Industrial concentration is inevitable, at least according to conventional economic wisdom. Over time, successful companies acquire their competitors, merge with them or push them into oblivion. The result is ever-larger industrial combines operating over ever-larger market territories and enjoying ever-greater economies of scale.
As an industry matures, the barriers to entry grow such that new companies cannot gain market access – so reinforcing the industrial concentration process. Moreover, large industrial groups tend to run large manufacturing plants. That is, plant-level economies of scale have reinforced the process of industrial concentration.
In the automotive industry, a cursory reading of one hundred years of history apparently provides testimony to the power of economic forces leading to concentration. With the latest round of mergers in vehicle assembly many in the industry are speculating that within a few years there will be just four or five major groups, albeit with each holding a portfolio of brands. This analysis however fails to recognize the possibility of new economic, social and environmental pressures that, combined with new enabling technologies, could create an automotive industry of a very different nature. It assumes an unchanging business environment – an unrealistic assumption not borne out by historical precedent. Diseconomies of scale can also develop while the process of forming large groups through merger and acquisition is fraught with hazard. After initial euphoria the share price of DaimlerChrysler slumped because of the difficulties of achieving synergistic integration – and this is indicative of the problems in translating theoretical benefits into real-world actions.
Re-writing history: Budd not Ford as the father of automotive mass production
The Model T Ford is widely regarded as the first and archetypal mass-produced car, produced in large numbers to a standardized design on a moving assembly track. We learn that mass production involves the making of identical products in large numbers. Yet the fact that the Model T was available in a wide range of body styles is often ignored. Herein lies a basic contradiction, and one that can only be explained with reference to the nature of the Model T design. Fundamentally, the Model T was a ‘craft’ era design built in very large numbers. Like virtually all its Edwardian contemporaries it used a separate chassis, stretchable to different wheel-bases, upon which a range of body styles could be mounted in a modular fashion.
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Modern mass produced cars are not like this. Their core technology is the steel monocoque or unibody, which though cheap to make in high volume, requires very high initial capital investments. Investments in body technology dominate a modern car assembly plant. It was E G Budd who, with a series of patents in steel forming, fixture design, and welding techniques, created the first all-steel bodies. These bodies offered many advantages, both for consumers and in terms of manufacturing. First to adopt the new technology for a volume application were Dodge Brothers, around 1915. In Europe Citroën was the first to introduce the system and among the first to take the next logical step of abandoning the chassis and using a full monocoque body structure. Others followed with all-steel bodies; even Ford adopted the technology in preparation for its Model A in 1925, although it had been buying in Budd bodies for a few years. The period between 1920 and 1960 witnessed the rolling out of this ‘Buddist’ revolution and many smaller makes, wedded to old pre-Budd technology disappeared.
Following the Budd revolution, the all-steel body became the single most important element in vehicle design. The manufacturing processes required for all-steel bodies became the core investment for vehicle manufacturers, such that it now determines the economics of car making in mass production. In high-volume car plants, it is the press shop, body-framing lines and paint shop that account for the majority of investments required. Equally, for each model produced it is the tools and dies to make the body that account for the single largest investments. These investments need to be repeated for each new model and partly repeated for each facelift or body variant.
Big is best: economies of scale in vehicle manufacturing
The current approach, then, involves the construction of large car plants able to manufacture and assemble all-steel cars in large numbers. Manufacturing economies of scale are realized and per-unit ex-factory costs are low. In order to sell this many cars, geographically extensive markets are required – which in turn means long logistics chains and dense networks of retail outlets. To date, most vehicle manufacturers have not had to bear a great deal of the investment cost in the dealer network. Neither have they sought to capture a high proportion of the total lifetime revenue stream created by a car in use. Long logistics chains between the manufacturing plant and the customer are managed by a combination of stock throughout the system and long customer lead times. The essence of lean production has been to seek compliance from the supply base and the vehicle distribution network to the demands of the vehicle manufacturing process – not to optimize the system as a whole.
(Source: Derived and adapted from Automotive News Europe, 1999. Includes commercial vehicles.)
The reason for the pressures for consolidation in the industry is the ‘gap’ between the technical optimum economies of scale required by the technologies used in car manufacturing, and the (considerably lower) actual economies of scale realized by the current structure of production. This is largely due to changes in market demand, which mean that volume growth is limited in mature markets, while product ranges need to be increasingly fragmented to meet customer expectations. Making and selling large numbers of near identical VW Beetles was fine when demand outstripped supply, however in today’s mature markets more extensive model ranges lead to much lower per model volumes for many models in the range.
In theory, maximum per-model economies of scale are in the region of two million units per annum. In 1998 global car production was 42.8 million units. This is sufficient to support four vehicle manufacturers – each with a five-model range, with each model selling two million units. In practice, no vehicle manufacturer has a total volume of ten million units (see Table 1) or a single model in production at volumes of two million units. European producers in particular have so far been able to sustain smaller annual per-model volumes through product-differentiation, longer product life-cycles, and strong branding. The latter aspect has allowed cost recovery rather than cost reduction strategies to be pursued.
There are many reasons for this situation, and many strategies to compensate for the failure to achieve maximum economies of scale. However, the closer any manufacturer is to reaching the theoretical ideal, the greater will be the competitive advantage that manufacturer will enjoy. The cost difference between one and two million units per annum is probably only about 5% per unit – but in the automotive industry this is the difference between profit and loss. The most significant attempt to resolve the problem is the adoption of so-called platform strategies. This approach allows the basic structure of the car to be common to several different models or variants, so achieving underlying economies of scale through the most expensive part of the body. It is likely, for example, that in the year 2000 the VW B platform (which includes the Golf model) will reach two million units per year. The growth in modular supply of large sub-systems can also be understood as a mechanism to cope with the cost and complexity of vehicle design and assembly.
The kind of platform strategy currently pursued by the Volkswagen Group was used in the 1980s by Fiat Auto and its various brands. Fiat has now moved on to a more sophisticated version of a platform strategy with its ‘space frame’ technology – as embodied in the Multipla. This involves the extensive use of rolled steel profiles in various standard formats. These can be used as standardized modular bridging sections between dedicated pressed subassemblies specific to each model. In this way, significant parts of each model’s body shell can be made from cheap unpressed components, which can be varied in length to change the distances between the fixed model-specific points. This allows considerable variety in body configurations at – by traditional Buddist standards – very low cost. The technology is shifting break even points downwards allowing lower volume variants to be made profitably. Lower volume models, such as the Multipla incorporate more of the profiles, while higher volume models, such as the New Punto, use lower proportions of these standardized elements.
Nonetheless, these measures may not be sufficient. Real change, involving the reassessment of some basic principles, is being forced on the industry. In the 1990s, the vehicle manufacturers virtually ceased to make money making cars. It is perhaps illustrative that the most productive plant in Europe, that of Nissan in Sunderland, first achieved profits over 2% of turnover in 1996 having started production in 1984. Equally, for most manufacturers there are only a few models in the range that achieve profitability, other lower volume models are essentially loss-leaders to allow a full-range strategy to be followed. Profitable revenues are earned in other areas, such as finance provision or replacement parts. In Europe, several vehicle manufacturers have moved downstream into direct control over retail and distribution in order to capture a greater share of the value of the vehicle. At the same time, vehicle manufacturers world-wide have been selling non-core operations in components production (e.g. Ford – Visteon; GM – Delphi) as part of an overall shift in the centre of gravity of the industry from a manufacturing focus to increasingly concentrating more on design, systems integration and retailing.
Despite these measures, traditional manufacturing and distribution faces problems. The high capital costs with very ‘lumpy’ investment in plant and models inherent in Budd technology are leading to high risk, though many producers do not perceive this risk, regarding it merely as normal and inevitable. The resulting over-supply is leading to discounting and rapid erosion of residual values. At the same time, the introduction of a new model can often lead to long delivery times for customer-ordered cars. The inflexibility of manufacturing is leading to an inability to adjust output to demand and difficulties in switching from one model to another – responding to increasingly violent market fluctuations is difficult with existing technology. The reliance on continued new car sales as the main source of revenue is increasingly untenable in developed markets, while costs rise as shorter model lifetimes lead to lower per model volumes. Thus high break-even points are leading to over-supply and the need to maintain extensive logistics lines to a large number of sales outlets. Finally, the environmental costs of production, particularly (but not only) with respect to the paint shop can no longer be ignored.
Vehicle manufacturing: the choices
It is already evident that there are several types of vehicle manufacturing available. Table 2 summarizes the main types. It is insufficiently appreciated that the definition of vehicle manufacturing is actually quite flexible – the types shown in Table 2 illustrate that traditional manufacturing and distribution is but one of a number of approaches that could be taken.
Most contemporary cars are built in factories that broadly follow the Toyota Production System (TPS) model, using existing Buddist all-steel technology. However, Table 2 shows that even within Buddism there is a range of configurations possible for vehicle manufacturing and assembly, while several lower volume producers have never adopted Buddism. Manufacturers such as Lotus, TVR and the kit car makers work outside the Budd paradigm and as a result have break even volumes an order of magnitude lower. Some kit car makers break even at 20 or 30 cars a year with their cheap tooling, while for firms such as Lotus or TVR the figure is probably in the range of 300 to 500 a year.
Most of these options have no impact on the vehicle distribution and retailing system. Thus, the Motor Panels’ built MGF body goes for final assembly at the Rover Longbridge plant and is sold through Rover dealers in the normal way. Still, contracted-out body assembly is itself testimony to the inability of high-volume manufacturing operations to accommodate lower production volumes. At the same time, there has been considerable experimentation with retail structures across the industry, largely in an attempt to reduce the 25-35% of vehicle costs accounted for by distribution or to maximize the potential of new technologies such as the internet. There are, of course, several small-scale car manufacturing operations that utilize the factory as the main point of sale – although there may also be a limited distribution network. This applies to the specialist manufacturers such as Marcos, Morgan and TVR and to kit-car producers such as Quantum.
Some of the features of the MFR concept, outlined below, are evident in these specialist manufacturers – such as a close (and often personal) relationship with customers, the use of the factory as a ‘showcase’ for customers, and the importance of activities such as reconditioning, service and repair to the business. Also, collection of the car by the customer at the factory has long been a feature at Mercedes where the Sindelfingen plant has a purpose-built centre to handle such transactions. The ‘customer collection’ idea has been adopted by Audi (for the A8 model) at Neckarsulm. More recently, VW has announced its’ intention to develop a large theme and retail park at the Wolfsburg plant in Germany. In these cases the perception is not so much that there is a cost advantage in factory retail sales or collection (though that may indeed be the case), but that the manufacturer is able to reinforce loyalty to the brand. Factory sales were also common practice in Korea up to the latter 1980s. By the early 1990s the Korean manufacturers had begun to establish their retail and distribution networks and began to abandon factory sales.
Many vehicle manufacturers have maintained direct ownership of sales outlets, notably in Japan but also in Europe. Indeed, with the threat in Europe of removal of the Block Exemption and a fundamental shift in the degree of control the vehicle manufacturers can enjoy over their franchised outlets, there has been a resurgence of interest in directly-owned sales outlets. While such a strategy does indeed allow control, it also exposes manufacturers to the capital cost of building and maintaining sales networks.
With micro-factory retailing the terms of competition are changed. Rather than seeking to match the high-volume, low unit cost approach of traditional manufacturing and distribution, micro factory retailing (MFR) refutes that logic by placing small factories within the markets they serve – and so eliminates the distinction between production and retailing. Rather than having one large plant producing, say 250,000 cars per annum the MFR approach would involve 50 plants, each assembling 5,000 cars per annum (i.e. 250,000 in total). There would be no separate distribution channels or sales outlets: the factory is also the sales, maintenance, service and repair location. Powertrain components and other generic items could be centrally produced in conveniently located highly automated facilities for distribution to the decentralised assembly plants, thus benefiting from economies of scale. Ironically this would conform to the early Ford dictum of “Manufacturing near the source of supply and assembling near the point of distribution”. Diagram 1 summarizes the structural distinctions between MFR and traditional manufacturing.
The business case for MFR has many aspects, not all of which can be captured in a like-for-like comparison with traditional manufacture and distribution. However, it is useful to consider the basic investment costs of the two. Table 3 provides a summary of a hypothetical case to produce 250,000 cars per annum.
Table 3 the investment costs of MFR compared with traditional manufacture and distribution
Item MFR Traditional
Volume per plant 5,000 250,000
No. of plants 50 1
Workers per plant 100 3,000
Total staff in production 5,000 3,000
Investment per plant £50 m £1.5 bn
Total investment in production £2.5 bn £1.5 bn
Model R&D cost £100 m £500 m
Model specific dies, etc. £250 m £500 m
Total investment in model £350 m £1.0 bn
No. of dealerships 0 500
Staff in distribution 0 5,000
Investment per dealer £0 £1 m
Total investment in distribution £0 £500 m
Total investment £2.85 bn £3.0 bn
(Note: Assumes 500 new car sales per dealer, investment cost of £1 million per dealer and 50 staff per dealer for traditional retail. Assumes £5 million per micro factory in model specific dies, etc.)
The MFR concept is not just Buddist car manufacturing on a small scale, it necessarily involves a radically different product technology and body production process. One of the nearest contemporary examples is TH!NK. This is a vehicle built on a folded steel platform onto which is fixed an aluminium body frame which holds thermoplastic outer panels. Virtually any type of non-Budd body/chassis technology is suitable for this type of low volume, modular, low investment devolved assembly. Despite this, the idea of factory retailing itself is not entirely new to the automotive industry and there are parallel lessons to be learned from other sectors (such as steel mini-mills and micro-breweries) that have already experienced some aspects of MFR in action. In other sectors, such as computers (see for example Dell Computers) consumers deal direct with the factory, a practice likely to become more prevalent with internet shopping.
The combined fixed cost of traditional manufacturing and distribution, including the franchised dealer network, is indeed substantial. Compared with this, the fixed costs for MFR are probably an order of magnitude lower. Perhaps more important than the simple investment cost comparison are the many strategic possibilities which flow from MFR. A few potential advantages are listed below:
·Investments in assembly capacity can be incremental, and thereby expand or contract in line with the market. Each MFR unit would have an investment cost well below that of a traditional manufacturing plant – although the cumulative investment cost for the same production capacity may be higher.
·The incremental expansion of capacity can also have a geographic component in that new plants can be added to develop new market territories.
·New products can be introduced incrementally, on a factory-by-factory basis.
·The factory becomes the location for repair, spare parts, in-use modification (e.g. external panel refresh, power-train upgrades) which allows the manufacturer to benefit directly from profitable aftermarket activities.
·The factory becomes the centre for End of Life Vehicle recycling and hence becomes the embodiment of product stewardship.
·The factory can undergo a transition over time from an essentially new car production focus, to one more involved in service and repair. That is, the factory does not depend absolutely on the continued sale of new cars.
·Customers can be taken around the plant, can meet the people who will make their car, and can thereby feel ‘closer’ to the product. Information on customer life-styles, aspirations and mobility needs goes direct to the factory to inform product development.
·There is no conflict of interest between production and retailing. The vehicle manufacturer can have direct control over the retail business and captures a greater share of the downstream value chain.
·The inherent flexibility of MFR is the practical basis upon which new levels of customer care can be built. MFR makes possible flexible response, shorter lead times, and late configuration.
·The MFR concept takes advantage of the possibilities offered by the internet, which becomes the main medium by which customers order vehicles, spares, etc.
·Stronger worker commitment to the product and to customers. These small factories escape from the ‘mass’ culture of traditional high volume manufacturing.
·MFR is the best means to take advantage of modular supply strategies combined with commodity or off-the-shelf purchasing. In transport terms, it is more efficient to move components and sub-assemblies rather than complete vehicles.
·Product can be customized to local market conditions.
·Manufacturing processes have a lower environmental impact compared with traditional high-volume manufacturing and even give the option of doing without a paint plant.
·MFR does not require a large, flat dedicated site with extensive support services. A modern car plant occupies several square kilometres of land. Compared with this, MFR requires a classic ‘light industrial’ facility.
·The MFR concept clearly resonates with social and political objectives in many countries world-wide by creating local employment in high-value manufacturing activities. It also embodies the growing desire to increase labour and reduce fixed investment in order to reduce cost, increase flexibility and increase social cohesion.
·A version of the MFR is therefore also ideally suited to investments in emerging markets. In these markets the investment costs of a major plant would be prohibitive. MFR could replace the existing approach of kit-assembly in such locations.
·Through duplication of MFR sites substantial investment savings could be realized through the multiple ordering of machines and equipment and the use of a standardized layout.
Of course the vehicle manufacturers cannot simply adopt MFR over-night, not least because of existing fixed investments in manufacturing, distribution and retailing. The MFR approach will have to develop in parallel with existing practices, or else on the margins of the industry. It will be best suited to the introduction of radical new technologies where market demand is uncertain, new brands may be required, and customers may have different expectations. Furthermore, MFR provides the means to exploit small geographic markets that hitherto have been neglected because with traditional approaches they have been uneconomic. Thus, in much the same way as emerging economies have by-passed fixed telecommunications systems and gone straight into mobile systems, so these locations may go straight into MFR rather than traditional vehicle manufacturing. China adopting the technology embodied in Chrysler’s China Concept Car (CCC) – now DaimlerChrysler’s Composite Concept Car – would be an example.
There may be continued industrial concentration in terms of capital and ownership, but fragmentation in terms of manufacturing structures. In this scenario, a large vehicle manufacturer would have several hundreds (or possibly thousands) of car assembly plants around the world. It is equally the case however that the MFR approach offers alternative structures. One example would be franchised MFR outlets operating under the brand of a vehicle manufacturer. Another example would be small, new entrants exploiting a market niche.
In ‘Taoist’ terms, vehicle manufacturers using Buddism are strong like a tree, but those using MFR will be strong like grass. Traditional manufacturing is big and strong but can be blown down by the hurricanes of economic and technological change. MFR is small and flexible, and can bend with the strongest winds.
Vehicle manufacturing is no longer just about shareholder value, profitability, and customer satisfaction. More and more questions are being asked of all multi-national corporations and big business in terms of their social and environmental impacts (see the protests against the WTO at Seattle for example). The automotive industry must meet social aspirations or else see political support ebb away. In this regard, MFR offers a way forward for the automotive industry in the transition to sustainability and social responsibility. It is this resonance with current social and political values that underpins the fundamental business case for MFR. The MFR approach offers a more stable economic and business structure in which growth (and decline) is spread over many locations. Finally, MFR is a further step towards de-coupling growth in material consumption from growth in wealth, and hence towards genuine environmental sustainability.