Why global OEMs choose Magna as partner?

Contract assembler Magna Steyr，part of North America's largest auto-parts supplier Magna International, is located in Graz, Austria. The facilities there can form the world's largest manufacturer of automobiles. Now, to focus on the urgent markets, Magna sees the customers from LCC-"low cost countries" as from "Leading Competitive Country". As Gasgoo.com interviewed two executives from Magna-James Tobin, President Asia of Magna International, and Ted Robertson, Executive Vice President, New Product Creation of Magna International and Chief Technical Officier of Magna America, the talk started with Magna Steyr.

Q: Magna makes components as well as fully built cars for third-party OEMs. Why they choose you to assemble the cars?

Ted Robertson: Every situation is specific and depends on a lot of factors; when a product is given to Magna, for example, It could depend on whether this added volume that the current OEM can't sustain on its own plant. And rather than adding a new plant, they look at their business plan and say they can't justify building a plant so if there is already another plant it place, using it would provide further building costs. So that's one situation.

Also It could be a location or the market. For example Chrysler was building minivans here in North America, there was a growing market in Europe, and they did not have to build a plant in Europe, Magna was already here, so all they had to do was to put some tools in that facility and the rest of the infrastructure was there and they were closer to the market to produce and save on shipping costs.

There are many scenarios on whether a manufacturer has the capacity, looking at the timing of the program- how long is the program supposed to last- maybe it's only a 3 year program so why spend a lot of extra cost when someone in Magna could do it in 3 years, come here and do it then leave.

A number of situations involve low volumes as specialty vehicles -$100,000 specialty vehicles- usually companies just as these don't have a plant and they are looking for a facility, especially a facility that can paint. It's usually one of our invitations; it's that you don't have to put up a paint shop because it's expensive. Well Magna has 2 paint shops in Graz, so they say when they do the business case; we can just pay for the tools, Magna has buildings and equipment lines available, and there is already a paint shop there. The costs; the paint shops have been amortized long time ago so it's just the cost of painting and some maintenance. For the OEMs are trying to do a vehicle and put all their costs in versus a facility that is already there, the answer is easy for them to justify going to Magna. So there are many factors involved.

Q: Would you expand the production capacity according to the market demand or would the OEMs take it back from you?

Ted Robertson: They could, sometimes. it's hard to predict the market. And the worst thing an OEM can do is to overestimate the market. Because there is all the surplus capacity and the overhead and that's got to be amortized. So everyone is getting smarter today because the volume per model is shrinking. So they will capacitate. Take for example 100,000. And that size is very successful. They have a choice whether to expand their plant, to pay for more tooling, parts as well as the assembly, or they can pay for the tooling for the extra amount and then give it to someone to produce in a facility. And you never know if the volumes are going to continue to grow or if it's just a 2 or 3 or 4 years blitz. And why would they go and expand their whole complex, and take on all that infrastructure, when they can use a flex facility - which Magna has- and if it goes for more of 3 or 4 years, and it looks like the train is continuing, then they will reevaluate and say "we have a winner here, we should expand our facility, and then bring the product back inside". Otherwise, they will just leave their facility, run at maximum capacity- so it's the most efficient way- and pay Magna to do the surplus.

Q: Have you seen specific car models that have been exceeding expectation?

Ted Robertson: Usually not. There are a few, but the car business is a fashion business, and there is a lot of competition so, if somebody comes up with successful product, other people will try to design it, and they will come up with something that looks fresher or newer, and so volumes will go up the first three years and after it will be the traditional fall off unless you reinvest in. So competition comes in. The OEMs in America had the truck market. But well who is making the big trucks now? Toyota, Nissan, and that was a smart move on their part, originally. And now they are saying, wow, we should have got into that earlier, because now, they brought their big trucks out, and now they are in trouble. So that's why I give you the general answer that usually the products are over estimated rather than being underestimated because of all these other situations.

Q: What if you have been building a model and then that product becomes quite successful. Is it likely that the OEM take it back to their facility?

Ted Robertson: Usually no, because for them to expand the facility and then do the tooling it takes at least 2 years. They are not sure whether the product would be successful beyond 3 years, because you would need to amortize that over another 3 to 5 years. So they are projecting 7 years. And it is very difficult to project the market in 7 years today. So usually they will say well let's continue, there is a good value proposition, it makes good business sense, usually they will try and renegotiate the cost, because the volumes are continuing and therefore every business is projected based on certain volumes and we will usually see that they decrease over time, but if there is a holding, then there is an opportunity to renegotiate and that's better for everybody. So that's typically the case and what I tend to see all the time.

Q: So currently you are in manufacturing cars, not on a contract basis. Will you be getting into small commercial trucks on the same line? LCVs are picking up in emerging markets. Will Magna get into that?

Ted Robertson: When you look at a plan on a macro level, you have a body shop, a paint shop and a train shop. Without a doubt, the paint shop is the most expensive investment. And we continue to work with our customers globally, and if they have a need for us to make a vehicle assembly, the business model will have to be ready for them and ready for us. We have to be assured that we can sustain the volumes that we would need based on the investment that we would have to make. And we order many pools of operation models out there today. When you look at Europe, I think there are 350 today. In China it's going to be equal to that or greater by 2013. So we continue to look at emerging regions, but it's very complicated. We have customers that want us to be completely on call, and we need the business case has to be going for us too.

Q: What are your future plans for the coming year? I heard you have many technologies coming out there, many engineering standards… just giving an example, I heard about a technology breakout with the Ford Focus.

James Tobin: There is a platform in Cologne Germany, and many manufacturing plants globally. I think somewhere between 12 to 17 plants complete vehicles for CKD. So it's a very big program for Ford. What we see is that they have a common architecture; we are using new manufacturing processes and we make sure that we have the global footprint in place to support the global manufacture request from our customers. Because again, like I mentioned before, we have to take each component, each group, working with every single tool and ship them to multiple regions. So we are looking at certain technologies to go into the emerging markets. In products as well as processes; processes are really important because we want to maintain consistency from region to region.

Q: What is the hope of having complete vehicle assemblies as a business in some of the emerging countries?

James Tobin: Right now, our vehicle assembling system is contained in Graz Austria only, we have the two assembly plants in Graz; we are exploring taking that "flexplant" concept, when I say "flexplant" it means having multiple products being built in one assembly plant, multiple modules, multiple customers in one plant. So we are looking to expand this concept to other regions of the world. Of course we are not going to build the plant hoping the work will come, we are talking about our customers and when it comes down to its capacity constraints. When you look at the BMW X3, or you look at Chrysler when they had the European volume of the minivan and other products that they wanted built over there; that's where it came down. It was capacity constrained within the OEMs. So we continue to talk to our customers like I said, we are extremely flexible on what products we offer, whereas it is a product or module, and the complete vehicle assembly. So we continue to see if there is a demand around in the world.

Q: Within other parts of the world like China and India, is it possible to hold a "flexplant"?

James Tobin: When you look at the growth in the automotive industry. We were about 68 million units in 2007 globally. The forecast is to grow by 2013 to somewhere around 84 million units. If you look at the amount of plants there are in America, as well as Europe, I don't know that they would require a "flexplant". The growth market, we continue to explore. If there is an opportunity for us to build the plant.

Q: So generally, whenever you enter a new market, do you start down and go up from the different car segments?

James Tobin: Again it depends on the customer. If you look at some of the brochure listed in the last 9 months, we are building everything from a Mini Cooper SUV, which is a very small car, to a High end Aston Martin. So you got one end of the spectrum to the other.