Build it up, knock it down

Knock-down construction sounds like a contradiction in terms but, as Sam Tulip reports, its a crucial strategy for any OEM looking to limit liability and maintain value in emerging or temporary markets

Collect, and con! - CKD is about rr' autamo constru easy as.

ull-function car plants are ruinously expensive, with a return on investment measured in decades. But many potential markets are small-scale, transitory or uncertain, while import tariffs may be punitive. But with most developed country markets fiat-lining, ignoring even small-scale growth opportunities is unthinkable. One solution is CKD. Actually, CKD (or Completely Knocked Down) is, as Robert Bommers, Director Asia-Pacific at BLG International Logistics explains, both a misnomer and just one end of a spectrum of techniques that can help carmakers exploit new or difficult markets. Other variants include SKD (Semi Knocked Down) and 'part for part' supply. SKD is easily understood, and involves the partial disassembly of a vehicle after it has been substantially built. Bommers explains: "SKD is used by OEMs to enter markets prior to commencing local production, and where there are import tariff concessions that are dependent on the degree of local employment generated. Each destination country has its own rules for what level of re-assembly activity qualifies, so it might be as simple as refitting tyres and batteries, or rather more involved: doors, for example. But it will all be simple steps that don't involve severe technologies such as painting, welding, or robots. We receive the vehicles, carry out the disassembly, and ship the resulting kits of parts to the re-assembly operation in the destination country."

Tackling the tariffs

Ulrich Schorb, Managing Director at Rhenus Automotive, concurs that a major driver of SKD operations is to ameliorate very high import tariffs, intended to protect local added value, so that the OEM can identify, develop and capture markets while local plants are still being planned and built. Schorb says that typically the requirement for local content will ramp up year-by-year, while the OEM "earns" tax relief on Its future plant. So, for example, Volkswagen moving into Russia will do 100,000 SKD units to gain market until its production plant is finished. He adds: "There is a very thick 'book' for local content - five per cent local in the first year, ten per cent the next, so the local content will start with tyres, glass and so on and build from there. "Or SKD flows may be fully assembled and then disassembled, or in some cases assembled without the powertrain. We pack into sea containers and ship to the final assembly plant, cleared through customs," says Schorb. "IT to support SKD through customs is crucial. There will always have been matters of negotiation with customs, mostly negotiated by our customer - OEMs are quite good negotiators!"

Kit logistics
CKD is more complex. Misleadingly, the vehicles are not knocked down at all - they have never been assembled in

Automotive LOGISTICS November/December 2007

the first place. The destination plant will be involved in some capital-intensive processes, typically paint shop. Bommers explains: "We supply complete sets of parts - like an Airfix model kit. The order process is triggered by the destination they place an order with the OEM and we control the supply, picking and packing the kit - so there is a large amount of IT infrastructure involved. "We know the contents of the kit, and that there are certain minimum volumes [for economic use of containers etc] which might be ten or 20 of the same specification vehicle. So the order is for say a lot of 20 cars: we put the kits together, mostly called off direct from the supplier although some parts may be delivered from the OEM, and we control the material flow." Typically the lead time from order to Free On Board the ship (or whatever Incoterms apply) is from six to eight weeks, although "there are some rush orders and we have ways of speeding up the process". But the main drivers of the process are IT-based - "crucial to ensure we meet all the requirements, not just of OEM and destination, but of all the different Customs and import regulations," says Bommers. Logistics at its best Schorb of Rhenus says CKD is normally a follow-on from successful SKD operations. "We will collect parts from suppliers, pack and consolidate, ship to, say, Russia, deconsolidate, and deliver discrete sets of parts to lineside." But the model is constantly changing. "More local value is added as production goes on, and car manufacturers will begin to bring their Tier One suppliers into the new territory, so the sources for the'kit of parts' are constantly changing." If an initial entry into a market, through SKD or CKD, has been relatively successful and volumes have grown, it may, says Bommers, make sense to move to a 'part for part' operation for all or part of the input. "In this case, the assembly plant at the destination has control of the stock control function, and they will re-order engines, doors or other parts" as they anticipate the requirement and in economical quantities, but not in discrete vehicle kits. But "all the orders are pull orders, triggered by the destination factory - that allows logistics at its best". The market is growing BLG manages a range of such operations globally. Bommers says: "We serve mostly developing countries or markets where a full factory would not be appropriate, but there are also flows to test the market for a new range into developed countries. Across all three modes, we shipped the equivalent of 250,000 cars last year, which pack into 90-100,000 TEUs of container, and we expect to ship 300,000 units in the current year. So the market for such services clearly continues to grow." Bommers reckons the company fills its containers pretty well and says it carries out its own packaging development. "We are continually thinking of ideas to maximise volume utilisation," he says. Flows are not exclusively from suppliers and OEMs in developed countries - Bommers explains that OEMs often

have suppliers in or near to the destination countries, as part of trade agreements or as part of a global sourcing strategy. This entails a degree of backfiow, although this tends to be mostly in 'part for part' operations, which has a major influence on the choice between one-way or returnable packaging. Balancing isn't just a case of physical fiows - fiscal matters are equally important. Schorb at Rhenus gives the example of South Africa, where buying 1kg of iron can be set against 2 ($2.80) of customs duty -"so we need to see if we can balance imports and exports". The main CKD/SKD fiows, says Schorb, are designed to build market share, tax-efficiently, to the point where setting

"IT to support SKD through customs is crucial. There will always have been matters of negotiation with customs, mostly negotiated by our customer OEMs are quite good negotiators!" - Ulrich Schorb, Rhenus Automotive
up a production facility makes sense (typically, he suggests, the manufacturer really needs at least 60,000-70,000 units a year). But there are also many niche markets, where a fully indigenous plant is unlikely ever to be economic. BMW in Indonesia, for example, builds 10,000-15,000 of the 7 Series models through CKD operation, brought in as a body-inwhite with the associated kit of materials. On the other hand, CKD has little attraction for the truly premium brands: "If you are Ferrari, you and your customers are prepared to pay the 500 per cent customs duty!" says Schorb. BLG employs 500 or more people in this trade, mostly ^

The sourcing locations for the 'kit of parts' are constantly changing

Automotive LOGISTICS November/December 2007

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but they are looking at local 'best quotes' first" Schorb suggests a good contract period might be three years with two-year prolongations, but he says "for big markets like Russia or India it could just be 30 months". On the plus side, CKD can give LSPs an entree:"lx gives us a big chance to be a player in the second phase [of market development]; also, we have had to handle situations at borders, for example, so we will have gained so much experience that it is difficult for the OEMs to change partners. A knowledge of a combination of automotive, local customs (and Customs) and local labour practises - there are perhaps only five or six companies worldwide that are good at that."

Packaging the promise

With more global markets, the prospects for growth in SKD/ CKD operations look promising, sometimes in surprising directions. For example, Schorb claims: "It's hard to sell a 'German' car in Russia or India, but you can sell a 'Brazilian' car [even if it's basically the same mode! and platform]. And while, at perhaps $2,000 per container, it would appear to be prohibitive to ship car kits from Brazil to India, the tax savings are so enormous that it can be worthwhile!" Trans-continental shipping isn't getting any cheaper, so hyper-efficient packaging is crucial to CKD/SKD operations. Working out the optimal packing of containers is very much IT-based, but backed by physical testing to see if the theory works in practice and BLG is for ever testing potential new packaging concepts and materials. There is also much work involved in devising the most appropriate protection and anti-corrosion treatments. The aim is, of course, to present parts, and thus the finished vehicle, in the same condition as if it had been completed in the OEM's plant. But, says Bommers: "The containers may pass through all the climatic zones: humidity, especially for the bodyshell, is a big problem, and generally parts take more protection than would a finished car." Schorb agrees that humidity control is, next to damage prevention, at the top of the list.

As OEM production moves towards Eastern Europe BLG believes it makes more sense to have warehouses closer to the the product flows

in Bremen and Bremerhaven."We need to be close to the ports and preferably in a free commercial zone," Bommers says. "But there are situations, especially with the move of OEM production towards the East, where it might make more sense to have our warehouses closer to the centre of gravity of the product flows." Such decisions are far from simple. CKD solutions are mostly tailor-made for the requirement and the links between IT and physical operations are critical. Yet CKD, and more especially SKD, operations are characteristically short-term: "In six months it may all be gone, or there may be downturns In volume and then a later surge, so we have to retain our operational capability. They are by definition very volatile markets - that is why OEMs use these channels."

Knocking down trucks

BLG's operations mostly involve cars, but commercial vehicles, from light vans to heavy trucks, can also be a consideration, precisely because of the small volumes. "Configurations can change immensely from country to country" says Bommers. "Two trucks may look the same, but their components may be completely different." It might be thought that such relatively small-scale flows would lend themselves to end-to-end operation by specialised logistics service providers. In practise, says Schorb, this doesn't usually work out. "The big OEMs say'I want to have one partner for the whole operation' but not a lot of companies can perform the whole pack, ship and deconsolidate process across countries or continents, so often the task is split into two, three or four portions for packing, freight forwarding, and deconsolidation. OEMs are certainly looking more and more for integration,

BLG employs 500 or more people in CKD activity, mostly in Bremen and Bremerhaven in Germany, the export hub for much of Europe's CKD material

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No dumping Whether returnable packaging is practicable remains a moot point. "If you can turn the packaging around more than three times a year it may be viable," he suggests. Weight considerations are important, so Rhenus favours wood, paper and cardboard, but many countries, China for example, but also Australia, have strict laws on the woods and other materials you can use, and what treatments are required. "We use more and more returnables because of environmental laws: in markets like Russia or India, where documentation is a big burden, this applies to packaging too, including rules on dumping wood and cardboard, some of which will be special papers, or chemically treated, for product protection. There are a lot of rules and regulations; usually our OEMS take care of the specification, but we still have to operate the system, and pick up insurance and liability issues." Quality to market Ensuring part quality is a major issue. By definition, if a part is damaged in transit, the re-assembly plant can't take another out of stock. The need to ensure that parts are in good condition going into the system extends supply chain lead times upfront. It means allowing

The need to ensure that parts, such as the engines that Rhenus handles, are in good condition going into the system can extend lead times because of extra quality checks and more protective packaging requirements

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PACKING CKD - CASE HISTORY

Ckdpack was founded in 1999 by Arun Modgil, initially in Australia, but now based in Mississauga, Ontano and as the name implies, it specialises in developing packaging solutions for the CKD trade. Modgil started by offering plywood-based returnable packaging, and found that invariably the OEMs believed they required packaging to suit their, already devised, production plans - of which CKD might be a very minor component. In pursuit of, in particular, GM contracts (GM has CKD flows covering 60 countries}, the real requirement was somewhat more complex for example, needs for containers to withstand quite long lay-bys in outside storage. The solution, Modgil felt, was to design a range of steel, returnable, container that could readily be adapted for all sorts of parts from engines to roof lines. the systems level, a long way towards creating a self-standing plant, with the responsibilities for materials storage, inventory control, demand planning and so forth. And as outlined earlier, though the CKD picture has got much more complex and global, solutions may be lagging. "No-one's able to estimate volumes - no kidding!," exclaims Modgil. "[OEMs] have very good databases around build guantities [and] types of model, but if you ask how many parts are coming from elsewhere [ie not from the normal linefeed] you're lost!" This matters. Ckdpack is involved in a contract for 10,000 Hummer vehicles in South Africa. "Parts from North America, engines from Thailand, transmissions from Brazil, plus local parts. That totals 60 40-foot containers a week," he says. That's a lot of activity for a niche market. And it is dwarfed by the CKD and

The - related plywood activities of "With CKD, you ship a set of say 12, regardless of collapsible the majors. containers He also any spare space in the container; with part for part reckons could only there is more scope to optimise the cube - a big Daimler are be used for improvement in logistics management" shipping one type of 100 component - Arun Modgil, Ckdpack and were containers a often day just for designed around those specific parts. We designed something CKD sedans; GM perhaps 200 or 250 a day, and he reckons the much more global and versatile, and they're being used across whole spectrum from SKD to part-for-part is growing at around five to six per cent a year. seven countries from Brazil and North America to Thailand and Germany," he says. One main thrust, he points out, is the reduction in the number Ckdpack also does non-returnable packs, especially to of platforms that the global majors are supporting, allied to destinations such as Kenya or Turkey where the returns globally diversifying component and assembly supply chains, infrastructure is not really in place. Modgil notes a "minor" trend What is happening in some real sense is that many vehicle towards the part-for-part mode, which can allow for much tighter production chains are reversing to a part-for-part, or even container loading: "With CKD, you ship a set of say 12, regardless CKD mode: pure assembly plants gleaning the fiscal rewards of any spare space in the container; with part-for-part there is of offering local employment, but supplied with 'kits of parts' more scope to optimise the cube - a big improvement in logistics brought together by a third party from worldwide suppliers. How management." long can it be before the OEMs outsource even final assembly, and hecome purely design, marketing and brand management On the other hand, Modgil acknowledges that there are a lot companies? As Modgil puts it: "All you need is tax benefits and a of reasons for CKD, not least that "production systems cost a lot piece of land." Oh! And a decent logistics partner. more than packaging" and moving to part by part is, at least at

BLG's 0 | J I . : J 1 ; J I I . ; ; . ^ ^ i ; , , , : , ^ , . L . ^ ^ I ^ . but commercial UCIIILIL;., from light vans to heavy trucks, can also be a consideration because of the small volumes

time for more rigorous checks on parts and their packaging than would be considered absolutely essential for a conventional line-side feed. It also demands that all parts are on hand when needed for consolidation. As Schorb notes: "If a day's worth of engines isn't available for packing, it's going to cost 500,000 ($700,000) in airfreight! Who pays for that?" Schorb sees Russia and India as the major markets for SKU/CKD (China, he suggests, has a car market so far developed already that an OEM is unlikely to get a sufficiently decent price to offset the additional costs - and anyway, most firms trying to crack the Chinese market are already there). But, contrariwise, the'next big thing'could conceivably be 'reverse CKD' - basic vehicles in kit form flowing from low-cost, low tech plants to the West for assembly and customisation. The future of the MG plant at Longbridge?

Automotive LOGISTICS Nove[Ti[->f>f/December 2007