Crucial Capacity?

Excess production capacity in North America — and the rest of the world — often is cited as one of the biggest problems facing the auto industry, particularly the U.S. Big Three. But as strange as it sounds, North American manufacturers could end up needing nearly all of their current annual straight time production of 18.2 million in the not-to-distant future, based on sales projections and long-term historical trends.

According to sales patterns dating back to 1950, a trend projection for U.S. light vehicles shows demand could reach 18 million or better annually by 2009. Throw in 3 million-plus annual sales forecast for Canada and Mexico within the next six years, and the “mature” North American market could increase by almost 20%, compared with today's levels, yielding annual sales volumes between 22 million and 23 million.

Roughly 80% of vehicles sold in North America are built locally. In such a scenario, today's 18.2 million-unit capacity — excluding production for overseas markets — would ideally meet demand in a future market of 22.8 million units or so.

That's an interesting notion in a year Detroit auto makers will negotiate new multi-year labor contracts with the United Auto Workers union.

A case against more plant closures might go like this: If the Big Three do shut down more factories, they will end up losing even more market share to foreign auto makers (with non-union factories) and imports during the decade's coming peak sales years.

Unfortunately that argument — if anyone dares to make it — would not likely find a sympathetic ear at General Motors Corp., Ford Motor Co. or Chrysler Group, because each of the Big Three, Ford in particular, is working to increase volumes of captive import brands such as Saab, Jaguar and Volvo. Except for a planned expansion at DaimlerChrysler AG's non-union Mercedes plant in Vance, AL, there is little evidence Ford, GM or DC plan to bring production of currently imported products to North America.

Meanwhile, capacity-reduction proponents can argue that the financial drain from excess capacity in the trough years between now and when vehicle sales peak, would cause too much near-term financial damage. It also could be argued that some plants slated for closure are too old to be profitable anymore, and the new, more flexible facilities are more productive and will give manufacturers the ability to produce more with less brick and mortar.

Ward's projects annual capacity indeed will rise by the end of the decade. That's because mostly overseas-based companies are adding new plants, more than offsetting cutbacks expected from the Big Three.

Ward's also estimates the Big Three will be cutting a net total — despite additional greenfield sites planned — of 650,000 units in annual North American production capacity by 2009. Meanwhile, capacity by other producers is expected to increase by 860,000 units, with the vast majority of that increase through non-union shops. The industry overall will have straight-time capacity of 18.4 million units by 2009.

That means future North American plant capacity might end up exceeding demand by only a few hundred thousand units. With manufacturers now making small profits despite capacity outstripping demand by some 3 million units, that could translate into a very bright light at the end of the tunnel.