DRIVING TOWARDS THE CLIFF EDGE – AND YET STILL ACCELERATING…

BMW, Debrecen, Hungary: 150,000 units p.a.

BYD, Rayong, Thailand: 150,000 units p.a.

Hyundai, Georgia, USA: 300,000 units p.a.

Hyundai, Chicarang, Indonesia: 250,000 units p.a.

Kia, Korea: 100,000 units p.a.

Lucid, Arizona, USA: 90,000 units p.a.

Lucid, Saudi Arabia: 150,000 units p.a.

Polestar, South Carolina, USA: 150,000 units p.a.

Tesla, Texas, USA: 1,000,000 units p.a.

Tesla, Berlin, Germany: 1,000,000 units p.a.

Tesla, Monterrey, Mexico: 1,000,000 units p.a.

Toyota, Alabama, USA: 300,000 units p.a.

Toyota, Guanajuato, Mexico: 100,000 units p.a.

Rivian, USA: 400,000 units p.a.

Scout, Carolina, USA: 200,000 units p.a.

Volvo, Slovakia: 250,000 units p.a.

Wait, is the auto industry a growth industry after all? This selection of recent new plant announcements adds over 5 million units of annual assembly capacity and might make you think so.

The reality, however, is rather different: ‘Peak Car Demand’ is no longer a remote possibility in many Western markets, where changing consumer behavior, rising cost of ownership, urban car restrictions, and car-sceptic politicians and regulators make further growth of car ownership rather unlikely. China has been the last large scale growth market and has some headroom left for growth – but new local Chinese BEV plants are easily filling that demand gap and have not even been included in this list.

But what about the accelerating electrification? Yes, battery-electric vehicles (BEVs) are replacing ICE cars, with more than half of new car sales likely being an EV in many markets by 2030. For new entrants, like Tesla, Lucid, and Rivian, building new plants is the obvious and often only choice. Opportunities like Tesla’s heavily discounted purchase of the Californian NUMMI plant from Toyota in the Financial Crisis are rare.

For established players, however, the expected course of action would be to line up ICE car assembly plants for conversion to BEV assembly. After all, besides the powertrain (which is usually produced in separate component plants) most other parts of a car are still the same, coming in from the same supply-chain. The overall assembly process does not require a newly build facility. And established OEMs are only shifting sales from ICE to BEV – but still set up new plants for these models, in a market that will show little growth overall. Often they locate these new plants in new geographies, following the lure of governmental incentives for new jobs or – as is the case with the US government’s IRA (Inflation Reduction Act) – circumventing trade barriers.

Certainly all these plant investments are justified by positive business cases, backed by ambitious sales plans. But, as we have had to realize too often in the past, all these growth plans cannot become reality at the same time, even less so in the ‘peak car’ world of today. So there is no doubt: The already quite dramatic overcapacity problem in our industry will be further exacerbated. With the exception of the short period of recent supply chain constraints it has haunted players across segments before: efforts to utilize the installed capacity lead to oversupply – and excessive discounting eats into the contribution margins that are needed to amortize the new investments. A vicious cycle for car makers and suppliers, and a painful experience that should not be easy to forget. The inevitable side effect is also clear: the costly closure of numerous ICE assembly plants, with the inevitable impact on local employment, not only in the assembly plant itself, but also in the co-located supplier plants.

Is there a way out?

• Challenge any (over-)ambitious volume growth plans thoroughly – and include scenarios without market & share growth in the decision processes.
• Give brown-field strategies proper consideration.
• Do not simply follow the path to the highest investment incentives and set up new shops in areas devoid of an automotive infrastructure and legacy. We have seen plants set up over 20 years ago in structurally weak areas still struggling today with building a loyal and skilled work force. The problems persist long after the initial incentive ended and the resulting quality problems severely burden operations and customer satisfaction until today.

In an Peak Car world everybody will be better off if we can grow revenue without growing volume – driven by better products, more services and stronger brands. The recent ‘happy years’ made it very clear how much better returns are when capacity is at or below demand.