Decision time: Making the right production footprint choices in a volatile market

Munich, April 2024

Decision time: Making the right Production footprint choices in a volatile market

 

Munich, April 2024

U

ncertain demand in a weak economy, a mix of powertrains, skills shortages and the influence of subsidies are making network design more important - and more complex

Automotive suppliers and OEMS are being forced to make hard decisions about their production networks, as they focus on efficiencies and protecting margins in an uncertain economy. Existing footprints are also being challenged by the electric vehicle (EV) transition, sustainability requirements, new skills needs and more political influence in the form of national subsidy programs.

Supplier ZF Friedrichshafen, for example, announced plans in January to close two plants in Germany with the intention of moving production to lower-cost locations in eastern Europe or India, and the future of Audi’s plant in Brussels is in doubt, according to multiple news reports. At the same time, Chinese EV maker BYD is building its first European factory in Hungary, which has a growing car battery industry.

Footprint decisions for suppliers are always complex because of the high costs involved – particularly after the rise in interest rates from years of historic lows – and the social and political impact of closures and job losses. But the range of current considerations, including the impact of generous new EV subsidies in the US under the Inflation Reduction Act, are making the process even more challenging.

Here we look at how suppliers can asses their overall network capacity in light of current and future market demands, to align with their strategic objectives.

Decision-making in uncertain times

Suppliers currently face complex additional footprint considerations, the first of which is undoubtedly politics. Governments are exerting more influence over where OEMs and suppliers locate production than they have done for a number of years, as national subsidy programs linked to the EV transition significantly affect the business case for factory locations.

The biggest is the US Inflation Reduction Act (IRA), signed into law by President Joe Biden in 2022. The IRA promises $433 billion of investments in the US economy, of which $369 billion are for energy security and climate change. The measures that directly affect the auto industry include tax incentives for consumers to buy EVs and grants to retrofit factories for low-emissions vehicle production. However, the subsidies only apply to EVs that are made with a proportion of materials that are sourced in the US or countries with US free trade agreements, such as Japan. The proportion was 30% in 2023, rising to 80% by 2027.

The earlier Bipartisan Infratsructure Law, signed in 2021, also awarded $6 billion of grants for companies investing in battery manufacturing and components.

The intention of the legislation is to build up the US’s domestic battery and EV production and reduce reliance on Chinese components, and the result is that OEMs and suppliers will have to move production to the US in order to sell EVs and components there.

We believe the effect on the automototive labor market will go beyond job losses in Europe and Asia if new factories are located or older ones re-located to the US. Tech talent is also likely to move to the US, because subsidies are focused on future clean technologies, and innovation will go with them. This will cause Europe to lose further ground against the US.

This is not to say Europe is stepping back from the race to build up its EV and battery production capacity. EU member states made €6.1bn available to support battery innovation and production through two Important Projects of Common European Interest (IPCEI) agreed in 2019 and 2021. There are no restrictions on the origin of the raw materials for batteries, in order to build up production of EVs and battery cells in the region.

From 2026, the European Union’s Carbon Border Adjustment Mechanism (CBAM) means companies will have to pay for certificates to cover the cost of emissions created during the production of goods they import, making low-carbon local production sites more financially attractive.

There are also EU subsidies available to build up manufacturing in less wealthy parts of the bloc such as eastern Europe. Building new plants with the latest automation and digital production tools will increase efficiency and likely will cost less than modernizing an existing production site. The cost advantage will be a strong factor in suppliers’ footprint decisions.

A transformed workforce

Beyond politics, new types of workforce considerations are also now affecting footprint decisions. The first issue is the availability of people with the right skills: new, highly digitalized and automated factories need workers with a broad range of technology skills, including engineering, computer science, robotics and experience with artificial intelligence (AI). Creative problem-solving by humans will become increasingly important as routine production tasks are taken over by machines, and we see a growing need for hybrid experts, who combine technical skills with creativity.

We expect a significant impact on traditional factory job profiles as a result of increased digitization and automation, especially at the operational level in factories making lower-cost, mass-produced models (we define these as volume or variant champions here). We see the number of shopfloor logistics roles declining by 63% in volume champion sites and 56% at variant champions’ plants by 2035 while the number of factory operator roles will shrink by 53% and 40% respectively, and the number of line managers by 24% in both types of factories.

In their place, we see high demand for new job profiles as the use of smart machines increases, and databases and data flow become more important. The number of data engineer roles is expected to increase by 78% in volume champion factories and 98% in variant champions’ sites, for example.

For employers, recruiting people to fill these roles will be highly competitive because their skills are in short supply across all manufacturing sectors. Suppliers will need to adjust wages accordingly and offer additional benefits to attract skilled staff to their production sites. The location of plants will become increasingly important – factories close to existing tech or automotive hubs, for example, may find it easier to hire the talent they need.

Setting the strategy

Figure 1: Global Footprint Strategy

Source: Berylls Strategy Advisors

Looking in detail now at a typical supplier’s footprint decision process (see chart above), the first step has not changed despite the complex new challenges described above. Footprint decisions need to be aligned with the company’s strategic objectives, and whether the current network meets them. How is demand expected to develop in different markets and can production sites adapt?

The next step is 360-degree site assessments of performance, cost structure and capacity, to give transparency over each production site’s future potential and improvement opportunities.

Suppliers can then shape the ideal future footprint, defining the plant archetypes and logistics networks they will need. These become the guiding concepts for scenario analysis, that will cover each of the major areas that would be impacted by a change in footprint: cost; the potential effect of subsidies and other government initiatives; the supply chain and logistics network; regulatory compliance; environmental impact; technology and innovation; human resources, and risk assessment.

The evaluated scenarios are narrowed down to a shortlist for evaluation by a wider group of stakeholders, and the final stage is a business case calulation on the short-listed network options, before moving into implementation planning and final decision-making.

Footprint success factors

Footprint decisions are among the most crucial that any auto supplier will make. The right production network is a critical part of the long-term financial and non-financial success of the company: new production facilities are very expensive, but so is keeping under-used or inefficient sites open. The impact of the investment decision, good or bad, will be felt by the company for years.

Cost efficiency is still a top priority for any footprint decision, but after a period of time in which the auto industry has been hit with one crisis after another, resilience is now ranked just as highly. Important production network considerations to reduce complexity and increase flexibility can include building factories close to customers to reduce the chance of supply chain disruption, and ensuring sites are located in places where there are enough skilled staff, or that are attractive to new hires.

Sustainability throughout the supply chain is also a key consideration for OEMs, and suppliers must be able to ensure their production locations meet customer and regulatory ESG requirements.

And as described above, the auto industry has become a key part of many governments’ industrial policy as they seek to meet commitments to transform their economies. Striking the balance between the short-term benefits of subsidies and the long-term results of choosing a particular location is now an important part of the footprint decision-making process. Some uncertainty is inevitable, as for example in the US where the outcome of the presidential election in November may change the position on EV subsidies.

However, what suppliers can do is make a thorough assessment of their product portfolio and expected future market demands, and consider the results alongside subsidy benefits, to see whether government support makes entering a new market worthwhile. They should also consider how reliant their product portfolio is on subsidies, and how that impacts their production network flexibility. 

All these factors – cost, resilience, sustainability and subsidies – deserve thorough consideration in footprint decision-making, to reduce the risk inherent to such large and long-lasting decisions.

 

At Berylls, we have worked with clients on production network strategy and supply chain design for years, building up deep expertise in defining the right criteria and evaluations for your company’s footprint decisions. We would be delighted to discuss this or any other aspect of manufacturing footprint with you.

Authors
Christian Grimmelt

Partner

Timotheus Wittek

Felix Scheb

Martina Seip

Christian Grimmelt

Christian Grimmelt has been an integral member of the Berylls Strategy Advisors team since February 2021. Previously, he gained extensive professional experience in top management consultancies and in the automotive supplier industry.

During his time at the world’s largest automotive supplier, he drove the establishment of a central unit to optimize the company’s global logistics and production network.

Christian Grimmelt’s consulting focus is logistics and production network optimization, purchasing and (digital) operations including launch and turnaround management for OEMs and especially suppliers.

Christian Grimmelt holds a university diploma in industrial engineering from the Karlsruhe Institute of Technology.