The North American automotive logistics industry remains in good health. Vehicle production and sales are back to near-historic peaks and continue to climb. New assembly and component capacity is being added in both the U.S. and in Mexico, driving materials, parts and vehicle flows. In response, logistics companies are investing in services and transport assets across the supply chain, from rail and cross-border operations between the US and Mexico, railcar and trucking capacity for finished vehicles, and new tools to better track freight and returnable packaging.
The next few years look positive for logistics in the auto sector. Brandon Mason, lead analyst for the Americas at PwC Autofacts, sees light vehicle assembly across the U.S, Mexico and Canada surpassing 20 million units by 2021, with more than 2m vehicles in incremental assembly forecast to be added in the U.S., and a similar amount in Mexico.
Increasingly popular SUVs and crossover vehicles are commonly single-sourced in North America, which will help to increase exports beyond the continent. Even with interest rates expected to begin rising by the end of the year, US vehicle sales should remain at or near the 17m unit mark annually. Any downturn is expected to be normal and cyclical, with a fairly swift recovery.
We spoke with Tim Horton, Schenker, Inc.’s Global Account Manager. He recently attended the 16th Global Automotive Logistics conference at the Detroit Marriott Renaissance Center. The conference brought together a growing industry that is looking toward a disruptive, but not necessarily, negative future.
The most common theme is change, but what is driving this change?
From the ground level, three powerful forces are roiling the auto industry: shifts in consumer demand, expanded regulatory requirements for safety and fuel economy, and the increased availability of data and information.
Shifting Consumer Demand
Consumers appear to be rethinking their long love affair with individual automobile brands and viewing cars more as transportation machines. Although this is not likely to have a major impact on sales volume, it is affecting how much people are willing to pay for automobiles. That willingness is also affected by the waning of product differentiation, due in part to a general increase in vehicle quality throughout the industry. The Detroit Three have caught up with Japanese manufacturers, and the mass market is catching up with luxury. Consumers are also demanding more sophisticated infotainment systems at a low price, and they are expecting more high-end features to be standard.
Expanded Regulatory Requirements
Tighter corporate average fuel economy (CAFE) regulations in the United States, as well as the rest of the world, are more expensive for Other Equipment Manufacturers (OEMs) to comply with, requiring higher volumes to amortize increasing costs. Regulators are also mandating that more safety-related features, such as backup cameras, be included as standard equipment on new models, adding further to costs.
Increasing Availability of Data and Information
Information about vehicle use and driver behavior is proliferating as sensors and telematic systems become more common. All players across the automotive value chain are interested in collecting more customer and car data, but uncertainty about how to use it is still widespread. Meanwhile, consumers have access to information about automobile specifications, prices, discounts, quality and performance, giving buyers greater bargaining power.
Digital business is a broad reference to areas including, but not limited to autonomous vehicles, ‘connected equipment’, such as machine-to-machine technology, wearables like smartwatches and glasses, advanced levels of automation, such as ‘smart robots’, and analytics or ‘big data’. Much of this technology could transform the economy – including automotive logistics, especially in areas like truck driving, parts handling and warehousing, Information Technology or freight brokerage.
Many executives at the conference agreed such changes and technology were coming to the industry, although some had different ideas about the timing of their adoption and their impact in the supply chain. Kalman Gyimesi, automotive marketing leader for IBM Analytics, cited a survey of supply chain executives in which 75% said they expect disruption over the coming decade from new mobility, telematics and other internet-related technologies.
“So far we have not seen much impact, but technology providers are looking at the sector. Companies that are now brokering new vehicle sales have big ideas about the downstream movement of vehicles and how to optimize that,” he said.
“I do fear being put out of business by an app,” he added. “I think Google has a chance to disrupt OEMs, 3PLs, 4PLs and all the carriers. Everything that we’re doing right now has a strong possibility to be disrupted.”
Some change has the potential to be positive and reduce costs. Driverless trucks, for example, would help relieve driver shortages and take labor out of the supply chain. But they could also eliminate jobs and even entire companies if they don’t keep up. Further consolidation among logistics providers driven by a need to reduce excess cost, will then need to be re-invested in research and development.
As the growth in local production raises questions about the status quo for vehicle flows into and out of the continent, one example will be international vehicle logistics,. Some forecast that most of the production capacity that will be added in North America is going to be sold across NAFTA. By the end of the decade, the number of imports moving to the U.S. from outside NAFTA – currently around 3.5m-3.6m units per year – could drop by half. That will have an impact on global shipping lines and ports. This is very disruptive, but not necessarily negative.
Some of that volume would come from Mexico both in increased volume moved by rail, as well as new exports moving by short sea. However, there are still uncertainties about Mexico’s infrastructure and its ability to cope with this increase. For example, the country’s largest port for moving finished vehicles, Veracruz on the Gulf Coast, lacks a dedicated car terminal and has issues over draughts for handling larger ships. According to Roberto Zavala, head of Mexico for WWL, current government plans for investment at Veracruz don’t include finishing a new ro-ro terminal until well into the next decade – and perhaps not before 2030. Does this make Veracruz a poor choice for decades? Yes, and no.
Evolution or Revolution?
The conference offered some examples of ‘smart’ technology that is already starting to appear in automotive logistics. Volker Vossler, vice-president of operations for Mexico at Seglo Logistics, a division of Germany’s Schnellecke Group, revealed that the company has started testing the use of drones to carry out ‘cycle counts’ of inventory in its warehouses. Whereas currently, workers need to be raised on forklifts to check inventory, the drones can move around the warehouse at any height to record or scan items. Vossler said that such an approach could save “huge” amounts of time, while improving flexibility and safety.
Vossler acknowledged that some of this technology, such as the warehouse drones, could lead to job losses. “It is normal for there to be some violence in revolutions,” he said.
However, such applications are still relatively rare for automotive logistics, an industry that is self-avowedly risk-averse and more ‘evolutionary’ than revolutionary. Gartner’s Dewicki suggested that much of the talk around these new technologies in logistics was still “mainly hype.”
“Many of the truly autonomous systems and related capabilities are at least 3-5 years off, and often more, from being robust enough to bet the farm on them,” he said. “Nevertheless, there are plenty of capabilities that have real world benefit right now. What remains is to figure out how to use them to reinvent our supply chain practices.”
Other executives suggested that the digital revolution might remain more of an ‘evolution’ for automotive. PwC does not foresee any major disruption to vehicle sales or assembly within its forecast horizon, and Brandon Mason suggested there might not be major impacts for 20 years.
“I’m not being a naysayer or denying the importance of technology like driverless cars, but I think there are a lot of things to work out, including from a cyber security point of view and otherwise,” he added.
There are also questions over the extent to which automotive logistics will change in a more ‘connected’ future. Marc Brazeau, head of NAFTA vehicle transportation for Fiat Chrysler Automobiles (FCA), suggested that, at least for the outbound chain, a connected, self-propelling car might not radically change the dynamics and challenges of vehicle distribution.
“As a driver, there are a lot of things that will change. But for the tactical supply chain, I think it’ll be the same things that we’re doing, at least in the near future,” he said.
Miguel Tavera, director of global logistics purchasing at General Motors, predicted that customers would shift away from purchasing cars via dealers to buying online.
Tavera commented: “We’re going to need a manufacturing and logistics processes that is much more flexible and responsive.” However, he didn’t foresee that this shift would radically alter automotive logistics.
Rather than the blood of revolution, some executives were most optimistic about how changing technology would help the logistics process rather than destroy it in its current form. Marc Brazeau suggested that a growing acceptance by consumers for cars to share data via telematics and internet connections was making it easier to consider using such technology to track vehicles in the supply chain.
“We first started talking about that 12-13 years ago, but the issue we had then was privacy, as customers were worried about giving away information. That is dissipating really fast now,” he said. “I think using telematics to gain real time visibility and track and trace is a hypothesis that is no longer far off.”
Other executives also demonstrated that they were embracing aspects of the digital economy to improve their business, even if the change might not be radical yet. Thomas Isaacs, director of corporate strategic logistics at Grupo Antolin North America, said that his company was carrying out an increasing amount of data mining across its logistics operations. For example, plant load optimization is now reviewed each week based on post-EDI supplier releases, to help plan and improve forecasts and adjust operations. The idea is to move toward an analytics that could be reactive or even proactive.
“Well understood data, regardless of its size or shape, minimizes our business risk, and maximizes our business gain by ‘telling a story’ which can illuminate a certain path – behind, beside, and in front of us – to let us see in in a better direction,” Isaacs said.
Does Automotive Logistics need a wake up call?
Ultimately, the conference did not forecast the death knell of the automotive logistics industry. Continued strong growth will propel the industry toward more traditional services and investments, whether by multimodal transport modes, cross-border flows with Mexico, or improved packaging. Executives are focused on continuous improvement and cost savings strategies. Brad Jacobs maintained that, regardless of the technology used, logistics providers would have to continue offering carmakers the best possible service at the cheapest possible price.
However, many questions remain about the future. PwC’s Mason pointed out that the growing popularity of SUVs and larger cars, and the waning sales of alternative powertrain this year, would pose a problem for manufacturers as they approached federally mandated fuel economy standards for their car fleets. The recent controversy over Volkswagen’s apparent cheating on emissions tests only raises further questions about how carmakers and the supply chain will meet the challenge of lowering emissions in the near future.
The conference theme, ‘Connected and coming soon…’, was a reminder of the changes already happening all around the automotive industry. UTI’s Ed Feitzinger pointed to Tesla as a possible indicator of the future automotive supply chain. It’s a car that is in many ways also a smartphone, in which software updates are frequently streamed directly to the vehicle. In future, a supply chain based more around digital technology, software updates and perhaps even 3D printing could make its logistics unrecognizable to those today.
Regardless of the next step in the evolution, or perhaps revolution, an openness to change will surely be important criteria across the automotive logistics sector– something that automotive logistics has perhaps not been so good at.
William Wappler, president and CEO of packaging specialist Surgere, warned that the procurement and management procedures at larger carmakers and tier suppliers were “sucking the blood out of innovation,” and not giving companies the space to be creative and make changes. If they didn’t, he warned, they could end up a dead company in the new economy, like Kodak.
“Tesla does not have a traditional supply chain. It’s more vertically integrated than other OEMs, and it is based around the customer,” said Wappler. “It will be interesting to see if Tesla changes to become more of a traditional supply chain as it grows, or if the industry starts to look more like it.”
“We still tend to hear about improvement, not innovation. It’s not finding new ways to do the same old things. Cutting costs is not innovation,” Wappler added. “If you are not innovative you won’t be part of the modern economy. That should be a wake up call.”
Sources: Tim Horton, Schenker, Inc., Global Account Manager, Phoenix, AZ AutomotiveLogisticsMagazine.com Strategy&.com