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2011 CONFERENCE REPORT

OEMs outline key areas for improvement in South American vehicle production

Regional vehicle manufacturers are under pressure due to increasing vehicle imports and raw material prices, but these problems can be addressed through improved plant flexibility and part supplier strategies.

 
The first AMS South America conference

19 SEPTEMBER 2011, São Paulo: Production facilities must be made more flexible and part suppliers must become fully-integrated into the production process in order to support increasing finished vehicle volumes, according to senior OEM executives and industry analysts speaking at the AMS South America conference, held in São Paulo, Brazil, 14-16 September.  

GM's Jose Eugenio Pinheiro highlighted plant flexibility as a key goal for OEMs operating in South America

In the first of a series of presentations made by OEM executives, Jose Eugenio Pinheiro, Vice-President of Production at GM South America, highlighted the need for improved production flexibility. Using Brazil as an example, he said that individual plant flexibility would be the key to delivering the number of cars required by the growing market. Yet beyond basic volumes, he said that plants should have the flexibility to quickly switch model output in order to produce the right vehicles in the right place. General Motors, he continued, would always look to build cars as close as possible to the market, but beyond simply being in the correct country, companies should be able to deliver those vehicles found to be most popular within a specific local region.

To support this, Pinheiro stated that GM already had the capacity to produce 1.4 million vehicles per year across nine South American plants comprising 10 production lines. These facilities, he continued, would be delivering more locally-designed cars, highlighting the Chevrolet Montana car-derived pickup and Agile mini-MPV as results of this initiative. “We must develop products using the latest technology and build them in highly-efficient plants,” he said. Support for this capacity, he said, would be driven by the comparatively low vehicle ownership rates in Brazil. Currently standing at approximately 170 vehicles per 1,000 people, the expected increase in this penetration would continue drive sales from the current three million to five million vehicles per year by 2020.

Tarcisio Telles, Director at PSA South America, believes that flexibility can be achieved through a well-trained labour force

Tarcisio Telles, Production Director at PSA Latin America, also highlighted improved flexibility as the way forward in the Brazilian market. “To be competitive, we must have flexible lines. We must diversify, use what we have invested. We must increase innovation and produce more cars on the same line.” Yet rather than investing in robotics to achieve this flexibility, Telles stated that it could be achieved through a well-trained labour force.

Part supplier support

Michelle Hill, from the Harbour Report, noted that imported vehicles are one of the major challenges facing local OEMs

Meeting the anticipated growth in market demand means carmakers relying on parts and components delivered from Tier suppliers, noted Michelle Hill, a partner at the US-based Oliver Wyman (publisher of the Harbour Report). She told delegates that she had visited 25 production plants around the world so far in 2011, including various facilities in South America, and reported that while virtually all OEMs are forecasting increases in production, few have suppliers equipped to deliver sufficient part quantities. This means outside assistance will be required to support the projected production figures.
 

Roberto Bastian, Mercedes-Benz do Brasil, emphasized that suppliers must be brought closer to the production process

With regards to parts supply within South America, Roberto Bastian, Vice-President of Logistics and Manufacturing at Mercedes-Benz do Brazil, noted that the series truck and bus maker's new facility in Juiz de Fora, Brazil, would be very different from the company's existing plant in Sao Bernardo, located near Sao Paulo. The new plant, he said, would rely on parts delivered from suppliers located close by.

This would serve to maintain a reliable flow of parts to the plant. Speaking about the Sao Bernardo factory, Bastian joked: “I need to beg my suppliers for parts, not like GM or Fiat!”

Import challenges

Citing details from the Harbour Report, Michelle Hill also focussed on another major challenge facing existing OEMs in South America, the increasing number of imported vehicles entering the market. She noted that since the economic downturn of 2008, the Brazilian real (R$) has increased in value by 40% in comparison to other benchmark currencies, making imports increasingly attractive despite the local taxes imposed on imported models.

To compete with this influx, Hill said that OEMs must use technology and innovation to deliver improvements in vehicle quality and take advantage of the buyer confidence evident across Brazilian society. “The financing is there and Brazilians want to use it,” she said.

Alexandre Bernardes, Vice-President of ANFAVEA, the group which represents local carmakers in Brazil, reminded delegates that over the past two years imports have have increased by 35% – while local production has increased by only 5%. Another concern which he said would need to be addressed was the declining number of vehicle exports.

Additionally, Bernardes noted that while Brazil is rich in energy, and particularly green energy, sourced primarily from hydro-electric installations, the cost of electricity and other utilities remains prohibitively high. The reason can be traced back to the depth of bureaucracy, which would have to be cut back in the short term in order to allow carmakers to be more cost-efficient. “Brazilian products must be more competitive, with better design and innovation, with an increased amount of regionally-sourced content,” he warned.

Automation as needed

VW's Celso Placeres stated that increased raw material costs were so high that they could not be passed on to the consumer

Further highlighting the need for local plants to improve flexibility in order to effectively compete, Celso Placeres, Volkswagen's Director of Manufacturing Engineering, instanced the company's Gol range. Produced on two full lines, he said that beyond giving VW the capacity to deliver sufficient numbers of the popular vehicle range, the lines could be adjusted to produce whichever model version was proving more popular at any given time.

Placeres was another speaker with the over-valued Brazilian currency on his mind; of the 825,000 vehicles produced by 

Volkswagen do Brasil in 2010, only 135,000 were exported, though this was offset by an 87% local part content average.

Placeres considered the addition of automation across vehicle production to be the best route to cutting overall costs. Asked later if this would provoke trades union members into further strike action – workers at Volkswagen do Brasil had only just returned to the production line after a stoppage – he replied that automation would not replace a given worker, but assist in helping to reduce cycle times and produce a better product.

Plan for the future

While flexibility and part sourcing remain critical to local improvements in production processes and in overall capacity, the techniques used to achieve this differ quite considerably between OEMs. While some would look to locate parts suppliers in close proximity to old and new plants, others, such as Renault do Brasil, have decided to implement all-encompassing strategies to achieve similar goals.

Alan Paupitz highlighted Renault's use of the 'monozukuri' production improvement system

Detailing the company's plan to achieve this, Alan Paupitz, General Manager for Renault in Curitiba, Brazil, offered details on the company's 'monozukuri' plan, designed to address overall company performance which he said had "stagnated" over recent years. Essentially monozukuri, another of the Japanese-based production practises that include the more familiar 'kaizen' and 'kanban' strategies, would be used to measure and improve process speed and quality – with the ultimate goal of reducing costs.

The theme of reducing costs was raised by most OEMs speaking conference. While Paupitz stated that costs related to inbound logistics had increased considerably, the same was true with raw materials. The price of chassis steel was "absurdly expensive", said Volkswagen's Celso Placeres, who noted a 20% increase in material costs – costs that could not be passed on to the consumer since they would result in uncompetitive vehicle prices.

Paupitz said that, to counter this, Renault monozukuri system would look to benchmark processes against its most efficient plants, streamlining product usage and production activities. Renault would look to reduce part diversity, with the goal of increasing part commonality and reducing material prices through bulk purchasing. Further, operator processes within the cell would be examined – in one such case, he revealed that operator tracking within a cell resulted in a saving of 41 steps, a saving of five square metres and 71 seconds in the takt time.

Ford's Silvio Illi addressing delegates

Work in process

OEMs operating in Brazil and other South American countries have had the market to themselves for the past decade. This has resulted in some complacency both in terms of production wastage and reduced vehicle choice, compounded by vehicle importers using the value of local currencies to make their products more affordable.

But carmakers in South America today have seen their shortfalls, and are making moves to correct them. Once new practises are incorporated, these OEMs will be better placed to battle the increased tide of imported vehicles through reduced costs and supply chain improvements, leading to a better, more varied selection of vehicles being produced at plants near to consumers.

How this will play out over the coming year will be one of the hot topics to be addressed at the 2012 edition of the AMS South America conference.