Why electric vehicle era means legacy factories must close

There is a growing concern about excess capacity in vehicle production. Excess capacity has been the bane of the industry for decades as every vehicle manufacturer has competed to stay ahead of its rivals. With a focus on too many plants, manufacturers in Europe, North America and Japan levelled off in the early 2000s by maintaining an adequate production/ sales balance to keep profits high. Additional competitors, first from South Korea and later China, have boosted global production capacity and put pressure on profits around the world. Hyundai-Kia has developed into a global powerhouse and reached a level where production remains in the profitable range. The bigger problem came from China, where dozens of new manufacturers attempted to take their share of the quickly growing local market. Once local production volume satiated the Chinese market, exports would continue the growth. Larger manufacturers grew quickly, filled huge plants and are now looking at exports while many smaller manufacturers have disappeared. This story is an extract from the February 2023 issue of AutoForecast Solutions' monthly report. Click here to download the full report, or to catch up on previous months Traditionally, targeting capacity utilisation of more than 80% is the norm for profitable operation. Established plants in mature markets usually operate about that level except during model changeovers or labor issues. Rating a Ford or Volkswagen factory in the 70% range is rare. But this has changed in recent years with new plants by EV startups and expansion of the more successful Chinese manufacturers. Now the market is shifting to EVs and manufacturers are finding it more efficient to build dedicated EV plants. Converting a plant designed to produce ICE vehicles misses the efficiencies gained from building a factory around the EV assembly processes. With this in mind, manufacturers are opening plants across the world to add EV production capacity. These new plants are, for the most part, not replacing existing plants. And this list does not include planned expansions of existing plants such as the doubling of Stellantis’s Kenitra plant in Morocco and expansion announced for Tesla plants around the world. Millions of units of added capacity can quickly be included if those plants were counted here. Just from this sample group of new plants, planned capacity for light vehicle production is increasing by nearly three million units. Existing plants produced as many as 96 million units as recently as 2017 and the global market is not expected to top that output before 2028. What happens with all of this excess capacity? Obviously, plants will need to close. During the current transition to EVs, manufacturers see their new products as adding incremental volume. Early adopters of these EVs are not necessarily displacing a sale of an ICE vehicle. Many early buyers of vehicles like the Tesla Model S or Lucid Air just want to be the first and have the money to add another vehicle to their personal fleet. Similar arguments can be made for vehicles like the Ford Mustang Mach-E and General Motors’ GMC Hummer. As these models generate higher volumes of sales and more affordable offerings come to market, this incremental volume diminishes and new purchases will take away sales of legacy models, lowering the demand and, ultimately, reducing the need for legacy plants. In North America, more than two million units of production will be added with new EV-only plants. GM is repurposing legacy plants for EV production and other manufacturers are expected to add EV production to existing plants in the short term, which should squeeze some volume capacity from ICE vehicle production, but there will be millions of units of additional capacity placing pressure on existing plants. If the startups – including Lucid, Faraday Future, Rivian and contract manufacturers Foxconn – are successful, Ford, GM, Stellantis, Toyota and Honda, as the largest manufacturers in the region, could need to take older plants offline in the next five to 10 years. This could displace tens of thousands of workers. The simpler nature of the assembly of EVs will also reduce the workforce needed to build vehicles over the next 20 years, but much of that reduction will come from the closure of existing plants. Transitioning to EVs will progress slower than many in the industry believe, but there will be a transition. This will require plants to be closed and workers to be relocated to other plants or other industries. Yes, there is a growing concern for over-capacity in the industry. It will be addressed gradually and it will be divided between older ICE plants becoming redundant and EV startups failing to find a foothold in the market. This will, ultimately, be the biggest shake-up in the industry since the Great Depression, leaving only the best and luckiest to survive. Sample of the new plants' production capacities Sam Fiorani