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OM in the News: Auto Makers Dare to Boost Capacity

January 17, 2014
Nissan's new Mexican plant will produce 1 million cars

Nissan’s new Mexican plant will produce 1 million cars

The auto industry’s recent fat profits from rising demand for new cars in North America is about to confront the law of supply and demand: A string of new factories in the region will start cranking out more than a million cars over the next few years. A large increase in production capacity poses a serious risk for auto makers, writes The Wall Street Journal (Jan.15, 2014). They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%.

VW said it would build a new North American plant as part of a near term plan to invest $7 billion in the region. That will be in addition to a factory already under construction in Mexico and its 2-year-old plant in Chattanooga, TN, which now operates at only 50% of capacity. Honda, Mazda, and Nissan are opening new plants in Mexico, while Ford, Toyota, and GM are all expanding capacity at their existing plants in the U.S. and Canada.

Some CEOs, like Fiat/Chrysler’s Sergio Marchionne, are already concerned about overcapacity. “The last thing we need is to get bricks-and-mortar capacity increased. Building new plants isn’t the only trend to watch, because increasing the use of automated production lines can boost output at existing factories,” he states. Marchionne knows the trouble that idle factories can cause. Excess production capacity and the use of heavy price discounting were two of the problems that contributed to Chrysler’s slide into bankruptcy in 2009. In Europe, where auto sales have fallen amid the continent’s prolonged economic slump, Fiat, Peugeot, and GM all have underused plants and are struggling to stem losses.

Classroom discussion questions:

1. Figure S7.6, in Supp. 7 (Capacity and Constraint Management), illustrates 4 approaches to expansion. Which approach are these firms taking?

2. What are the main considerations in capacity decisions?

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