GETTINGUNDERTHEHOODOFAUTOMOTIVELABORCOSTPERVEHICLE

DanielHirschJimSchmidtJenniferWong

GettingUnderTheHoodOfAutomotiveLaborCostPerVehicle

?OliverWyman

PAGE

10

Theglobalautomotiveindustryisfacingsignificantnewchallengestogrowthandprofitability—fromtariffsintheUnitedStatestoincreasinglyaggressiveChinesecarmarketingoutsideofChinaandasimultaneousslowdowninsalesofbatteryelectricvehicles.Theheightenedcompetitionandcomplicatedeconomicsareputtingpressureonautomakersworldwidetobalanceproduction,right-sizecapacity,andmanagecostseffectivelyto

staycompetitive.

Thecurrentenvironmentisshininganewlightonlaborcostpervehicle,whichconsidersbothwagesandproductivity,andrepresentsakeymetricindetermininganautomaker’scompetitivenessandprofitability.Becauseofthemeasurement’sincreasingimportance,

OliverWyman’sHarbourReportteamrecentlycompletedanin-depthlookatlaborcostpervehicleacrossmorethan250vehicleassemblyplantsworldwide,usingpubliclyavailabledataandthird-partysources.Thenewanalysisalsoconsiderssourcingstrategiesincalculatinglaborcostspervehicle.

Beyondlaborcostpervehicle,thereportgoesontoexamineconversioncost,whichiscalculatedbylookingatdirectandindirectlaborcosts,overheadincludingrent,energyconsumption,equipmentmaintenance,andproductionsupplies,anddepreciation.Thefocusonlaborcostandproductivityprovidesawindowintoaplant’scompetitivenessaslabortypicallyrepresents65%to70%ofthetotalconversioncost.

Exhibit1:Laborcostisamajorcomponentofconversioncosts

35%

65%

Other(IndirectMaterial,Depreciation,Energy)

LaborCost

Source:OliverWymananalysis

Basedonthedata,wecreatedfourgroupingsofcarcompanieswithsimilarlabor-cost-per-vehicleattributesbutoftenwithverydifferentchallengesbeyondlaborcost.Theanalysisrevealssubstantialdifferencesinlaborproductivityandwageratesamongleadingautomotivemanufacturers,whichcouldcomeintoplayasthecompetitiveatmosphereintensifies.

Exhibit2:Fourmainautomakerarchetypesbasedonlaborcostpervehicle

InUSdollars($),2024

Europremiums 2,232

EV-onlymanufacturers 1,660

Mainstreammodelmanufacturers 880

Chinesecarmanufacturers 585

Source:OliverWymananalysis,automotivemanufacturerwebsites,originaldatasourceGlobalData,GermanAssociationoftheAutomotiveIndustry(VDA),Liepin

HEREAREDESCRIPTIONSOFTHEFOURARCHETYPESWEDEVELOPED

EUROPREMIUMS

Withthehighestlaborcostpervehicleatanaverageof$2,232,thiscategoryincludesaselectgroupofEuropeancarcompaniesthatproducepremiumautomobiles,suchasMercedes-Benz,BMW,Audi,andJaguarLandRover.TheEuropremiumcategory’saveragelaborcostpervehicleisnearly$570morethanthenextgroup.

EventhoughVolkswagendoesn’toftencompetedirectlyagainstthesepremiumbrandsforconsumers,itisincludedwithEuropremiumsbecausemostofthebrand’sproductionisinGermany,givingVWasimilarlaborcostpervehicle.Additionally,formanyyears,VWhascommandedahigherpricepointovermainstreammodels,especiallyinEurope.

Therangeoflaborcostpervehicleisalsowidewithsomeofthemanufacturersaveragingcloserto$1,800pervehicleandothersabove$2,900.Onaverage,Germancarproducersdealwithasignificantlyhighlaborcostpervehicleof$3,307—theproductofstronglaborunionsandstrictregulationonworkinghours.Ingeneral,allmembersofthegroupalsohavesizableproductioncostspervehicle,highcapitaldepreciation,andahigherlevelofcomplexityinmanufacturinginvolvingmoreindependentparts.Theimpactoftheseattributesiscompoundedbylowerlaborproductivitycoupledwithelevatedwagecosts.

EV-ONLYMANUFACTURERS

ThesecondgroupiscomposedofstartupEVmanufacturers.WeincludeTeslainthisgroup—eventhoughithasgrownbeyondstartupstatus—becauseitsharesasimilarlaborcostpervehicle.Likemoststartups,italsodoesnotworkwithorganizedlaborcontractsandnegotiatedwageratesandbenefits.Foravarietyofreasons,includingrelativelylowproductionratescomparedwithmainstreamproducers,thisgrouphasrelativelyhighproductioncostpervehicleandrelativelyhighlaborcostspervehicle—twicetheratetheirprimarycompetitionamongmainstreamproducersmustcontendwith.Competitivelaborproductivityischallengingforthegroup—evenwithnon-unionwagerates—becauseoflowerproductionvolumes.Butthereisalsoawiderangeoflaborcostspervehicle,withthelowest$1,502andthehighest$13,291.Thisgroup’scompetitiveedgehasbeenprovidedbysubsidiesandtaxcreditsthatencouragecarmakerstobuildEVandbatteryplantsandconsumerstobuyEVs.TheTrumpadministrationintheUSisworkingtoeliminateincentivesforEVproductionandconsumerpurchases,whichwouldeliminatethiscompetitiveadvantageandcouldaffectthegroup’sabilitytoreachscale.

MAINSTREAMMODELMANUFACTURERS

Themakeupofthisgroupisbroad,consistingoftraditionalautomakersinFrance,Italy,theUnitedStates,Japan,andSouthKorea—allwithmodelsthatboasthighproductionvolumesataffordablepricepoints.Withanaveragelaborcostpervehicleof$880,thisgroupiscompetitivein

termsoflaborproductivityandwages,withmostmaintainingdiversifiedmanufacturingnetworksinbothhigher-andlower-costcountries.Thesecarmakerstendtomaintainolderfactorieswithlowerdepreciation,andtheirproductcomplexityislowerthanthatofEuropremiums.

Buttherearealsosignificantdifferencesbetweenmainstreammembers.Japaneseautomakers,forinstance,maintainarelativelylowlaborcostpervehicleinJapanof$769,whichisonparwithnewerplantsinEasternEurope.In1982,whenTheHarbourReport?publisheditsfirstreportcomparingcostdifferencesbetweenUS-basedmanufacturersandJapanesemanufacturersmakingcarsinJapan,theaverageJapanesecostpervehiclewasover250%lessthanAmericanmanufacturers.Todaythedifferenceis200%,withlaborcostspervehiclestillrepresentingsomeofthegap.TheaverageUSlaborcostpervehicleis$1,341,whichincludestheimpactofthemostrecentunionnegotiationsin2023whentheUnitedAutoWorkersstrikebroughthistoricgainsforautomotiveassemblylineworkers.

CHINESECARMANUFACTURERS

Chinesecarcompanieshavealowaveragelaborcostpervehicleof$585,whichistheproductoflowwagesandhighefficiencyamongcarmanufacturersandthesupplychain.Thatsaid,thereisawiderangeoflaborcostpervehiclebetweendomesticChinesemanufacturersandWestern-affiliatedjointcarproductionoperationslocatedinChina.That’sbecauseChinese-ownedcarcompaniesmaintainlargerworkforcesandlowerproductivitymetricsthanthejointventuresbetweenChineseinterestandWesterncarmanufacturerswhichmaintainworkforcesmorealignedwithWesternoperations.

Thisgroupisclearlyleadingthemarketwiththelowestoverallconversioncost,excludingdepreciation,atone-quarterofwhatthehighestcostpervehiclegroupachieves.Productcomplexityisrelativelylow,andmanufacturingtechnologyattheirmostlygreenfieldfactoriesmatchesthehigheststandardsetbytheindustry.WithanetworkofplantslocatedinChina,wageratesarestillrelativelylow,albeitincreasingrapidlyincoastalareas.AutomationresembleslevelsatmostwesternEuropremiumandmainstreamfactories,andproductivityisrelativelycompetitive.

Exhibit3:Rangesoflaborcostspervehiclewithineachcategory

InUSdollars($),2024

Average

Europremiums

1,829

2,232

2,959

EV-onlymanufacturers

1,502

1,660

13,281

Mainstreammodelmanufacturers

597

880

1,275

Chinesecarmanufacturers

323

585

929

Source:OliverWymananalysis,Automotivemanufacturerwebsites,originaldatasourceGlobalData,GermanAssociationoftheAutomotiveIndustry(VDA),Liepin

GLOBALLABORCOSTDISPARITIES

Theanalysishighlightssubstantialdifferencesinlaborcostsamongleadingautomotivemanufacturingcountries.Perhapssurprisingtosome,Chinaisnolongerthelowestlaborcostpervehiclenation.Today,lowerwageratesarepaidinnations,suchasMoroccoandRomania,andrisingproductionvolumesandproductivityhavepushedthesenewproductioncentersintothetopslotsforlowestlaborcostpervehicle,alongwithMexico.

Morocco,forinstance,hasbecomethelow-costproductioncenterforFrenchmanufacturers,muchinthesamewaytheDetroitThreeautomakershaveoperatedoutofMexicoforthepast40years.FrenchcarmanufacturersnowhavemorethanhalfoftheirproductionoutsideofFrance.

Mexicohasalsobecomeastrategiclow-costproductionbaseforGerman,Japanese,andSouthKoreanautomotivemanufacturers.ThisoffshoringhereandinplaceslikeMoroccohaskeptdownthelaborcostpervehicle,especiallyforthemainstreamcategory.ButthecompetitiveadvantagesprovidedbyMexico’srelativelylowproductioncostsmaybetemperedbyproposedTrumpadministrationtariffs.

Turkey,whilestillamongthetopfivecountrieswiththelowestlaborcostpervehicle,hasbeenaffectedbyhighinflation,whichpushedupwagestolevelscomparablewithJapan.MonthlywagesinTurkeyhavetripledoverthelastthreeyears.

Exhibit4:Laborcostpervehiclebycountry

InUSdollars($),2024

ProductionTrend

(2024vs.2019)

Morocco

106

29%

Romania

273

11%

Mexico

305

4%

Turkey

414

-5%

China

597

24%

Poland

663

-7%

CzechRepublic

691

-2%

Japan

769

-7%

SouthKorea

789

-15%

Slovakia

830

4%

Spain

955

-17%

Canada

968

-30%

UnitedStates

1,341

-2%

France

1,569

-36%

Italy

2,067

-34%

UnitedKingdom

2,333

-31%

Germany

3,307

-13%

Source:OliverWymananalysis,Automotivemanufacturerwebsites,originaldatasourceGlobalData,GermanAssociationoftheAutomotiveIndustry(VDA),Liepin

PRODUCTIONVARIABLESTHATINFLUENCELABORCOSTPERVEHICLE

Inadditiontoregionaldifferencesinlaborcostpervehicle,hereareseveralotherfactorsthathaveasignificantimpactonlaborcostpervehicleandthetotalproductioncostpervehicle:

DESIGNCOMPLEXITY

Oneveryimportantfactoraffectingproductivityand,thus,laborcostpervehicleisengineeredhourspervehicle—ametricreflectingthelevelandsophisticationofengineeringneededtobuildavehicle.Thisincludestheestimatedtimeneededforanoptimaldesignandproduction

processtomakeasinglevehicle.Oftenusedasakeymetricforbenchmarkingefficiency,thelowertheengineeredhourspervehicle,themoreefficientthedesignprocess.Workingtowardlowengineeredhourspervehicleleadstolowerproductioncosts,fasterdevelopmentcycles,andifexecutedproperly,betterproductivityandlowerlaborcostpervehicle.

Exhibit5:Therangeofdesigncomplexityisanimportantfactorinthelaborcostpervehicle.

Engineeredhoursperunit(EHPV),2024

8

32

7

28

6

5

12

11

Europremiums

EV-onlymanufacturersMainstreammodelmanufacturersChinesecarmanufacturers

0

Source:OliverWymananalysis

5 10

15 20 25 30 35

Chineseautomakershavesignificantlyreducedtheirengineeredhourspervehicleoverthelastdecade,keepingitlowerthanothercompetitors.OuranalysishasrevealedChinesecarsrequireone-halfoftheengineeredhourspervehicleoftheEuropremiums.Additionally,mostChineseplantsbenefitfrombeingnewer,greenfieldfactoriesthatprovidemoremanufacturingflexibilityandstate-of-the-artlayouts,equipment,andprocesses.

Chinesefactoriesalsoaretypicallymanufacturingalimitednumberofmodelvariants,withalimitednumberofpropulsiontechnologiesandindependentpartscomparedwithEuropeanpremiumcarmakers.Thisstrategyhasadvantagesintermsofinvestmentsandflexibilityandhasledtolowerengineeredhourspervehicleandlaborcostpervehicle,whichultimatelycutsoverallproductioncosts.

Fordecades,themajorityofmainstreamcarmakershavefocusedonloweringengineeredhourspervehicle,evenasfeaturesandcontentcontinuetobeadded.ThisgroupisnownotfarawayfrommatchingChinesemanufacturers,whichhashelpedmainstreamautomakerscuttheirlaborcostspervehicle.

EXPANDINGCONSUMERCHOICESDOESN’TCOMECHEAP

Offeringcustomersmorechoicesmayendupboostingsales,butitcanreduceefficiencyatassemblyplantsandboostcosts.Oneplacethisisbeingfeltiswiththeincreasingnumberofpowertrains—gas,diesel,hybrid,andall-electric—beingofferedandproduced.

Efficientautomakersutilizesplitlinesanddynamicsequencestohandledifferentpowertrainvariants,butaccommodatingtheaddedcomplexityoftenraisesthelaborcostpervehicleaswellastheoverallconversioncostsasitoftenrequiresalargermanufacturingfootprintinthefactory,moreequipmentandhigherenergyconsumption.Thereisaclearcorrelationbetweencostsandthenumberofindependentpartsperfactory,withmorepartsresultinginhighercosts.

Linebalancing,complexlogistics,andhighspacerequirementscontributetoveryhighcostspervehicle.Unfortunately,thehighcomplexityoftheproductnolongertranslatesintohighermarginsinthemarket,andproducersofcomplexvehiclescannolongercompensateforthehighercostsoftheirfactorieswithincreasedmargins.

ENERGYCOSTS

Energycostsarenotincludedincalculationsoflaborcostspervehicle,buttheycangreatlyenhanceordetractfromaccomplishmentsinloweringlaborcostspervehicle.Ourresearchshowssignificantvariationsintheseadditionalcostspermarket.Forinstance,GermanandFrenchautomakersfacedifferentsituationswhenitcomestoenergypricing.WhilenaturalgascostsinGermanyhavebeenrisingbecauseoftheinvasionofUkraineandaddingtoGermanautomakers’productioncostspervehicle,Frenchcarcompanydomesticproductionisbenefitingfromlowerratesfromincreasedrelianceonnuclearpowerandloweroilprices.Meanwhile,Chinakeepsenergycostsdownwithcontinuedrelianceoncoal,despitepledgestoreducecarbonemissions.

SUPPLYCHAINRESTRUCTURING

Whilealsonotdirectlypartoflaborcostpervehicle,disruptioninthesupplychaincanaffectitbycuttingproductivityasworkerswaitforpartstoarrive.SincetheCOVID-19pandemicandthe

semiconductorchipshortageearlierthisdecade,restructuringthesupplychainhasbeenamajorfocusoftheautoindustry.Whetheraimedatreducingrisksorpreventinglogisticalbottlenecks,automakersarelookingtodual-sourcingandnear-shoringtobringstabilitytosourcingpartsandrawmaterials.Recently,theequationalsoincludesdeterminingtheimpactofthreatenedtariffsandothergeopoliticalstrainsthatcouldinterruptthesupplychain.

RECOMMENDEDSTRATEGIESFOREACHAUTOMAKERCATEGORY

Automakersgloballyfacesignificantdisparityinlaborcostspervehiclewiththecompetitiveadvantagesanddisadvantagesthatgowiththedifferences.Therearestrategiesthateacharchetypecouldpursuetobettercapitalizeonadvantagesandtemperdisadvantages.

Europremiums:Theneedtorestructure

Thisgroupneedssignificantrestructuringtoachievebetterfocusinitsproductportfolioandmarginoptimizationandpreparefortheprospectofatariffwarbetweenmajortradingpartners.SincethegrouphasreliedheavilyonChinaforbothsalesandlowercostproduction,Europremiumsshouldconsiderredesigningtheirproductionfootprintnowtoenhanceefficiencyandprofitabilitytooffsetpotentialtariffs.

Tomaintainattractivemargins,thetargetlaborcostpervehiclefortheEuropremiumsshouldbecloserto$1,500—33%lowerthanthecurrentaverage.Sinceitwouldbedifficultandunpopulartocutwages,thegoalshouldbetoincreaseproductivitybyimprovingengineeredhourspervehicle.Bycollaboratingwithsuppliersandstakeholdersearlyintheproductdevelopmentprocess,themajorcarcompaniescanreducecomplexityandidentifycost-savingopportunitiesbeforeproductionbegins.Earlyengagementwithsuppliersandevenpotentialinvestmentinkeyonescanleadtoinnovativeproductionfootprintsthatmitigatetheimpactofincreasedcosts.

EV-onlymanufacturers:Definingthepathtoscale

EmergingplayersintheEVsector,suchasRivian,arenavigatingthechallengesofscalinguptheiroperationsandestablishingdefinedproductionsystems.Thepursuitofscaleandefficiencyinproductionprocessesiscriticalforthesecompaniesastheystrivetobalancegrowthwith

costmanagement.

ThisistrueevenforamoreestablishedplayerlikeTesla,whichisstilllookingtobuilditsplantinMexicoandstruggleswithlowutilizationatitsBerlinfacility.Thejourneytowardsachievinga

streamlinedproductionsystemisessentialforthesestartupstoreducelaborcostsandenhancetheircompetitivepositioninginthemarket.Additionally,achievingmorescalewillbenefittheirsupplychainnetwork,openinglargeropportunitiesandsavingsachievedfrommorevolume.

Inthecurrentmarket,oneofthebiggestchallengesallEVproducersfaceisthereductionofgovernmentalsubsidies,oftennecessaryfortheestablishmentofnewtechnology.IntheUS,theexpectationisforalltaxcreditsandcorporatesubsidiestobereducedorwipedoutbythe

newadministration.Butsubsidiesinotherpartsoftheworldhavebeendeclininginrecentyears,whichputsnewcomersatadisadvantagetomoreestablishedEVbrands.

Mainstreammodelmanufacturers:Keepcostslowerthroughtechnologyinvestment

Severalmainstreamcarmakers,suchasHyundai,RenaultandStellantis,leveragestrongcapitaldepreciationandefficientmanufacturingprocesses,includingkeepingengineeredhourspervehiclelow,tokeepcostsdown.Thetradeoffhasbeencuttingthenumberofchangesfromonemodelyeartothenextandfromonemodeltothenext.Whilethisstrategyhaskeptproductioncostsdownandlaborcostspervehicleonparwithothercarcompaniesinitspeergroup,ithasthedownsideoflowertechnologyintegration.Mainstreamautomakers—especiallythoseinEuropewhereChinesecarcompaniesarebeginningtomakeheadwayinthemarket—mustchoosetherighttechnologiesfortheirmarketstokeeppacewithChinesemodels,especially

insoftware,infotainmentsystems,andautonomousdriving.Thehighestcostreductionleversfortheseproducersliewithinthesupplychainthroughright-sourcing,whichofteninvolvesinsourcingsmallerpartsandtechnologies.

Carmakersinthisgroupwithrisinglaborcostpervehicle,suchastheDetroitThreeautomakers,needtocontinueinvestingindigitaltechnologiestoenhancetheiroperationalefficiencyanddata-drivendecision-making.Byleveragingdigitaltoolssuchasvisionsystems,digitaltwiningandautomatedlogistics,manufacturerscanoptimizetheirproductionprocesses,improvelaborproductivity,andmaintainprofitabilitydespiteexternalpressures.

Chinesecarmanufacturers:Establishbrandvaluebywinningthequalityrace

Whilecostsarealreadylowfortheseautomakers,therearecost-savingpotentialsthroughinvestmentsinquality.ImprovingthequalityoftheirvehicleswillbeakeysuccessfactorinthecomingyearstobuildtheirbrandvalueandgaintrustintheEuropeanandAmericanmarkets,whichcouldmeanasignificantvolumeincrease.Mostqualityissuesarecausedbysuppliersanddesignflawsthatcanberemediedthroughdisciplinedsupplierperformanceprocesses.

Establishingaresilientsupplychainandincreasingproductmaturitywillbetoppriorities.Yearsago,SouthKoreanmanufacturershadasimilarchallengetoincreasebrandvalueoutsideofSouthKoreabutovercameit.HyundaiMotorGroup,whichincludesHyundaiandKia,isnowthethird-largestglobalcarmanufacturer.

CONCLUSION

Astheautomotiveindustrynavigatesarapidlychangingenvironmentmarkedbyproposedtariffsandcompetitivepressures,OliverWyman’slaborcostpervehicleanalysiswillhelpautomakerswithcriticalinsightsintopivotalcostlevers.Lookingahead,weplanfuturereleasesandanalysesoverthenextmonthsonothercriticalindustrytopics,includingtariffs,sourcing,batteryelectricvehicledemand,andChineseexpansionintheautomotivesector.

METHODOLOGY

Whatislaborcostpervehicle?

FromthedeskofTheHarbourReport?,thepre-eminentauthorityofautomotivemanufacturingbenchmarking,OliverWymanconductedathoroughanalysisofworkforce,wages,productionandsourcingofsubassembliesandservicesforglobalcarmanufacturersinkeyregionsoftheworld,includingNorthAmerica,Europe,China,Japan,andSouthKorea.Thefindingsinourlaborcostpervehiclestudyarebasedonextensiveresearch,aswellasourexperienceastrustedadvisersintheindustry.Theeffortincludedresearchingvehicleassemblyplantsproducing

cars,trucksandSUVswithinternal-combustionengines,hybrid-andbattery-electricpropulsionsystems.Theanalysisisbasedonpubliclyavailableinformationasofyearend2024unlessotherwisestated.

OliverWymanshallnothaveanyliabilitytoanythirdpartyinrespectofthisreportoranyactionstakenordecisionsmadeinconnectionwiththecontentofthereport.

Theopinionsexpressedhereinarevalidonlyforthepurposestatedhereinandasofthedatehereof.Informationfurnishedbyothers,uponwhichallorportionsofthisreportarebased,isbelievedtobereliablebuthasnotbeenverified.Nowarrantyisgivenastotheaccuracyofsuchinformation.PublicinformationandindustryandstatisticaldataarefromsourcesOliverWymandeemstobereliable;however,neitherOliverWymannoranyproviderofsourcedatamakesanyrepresentationastotheaccuracyorcompletenessofsuchinformationandOliverWymanhasacceptedtheinformationwithoutfurtherverification.Noresponsibilityistakenforchangesinmarketconditionsorlawsorregulationsandnoobligationisassumedtorevisethisreporttoreflectchanges,events,orconditi