Carmaker supply contracts start to spread in Europe

By Luca Ciferri, Automotive News Europe

TURIN -- Auto manufacturers building vehicles for each other is fairly common in the US and Japan, but the practice is rapidly spreading to Europe.

It can slash manufacturing costs, spread scarce resources and quickly fill gaps in product lineups, but the risks include brand dilution and creating an instant rival, analysts say.

"European OEMs are gradually waking up to the fact that they do not operate in a vacuum," said Adam Jonas, European auto analyst at Morgan Stanley in London. "To compete with the Koreans, Japanese -- and Chinese in the next 10 years -- they need to team up to maximize scale economies and eliminate redundant development efforts."

Supplying vehicles to another OEM is efficient, said Jens Schattner, automotive analyst at Dresdner Kleinwort Wasserstein in Frankfurt.

"It leads to an increase in capacity utilization and therefore to lower fixed costs per model for the car manufacturer," he said.

While having OEM supply contracts with other carmakers offers advantages, such as savings, it also carries the risk of excessive brand dilution, warned Roman Mathyssek, automotive analyst at Global Insight in London.

"The cost-cutting pressure is increasing the risk of making myopic decisions in terms of product differentiation," Mathyssek said.

For example, he considers the Citroen C1, Peugeot 107 and Toyota Aygo minicars too similar. The cars share 92 percent of their parts. Mathyssek blames the aggressive savings targets set by Toyota and project partner PSA/Peugeot-Citroen for the situation.

Traditionally, Europeans purchased completed vehicles from independent coachbuilders. Lots of independents -- Pininfarina, Karmann, Heuliez, Bertone -- specialized in assembling and often designing convertibles, coupes and other low-volume variants of cars for larger automakers.

In the past, the only European automaker supply contracts were between companies within an automotive group, such as Seat supplying the first-generation Cordoba sedan and wagon to sister brand Volkswagen. VW sold it as the Polo Classic and Variant. Another example is Isuzu supplying its Trooper large SUV to Opel/Vauxhall as the Monterey.

Europe's first automaker supply contract among true competitors was Volkswagen building the Galaxy minivan for Ford. Ironically, it came from a broken joint venture.

VW and Ford created Autoeuropa in Setubal, Portugal, in 1995 as a 50-50 joint venture. But at the end of 1998, Ford withdrew. In January 1999, VW bought Ford's stake. VW agreed to keep building the Galaxy at Autoeuropa until the end of 2005.

First of a wave

Since then, other automaker supply contracts have been established, but the products are just reaching the market.

This week at the Tokyo auto show, Mitsubishi will unveil its second-generation Outlander medium 4wd crossover. But Mitsubishi will also build in Japan two variants of its new crossover for Citroen and Peugeot.

The Outlander will arrive in Europe at the beginning of 2007, with the Citroen and Peugeot variants following in September.

"Mitsubishi is making all the investments for this new project. PSA is just paying in advance for the parts specific to their variants," Mitsubishi Motors President Osamu Masuko said in an interview.

Mitsubishi will recover the rest of its investment in the price it charges PSA per unit built, or the so-called pay-per-production.