The Detroit Three auto makers learned a valuable lesson during the Great Recession: too much assembly capacity is deadly.
Now, with the U.S. market bouncing back, Chrysler Group LLC, Ford Motor Co. and General Motors Co., are applying that lesson and squeezing as much production as they can out of existing factories without building new plants – thus avoiding huge new fixed costs.
The latest example of the new religion in Detroit will come this summer, when auto makers cancel or scale back annual summer shutdowns at North American factories so they can keep them running flat-out to meet hot demand.
The summer break will be cut in half to one week at most of Ford’s North American assembly plants – including its Oakville, Ont., factory – which will enable it to produce 40,000 extra Edge, Flex and Lincoln crossover utility vehicles this year.
Chrysler said two vehicle factories in Detroit and one in Toledo, Ohio, will keep producing all summer, as will all the company’s engine and transmission plants, with one exception.
The companies have learned from “the sins of the past,” said Jeff Schuster, senior-vice president of forecasting for consulting firm LMC Automotive. “Their approach to how to manage the balance between supply and demand is much smarter and appropriate for the environment we’re in.”
During much of the 2000s, the Detroit Three offered massive cash rebates and cheap financing to consumers in order to move inventory and keep their plants running. It was an era known as profitless prosperity, when the U.S. market regularly topped 16 million in sales annually but the Detroit Three lost tens of billions of dollars.
Auto makers cut capacity deeply after the recession, closing dozens of assembly, engine and transmission plants in North America. Today the U.S. market has recovered to the point where Americans are buying about 15 million vehicles annually and Chrysler, Ford and GM have increased their combined market share against foreign auto makers.
Now they are adding third shifts at many plants, running them on weekends or working overtime – sometimes all three – to wring extra production from existing plants before building added facilities or installing new assembly lines. That’s despite hundreds of thousands of units of new assembly capacity being added by Asia and Europe-based manufacturers.
Those auto makers are also boosting production at existing plants amid the hot U.S. market. Toyota Motor Manufacturing Canada Inc., for example, is running daily overtime at its assembly plants in Cambridge, Ont., and Woodstock, Ont.
Mr. Schuster noted that a decision by Ford to shift production of the subcompact Fiesta to Thailand from Mexico opens up capacity at the Mexican plant to produce larger, more profitable vehicles and is a good example of how the company is taking advantage of its global manufacturing base.
About 3 million units are coming on stream industry-wide between 2011 and 2015, the most growth in capacity in any four-year period yet in North America, Morgan Stanley auto analyst Adam Jonas said earlier this week in a note to clients entitled A Letter to Detroit.
“When it comes to capacity, this industry has a history of: ‘If you build it, let’s hope they come. And if they don’t come, we’ll make them come,’ ” Mr. Jonas wrote. He urged the Detroit Three to maintain a focus on designing and developing great vehicles and emphasizing “wallet share over market share.”
However, physical expansions of assembly plants or construction of new plants by the Detroit Three are probably coming before the end of the decade, Mr. Schuster noted.
It takes two to three years to build an assembly plant so announcements of new plants could be made within a year or two if the market remains hot and the Detroit Three sustain their market share gains.