SAO JOSE DOS PINHAIS, BRAZIL — Bringing a $700 million automobile factory to production from scratch is not an easy task, especially with complicating factors like a plunge in the local vehicle market.
But that's what's going on at Volkswagen AG's newest facility, where suppliers are located adjacent to a state-of-the-art VW/Audi AG plant in Sao Jose dos Pinhais.
The plant, which assembles the Golf A4 and Audi A3, officially opened Jan. 18, when Brazil's currency problems were most acute. Since late February, the plant has been making vehicles for inventory — the new models will be introduced during the second half of the year.
In mid-April, only eight cars were being produced per day. In May, the goal is 30 per day, evolving to 200 by December.
But Brazil's slumping demand for new cars means the projections are far below the 550-700 vehicles per day originally planned for the facility.
With no tradition in the automotive sector or plastics industry, Sao Jose dos Pinhais has seen its profile change quickly, since giant companies such as Volkswagen and France's Renault SA have decided to install facilities in the region.
According to VW/Audi's purchasing liaison manager Bernhard Grossmann, among the 35 new part suppliers setting up plants to serve the company in the region, 15 are from the plastics sector.
The VW/Audi facility's relationship with its suppliers is unusual in this hemisphere, but it does not represent a completely new industrial concept in the automotive arena when compared with European standards, according to experts from VW/Audi and supplier firms.
The plant features a totally integrated supplier park, which was constructed to house 13 Tier 1 firms on a 494-acre parcel that the local government donated to Volkswagen.
This model already is used in Spain and Belgium, but the closest experience VW has in Brazil is its truck assembly line in Resende, Brazil, where suppliers have their units inside the automaker's facility and also participate in the assembly operation.
``It's a different system that wouldn't work so well with a car factory. A car assembly line is much more complex and you have a lot more components and details to care for,'' Grossmann said.
He said the Tier 1 firms picked for the Brazilian production of the Audi A3 and Golf A4 already have been involved in such projects in Europe. VW and most of the suppliers signed five-year supply agreements.
Almost all the main suppliers accepted the offer to be inside the park because they figured it was the fastest and easiest way to fill orders and solve potential production problems. Suppliers can serve other customers from the park — they do not have to promise exclusive deals with VW.
``They are all just-in-time suppliers, and this demands proximity,'' Grossmann said. Among the group are subsidiaries of Johnson Controls Inc.'s Plymouth, Mich., car parts unit (complete seat systems); Peguform GmbH of Botzingen, Germany (bumpers and painted parts); Hella KG Hueck & Co. of Lippstadt, Germany (front ends); and Textron Automotive Co. Inc. of Troy, Mich., via Kautex Textron's division of Windsor, Ontario (fuel-tank systems).
What Grossmann calls ``just-in-time suppliers'' takes the definition to a new extreme, when associated with the carmaker's just-in-sequence supply needs.
For example, Hella-Arteb SA has 240 minutes to deliver front ends to the exact point on the assembly line where the goods are needed, and the clock starts ticking the moment the invoice for the module is issued. Invoices are transmitted from VW/Audi to the supplier park through a fiber-optic communication system.
``Each module consumes roughly 24 minutes to be completed, but since the deliveries are programmed in lots of 24 units, the minimum production cycle time amounts to 180 minutes,'' said Hubertus Kohne, Hella-Arteb's plant manager.
``With the few minutes that are left over, we only have time to check for quality, repair small details and send the products to the automaker. We are not allowed to commit mistakes.''
Hella-Arteb is a 50-50 joint venture between Hella and Brazilian lighting firm Ind£strias Arteb SA. The venture was created to serve the VW/Audi plant.
Similarly, JCI has roughly 150 minutes to furnish its complete seat systems, while cockpit assembler SAS Automotive do Brasil Ltda. has 120 minutes to deliver its approximately 120-item modules.
Due to its tough deadline challenge, SAS is installed inside the carmaker's facility, adjacent to the vehicle assembly line.
``This allows for the cockpit-request interval to be smaller and its quality to be preserved, in view that transporting such a complex module is not easy,'' said Alexander Kyllmann, SAS plant manager. SAS is a joint venture between Sommer Allibert SA of Nanterre, France, and Siemens Automotive of Munich, Germany.
All the specifications, such as number of doors, color and type of finishing, for every single car to be produced by VW/Audi are listed on a device that is stuck onto the body of each vehicle throughout the entire production process. The device allows the car's progress to be monitored electronically along the assembly line by the firms in the supplier park.
``If the vehicle arrives at the point in the assembly line which you are supposed to service and your module is not there, it will continue traveling the line and generate a `cripple.' And a cripple is something that no supplier wants to generate,'' said Karl Schmitz, sales account manager for the VW business unit in South America at Johnson Controls do Brasil Automotive Ltda.
He added that parts only are released for payment to suppliers when vehicles are approved by quality control, which is located at the last check point on the assembly line.
In such an interdependent, practically inventory-free production system, VW/Audi's desire is that all employees in the supplier park work under union labor policies similar to those in effect for the automaker, said JCI human resources manager Andre Ramos.
``This issue is being analyzed. The idea is for the level of motivation to be the same for all those involved in the manufacturing of the vehicles, minimizing the risk of a strike at a particular supplier resulting in a stoppage of the entire assembly line,'' he said.
VW/Audi's new facility was designed to be among the 10 most productive automotive plants in the world. Its layout is a complete novelty: the facilities that house the body shop, painting shop and the final assembly converge toward a triangular-shaped building called the Communication Center. This is where the joint-use areas are located — such as cafeteria — as well as the offices of various multiple disciplinary teams.
``The quality demands at the plant are very high. German standards are being transferred 100 percent to Brazil, so that the unit can exported without fear to any part of the world,'' said Paulo Ricardo Schulz, general manager at Rutgers Automotive do Brasil Ltda. Rutgers provides plastic front-end main supports to Hella-Arteb and, like all subsuppliers considered strategic to VW/Audi, was selected by the automaker.
The Golf A4 and Audi A3 models in production in Sao Jose dos Pinhais will introduce some new concepts in plastic auto parts to the local market. The most significant, according to VW/Audi's Grossmann, are the front-end module by itself, with its main support made of GMT; the water-based painting for plastics parts such as bumpers and mirror casings; multilayer fuel tanks; and the finish of the instrument panels.
Both the Audi A3 and Golf A4 instrument panels present a sophisticated slush skin with a leather look and touch.
``The skin is produced utilizing PVC resin and joined to the PP panel structure through a foaming process,'' explained Jorge Delic, sales and marketing manager at the Sao Jose dos Pinhais-based Sommer Allibert America Latina Ltda.
Sommer Allibert SA invested $50 million in a facility geographically situated between VW/Audi and Renault's new factories. Besides providing instrument panels to VW/Audi, the unit also furnishes this automaker with door panels with integrated components such as speakers, wiring harnesses and switches. It also supplies instrument and door panels to the neighboring Renault assembly line.
In view of all the technological advances a $700 million assembly plant can bring about, the question that remain is: How to make such an investment feasible when its primary market, Brazil, is in recession?
When VW first started to plan the facility in 1996, the company imagined that the country would consume about 2.1 million vehicles annually in 1999 and 2000. But the international financial crisis took its toll, and interest rates have skyrocketed. The result was that in 1998 actual production was 1,573,129 units, a volume lower than that of 1994.
``This is not a plant that was built to last one or two years. It was conceived to last 10 or 20 years. The market and sales team expect to see a growth curve [in consumption] as of next year,'' Grossmann said.
``We never believed in the much-talked-about high growth rate expectation for vehicle consumption in the region, especially taking into account the fact that economic stability is something recent in Brazil,'' said Vicente Perez-Lucerga, general manager of Kautex Textron do Brasil Ltda. ``As is the case with auto manufacturers, we are incurring a calculated risk. You don't wait for the market to adjust itself in order to then start investing, because you will be too late.''
According to one supplier, the projected vehicle production at the VW/Audi unit this year has been downscaled from 100,000 to somewhere around 30,000, whereby the plant's capacity is for 160,000 cars per year. VW/Audi did not confirm the forecast.
Considering the shortfall, VW/Audi is reviewing its original plans. One solution under consideration is to export Golf A4 units to the United States, and to add a third model to the production.
``Among the most probable candidates are the other vehicles of the A4 platform — VW New Beetle, Audi TT, VW Golf Variant, Seat Toledo, Skoda Otavia and VW Bora,'' Grossmann said.
Another possibility is to increase local content of the Brazilian vehicles. At present, about 40 percent of the Audi A3 and Golf A4 are produced locally. Now, with the exchange rate stabilizing at around 1.65 real per U.S. dollar, VW/Audi has decided to increase that to 80 percent within two years.
``We can only gain for having components produced locally,'' said Caetano Piragine Zafra, engineering and manufacturing manager of Hella-Arteb. ``The only difficulty is to amortize the investments necessary when production scales are small.''
Grossmann said that one of VW/Audi's goals is to limit the number of direct and indirect suppliers to roughly 150 firms, while in Germany a car facility easily counts on 400 suppliers.
``Concentration favors quality control. Fewer suppliers can produce more parts and obtain more production orders,'' he said.
The suppliers expect a little bit more than that. Some are discussing price adjustments due to the changes in production volume and currency devaluation, while others want VW to compensate them with additional business.
``We depend on the auto manufacturers as much as they depend on us,'' said one Tier 1 official.
``The market retraction is not VW/Audi's fault and this situation is equally affecting other automakers,'' said JCI's Schmitz. ``The fact is that we win the project because we have the know-how to meet the client's high demands, we designed our plants to operate at large capacities and now we see that the amortization of our investment has been compromised.
``Providing parts for successor models would be obvious, logical and fair. And we are also looking at supplying to new platforms,'' he said.
Jose Calabuig, general manager at Peguform do Brasil Ltda., is confident that the market situation will improve.
He based his opinion on the effectiveness with which the Brazilian government controlled the effects of the financial crisis. International economists already have reviewed and improved the macroeconomic forecasts that they made for Brazil back in March.
Schulz, from Rutgers, endorsed Calabuig's position. ``The baton that conducts this orchestra is the economy. And in such a dynamic market as Brazil, a turnaround increasing consumption rates can happen at any time.''