The current struggle for survival of European coachbuilders raises doubts over the long-term viability of these peculiar suppliers’ business model. At the very least, the sector’s focus is shifting, writes Matteo Fini
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The news over the last few months reported historic names in their umpteenth attempts to restructure with new business plans and the support of new investors, Others have filed for bankruptcy and even exited the car business. Fresh capital injections, stretches of the value chain, additional business lines and, most recently, product diversification have not justified the business case for most stand-alone coachbuilders. The outlook is gloomy, and a further drop in the number of players in the sector can be reasonably expected in the medium term. Carving out much more premium niches looks like the only viable long-term plan for these battered suppliers.
For those who work in the industry it would certainly sound surprising to hear the turning point originating the decline of coachbuilders was the success of a book, but this is not too far from the truth. Back in 1990 when Womack, Jones and Roos published “The machine that changed the world” the poor manufacturing efficiency of US and European car makers compared to their Far Eastern competitors became public knowledge.
The book, one of the few written with a true industry background and support, helped building awareness within the industry as a whole about the new benchmarks. Lean manufacturing techniques with their heavy doses of Japanese jargon became object of study in the manufacturing departments of automakers on both sides of the Atlantic. Despite difficulties in catching up with Japanese OEMs, a lag that still persists to some extent, European and American car makers achieved better levels of manufacturing efficiency. The culture of systematic elimination of “muda” and inefficiencies in general as well as the looming focus on build-to-order practices (3-day-car programme for example) led to heavy investments in increasing manufacturing flexibility on assembly lines, which also required more commonalities across models built on the same platform.
While building up this capability, OEMs were still outsourcing lower-volume models’ production – such as premium SUVs or cabrio and roadster versions. The first accounted for almost half of coachbuilders’ production output between 2000 and 2008, while cabrio and roadsters models for another third. It was still difficult and unprofitable for automakers to include these on their assembly lines, so volumes assigned to coachbuilders reached their all time record in 2004 with 329,000 units, 2.2% of the total production of cars in Western Europe for that year. The production levels remained fairly stable until 2006.
The final ingredient to create the perfect storm for undermining the business model of European coachbuilders was the overcapacity issue, a hot topic today for OEMs, which have become increasingly concerned by assembly line saturation and the profit-making implications this has. As the excess capacity for western European plants reached the record level of 39% in 2009 and with forecasts not projecting a return to profitable levels for capacity utilisation rates, widely acknowledged to be 75% of installed capacity, before 2013, it is clear that automakers with spare capacity and enough expertise to bring the production back in-house have decided to do so.
Starting in 2008 one announcement followed another. Volkswagen Group announced its convertible Golf and the replacement of the A4 cabriolet, the A5, would be produced in-house, basically putting an end to Karmann’s hopes to avoid insolvency, while BMW moved production of the X3 SUV from the Magna Steyr plant in Graz to its Spartanburg, US, operations.
Although it has a business subject to shrinkage, Magna represents at the moment the only large-scale coachbuilder. It has inked an agreement to take on the production of Porsche Boxster and Cayman and will potentially be integrated in a bigger manufacturing group if it acquires Opel. Magna’s coachbuilding unit’s main strength was based on the fact that it could rely on a much bigger group, relatively strong financially and with a diversified portfolio of activities as a supplier ranging from doors and seats to electronics and powertrain systems. Other coachbuilders and especially German Karosseriebauer Karmann did not have access to anything similar, although Karmann had a metals division and also supplied roof top systems to OEMs.
Similarly iconic Italian coachbuilders like Bertone and Pininfarina were in dire financial straits when contracts with Fiat group and other car makers began vanishing or achieving outputs much lower than expected. Interestingly in both cases problems started when the founding families commitment run out because founders or heirs passed away.
Bertone technically ended its operations in 2005 when the last contract for Opel Astra Cabrio was cancelled. It seems to have found a solution to its problems with the EUR100m acquisition of its plant in Grugliasco, near Turin by Fiat, which intends to build two high-end models based on one Chrysler platform by 2011. This will obviously lead to the end of the contract between Chrysler and Magna which builds the Chrysler 300 and the Jeep Grand Cherokee.
Pininfarina, whose styling studio is well-recognized for the design of many Ferrari models and other prototypes, tried to rely on other revenue streams to avoid overexposure to coachbuilding. It has added upstream services such as design and engineering services, whose clients were mostly Chinese carmakers such as Chery and Brilliance, all eager to have access to Western design style.
It even diversified into product and interior design in the wake of the “made in Italy” bonanza. In light of the current state of the Italian carrozziere it is clear these efforts were not successful in reviving its fortunes. The last attempt to avoid final liquidation is the sale of its main plant to a company owned by the Piedmont region, which will then lease it to a private investor, Gian Mario Rossignolo, who wants to use it to build aluminium-based premium cars by 2011 with a total output of 10,000 units.
Shaving off the costs associated with a plant from its balance sheets will allow Pininfarina to focus on the production of the Bluecar, an electric vehicle to be built by 2011 thanks to a joint-venture with French entrepreneur Vincent Bolloré who will supply the Li-ion batteries. However even this attempt is clouded by rumours of potential problems. The financing the French government has allocated to electric vehicles production could lure Bolloré to move production to France leaving the Italian coachbuilder without business.
Other coachbuilders like France’s Heuliez and Valmet in Finland have also looked to the electric vehicle business to cope with shrinking revenue from more traditional programs. The first has been rescued by Bernard Krief, backed by Chinese investors, and plans to produce three electric vehicles, one of which, the Friendly, will be available next year. Valmet Automotive will produce the electric sports car Karma of California-based Fisker while the production of Porsche Boxster and Cayman will be phased out by 2012. However even the electric vehicles business does not provide the certainty of a viable business over the long-term. Electric programs, particularly if focused on city and lower segment models, are exposed to the risk of being brought back in house when volumes will achieve levels at which it is cheaper for car makers to use their own assembly lines. It may be a thriving business for some years, but in five years time these coachbuilders would find themselves in the position to look for new niches again.
It is clear there is no easy recipe for survival in this niche of an industry which has never been particularly profitable. While in the shorter term some electric programs could help make ends meet, painful decisions involving a hefty reduction of capacity and headcount are apparently the only solution for these companies. With a much leaner organisation and a focus on high value-added and high-specification premium programs there could be good opportunities for coachbuilders to thrive. After all, the added value in one Aston Martin Rapide is ten time that added by niche models built by volume car makers. Maybe margins would not be equally high, but it may still enough to eke out a living. Perhaps.
Matteo Fini
Lead Researcher, SupplierBusiness.com
matteo.fini@supplierbusiness.com
This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.
