Automotive freight shifting gears

Automotive freight shifting gears

Ford Motor Co.’s recent announcement to scale back its unit production capacity 26% by 2008 reflects an automotive trend toward a build-to-order model rather than a capacity-driven model

Ford Motor Co.’s recent announcement to scale back its unit production capacity 26% by 2008 reflects an automotive trend toward a build-to-order model rather than a capacity-driven model.

Following General Motor’s recent announcement of plans to slim capacity, the Ford move has led several automotive and trucking experts to conclude that automotive production scales will tip away from Ford and GM while foreign automakers’ production nexuses—generally in the South—will stay strong.

Ward’s Auto World associate editor Steve Miller describes the Ford and GM dilemma as “an abundance of product and a dearth of buyers.” Ford and GM are making a key shift to tailor production to match consumer demand rather than capacity, he explained.

“What [Ford] came up with essentially with the ‘Way Forward’ plan is the idea of going right to building cars for the consumers as opposed to just doing so because they have capacity at a plant,” Miller told FleetOwner. “The Japanese have figured out how to tailor production to demand and the U.S. is just learning how to do that now. [U.S. automakers] no longer want these fat inventories. Technology has enabled just-in-time production, so there’s no reason for it.

For the foreseeable future, bringing down production capacity will mean fewer autos will be built in the U.S. Also notable to carriers that haul automotive freight is that Ford has pared down its number of suppliers—making the supplier market more competitive than ever, Miller added.

The recent announcements by Ford and GM came as no surprise to the trucking industry. In fact, there had been signs of the erosion of Big Three (GM, Ford and Chrysler) production ever since foreign automobiles started growing in popularity.

Joplin, MO-based truckload carrier Contract Freighters, Inc. (CFI) is but one carrier that recognized this-- and acted. CFI in the early ‘90s had drew 40% of its business from freight related to the Big Three. Now that figure is less than 1%.

“When we looked at the automotive model years ago, we often wondered when they would have to do something like they’re doing today,” CFI president & CEO Herb Schmidt told FleetOwner. “Certainly the realization that something serious at some point in time had to be done was pretty clear several years ago. It was clear to me if I were running that company that there were some changes on the horizon and there would have to be some changes to compete with the Nissans and Toyatas and other players that are coming into that environment.

“[The reason CFI shifted away from the Big Three was] certainly not because we saw a demise in automotive,” Schmidt continued. “Quite frankly, it happened more quickly than I anticipated. But the margins continually deteriorated until you finally got to the point where you say ‘I could make more money over here or there.’ You come to the stark realization that you could deploy your assets elsewhere and do much better.”

CFI began diversifying its customer base away from automotive when it became increasingly difficult to turn a profit on that freight. Slow pay, pressure to stretch payment, de-escalation in rates, and trailer pools being utilized for extended periods of time began to eat into CFI’s margins, Schmidt said. “It slowly creeps in. Those are the kind of signs you look for when you evaluate your cost to any particular customer-- regardless of who it is.”

Schmidt noted that Ford and GM face a considerable challenge in maintaining a reliable transportation network as they struggle to turn a profit while freight capacity remains tight.

Despite GM and Ford plans to slash capacity, no one predicts that the generally solid freight environment trucking now enjoys will erode as a result.

“This will hurt some regional carriers that are strong in the Midwest with automotive companies,” Satish Jindel, president of S.J. Consulting told FleetOwner “But with the market being fairly tight, I think the impact will be short term-- if it were 2002 or 2003 they’d be feeling it a lot more. Plus, it’s not going to happen in one day. It’ll happen through a period of time so there’ll be breathing for carriers to make adjustments in that time frame.”

But for some carriers, diversification away from the automotive industry is not readily an option. “Ten to 15 years ago you had carriers reliant on GM or Ford but in recent years they increased their portfolio of customers-- especially with non-U.S. automakers,” Robert Farrell executive director of the Automobile Carriers Conference, an affiliate of the American Trucking Assns. whose membership hauls finished automotive goods, told FleetOwner.

“[The Ford and GM announcements] reflect a shift in the marketplace,” Farrell said. “It appears that production in the U.S. from non-domestic producers will continue to grow.”

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