What do OEMs do in a global sales slump? Build more factories

Nissan is reportedly cutting about 10% of its global workforce — some 12,500 people. Ford is supposed to be in the process of showing some 7,000 salaried workers the door, which is to be complete by the end of August.

Car sales in western Europe were down 3.5% in the first half of 2019 compared with 2018. In China, passenger car sales were off 14% for the first half of 2019.

And in the U.S. things were better than either of those cases, but there was a still a 2% decline for the first half of the year, and were it not for the U.S. consumers’ seemingly insatiable appetite for pickup trucks and crossovers of all sizes, that number would have been certainly higher. (Consider, for example, FCA sales for the first half in the U.S.: Ram (333,168) and Jeep (456,281) brands had a total 789,449 units during the first half of 2019—which means that Chrysler, Dodge, Fiat, and Alfa Romeo only contributed a combined 306,661 units for FCA’s 1,096,110 first half sales.)

Globally there is a consensus that things are slowing economically (e.g., the U.S. Commerce Department reported that U.S. GDP grew 2.1% in the second quarter, which might seem good except that (1) it was 3.1% in the first quarter and (2) that is the lowest level since Q1 2017), and that the auto industry is likely to see so-so sales for the next few years.

With all that as prologue, you might imagine that global OEMs are planning to reduce their global footprints.

However, according to May Arthapan, director of Asia Pacific Forecasting for LMC Automotive, a global analysis firm, the OEMs are building more factories.

Yes, factories are being closed, like Lordstown. But according to Arthapan, there will be 36 net new plants added to the global automotive manufacturing base: 14 plants will be closed in 2019, 50 will be opened, so it goes to 36 new ones.

And it gets even more puzzling, as Arthapan writes, “While we are expecting a loss of 2 million in global Light Vehicle build in 2019, 3.6 million units of new capacity will be added, on top of the existing 45 million units of idle capacity, or 34% of the total.” That’s right: there is a whole lot of production capacity that isn’t being used right now, yet more capacity is being added.

Not surprisingly, a lot of new capacity is being put into China. According to Arthapan, during the past three years the Chinese market has contracted by 1% yet the production capacity has increased by 6%.

The capacity being added in China isn’t wholly predicated on indigenous brands. Arthapan’s data show that VW Group and Hyundai Group are putting a considerable amount of manufacturing investment in China.

Yet the U.S. is also going to be getting additional capacity between now and 2026, some 1.3 million units.

Consider that there is a $1.6 billion investment being made in Huntsville, Alabama, to build the Mazda Toyota Manufacturing U.S.A. plant, which is to go online in 2021 for the production of SUVs for both brands.

FCA is taking two engine plants in Detroit and transforming them, also with a spend of $1.6 billion, into a single car assembly plant, which will start building Jeeps by the end of 2020. Arguably, given what Mack I and Mack II, as the engine plants are known, were and what they’re being transformed into, this is a whole new thing. (And going back to the importance of Jeeps and trucks to FCA, the company is also investing $900-million in its existing Detroit Jeep plant to build the new Grand Cherokee and Dodge Durango and a total of $1.5 billion at its Warren, Michigan, truck plant to provide capacity for the Jeep Wagoneer and Grand Wagoneer, while continuing production of the Ram 1500 Classic.)

And VW, which plans to have the global capacity to have the ability to sell 1 million electric vehicles globally by 2025, which undoubtedly accounts for a considerable amount of the added capacity (Arthapan: “VW Group is at the forefront when it comes to investing in plant expansion, with 1.4 million units of new capacity in the pipeline between now and 2026”), is spending $800 million at its Chattanooga manufacturing complex to put EV production in the plant by 2022.

While there’s nothing that says that there won’t be more plant closings as there are more plant openings, should sales continue to go south — or not go very far north — things may get troubling for auto workers the world over.