Era of electric vehicles means old factories have to close. Subscribe to Electric Vehicle News Bitesize Podcast for FREE to hear more!
New plants dedicated to easier-to-produce EVs could make older ICE facilities redundant.
Concerns about overcapacity in car production are growing.
Overcapacity has been the bane of the industry for decades as every automaker struggles to stay ahead of rivals. Due to too many factories, European, North American and Japanese manufacturers levelled off in the early 2000s to maintain high profits by maintaining a reasonable balance of production and sales. Other competitors, first from South Korea and later from China, have added global capacity and weighed on global margins.
Hyundai-Kia has grown into a global powerhouse and reached a level where production remains profitable. The bigger problem comes from China, where dozens of new manufacturers are trying to get a piece of the fast-growing local market. Once local production saturates the Chinese market, exports will continue to grow. Larger manufacturers have grown rapidly, filling huge factories and now seeking to export, while many smaller manufacturers have disappeared.
A target of over 80 percent capacity utilization has traditionally been the criterion for profitable operations. Established factories in mature markets typically operate at this level, barring model changes or labor issues. A Rating in the 70% range for Ford or Volkswagen plants are rare. That has changed in recent years, however, with new entries from Electric Vehicle startups and expansions by more successful Chinese manufacturers.
Now that the market is shifting to electric vehicles, manufacturers are finding it more efficient to build dedicated electric vehicle factories. Converting factories to make internal combustion would lose the efficiencies gained by building factories around Electric Vehicle assembly processes. Against this background, manufacturers have opened factories around the world to increase production capacity of electric vehicles.
In most cases, these new plants will not replace existing plants. The list includes unplanned expansions of existing factories, such as the doubling of Stellantis’ Kenitra plant in Morocco, as well as announced expansions of Tesla factories around the world. If these assets were counted here, millions of additional capacity units could quickly be included.
Judging from the models of this new group of factories alone, the planned production capacity of light vehicles will increase by nearly 3 million units. Existing factories were producing 96 million units as of 2017, and the global market is not expected to exceed this volume until 2028. What happens to all this excess capacity? Obviously factories have to close.
In the current transition to electric vehicles, manufacturers see their new products as additional sales. Early adopters of these EVs won’t necessarily crowd out sales of combustion-engined vehicles. Many early buyers of vehicles like the Tesla Model S or Lucid Air just wanted to be the first and have the money to add another car to their personal fleet.
Similar arguments can be made for vehicles like the Ford Mustang Mach-E and General Motors’ GMC Hummer. As these models generate higher volumes of sales and more affordable offerings come to market, this incremental volume diminishes and new purchases will take away sales of legacy models, lowering the demand and, ultimately, reducing the need for legacy plants.
In North America, more than two million units of production will be added with new Electric Vehicle-only plants. GM is converting older plants to Electric Vehicle production, and other manufacturers are expected to add Electric Vehicle production to existing plants in the near term, which should squeeze some capacity out of ICE vehicle production. This puts pressure on existing factories. If startups — including Lucid, Faraday Future, Rivian and contract manufacturer Foxconn succeed, Ford, General Motors, Stellantis, Toyota and Honda, the largest manufacturers in the region, may have to close older factories in the region. This could displace tens of thousands of workers.
Easier methods of assembling electric vehicles will also reduce the manpower needed to build cars over the next 20 years, but most of that reduction will come from closing existing factories. The transition to electric vehicles will be slower than many in the industry think, but there will be a transition. This requires closing factories and moving workers to other factories or other industries. Yes, there are growing concerns about overcapacity in the industry. It will be done in stages, split between old internal combustion engine factories that are about to become obsolete and electric vehicle startups that cannot gain a foothold in the market. Ultimately, this will be the biggest shock to the industry since the Great Depression, from which only the best and luckiest will survive.
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