A New Reckoning

Utilization rates for light-vehicle plant capacity are in for a ride.

August 12, 2024

Michael Robinet

As the industry worked through accelerated production volumes last decade, there were few concerns surrounding low capacity utilization in our fixed-cost-heavy North American ecosystem. With the benefit of stronger demand and a rich product mix, the industry was allowed to shift attention toward other priorities. Having too much capacity or not properly utilizing it was not a major concern in a market that averaged 17 million units from 2016 through 2019. The first few years of this decade – with the onset of COVID, low chip availability, growing inflation and a host of other supply disruptions – provided plenty of reasons not to focus on emerging utilization issues.

Despite last year’s increasing production volumes, the new UAW and Unifor labor agreements (and their no-facility-closure clauses) place the issue of capacity utilization back at the head of the line, this time with the added complication of an industry grappling with the complexity of integrating battery EV and hybrid variant builds into the same plants that have assembled ICE vehicles for decades. The build processes, supplier requirements and plant requirements are too different to meld into one factory. Many OEMs have opted to convert ICE facilities to BEV – never to return. While efficiencies can be gained with a singular build focus (ICE/Hybrid or BEV), any delay by customers to adopt BEVs upends these efforts. Other factors will impact overall capacity utilization through the end of the decade. Key among them will be the addition of incremental plants by current and new OEMs. This includes Ford’s massive Blue Oval Project (now called TEVC-Tennessee Electric Vehicle Center), capacity added by Tesla in Texas, VW/Scout in South Carolina, the now-delayed Vinfast project in North Carolina and other capacity expansions by current players. Add to this a market that is grappling with the impact of pent-up demand from the last four years essentially being satisfied with little inventory build and the affordability of those offerings starting to come into question as consumers face interest rates three times higher than just a few years ago. Mix in the impact of various new China-sourced vehicle tariffs by NA countries and reciprocal ones installed by China, and volume will face another constraint. Without the Detroit 3’s safety valve to take capacity offline, we have a growing utilization issue which will impact profits and the ability to compete in the future.

The graphic from the S&P Global Mobility Light Vehicle Capacity Utilization Forecast outlines that straight-time capacity utilization may dip towards 65% later this decade. Without the ability to restructure vehicle sourcing to drive overall corporate efficiency, one can already anticipate a growing list of plants to be addressed when labor contracts expire in 2027-28. OEMs with reduced profitability and few strategic options to improve efficiency while facing strong competition from China-based OEMs outside of North America may face a real reckoning.Suppliers will not be immune. When OEMs experience low utilization at one or more plants, odds are that suppliers increased capacity to handle the same lofty volumes. Thus, issues at the OEM level immediately find their way to the supply base. Several of these smaller suppliers may not have the financial flexibility of their larger OEM customers. Closing or selling plants may be their only option.

In the end, several moons aligning to drive utilization downward later this decade will have severe consequences for an ecosystem still climbing out of the recent COVID-driven supply impacts. This new reckoning will not be solved easily or delicately. It is clear that critical manufacturing decisions will be forced upon many OEMs, their labor unions and associated suppliers later this decade.