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For many automotive suppliers over the past 20 years, the calculus of plant location has been relatively simple. If there was a billion dollars of revenue in a region, that was probably a reason to build and maintain a big plant there. If low-cost labor was available in a different country but not in one’s own, then the executive team was probably evaluating the pros and cons of relocating.
Then COVID-19 came along, disrupting supply chains and reducing people’s driving time and the demand for cars. Some of the strategizing about plant location receded into the background as other matters took precedence.
Now, as businesses start to contemplate a postpandemic world and automobile sales recover, automotive-supply executives are returning to their discussions about footprint location and are finding them more complicated than ever. It’s as though these executives are captaining a ship that has just weathered a terrible storm—and, instead of coming into clear waters, they discover that the rocks that were on the nautical chart before are now much bigger and closer.
This article dives into the trends that have turned manufacturing-footprint strategy into such a conundrum. Those trends include the rapid rise of electric vehicles; the arrival of new, disruptive OEMs; and CO2 regulations that loom over the automotive supply chain industry. We conclude with a checklist that automotive suppliers can use to determine how their manufacturing footprints should change to give them the best chance of winning in the future.
In addition to the traditional considerations about their footprints, automotive suppliers today face a host of new questions. The following are among the most important:
Not many automotive-supply executives would dispute that these questions are important. But executives’ full agendas mean they’re generally not in a position to step back and take a strategic long-term view. Much of the decision making in automotive manufacturing is, indeed, incremental—focused on something happening a year from now (such as where to put in an efficiency program) or two years from now (such as which plant to use for a new product). This incrementalism could leave suppliers in the wrong place, from a physical-footprint perspective, as the industry reinvents itself over the next decade.
The most important trend, of course, is the rise of electric vehicles at the expense of vehicles that use internal-combustion engines and run on gas. This trend is propelling many of the changes facing automotive suppliers, but there are other trends, too. Below are four of the most important.
The automotive suppliers participating in the McKinsey-CLEPA survey were skeptical of these OEMs’ relevance: two-thirds said they didn’t think a significant part of their revenues in 2030 would come from parts manufactured for these new OEMs’ vehicles. If suppliers’ investment decisions reflect that belief—that is, if they continue to direct their efforts overwhelmingly toward their existing OEM customers—we think they will be cut out of a significant value pool. Our view is that the new OEMs are poised to do well and that there will be a significant volume shift toward them and away from current OEMs between now and 2030.
Because of this decline, roughly half of all suppliers are looking for new growth in areas outside of automotive. Among those looking to branch out, seven in ten say they’re exploring sectors without any connection to automotive, such as everyday household products.
Our analysis suggests that it might be 2030 before the industry again sees light-vehicles sales matching those of 2019.
The math of doing some manufacturing in low-cost countries still makes sense for automotive suppliers. Consider the example of Europe. Despite the wage inflation in many low-cost European countries, the absolute gap between blue-collar labor rates in low-cost countries and in Western Europe will continue to widen between now and 2030. And even if higher wages in low-cost countries such as Poland and Romania erode some of the potential for savings, some of those savings will still be possible by switching manufacturing to places such as Serbia, the Republic of North Macedonia, and the Republic of Moldova.
Indeed, one French player will soon start operating its fourth plant in Serbia, and a Chinese supplier has committed to putting more than $50 million into a Serbian plant of its own. These companies’ investments are starting to improve the infrastructure and the administrative and legal capabilities in the country.
Of course, manufacturing in a low-cost country is only one of the ways automotive suppliers can get an economic advantage. Another is by introducing more automation into the plants they already have in high-cost countries.
And then there’s the very compelling argument that footprint decisions should not and will not be based on one factor in the future. Cost won’t go away as a component, of course; it will always matter. Also important, however, will be supply chain sustainability. Resilience will be a third factor, after a year in which a pandemic and the weeklong closing of the Suez Canal vividly demonstrated the vulnerabilities of global supply chains.
During this time of generational disruption, automotive suppliers’ structural competitiveness will be tested. For those companies looking to begin a process of footprint reimagination, we recommend six steps (Exhibit 2):
This step should also include a plant-by-plant assessment of operational effectiveness—a crucial attribute given the pressure OEMs are putting on suppliers to lower their costs.
One approach to consider—not widely used by auto suppliers—is value chain streamlining, which unbundles product components based on labor content and transportation costs. A recent Europe-focused study concluded that for highly stackable items—defined as 600 or more parts per truck—manufacturing in a low-cost country would be more economical than a nonautomated plant in a high-cost country at a distance of up to 1,500 kilometers. Even if the plant in the high-cost country were automated, the cost advantage would hold at a distance of up to 1,000 kilometers, the study found.
Of course, this economic analysis could change as automotive companies start facing more sustainability-related regulations in their supply chains. The analysis also doesn’t account for the high social costs created by certain types of value chain streamlining.
One solution is to house independent product groups in one relatively big location where they can operate autonomously while sharing facilities management staff and other overhead. This strategy is informed by our past benchmarking, which shows that automotive-supply plants with between 1,000 and 1,500 workers do the best job of indirect cost absorption (Exhibit 3).
Not only plant size but also every aspect of a supplier’s overall footprint is necessarily specific to the company. So this last step is about figuring out the specific restructuring moves you should make and identifying consolidation projects to get you started.
Manufacturing footprints that served automotive suppliers well in the past are going to fall short in the coming period of disruption. The best way to survive isn’t to react to the changes. It’s to anticipate them and get out in front of them—shaping your company’s future in the process.
Andreas Behrendt is a partner in McKinsey’s Cologne office, Ricardo Moya-Quiroga Gomez is a partner in the Munich office, Raphael Rettig is a partner in the Düsseldorf office, and François Soubien is a partner in the Paris office.
The authors wish to thank Thomas Baumgartner, Alberto Bettoli, Harald Deubener, Axel Karlsson, Martin Lindner, Nicolai Müller, and Ulf Schrader for their contributions to this article.
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