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Ford CEO Alan Mulally shines the hood of a Ford Focus. (HO)
Ford CEO Alan Mulally shines the hood of a Ford Focus. (HO)

Overcapacity woes stalk auto makers Add to ...

After a tumultuous year that brought auto makers to their knees and forced radical restructuring, executives fear the industry is still dogged by a key problem that helped cause massive pools of red ink in the last decade - too much capacity.

"We still have overcapacity in the United States," Ford Motor Co. chief executive officer Alan Mulally said at the North American International Auto Show in Detroit. Even though auto makers have closed dozens of assembly plants in North America in the wake of plunging auto sales, officials say vehicle supply continues to outweigh demand, leaving pressure on pricing and profit margins.

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Consumers benefit from deep discounts offered by auto makers with too many plants operating in a shrunken market, but such price wars have devastated the bottom lines of auto makers throughout the world.

"It's hard to expect rational behaviour when you overproduce," Mr. Mulally told a small group of reporters at the auto show.

Sergio Marchionne, chief executive officer of Chrysler Group LLC, described Chrysler's sales tactics of a year ago, when it was battling desperately to stay afloat in a rapidly deteriorating market, as "absolutely unnatural," and vowed to cleanse such behaviour from the company.

"We were just pumping out cars at the speed of light, with heavy discounting attached. I can replicate that world, but I also know I can replicate the bankruptcy if I do it."

At the time, Fiat SpA, where he is also CEO, was kicking the tires at Chrysler before picking up 20 per cent of the No. 3 Detroit producer after it emerged from Chapter 11 bankruptcy protection.

Mr. Marchionne has been a vocal advocate of capacity reduction in Europe and noted that Fiat recently announced it is closing one of its European plants.

"We're addressing it," he said during a roundtable meeting with reporters Tuesday. "I'm just encouraging the other CEOs of the car companies to address it with the same level of courage that we've displayed." Mr. Marchionne said North America doesn't suffer from overcapacity as Europe does.

Ford has closed several assembly plants in North America and will shutter factories in St. Thomas, Ont. and Minnesota next year, and that should bring its capacity in line with demand, said Joe Hinrichs, president of Ford's Asia-Pacific and Africa operations and former vice-president of global manufacturing operations for Ford.

But even as Ford and its Detroit rivals were slashing capacity, auto makers based in Asia and Europe were building new factories, most of them in the southern United States.

Some are still adding capacity. Volkswagen AG is building a plant in Chattanooga, Tenn., to build a mid-sized car and the Mercedes-Benz division of Daimler AG is shifting production of its C-class cars to Alabama from Germany.

The Asian and European companies began work on big expansions last decade when U.S. sales topped 16 million annually and appeared to be on pace to stay above that level permanently.

Mr. Mulally said, however, that the new normal annual selling rate appears to be about 15.5 million for the U.S. market.

Consumers bought about 12.7 million vehicles in the United States, Canada and Mexico last year. Using Mr. Mulally's figure for the U.S. market would mean total North American sales of about 18 million, said Jeff Schuster, executive director of automotive intelligence for consulting firm J.D. Power and Associates.

North American capacity right now is about 18 million, Mr. Schuster said, which means capacity and sales should match up fairly closely. But as much as one-quarter of the vehicles sold in North America are imported, so there is more capacity than demand. He noted that auto makers have cut about 1 million units of capacity during the crisis, but moves by offshore makers make up for that.

Companies now competing in North America face a rerun of the vicious discounts and price wars of the past decade if excess capacity is still in place when auto makers in China and India turn their attention to this market during the next few years.

"The Chinese today, their market is growing so fast, but they have started now looking out," said Yoshi Inaba, president and chief operating officer of Toyota Motor North America Inc. "And also the government is pushing. I wouldn't be surprised [if]in a couple of years they start landing into this market."

Mr. Inaba believes Indian auto makers will take a longer time.

The crisis has, however, made Toyota more cautious about investing in new plants in North America, he said.

Toyota added plants in Woodstock, Ont., and Texas in the past few years and built a plant in Mississippi that is now sitting idle with no equipment in it because of the collapse in the U.S. market last year.

After General Motors Co. pulled out of a joint venture with Toyota in California, the Japan-based auto maker announced it would close that plant this year.

Nonetheless, Mr. Inaba said Toyota still believes the North American market is a place where companies can make money and is still committed to a policy of building vehicles in the markets where they're sold.

Follow on Twitter: @gregkeenanglobe

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