‘Capacity’ North American Auto Industry’s Latest Battle Cry

This is the first in a series of reports on the health of the North American industry. Tuesday: Canada.

Auto maker executives are doing something in North America they are doing nowhere else in the world: complaining they do not have enough production capacity.

Asia is fretting about slowing vehicle sales and Europe is sinking back into recession, but in the U.S. some auto executives, such as Chrysler/Fiat CEO Sergio Marchionne, are saying they wish they could build more vehicles faster. But no auto maker is considering building new auto assembly plants in the U.S. or Canada in the near future. In other words, complaining about capacity is more of a battle cry than an expansion strategy.

The U.S. economy hardly is booming, but car and truck sales have been growing steadily for the past two years. The average age of a vehicle on the road today is 11 years, the oldest ever. A flurry of attractive new products coupled with low-cost credit is starting to ratchet up sales and production back to pre-recession levels, and a number of new models are in short supply.

Despite high unemployment and weak consumer confidence, record low interest rates are enabling auto makers to offer attractive deals to customers desperate to replace aging rides. The affordable rates also are allowing auto dealers to stock larger inventories, further boosting sales.

It is the low cost of money that caused many analysts to underestimate the strength of the U.S. market in 2012, says AutomotiveCompass forecaster Warren Browne. Light-vehicle deliveries should finish at about 14.3 million despite the impact of Hurricane Sandy, he says. That’s well above some estimates made 12 months ago that were as much as 1 million units lower.

But standing in the way of faster growth, some say, is the fact that auto makers and suppliers have only a fraction of their former capacity. During the dark days of 2008 and 2009, when vehicle sales sank to their lowest level since the 1980s, dozens of plants were shuttered and millions of units worth of capacity eliminated.

The problem is most acute at the supplier level, where tires, castings, forgings and precision-machined components already are in tight supply. Many factories now are operating on three shifts to keep the pipeline filled, but suppliers worry about making too many commitments in an economic environment still full of uncertainties. In some cases additional shifts are being staffed by contract or temporary workers.

After bottoming out in 2009 at about 8.7 million units, North American LV production is expected to hit almost 15.3 million this year and more than 15.4 million in 2013, according to WardsAuto forecasts.

That means factories are humming. During the third quarter of this year, the North American LV plant utilization rate was 93.5%, the best for the period since WardsAuto began tracking the data in 2005.

While that may suggest auto maker plants are getting close to their limit, they actually can run well above 100% of straight-time capacity by adding a third shift, speeding up assembly lines and other tricks.

Thanks to 3-shift or 3-crew operations, Ford’s 10 North American assembly plants are punching out cars and trucks at 112% of straight-time capacity. Volkswagen’s facilities in Chattanooga, TN, and Puebla, Mexico, are knocking out cars at a whopping 145% of capacity, according to WardsAuto data.

That’s why auto makers really are not worried about running out of product next year.

Chrysler has added a third shift at its Jefferson North factory in Detroit (Grand Cherokee, Dodge Durango) and Belvidere, IL, (Dodge Dart, Jeep Compass and Patriot) plant and expanded hours at its Toledo supplier park (Jeep Wrangler). It also is in the process of adding a second shift at its Toledo North facility in 2013 for a yet-to-be-named Jeep SUV.

Chrysler’s 11 North American plants currently are running at 94.4% utilization and should ease to 89.7% in 2013, according to WardsAuto forecasts.

“Although things are never perfect, I think we are in pretty good shape heading into 2013 to be able to meet our forecasted demand,” says Reid Bigland, president and CEO of Dodge and chief of U.S. and Canadian sales.

Toyota has announced capacity increases at several North American plants, including investing $400 million in Princeton, IN, for 50,000 more Toyota Highlander CUVs annually and $100 million for 30,000 more units a year of the Lexus RX CUV in Cambridge, ON, Canada.

Toyota’s seven North American factories are running at 88.7% this year and are predicted to increase only slightly in 2013, WardsAuto says.

“More North American localization is currently being studied. However, for 2013 we believe we are right-sized,” says Jim Lentz, president and CEO of Toyota Motor Sales U.S.A.

The only part of North America seeing actual new bricks and mortar is Mexico. Honda, Nissan, Mazda and Audi all have announced all-new plants or major expansions in Mexico that will mostly replace exports to North America from their home countries in Japan and Germany.

Not including overtime, Mexico currently has capacity to produce 2.6 million vehicles annually, and WardsAuto forecasts an increase to 3.2 million units in 2015 and 3.5 million in 2017.

“Strategically, Mexico plays very strongly into our plans,” John Mendel, executive vice president-American Honda, told WardsAuto last year. “We’ll now have the capability to do everything on shore in North America.”

While some hot new products such as Jeeps and the Ford Fusion sedan and Escape cross/utility vehicle are in short supply, analysts say auto makers have numerous ways of satisfying demand without adding capacity, such as using incentives to steer consumers to slower-selling models.

“Auto makers are going to be focused on managing the portfolio much more next year,” says Browne. “Incentives will move to products where there is sufficient capacity.”

And, unlike years past, today’s highly flexible assembly plants now are capable of building many different models. That allows auto makers to easily increase production of a strong-selling vehicle at the expense of less-popular versions. For instance, Ford’s Michigan Assembly Plant in Wayne, MI, builds four vehicles with five powetrains on the same line.

Despite its 112% utilization rate, Ford still has open capacity at facilities such as its perennially underutilized Flat Rock, MI, plant, where joint-venture partner Mazda recently ceased Mazda6 production, WardsAuto says.

But some auto makers complain privately that while they are confident in the adequacy of their own capacity, they are concerned about some of their Tier-1 suppliers and those farther down the supply chain.

Auto makers keep very close tabs on their suppliers and sometimes encourage companies to enter specific product segments they fear will be under-served in the future. This was the case with turbochargers, says James Verrier, president of BorgWarner.

Some years ago, auto makers believed new fuel-efficiency and emissions rules would boost demand for turbos all over the world, while there only were three major turbocharger suppliers in the marketplace: BorgWarner, Honeywell and IHI.

Verrier says auto makers were concerned that number was not sufficient, so Siemens VDO, before it was acquired by mega-supplier Continental, was encouraged to enter the business along with Bosch Mahle Turbo Systems, a new joint venture.

Even so, suppliers are a lot more cautious about jumping into new businesses and adding capacity than they once were. The horrors of 2009 still are fresh in their memories, plus Europe’s woes and the battle in the U.S. Congress over government debt and spending are not instilling confidence.

Suppliers have one eye on their customers’ ambitious forecasts and the other on the U.S. Congress locked in bitter debate over the national budget, says Dave Andrea, senior vice president-Industry Analysis & Economics at the Original Equipment Suppliers Assn.

“Our guys are preparing for an incremental increase, but on the flip side, they have to be structured for a slight downturn,” he says.

A recent economic forecast by the University of Michigan predicts the Congressional battle over the so-called fiscal cliff will not impact U.S. LV sales, which it predicts will hit 14.3 million units this year, 15 million next year and 15.6 million in 2014.

But such predictions are little comfort to auto suppliers shell-shocked from the recession, when 62 of the industry’s largest suppliers went bankrupt and many others were forced to close plants and lay off 40% of their employees just to stay solvent.

“We’re in a transition right now where suppliers are being selective about what new programs they take on and bring into existing capacity, because they want the cost structures and the margins to be profitable,” Andrea says.

The overall capacity utilization rate for suppliers is well below that of auto maker assembly plants, about 80%. However, the top 25% of OESA’s membership is running above 90% capacity utilization, and these are the companies that are struggling to keep up, he says.

But even though there are concerns about the supply of some parts and product groups, most analysts say worries about capacity in North America are overblown because sales and production are advancing at an uncharacteristically gradual rate.

The current automotive recovery still is the weakest of the last four, starting with 1975-1979, Browne says. Recoveries beginning in 1975, 1982 and 1991 all were far quicker and put much more pressure on auto makers and suppliers than 2009’s recovery.

“There will be some bottlenecks, but the growth has been fairly steady,” he says. “There is a silver lining in the slow economic growth we’ve had in that it has been a relatively consistent pace. People have had time to adjust compared with previous recoveries, where it really has snapped back.”

However, there are greater capacity concerns looking past 2013. An historic number of new model launches is coming in the 2014-2015 timeframe, and that definitely will put pressure on suppliers needing to tool up for these new programs, OESA’s Andrea says.

If sales start to zoom well past 16 million after 2015 as many predict, the industry will start building new factories to meet demand, analysts say. While some argue that auto makers will be content to avoid the risk of adding new bricks and mortar, give up market share and focus solely on profits, AutomotiveCompass’ Browne, a former auto executive, disagrees.

“I don’t think for one second that pursuing market share has ever been stripped out of the DNA of auto makers. They are just more pragmatic about it today.”

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