With global light vehicle (LV) utilization at a record low for this century, are we now headed for an accelerated wave of plant closures as OEMs respond by adjusting their slightly oversized manufacturing footprint?
Certainly, if we look back on the experience of the last significant downturn in the auto industry, during the financial crisis, falling volumes and utilization rates led to an increase in plant closures as OEMs took action to cut costs and cover losses. In the worst affected regions – Western Europe and North America – the total number of operational LV assembly plants decreased by 23 between 2007 and 2011, representing a decrease of 12%.
More recently, the auto industry has certainly struggled. COVID-19, the semiconductor crisis and the war in Ukraine have all played their part in undermining global LV output. From its peak in 2017, global LV production fell by more than 20% last year to just 77 million units, pushing the industry utilization rate below 55%.
Unlike the financial crisis, however, OEM margins have soared during this recent downturn as supply-side constraints have kept new vehicles scarce and transaction prices high. Due to the huge profits, politically, this may not be the best time for OEMs to implement a program of plant closures and rationalization. Nevertheless, with a deteriorating market outlook, soaring input costs, the challenge of transitioning from combustion technology to electrical technologies, and a deliberate strategic shift by some brands to increasingly pursue margin over volume, OEMs cannot tolerate such low utilization rates for very much longer. .
Justin Cox, Global Production Director, LMC Automotive