Localisation and rationalisation to boost car carrier shipping volumes
As mature auto markets peak and OEMs ramp up new technology investment, car carrier shipping volumes are likely to benefit.
Honda’s recent decision to cease car production at its Swindon UK plant and supply European car markets from Japanese factories has raised speculation that this may represent a wider industry reshoring trend. Similarly, Ford announced capacity rationalisations across Europe, Russia, Brazil and China while investing $1 billion in two of its US plants. Were other OEMs to follow suit and seek to fulfil overseas market demand from domestic assembly lines it would signal a boom for finished vehicle shipping. However, while some boost to shipping volumes is anticipated there are other drivers at play.
Like other Japanese car brands, the UK had been Honda’s preferred production base from which to supply Europe’s vehicle market for decades. However, struggling to regain market share following the 2008 financial crash, the company turned to further afield export markets such as North America, at a time when consumer tastes were turned to SUVs and crossover vehicles. By 2018 the Swindon’s plant output had slumped to just 160,000 vehicles, making it one of the smallest and least efficient auto factories in Europe. The signing of the recent EU-Japan free trade agreement and the potential trade disruption of Brexit were tipping points that sealed the decision.
While there remains the risk that other Japanese car makers may follow Honda’s lead with regard to UK manufacturing, there is little evidence that this represents a widespread reshoring trend across the global industry. But according to Drewry’s Finished Vehicle Shipping Market Review & Forecast 2018/19, while the growth in OEM overseas production relative to home market manufacturing has stalled in recent years (see Figure 1) this was due to a recovery in mature markets such as North America and Europe which boosted demand for domestically produced vehicles. But as emerging market demand is improving in countries such as Brazil and Russia and reaching new highs in the likes of India, car manufacturers are reactivating underutilised overseas plants and investing in new local capacity.
Indeed, as the report makes clear, those OEMs that invest most heavily in overseas production capacity have recorded the fastest overall output growth, with Asian brands leading the charge.
While Japan’s Nissan, whose output accounts for a third of UK auto manufacturing, recently cancelled plans to build its X-Trail SUV in Sunderland, it is boosting manufacturing capacity in Russia which had previously been fulfilled from the UK. In addition, it plans to open a new production plant in Algeria and is investigating building in Ghana. Globalisation of electric vehicle production has started too. Hyundai is planning new production bases for electric vehicles in India and Indonesia.
Meanwhile, the high cost of investments in technology is putting a strain on OEMs balance sheets, forcing rationalisation of traditional production capacity in more mature markets through centralising production in larger, more efficient factories globally. This has put smaller plants, such as Honda’s UK plant, at risk.
As new Free Trade Agreements are being negotiated, higher shipping costs are being offset by greater plant utilisation and production efficiency gains. Tariffs on Japanese car exports to the EU will be eliminated over the next eight years.
So what does this mean for seaborne trade demand in finished vehicles? Drewry expects that growing consumer demand for cars and higher production levels in emerging markets will buoy traffic moving on North-South shipping routes and regional trades, while assembly plant rationalisation in mature markets will boost East-West deepsea shipping. And higher volumes of finished vehicles will also drive demand for spare parts shipments moving by containerships. But longer term the shift to electric powered vehicles could moderate trade growth with lengthening product lifecycles and fewer spare parts requirements.
However, the driver of this rosier immediate outlook has more to do with technological developments and emerging market development than any possible reshoring trend. Meanwhile, transport providers dependent on mature markets such as the UK and mainland Europe will be vulnerable to further production capacity rationalisation.