Good Idea! Now find a better one.

Car companies sell cars and the parts to repair and maintain those cars. What if they built parts to replace components in competitors’ cars?

Could Ford take a 5 year old Nissan truck, rip out the motor and drive system and replace it all with brand new Ford equipment?

Or in other words, does a car company have to sell whole cars? Could they sell half or 1/4th of a car? The answer is yes, but the question, Why?, remains.

I mean what’s wrong with selling entire cars and replacement parts only? Absolutely nothing - it makes quite a bit of money. But there’s a problem in the auto industry right now: overcapacity. Automotive research firm CSM Worldwide put global automotive excess capacity for 2005 at 15 million units.

So what do you do in a situation such as this? For Ford Motor and GM, they’re working to reduce their production capacity. Previously they kept their plants running using discounts and incentives but the quality of the offerings from competitors makes that a poor business in the long run.

Another option is to win more market share as Toyota and Honda have been doing. But this is much, much easier said than done - especially if you have legacy union work rules plus healthcare and pension obligations out the wazoo.

A third option is to find other ways to use that capacity. We’ll briefly consider two: Selling fractional cars and selling production capacity.

Why Buy? Upgrade!

If you’re having difficulty selling the whole car, why not sell only the best (and most profitable) parts to consumers? And whereas someone might not consider an entire Ford, perhaps they would consider a Ford engine? Or a Ford interior? Or a new Ford body?

Instead of spending $25,000 on a new Ford truck, spend $6,000 on your old Ford, Chevy or Nissan truck to get 80% of the benefits of a new truck.

Why buy an entirely new car just to get the more powerful engine, the new interior, the fuel efficient hybrid, or even the new body style? Currently, your only option is after-market products and those are geared more towards enthusiasts in various forms.

Here, let me build that for ya!

Another take on staving off overcapacity woes is to find someone else to use that capacity. While there may be industry-wide overcapacity, specific companies may have under-capacity in specific regions - an opportunity for arbitrage. Who among Ford and GM’s competitors is building assembly plants here in the US? Why?

Why not lease out Ford’s capacity for a competitor to assemble their cars? While it would put a serious dent in a few people’s pride, cash flow from a plant is better than cashflow to idle a plant.

Instead of thinking of Ford’s assembly plants as places where Ford’s are assembled, think of them as places where automobiles are assembled. When Ford is doing well, assemble Fords. When Honda and Toyota are doing well, assemble Hondas and Toyotas.

Use excess manufacturing and assembly capacity to generate profit even if your cars and trucks aren’t.

Either way, someone eventually someone will buy those idle buildings or the land underneath them and find something productive to do.

Additional Perspectives:

Overcapacity is nothing new as the auto industry faced a similar problem of 6 millon units of excess capacity in 1991.

the 6-million-unit overcapacity problem in North America could fall by half [by 1994], as long as plants already on the chopping block actually close, no more plants open than are already planned and the domestically built share of car and truck sales stays close to 80%. (emphasis mine)

If only they knew in 1991 that foreign car makers would only get stronger…

Interestingly, some say China will also have an automotive overcapacity problem by 2010.

But most interesting are the problems at Chrysler that have been brewing behind the more public falters of GM and Ford:

Chrysler admits it has 50,000 vehicles sitting on random storage lots. Those cars and trucks are in what Chrysler calls its “sales bank.” It’s a practice — abandoned by most automakers more than 25 years ago — by which Chrysler produces cars that no one has ordered and waits until dealers have space on their lots and are willing to take them on.

Because of union work rules, it’s cheaper for Chrysler to produce these cars and let them sit in parking lots than it is to idle the workers - assuming they can sell the cars of course.

Business Week is even reporting grumblings that Daimler is considering spinning off Chrysler altogether.

When a business has factories that need to run near 100% capacity all the time to be efficient and profitable, shifts in overall demand can be dangerous and shifts in consumer preferences can be absolutely deadly.

Tags: Auto Industry, overcapacity, Ford, Nissan, GM, Chrysler