Prof. Garel Rhys has raised the specter of ruin and devastation in the world's automobile industry caused by overcapacity (Automotive International, December 1998). Too much production capacity, he said, 'threatens the long-term development of the world motor industry.'
Rhys said that overcapacity 'must be addressed sooner rather than later if stability is to return to the world automotive sector.' He made it sound intensely apocalyptic.
I disagree, and I am in good company. Jean-Martin Folz, chairman of PSA/Peugeot-Citroen, has said, 'I consider the overcapacity issue just nonsense the way it is usually put.' Folz was referring to the way industry observers point out that millions of units of capacity are not being used at any given time.
Rhys argued that the world's auto industry could make 5 million more units than markets can absorb. He made that sound like a lot of capacity is idle, sitting around doing nothing except dragging down the industry's profitability.
But let's add that 5 million to the industry's car production, which in 1997 was some 39.9 million units. That total, which was for cars only, suggests that the actual capacity of the industry to build cars was, say, 45 million units. That means the industry was producing at 88.6 percent of capacity.
How horrendous is that? In fact it turns out to be quite good. According to DRI McGraw-Hill, the global level of car-industry capacity utilization was 84 percent in 1990 and 77 percent in 1996; it is forecast to stay about the same through 2002.
We would be doing very well indeed to produce at the 88 to 89 percent of world car capacity that a 5-million unit excess would imply. In Europe, by comparison, DRI said that manufacturing companies as a whole achieved capacity utilization of around 85 percent.
'We think overcapacity is overblown as a scapegoat for the [car] industry's problems,' said DRI analyst Nigel Griffiths.
When Ludvigsen Associates conducted a thorough audit of Western Europe's car-making capacity a decade ago, we concluded that its utilization rate then averaged 85 percent; this was close to DRI's 87 percent for Europe in 1990.
We also concluded that a 100 percent capacity-utilization rate would be extremely rare because of such factors endemic to the industry as:
Balancing of models, body styles and colors to meet national and regional markets.
Shutdowns for new-model launches and changeovers.
Forecasting errors that cause short-term production underruns.
Difficulties in adapting production to specific customer orders.
We concluded that reaching even 95 percent of capacity would be a meritorious achievement for any carmaker. The closest any company came in our study year (1988) was Fiat with 93.05 percent. PSA was at 92.88 percent, Volkswagen at 92.57 percent and BMW at 92.41 percent.
When a seller's market is in full swing, of course, you can build to the walls. We did that at Ford of Europe in the late 1970s and made a mint of money.
But life was simpler then. We had dedicated factories for the Fiesta, Escort, Capri and Granada - hardly a complicated model range.
The much greater complexity of the model ranges offered by all the world's carmakers now works against full capacity utilization. And that situation will not change.
Toyota Motor Corp. President Hiroshi Okuda interprets the consequences thusly:
'The companies that can identify what technologies are needed, introduce them quickly and commercialize them will succeed. The company that cannot do that will be absorbed. I think that will be what the automobile industry will be like in the 21st century.'
This view was expressed more succinctly by Robert Lutz before he retired from Chrysler Corp.: 'We used to think: `The big will eat the small.' Now it's: `The swift will eat the slow.''
The creation of DaimlerChrysler has done nothing to disprove this adage. Indeed, DaimlerChrysler will need to be careful or the strains of its amalgamation will move it into the slow lane.
Being swift includes having the flexibility to produce a wide range of models and body styles in a single plant and to be able to make fast changes among those models to meet demand.
In Japan, the aim for some time has been to increase plant flexibility to adjust output to meet demand in both quantity and quality. If such flexibility can be achieved, redundant capacity can and should be shuttered.
Traditionally, European-based automakers have preferred a bulky order book to give them the security to cope with a historically rigid work force and social arrangements. Now those arrangements are becoming more flexible, and Europeans are becoming more relaxed about adding speculative capacity, especially in Eastern Europe.
Ironically, the North Americans, who once had the most flexible labor agreements, have become more rigid in their work-force commitments.
Now for some striking contrasts of views on auto industry 'overcapacity.'
DaimlerChrysler's Robert Eaton recently said he thought there was global overcapacity of 21 million units, equivalent to 80 assembly plants' worth of unused vehicle production. He did not supply the methodology for this astonishing assertion, although it seems clear he was talking cars and trucks.
On the other hand, Pemberton Associates forecasts that world vehicle sales will reach 92 million units by the year 2015; this, in turn, would require the equivalent of 160 new integrated production facilities.
Perhaps even Eaton's concept of 'overcapacity' will be absorbed sooner than we think.
Rhys urged us to slay the dragon of 'overcapacity' to bring stability back to the world's motor industry. But can there actually be such a thing as stability in such a competitive and volatile industry? Yes, there can. We had it when the following conditions applied:
When national auto markets were protected heavily by high tariffs and were served largely by domestic producers
When government-owned or dominant 'national champion' producers ruled the roosts in their home markets
When strong demand in a seller's market grew steadily and reliably year after year.
These three conditions applied in North America through the 1940s and applied in Europe until a decade or so ago. The European Union broke down Europe's tariff walls. The 'national champions' have been privatized and/or absorbed. And, since the early 1990s, we have learned that year-to-year growth is not a given in Europe.
But would we willingly turn back the clock? Would we prefer to go back to the years of minimal product choice and high tariffs on imported cars in national markets? I don't believe so. We could never return to market 'stability' in that sense.
Until very recently these three conditions also applied in the major Asian markets: Japan, Korea, Malaysia and Indonesia. They had all three stability factors: closed markets, big 'national champion' producers and steady, spectacular market growth.
Now, the last factor - market growth - has failed them. Their markets have headed toward instability, which ultimately will be to the advantage of Western vehicle producers who would like to have a larger role in those countries.
Unstable, fickle, demanding and unpredictable, the world's auto industry will meet no one's definition of 'stability' in the years ahead, no matter what we do about capacity.