Gojirra99

OutFront
The Fabless Car Company
Joann Muller & Jonathan Fahey, 11.14.05


As pretty as the new Pontiac Solstice is, General Motors doesn't plan to sell very many of the $20,000 roadster convertibles now arriving at dealerships. GM is keeping the volume low by design, to about 20,000 cars a year. Yet the car is being built at a giant 3.2-million-square-foot, 58-year-old factory in Wilmington, Del. that only a decade ago cranked out as many as 221,000 vehicles a year.

Over this misallocation of resources GM has little control. Union rules require it to pay workers whether they are building cars or not, so it might as well have them build something. While a few of GM's 29 North American factories are working overtime, many more are vastly underutilized. Overall, GM has 14% more capacity than it needs to build the 5.5 million cars and trucks it sells each year.

GM and the other auto companies in the same straits are taking tentative steps to reconcile these disparities. GM (which has lost $6 billion so far this year) and Ford ($1.5 billion) are both planning to close multiple factories and cut thousands of hourly workers. GM's recent agreement with the United Auto Workers could shave $15 billion off the company's long-term health care liability. And the bankruptcy of Delphi, the nation's largest parts supplier, could further overhaul the industry's flabby cost structure by closing factories and by cutting pay, pensions and health care.

But another idea gaining speed would transform the industry more radically: give smaller contract manufacturers responsibility to build entire vehicles, like the Solstice. The big automakers, under this model, would do less automaking and more designing, engineering and marketing. The small manufacturers wouldn't be weighed down by large factories and expensive workers. Unionized suppliers typically pay $10 less per hour than manufacturers.

This transformation, if indeed it does take place, will be years in the making. But what it might bring would look a little like the auto industry of the distant past, when Henry Ford arranged for Dodge Brothers to build most of the Model T's sold by Ford Motor and Walter Chrysler subcontracted car bodies. The concept is certainly not out of step with modern manufacturing, either, which has many an electronics firm farming out its dirty work. In the chip business the participants are called "fabless"--they are manufacturers without fabrication plants.



Magna Steyr, a subsidiary of Canadian auto supplier Magna International, is now looking for a U.S. site where it would put a factory and build entire cars, not just parts of them. It's been pitching the idea to GM, Ford and Chrysler, as well as to European carmakers that are having a tough go sending cars made in high-wage European factories to the U.S.

ASC, a Southgate, Mich. specialty carmaker, has a slightly different twist on the same concept. It builds the Chevrolet SSR convertible pickup truck in 42 sections at a factory in Lansing, Mich., then hauls the sections 6 miles up the street to a GM plant where UAW workers put it together. Germany's Karmann is opening its first factory in the U.S. in January 2006 to supply roof modules to Chrysler and General Motors, but it has offered to build whole vehicles. It's already building the Chrysler Crossfire in Germany and shipping it to the U.S.

Says Timothy Olind, chief operating officer of Karmann USA: "We can provide financing for the entire product so it doesn't show up on their books until the product shows up at the dealer."

GM, Ford and Chrysler could better afford to risk bold, unique designs if they didn't have to sell out a whole factory's worth of vehicles. "It's a fairly cheap way of buying capacity to bring new models out, and if you fail, you're not left with excess capacity and all those legacy costs," says ASC Chief Executive Paul Wilbur.

The outsourcing of carmaking is fairly common in Europe, where the long tradition of customized coach-building morphed into low-volume mass production. In Graz, Austria, Magna produces BMW X-3s, Mercedes-Benz E-Classes, Saab 9-3 convertibles, Jeep Grand Cherokees and Chrysler minivans. A factory owned by Karmann produces Audis and Mercedes, in addition to the Crossfire. In Asia contract manufacturing is also well entrenched, though it's typically done by companies that are partially owned by Japanese automakers.


What makes contract manufacturing appealing now in the U.S. is the fragmenting market--there are 330 models this year compared with 250 in 1996. That means a lower sales volume for each. All three automakers are scrambling to remake their assembly plants so that any one plant can pump out a variety of models at the same time, but flexibility isn't coming fast enough. "The outside guys are nimble. They can expand and contract," says Jay S. Baron of the Center for Automotive Research, which will soon publish a study on low-volume manufacturing strategies.

Automakers could farm out small-volume vehicles, such as the Solstice, to companies like ASC. Or they could pay contract manufacturers to sop up excess demand when times are good, enabling them to run their own operations at peak efficiency. Automakers would plan for a factory to build 70% of a model's highest volume, which usually happens during the first 18 months after a vehicle is introduced. A contract manufacturer makes up the other 30%, and later, when the vehicle starts to age, the automaker changes over its factory to something new and lets the contract manufacturer build the stragglers.

Chrysler has already taken a half-step toward contract manufacturing in the U.S., with a Jeep factory now under construction in Toledo, Ohio. Chrysler turned over three-fourths of the operation to suppliers, who also bear a large share of the investment risk.

Giving up manufacturing altogether is a notion that makes GM Chief Executive G. Richard Wagoner bristle. "Generally, contractors don't offer any advantages that we can't do ourselves," he says. "We think it's core to our business to build our cars and trucks." And recently GM has been better at putting vehicles together than designing and engineering interesting ones. According to an annual manufacturing study published by Harbour Consulting, GM now has 8 of the best 20 factories in North America. "Manufacturing is where they've made the most progress," says Ronald Harbour. "What they haven't been able to do is convince people their products are better and different."

Would the unions put up with lower wages at the subcontractors? "The UAW is probably receptive when the alternative is closing the plant," says Baron. Indeed, the UAW signed off on Chrysler's innovative Jeep factory, which included lower pay for some.

And before it makes sense for the auto industry to add factories, the old money-losing factories will have to be shuttered. ASC's Wilbur estimates 21 of the 101 assembly plants in North America are running at less than 50% of capacity.

source : forbes.com

Threxx

It's already the big 2.5

Heck, the average GM is sending under 80% of your dollars to the US economy, and the average Toyota (including the ones made in Japan) is sending over 40% on average, of your dollars to the US economy. GM is steadily decreasing that number by outsourcing to Japan, Europe, Australia, Mexico, China, Korea, etc. Toyota's # is increasing (as well as Honda's and Nissan's). It is my belief that within the next 10 to 20 years any car company still surviving won't really "belong" to one country in particular. I mean true the head management may still be in the US or Japan or Europe depending on the company in question, but the production, parts sourcing, marketing, colaboration, etc will make the model lineups all different shades of grey. I think it's kinda nice to see really as I believe a true global economy is our world's best chance for peace. Nothing brings people together like making money together.

Trexus

You are so correct. You definitely see the BIG PICTURE. Others are still light years behind. I've stated this before. The world does not revolve around the U.S. The world revolves. Bringing the world together to make money and provide jobs for everyone will benifit each and everyone in this world. When people say "God Bless America" they are excluding the rest of the world. I say " God Bless the World". It includes everyone. That is one of the reasons many foreign countries dislike the U.S. because in their eyes they see that the U.S. is only looking out for itself. Sure we can't take care of everyone but we should work together to make this Earth a better place to live in.

Threxx

I agree - I don't like us playing 'world police' or 'world welfare' where we're constantly defending smaller countries and giving them money. But at the same token I think we treat the rest of the world selfishly in an economic perspective. The creation of a global economy is inevitable and it's true it's going to hurt the US economy while helping other country's economy. But in the end the US participating wilfully in the transformation is going to set them up for success much better than resisting it. And in the end the global economy will benefit everyone in the world, including the US. And as mentioned, should help to promote global peace aside from possibly terrorism (and any other gorilla or religious militant factions).

mmarshall

No...we indeed have a global economy but it was NOT inevitable. Part of the problem....and part of the reason why we DO have a global auto economy....is that Ford and GM both bit off more than they could chew. Both companies expanded too much by buying European and Japanese companies that should have stayed independent. In doing so, Ford and GM, while expanding their customer base, also vastly expanded their expenses and liabilities as well.......and now it is coming time to pay the Piper, and they simply can't afford it. While Chrysler products have no doubt benefittedfrom Mercedes chassis designs and transmissions, a general arguement can also be made that the Mercedes-Chrysler union should have never taken place either....and there has been some talk lately about breaking it up.
This buy-out and merger mentality is not limited to American companies either. European, Japanese, and Korean firms are all combining and merging at record paces. So...yes, the global economy DID happen, but only because not enough CEO's said "No" to mergers.

Threxx

On a grand scale the global economy was inevitable; in the realm of cars it's possible that it wouldn't have happened so soon and as much as it has to date, but it would still happen eventually, especially with the advent of global platform designs, it just makes more sense to produce cars approximately where most of them will be sold, and to that nationality's preferences.

Trexus

I agree that the global economy was inevitable. U.S. companies aren't doing it correctly. For example (and I will use extremes to get my point accross).

U.S. companies' idea of outsourcing is far different than Japanese companies' (Toyota) idea of outsourcing. For example, one company that uses physical labor such as Nike will outsource the labor to China to make shoes for the U.S. Sure we pay them wages but just enough for them to survive (say $2 per hour). Assuming it cost Nike very little to make and they still charge $100 for tennis shoes. Another example of intellectual labor, Ernst & Young would outsource work to India but for the benefit of the U.S. E&Y did not prepare Indian taxes just good 'ol US of A's. Let's say it would cost E&Y $100 to pay an Indian to prepare a corporate tax return and they would still charge a corporation $10,000 for their tax return. Again I'm using extremes. The savings that these U.S. corporations in labor was not passed onto the client or customer because they were still paying the same amounts if not more for products or services. It just goes to show how greedy these U.S. corporations are.

Now let's look at Toyota. They have opened a manufacturing plant here in the U.S., Canada, Mexico, Australia, Asia and Europe. They hire and pay wages here to build cars that are sold here in the U.S. This helps our economy two ways, wages earned by employees working for a Toyota plant here and selling what they make here. Toyota is not building cars here in America and then shipping the cars back to Japan to be sold. Unlike U.S. corporations they build products in foreign countries to be shipped back here to be sold. That is one of the reasons foreign countries dislike the U.S. It appears we're using their cheap labor for our benefit. Yes, we pay them a wage but just enough for them to survive. Why can't these U.S. corporations copy Toyota's way of outsourcing.

Threxx

Well, I'm not so sure if Toyota is angelic as that may make them seem. They are primarily building here primarily for cost savings courtesy of our government. GM and others are not subject to as much taxes for outsourcing to China and bringing the stuff back in simply because they're already a domestic company. But I think that's wrong - the government should not allow them such benefits because them doing that hurts us just as much if not more as does people buying 'foreign' cars in the first place.

Oh... BTW, funny you mentioned Ernst & Young. My wife interned there about a year ago and once she completes her CPA this spring she has an offer to go work for them again full time as an auditor. Hope she doesn't get oursourced.