Dean Barber

A Brave New World with Wolves a Howlin’

In Uncategorized on April 24, 2011 at 7:17 am

 Sometimes a company will say something important and even surprising.  In a corporate world often characterized by press releases devoted to trivial self promotion, when a company says something meaningful, well, we tend to notice.

Toyota, the world’s biggest automaker, said something this past week that truly shocked me and got me thinking. It said it expects global production to return to normal by, get this, December.

It is no secret that the world’s biggest carmaker has been struggling, wounded with supply-chain disruptions caused by Japan’s March 11 record earthquake and tsunami. But December?

That underscores two things for me, which I am sure is not lost on manufacturing executives in this country and worldwide, particularly in the automotive industry.

1) The fragility and susceptibility of supply chains. Suddenly, companies are re-examining their long, tenuous supply lines, and giving serious consideration to bringing back certain production to the United States in order to better serve customers. In this sense, the earthquake in Japan has served as a wake up call. (See April 17 Barberbiz blog: “Why Bringing It Back Home Makes Sense.”)

2) Toyota and other Japanese automakers are hurt and possibly vulnerable to losing some market share.

The Wolves a Howlin’

We will speak on the second point first. I have to believe that Toyota became the largest carmaker in the world by being the smartest carmaker in the world. So it would be a safe bet that is a company that will recover from the injuries it received because of the devastating earthquake.

But I also have to believe, because of recent events, that the wolves are circling. The wolves are a howlin’.

“No one knows how long production will remain at about 30 to 40 percent of the usual level,” said Koji Endo, an analyst at Advanced Research Japan in Tokyo. “Customers who are not willing to wait for Japanese vehicles may switch to buying American, Korean and European cars instead.”

That notion of consumers looking at “instead” options must have Japanese automakers concerned.

The very nature of business has always been opportunistic, very wolf-like. If a competitor stumbles or shows weakness, you jump in to fill the void. Judging from what Toyota is saying and doing, there is no doubt some stumbling, bumbling and grumbling going on in Japan. And it is not just with Toyota that is feeling the pain. Honda Motor Co. and Nissan Motor Co. are struggling to restore full plant operations in Japan and at factories abroad that are running short of parts.

Nissan has had to stop production at factories inTennessee, because of uncertain availability of parts from Japan. Honda’s North American production is running at half the normal rate through May 6 due to the earthquake inJapan.

And while domestic automakers have also been adversely affected with shutdowns and slowdowns caused by shortages of Japanese-made parts, I would have to suspect that Detroit is carefully watching to see if U.S. consumers are not willing to wait to buy a certain Japanese model that may now not be so readily available.

An Industry Rebound

This all comes at a time when the auto industry has been rebounding. Consumer confidence, albeit shaky with the pain at the pump that we are all suffering, appears to be on the upswing. The jobless rate fell for a fourth straight month to a two-year low of 8.8 percent. There is a general belief that things are getting better.

Press reports from Michigan indicate that GM is considering investing up to $450 million in its technical center and powertrain plant in Warren, Michigan.

And you know that things must be getting better when Mercedes Benz and BMW are spending a combined $280 million on two Manhattan showrooms. No, that’s not a typo — $280 million on two showrooms in New York. Now that deserves a howl.

In Chattanooga, Tenn., another German automaker, Volkswagen, had a soft launch of its new $1 billion plant, which is to be officially opened on May 24. But this past Monday, a Tennessee production worker drove the first 2012 Passat off the assembly line. The new plant is expected to employ between 2,000 and 2,500 workers and make 150,000 vehicles a year.

Farther south in LaGrange, Ga., Kia has begun expanding its new $1 billion plant. Kia reported record March sales of more than 44,000 units, a 44.7-percent increase from March 2010. The company said it will hire an additional 1,000 employees at its Georgia plant, adding a third shift to support a third model.

In 2010, Kia produced 150,000 vehicles in LaGrange. This year, it predicts 260,000 vehicles will be built at the Georgia plant.

For Kia’s parent, Hyundai, things are only getting better at its Montgomery, Ala., plant, which set a monthly production record last month, as 31,730 Sonata sedans and Elantra compact sedans rolled off the assembly lines. In March, U.S. sales of the Sonata and the Elantra rose a combined 55 percent over the year-ago period. The Alabama plant is projected to produce more than 330,000 vehicles this year, topping its stated annual capacity of 300,000.

Prediction: Hyundai will build a second plant in North America.

I think it is safe to assume that part shortages in Japan are not stopping Kia and Hyundai from taking a very aggressive approach to increasing production in the U.S. By my definition, these two Korean companies are among the wolves a howlin,’  looking for any weaknesses to exploit.

A Brave New World

It may sound harsh but it is true — disasters create opportunities. The supply chain disruptions caused by the earthquake has prompted manufacturing executives to take a new, hard look at how things have been and how they could be. As such, the earthquake may have far deeper and lasting effects than Toyota playing catch up to achieve full production by the end of this year. I think it goes far beyond that.

And this is where it gets really important.

Stan Aronow, a research director in the supply chain research group at Gartner, said companies which previously shifted production to low-cost countries may pull 30 percent back to their bases by 2015.

“You’ll probably see a global redistribution of the manufacturing footprint,” said Aronow, who used to work at Intel Corp. (INTC), the world’s largest chipmaker.

Let’s read that again — a global redistribution of the manufacturing footprint. Now that is a brave new world.

Indeed, the repairing and altering of supply chains, prompted by Japan’s earthquake and surging fuel prices, may provide all the ammunition needed to spur additional business investment in the U.S. And in the end, that is a much bigger story, has much more impact to most Americans, than whether Toyota loses some market share.

Joseph Carson, director of global economic research at Alliance Bernstein LP in New York, says companies exploiting new ways to ensure cost-effective delivery of raw materials and their own goods may boost spending in the U.S. alone, beyond the 8 percent he estimates for this year, double the pace of 2010 and more than three times the projected rate of consumer demand.

“Recent events raise questions over the global supply chain and reliance on single-source suppliers,” said Carson. A shift “could add fuel for a prolonged investment cycle that would have been impossible to predict a year ago.”

No doubt this is the stuff of boardrooms worldwide. This will get interesting.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas —

  1. Another good blog Dean. I’ve been to Korea and toured Kia and Hyundai facilities there. Trust me, they are aggressively pursuing their Japanese counterparts and fully expect to catch and pass them at some point in the future. I’m sure those fangs are glistening as they bare their teeth given the current circumstances.

    Kia/Hyundai are putting out a great automobile that only a decade ago was considered sub-standard. When they upped the ante and developed world-class cars nobody believed they were any good. Did they wring their hands and complain that the public should trust them, like some other auto companies that will remain nameless? No, they were the first to go with a 100,000 mile warranty, to PROVE they were making a better car. If the Big Three aren’t careful, they’ll be watching what the Japanese are doing while the Koreans blow their doors off (yes, pun intended).

    I am glad that these companies are investing in American facilities. They typically pay good wages while investing in the local communities. They can be wolves to their competition while being good for their communities.

    Another great post Dean. Keep ’em coming.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: