The automotive industry used to be awash with sub-contract manufacturers. Some will argue it still is – lots of Japanese vehicle assembly is carried out by affiliates for example, while kit operations in far flung countries are often managed by sub-contractors. However, they could also be categorised more as joint ventures with the OEM holding a minority share.
What we’re talking about is the likes of Heuliez, Matra, Pininfarina, Bertone, Chausson, Magna, Valmet etc – specialist manufacturers – odd-jobs who’d take on anything no matter the size. One-by-one, with a few notable exceptions, they began to disappear.
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The reasons? The OEMs themselves had excess capacity, far better for the bottom line to use in-house resource. But this was always the case I hear you say. By the late 1990s/early 2000s capacity was very different. It was much more flexible due to more advanced production techniques and due to the adoption of modular platforms. This made it much more straightforward to put a cabriolet down the same line as a sedan rather than entrust the build with a specialist odd-job. This was no doubt further compounded by the trend for coupe-cabriolets at the time (Peugeot’s 206CC being the first of the breed).
Now it seems that sub-contracting is enjoying something of a renaissance – not quite in the number of firms carrying out odd jobs but in the number and variety of models being built. Magna’s adding BMW’s next generation Z4 to its roster alongside the 5-series, Jaguar E-Pace and I-Pace, Mercedes G-Wagen it already builds. Meanwhile, Valmet Automotive in Finland continues to be entrusted as flexible capacity for Mercedes-Benz models. Similarly, the Nedcar plant in Born, Netherlands has been repurposed as a sub-assembler and builds BMW and Mini models. The market’s not as competitive as it once was – Magna and Valmet dominate, with the repurposed VDL Nedcar coming hard. Further afield it’s been in the news that Hyundai is considering investing in a 100,000 capacity subcontract plant operated in Gwangju’s Bitgreen National Industrial Complex. Why? Workers there will be paid half of what line-workers at Hyundai’s own plants in Korea can command and it’s a less costly way to add capacity.
Sub-contractors are prospering at the moment because they’re effective for the bottom line. Where for the OEM new capacity in-house becomes a fixed cost overhead, sub-contracting becomes a variable cost. In a similar vein, OEMs have long taken to employing agency staff to man their 3-shift 24/7 manufacturing operations. These temporary arrangements allow the OEM to breathe – expanding and contracting as the business environment requires.
This need to breathe, particularly as the European auto industry’s airways are threatened with constriction by a hard Brexit, got me thinking.
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By GlobalDataBack in the 1990s, Daewoo expanded its manufacturing footprint rapidly, and circumvented tariffs, by setting up a series of ‘screwdriver’ operations in special economic zones throughout Europe (mainly in the East). Couldn’t this be a way for the automotive industry to navigate around tariffs that could be re-imposed on UK-EU bilateral trade in a post-Brexit world? As if by magic, it was reported in the UK’s Daily Telegraph on 17th June that the UK government was considering setting up ‘supercharged free ports’ as a means for businesses to import, process and export goods circumventing tariff imposition and customs costs.
This struck me as an ideal way for the European automotive industry to carry on frictionless trade post-Brexit, not only could whole vehicles potentially be assembled but the complicated rules of origin could be navigated around for major automotive components. A few phone calls later and I was in touch with a UK government adviser on the subject who told me anonymously, “This idea was discussed immediately after the referendum and rejected for being defeatist; but now it’s being taken seriously.” But would this idea of a freeport have to be restricted to an actual shipping port? “Not necessarily – the Renault-Dacia plant in Morocco qualifies as being in a tax free zone, but it’s some way inland from the port of Tangiers, so locations away from a port could be designated as a tax free zone if the in- and out-bound logistics complied with the relevant rules”, he said. So it’s conceivable that something like Honda’s mothballed second plant in Swindon could be repurposed for contract vehicle assembly or that an area of Ford’s Dagenham engine plant could be given over for the processing of high-value-added automotive components.
It seems that not only is sub-contracting enjoying something of a renaissance, but that it could be the answer to the complex questions that Brexit is raising for the UK and European auto industry. That’ll be the Daewoo.
