The auto industry is going on a diet. Amid warnings that automakers are suffering from vast worldwide excess production capacity, companies are sharply reducing their investment in assembly plants.
According to a survey by the University of Windsor in Ontario, Canada, expenditures in 2001 are likely to be sharply lower than last year, based on results for January through March. Moreover, this follows three consecutive years of declining investment.
'The capacity investments in the 1990s were so high that they couldn't be sustained,' says professor A.J. Faria, the author of the study. 'Another reason for the dropoff are the mergers and acquisitions among the major automakers. One partner can use another partner's plants.'
In the 1990s, automakers rushed to set up operations in South America, Asia and Eastern Europe. Worldwide investment reached a peak in 1997, when automakers spent $32 billion. In 2000, investment plunged to $14 billion, and expenditures this year are expected to reach $7 billion.
As usual, the United States led all countries last year with $7.4 billion spent on new assembly plants or plant expansions. In second place was Canada, followed by Mexico, Brazil and China. (See chart on Page 25 for complete investment rankings.)
The annual study does not count automakers' investment in new engine or stamping plants. Nor does it track suppliers' expenditures on new factories. Nonetheless, it seems likely that these investments are declining, too, given the tendency of suppliers to follow their customers' lead.
If so, the competition for investment is likely to grow even sharper. In Asia, China is likely to remain the top investment site, given its huge potential market and rapid growth. Over the past four years, Brazil has ranked second. But that country's slower-than-expected sales growth could force it out of the top five. South America 'was supposed to be a fast-growing market, but it's been beneath expectations,' Faria notes.
Faria's study parallels the conclusions of a report by A.T. Kearney. Each year, the Chicago, Illinois, consulting firm asks the world's 1,000 largest corporations where they plan to build factories. As expected, the United States topped this year's list. China placed second, followed by Brazil, the United Kingdom and Mexico.
Only a small fraction of A.T. Kearney's respondents were automakers. But the similar results of the two studies suggest that automakers and other manufacturers are attracted to China, Brazil and Mexico for similar reasons. All three countries are moving to privatize their economies. Each has a growing middle class, and each has begun to remove trade barriers with other nations.
Perhaps the biggest puzzle posed by the two studies is India. That nation was among the top five automotive investment targets in 1998 and 1999, but fell behind in 2000 and 2001. Executives interviewed by A.T. Kearney listed India as a tempting market over the next decade, but a low priority in the near future. Perhaps that country's weak effort to privatize its economy has slowed corporate investments.
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