Reeling from a costly and sudden build-up of unsold cars, manufacturers are looking for better ways to build, ship and sell their vehicles.
Stocks of unsold vehicles at dealerships and ports ballooned across many regions around the end of last year as a sudden freefall in sales exposed inflexibility among manufacturers.
“Automakers can’t adapt that quickly to sudden fluctuations in demand,” UBS Securities analyst Tatsuo Yoshida explained. “Unlike white goods makers, they can’t open and close factories on a whim. In times like these, they can only sit tight and endure it.’”
This lack of agility has translated to weaker balance sheets. During the first three financial quarters to December 31, Japan’s Honda saw 367billion yen drained from its operating cash flow – more than double the amount from the same period a year earlier.
Others report similar trends, as the crisis and tumbling sales force them to rip up profit targets and focus on cash.
“Every car manufacturer will now be looking to take this cost out of the business. The most precious resource we have now is cash, and the biggest user of cash is vehicle inventory,” said Simon Thomas, Nissan Europe’s senior sales vice president. The pain is especially acute in the United States, where cars are usually sold directly off dealer lots, meaning carmakers are building cars for sale weeks or months in advance.
At the other end of the spectrum is Japan, where more cars are built to order and dealers carry virtually no inventory. Europe lies in between.
Some manufacturers have already come up with new ideas to squeeze inventory costs out. Nissan has brought “build-to-order” (BTO) to Europe, using its relatively flexible Sunderland plant, which makes the popular Qashqai model, as a starting point.
“Before the economic crisis we probably thought our BTO programme was quite adequate. But clearly in the current context, where cash is so valuable, it’s not,” Mr Thomas said.
The diversity of the European market makes a complete shift to build-to-order unlikely, But Mr Thomas said he wanted the ratio to exceed half, from less than ten per cent previously.
Michel Faivre-Duboz, who oversees supply chain and logistics at Nissan’s French partner, Renault, agreed that building all cars to order would not make sense, partly because it is impractical for models such as Renault’s Korea-made Koleos 4x4 crossover which is shipped large distances to customers.
Nevertheless, the group is making some changes. “We’re having to live dangerously, to try to make as many sales as we can with the lowest possible levels of stocks,” he said.
Analysts give a cautious welcome to the counter-measures.
“Anything these companies can do to lower their cost bases and increase their efficiency will be welcome,” said Tim Urquhart, analyst at financial analysis firm Global Insight.
“They can’t afford to have hundreds of thousands of cars sitting around doing nothing. It damages the brand and hits residual value.”
The Renault-Nissan group now holds a weekly meeting on inventories, keeping the thorny issue in the spotlight. The partners are leaning towards a system whereby output is based on the “pull” of customers rather than the “push” of production.
To that end, Nissan is looking to raise its stock of vehicle components to allow for tailor-made cars, rather than be stuck with a stock of unsold cars with unpopular specifications. In tandem, it aims to cut its inventory of fully-assembled vehicles across Europe to two months from the current three.
Toyota has a similar idea. Although Japan’s top carmaker has several factories across Europe, including Burnaston in Derbyshire, it still imports some components from Japan, limiting flexibility.
Didier Leroy, a top executive at Toyota, said that needed to change, which is why the company is looking to set up a system of holding some specific inventory of parts in Europe this year.
“Step by step we are decreasing the lead time to be closer and closer to the Japan organisation,” he said recently.
Honda, meanwhile, is counting on its basic policy of building as many cars as possible locally to help it react swiftly to trends in demand.
But having a broad manufacturing footprint can backfire, such as when factories – like Honda’s Swindon plant – are idled for months at a time, while overhead costs remain.
“If you look at balance sheets of different manufacturers, my experience has been that the cash tied up in plant and equipment is actually far greater than the difference in inventory if you adjust for scale,” said Jeffrey Guyton, chief executive of Mazda Motors in Europe.