This month at the Management Briefing Seminars in Traverse City, Mich., a yearly conference that brings together manufacturing experts and other auto industry executives, Kevin Rahrig of AM General detailed how the company built the Mercedes-Benz R class under contract for Daimler.
As U.S. sales of cars continue to shrink and demand grows for SUVs and crossovers, contract manufacturing may be a way for automakers to keep cars in the lineup without having dedicated factory space that may go underused.
Rahrig said the Mercedes plant in Vance, Ala., built up a two-year supply of R-class bodies in advance of the end of production to make way for -- you guessed it -- more popular SUVs and crossovers. The R class -- was it a minivan, tall wagon or crossover? -- didn't sell well here or in Europe, but there was strong enough demand in China for Mercedes to continue offering the vehicle there, even though the company needed factory space in Vance for higher-volume, more profitable vehicles.
R-class bodies in white were assembled at Vance and then wrapped in plastic and stored on shelves in warehouses. They were fully assembled -- interior, electronics, suspension, powertrain, etc. -- by AM General at its plant in Indiana.
The strategy enabled Mercedes to satisfy demand for the R class in China and build more popular vehicles in Alabama, a win-win-win for the company, Chinese consumers and for AM General.
Reuters reported last month that General Motors is considering axing the Chevrolet Impala, Buick LaCrosse, Cadillac CT6 and three other cars. The Ford Fiesta could be history in the U.S. after the 2017 model year.
Fiat Chrysler Automobiles, you'll remember, already killed the Dodge Dart and Chrysler 200. So if there is, say, a war in the Middle East or drastic production cuts from OPEC or some other event that triggers a huge spike in oil prices and the market shifts back to fuel-efficient cars, FCA and other companies that rely on trucks and SUVs for most of their profits could be financially vulnerable.
And this is why I think it makes sense for automakers in North America to outsource production of cars to contract manufacturers. It's a hedge so they don't get caught like they did in the summer of 2008 when the price of a gallon of gasoline peaked in the United States at $4.08 and dealership lots were stripped of fuel-efficient cars.
In addition to AM General, Canada's Magna International with its Magna Steyr division in Europe, can build vehicles for automakers. And a number of empty auto plants could be retooled for contract manufacturing.
We've already seen how high gasoline prices can tank sales of light trucks. It would be foolish to think fuel prices are going to stay low indefinitely. And even though fuel economy of light trucks has improved markedly in recent years, they will probably never be as fuel efficient as cars because of weight and aerodynamics.
By ending production of the Dart and 200 after just a few years, FCA lost billions on both cars. All the money FCA spent to design and engineer the cars and to retool the Sterling Heights, Mich., assembly plant where the 200 was built, went down a giant drain. Maybe some of those losses could have been avoided by transferring production to a contract manufacturer.
If contract manufacturing is not the answer, then automakers need to have some other contingency plan to get fuel efficient cars back in dealer showrooms quickly when fuel prices spike.