Globalization’s Cracks Steer Carmakers Into Uncertain Future
WHY YOU SHOULD CARE
Mass shifts in car manufacturing could upend economies dependent on them, and create new opportunities.
By Peter Campbell
With the world slamming the brakes on globalization, the car industry is agonizing over production. Long accustomed to shipping vehicles around the world, carmakers are looking at reshuffling manufacturing to avoid tariffs. “Let me be clear,” says Oliver Blume, CEO of Porsche and head of production at the Volkswagen Group. “Wherever it is reasonable to localize, we will do that — without hesitation.”
His remarks come as the EU threatened to retaliate against up to $300 billion of U.S. products; they follow similar warnings from General Motors over potential switches of production because of tariffs.
“The sad truth is that if you impose tariffs, production will move around,” says Arndt Ellinghorst, lead automotive analyst at Evercore ISI. “If nationalist trends continue, the inevitable outcome will be more production where you sell the car because that’s the only way to avoid larger tariffs.”
VW Group, with 122 factories around the world, has the “maximum of flexibility and the ability to adapt to changing needs and requirements,” Blume adds.
Harley-Davidson became the first auto group to shift manufacture last week by moving production for Europe-bound motorcycles from the U.S. to its plants in Brazil, India or Thailand. The move sparked the wrath of President Donald Trump, who deemed it “unacceptable.”
There are few industries that have benefited from globalization more than automobile production.
Max Warburton, analyst at Bernstein
Harley, as Blume’s comments suggest, is unlikely to be the last group to tinker with its factory allocations as many national car industries rely on exports for survival — international sales account for 80 percent of Britain’s production, 82 percent of Mexico’s and 78 percent of Germany’s.
Half the cars sold inside the U.S. are made outside it, with Mexico, Japan and Europe the largest importers, while almost 1 in 5 of the cars made at American plants go overseas. “There are few industries that have benefited from globalization more than automobile production,” says Max Warburton, analyst at Bernstein. “The industry relies on shipping parts and cars across borders.”
Harley’s move, together with concerns voiced over the weekend by General Motors, BMW and Hyundai, and the retaliatory warning from Brussels against the U.S. highlight how the threads of this interconnected world may be about to be unpicked.
Brussels has sent out a detailed response to the U.S. threat to impose 25 percent duties on imported cars that warned the EU and other large economies would be “likely” to apply countermeasures to “a significant volume of trade,” with as much as $294 billion — accounting for 19 percent of U.S. goods exports in 2017 — potentially in the line of fire.
This type of action is likely to encourage the car industry to accelerate its shift toward regional production.
About two-thirds of Toyotas sold in each region are made within its borders, whether North America, Europe or Japan.
“To some degree, carmakers are already making cars in regional locations,” says Ian Henry, director of U.K. group AutoAnalysis. “If you look at Toyota, they make the same basic vehicle for Europe in Europe, and for Japan in Japan.”
VW produces 50 percent of its cars in the markets they are sold in, including four different factories producing the Golf.
“Tariffs are only one factor for the decision where we produce our cars,” says Blume, also VW’s head of production. “Different customer needs and local requirements, shorter transportation ways and thus less transport costs are also important factors.”
Ian Robertson, who stepped down as a senior director at BMW at the end of June, says: “We have a very simple philosophy, we always have a situation where ideally production plants are as close to our customers as possible.
“That’s why we have 30 plants across the world, some of that is for politically regulative situations, but a lot of it is to be close to customers.”
The company built its giant sport utility vehicle factory in Spartanburg, South Carolina, because at the time the U.S. was BMW’s largest market. Today the factory is the global export center for the X5 vehicle, one of the company’s highest-margin products. Within two years, BMW is expected to localize X5 production inside China for that market, while the company boasts flexible manufacturing systems that allow it to make a range of vehicles at its sites.
Changes in manufacturing systems, which allow radically different cars to be made alongside each other on the same factory lines, may ease the costs of shifting production between continents. The lines at Spartanburg make a range of SUVs for BMW, ranging from the midsize X3 to the larger X6, but can also accommodate cars as small as the 3-series sedan.
Volkswagen’s vast Slovakian plant makes cars ranging from the tiny VW Up to the huge Audi Q7 and Porsche Cayenne. Three cars within the Volkswagen stable — the Audi Q7, the Porsche Cayenne and the VW Touareg — share the same basic platform, allowing them to be made on the same line.
Not every carmaker is so flexible. The larger companies — Toyota, VW and the RNM Alliance all make roughly 10 million vehicles — will have the capacity to reshuffle production accordingly, and the global heft to bear the costs of moving factories if needed.
Midsize players such as BMW and Daimler, making about 2 million cars a year, do not have the scale to shift production closer to the customer. Companies that are smaller still, such as Volvo and Jaguar Land Rover (JLR), which produce less than 1 million cars, are likely to be much harder hit. For example, the U.S. is JLR’s largest market, but almost all of the company’s production is based in Europe.
Flexible manufacturing, though, is becoming more common across the industry — something that will only accelerate as more electric cars are produced. “In the past you needed to guarantee 150,000 of the same car to justify production at a site; now it can be two small SUVs and a compact car all on the same platform,” says Evercore’s Ellinghorst. “That increasingly enables locations to be more flexible.”
For those that can move, the decision to press the button on changing production depends on whether the current bout of trade threats are a blip that will evaporate when Trump leaves office, or whether they are the new normal in a world turning its back on borderless trading.
“Putting in a new plant into a location is a long-term decision,” says Jeff Schuster, president of global vehicle forecasting at LMC Automotive. “Whether we see production shifts really depends on how long a trade war lasts.”
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