AUTOMOTIVE OVERCAPACITY? IT'S NOT A PROBLEM
By ALEX TAYLOR III

(FORTUNE Magazine) – Want something to worry about besides the year-2000 effect on the world's computers? Try wringing your hands about overcapacity. The New York Times recently fingered it as capable of causing the destruction of the global economy.

Cars are usually branded as one of the biggest villains. In a May cover story, The Economist fretted that global auto overcapacity could drive one or two companies into bankruptcy, or force others into mergers, or cause still others to shrink from mass producers into niche players.

Here's why these people have the jitters: Every region of the world has too many auto factories and not enough customers, so great chunks of plant, equipment, and workers go underutilized. To make matters worse, more plants are springing up in places like China, Thailand, and Brazil. Since those countries won't be able to absorb all the new production right away, the alarmists say, cheap cars will then flood North America and Western Europe, driving down prices and pushing some manufacturers to the brink. The numbers are indeed sobering. According to Autofacts, a West Chester, Pa., research group, all the world's auto plants will have the ability to build more than 74 million cars and trucks in 1998, but only 71.3% of that capacity will be used.

It's highly unlikely, however, that this imbalance is about to bankrupt the world's automakers--much less usher in the Great Depression of 1999. Overcapacity is a little like global warming. It's measurable, but exactly how good the measurements are is in dispute. It fluctuates over time and seems to be getting worse--but then again, maybe it isn't. And while it sounds terminal or at least infectious, nobody has died recently from overcapacity. Building bad cars, ignoring customer preferences, falling behind the technology curve--those are the real company killers.

What the fearmongers ignore is that all manufacturing capacity isn't equal, and it certainly isn't interchangeable: cars aren't pork bellies or barrels of oil. Overcapacity differs from product to product, company to company, and country to country. Most of the excess capacity in North America belongs to General Motors, and most of it is in passenger cars. But cars are money losers compared with big sport-utility vehicles and pickup trucks--and GM has almost no excess capacity there. Not surprisingly, it is gradually shifting its car capacity over to trucks or closing it entirely. The biggest chunk of overcapacity is in Southeast Asia. But that's exactly where automakers want it, because they are building in anticipation of future demand. Says James Mateyka, an A.T. Kearney automotive consultant: "When you go into a new market, the entry point is always larger than what the market can absorb." If a company waits until demand equals capacity, it may miss the market.

Yes, it is true that new factories in Asia making products like blue jeans and computers hurt competitors in the U.S., but most new Asian car factories have little consequence for automakers outside the region. In the midst of Thailand's financial crisis, Toyota shut down its auto plants there. Another example of global overcapacity, you say? Well, Toyota makes a car in Thailand called the Soluna. Designed for sales in Southeast Asia, it features a beefed-up chassis for driving on potholed streets and simple, easy-to-repair parts for do-it-yourselfers. It simply isn't sophisticated enough for Western customers. An excess of Solunas in Thailand isn't going to affect demand for Lincoln Navigators in New York's over-moneyed suburbs.

Automakers like to blame overcapacity for lackluster profits. But that's an excuse, not a reason. Competition is always there. Automakers have to learn to add value to their brands so they don't become commodities. The current excessive supply of Ford Tauruses isn't preventing Toyota from charging premium prices for its Camry.

Excess capacity has been around for years, and companies treat it as another cost of doing business, like administration or R&D. Automakers usually add capacity in 100,000- or 200,000-vehicle increments, so it is never possible to hit the market precisely. And when they want to reduce their capacity, labor unions usually get in the way. When Renault tried to shutter a facility outside Brussels that employed 3,100 people, it touched off a dispute with Belgian autoworkers that took seven months to resolve.

In fact, overcapacity ought to be looked at favorably because it's an expression of faith in the future. Facilities with new technology are being built to replace obsolete ones. Says GM vice president John Smith, who runs Cadillac: "Overcapacity is Darwinian. It has happened through history. New plants make better products." The time to worry will be when production catches up and overcapacity is eliminated. That will mean that the auto industry has stopped growing and is heading downhill.