Ford's Brazilian Experiment

By Charles Delvalle

American automakers can build small cars profitably... just not in America.

Look at Ford's most advanced plant in Brazil. They have no problem building cars profitably there.

I know, you might be thinking, "labor costs are cheaper, that's why". And while that's certainly one reason, it's not the only one.

You see, Ford has built one of the most advanced factories in the world, in Brazil. This factory is a flex-factory. In other words, it builds multiple cars on the same line. In this factory, Ford builds five different cars. If demand levels drop for one car and increase for another one, Ford can rapidly alter their product mix.

The result? No inventory build-ups of cars that simply aren't selling. And more sales of the car that is selling.

Ford doesn't have many flexible manufacturing plants in America. That means that anytime they want to switch a plant that builds SUVs to one that builds small cars, they have to spend millions of dollars just to retool the plant. Plus, it could take over a year for the work to complete.

Lost money and lost productivity. And that's just one reason why it's hard for Ford and GM to build cars profitably here in the states, but it doesn't end there.

Ford's plant in Brazil is huge. So huge, that it has over two dozen of Ford's suppliers built directly into the plant. This is huge.

In America, when Ford and GM buy alternators for their cars, these alternators are shipped from over 10 different locations. The process of shipping heavy parts isn't cheap and certainly adds another layer of costs to the end product.

Plus, let's say Ford anticipates demand for one of their cars to be very high and orders a lot of alternators. If demand is under what Ford expects, they now have too many alternators in inventory. If sales drop as they did in October, Ford is left holding a huge inventory that might not get worked down for months.

When you have suppliers integrated into your factory, the supplier provides the part needed at the very moment it is needed to be put into the car. This reduces the price of keeping inventory and makes shipping costs nearly non-existent.

Plus, quality goes up a level. Let's say that alternator had a defect. At the Brazil plant, they walk over to the supplier and tell them something is wrong. The supplier then fixes the problem on the fly - instead of fixing it in the next shipment.

In America, suppliers aren't nearly as integrated as they are in Brazil. And the result is that product fixes don't happen as quickly as they could and shipping costs are more. Plus, the time it takes to build the car increases.

Ford and GM have a hard time integrating suppliers because they have so many of them. In some cases, GM has over 20 different suppliers providing them alternators. Toyota, on the other hand, has just a handful of suppliers that they tightly control. This allows Toyota to provide better quality.

But even if GM and Ford drastically reduced the suppliers they receive parts from, they'd still have a hard time heavily integrating their older plants. The UAW wouldn't have any of it.

So I've just listed three reasons why GM and Ford have a hard time building a profitable car in the US.

1. Flexible manufacturing lines are nearly nonexistent in the USA
2. Suppliers aren't properly integrated into auto plants
3. The UAW won't allow the Big Three to be flexible

The reasons go on and on.

For example, most people don't realize that since the big three couldn't drop labor costs, they worked on dropping the cost of their parts. When I spoke to a friend who is black belt Six Sigma certified (he helped build the manufacturing line for Proctor and Gamble), he told me that when a manufacturer focuses on lowering the prices of parts, they end up with more defects and lower quality.

He also told me that in the US, unions mandate multiple breaks for their workers. These breaks all happen at the same time and have the effect of "stopping the line". Last time I checked, stopping the line is a huge productivity waste. Why don't they just let half the employees take a break and keep the line going? It seems logical, I know. Perhaps too logical.

Another mistake the big three commit is that anytime there is a paint scratch or some kind of minor defect, they stop the line to fix the cars with the defect and to correct the problem. What does Toyota do? Well, they keep the line moving along until the end of the day. They figure they can just fix the problem just before the car is shipped. No wonder Toyota has one of the best capacity utilization rates in the automotive business.

If you'll notice, though, most of these problems are easy fixes. But until now, the Unions made it hard.

That's not to say that I'm not hopeful.

The recently passed UAW deal will make it so that labor costs are virtually the same between the Big Three and the Japanese competition around 2010-2011. This will give them roughly $1,000 cost savings per car built. And that's exactly what's needed in order for the Big Three to build small cars in the US at a profit.

If the government follows through with giving the Big Three money for retooling and converting plants to flex-manufacturing plants, it will help the bottom line even more.

I'll admit looking at the way the UAW has screwed automakers makes me hate unions. I understand there is some need for them, but I also think that unions went unchecked for far too long.

They became far too powerful and could be partly responsible for contributing to the downfall of the American automotive industry. That's not to say that the Big Three didn't do this to themselves.

They made a series of catastrophically stupid decisions to lead them to where they are today. I've covered this before in previous articles.

But the unions really piss me off. Where else in America are you paid $100,000 just to retire early? Only in Michigan.

Any new bailout that is approved for the Big Three MUST include a reworked labor agreement with the UAW. The UAW better be willing to give up a lot more then they have. Let the Big Three integrate suppliers. Let them build more productive plants.

If these things don't happen, the Big Three will always be behind the competition.

Stay free,

Charles