Evolutionary Shift In Auto Production?

Aspects of the bankruptcy reorganization of GM and Chrysler suggest a possible fundamental shift in world auto production. Up to about 50 years ago, auto production was highly vertically integrated. An auto company would design the vehicles, make all or most of the parts and assemble the vehicles. Over the last 30 years, auto companies increasingly outsourced or purchased many of the components used in the production of their vehicles from parts suppliers.

There is the possibility that a fundamental shift is occurring in auto production as a result of the bankruptcy reorganization. In some cases, the auto company might design and sell the vehicle but outsource the entire production and assembly process.

Magna, an auto parts supplier based in Canada with world wide operations which is currently a major supplier of parts to the auto industry, has bid for GM's Opel operation. Magna's business plan is to use Opel's factories to assemble vehicles for auto companies on a contract basis. Penske Automotive has bid for GM's Saturn arm. Penske does not plan to make the Saturn but, at least for the next couple of years, to contract the production of the Saturn to GM's existing factories.

There is the possibility that if the Penske and Magna deals go through that this will result in a major reduction of the vertical integration of the automotive industry and could lead to significant cost reductions. Some companies will design and perhaps sell the vehicles and contract out the production of the vehicle to firms that specialize in manufacturing. This probably will also lead to sales and support of the vehicles being performed by another set of companies. This production model will make it possible for new companies to enter the auto industry as these new companies will not need to finance the construction of a manufacturing capability.