are electrified, it may not be cost-effective to build extreme manufacturing flexibility into every facility. Unless the industry fully understands the rate at which the fleet will transition to BEVs, which seems unlikely, capacity utilization will be in a trough for years to come. It’s yet another unintended consequence of electrification.
As this lumpy transition continues, winners and losers will emerge throughout the value chain. From OEMs on down through the supply tiers, this ongoing production imbalance will lower overall industry utilization and drive winners and losers. With the high production levels from the past behind us, volume will not mask this issue. We’ll need to get used to low utilization rates and the resulting impact on OEM competitiveness, their suppliers and the viability of others in the ecosystem.
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