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it up,knockit downKnock-down constructionsounds like a contradictionin terms but, as Sam Tulipreports, its a crucial strategy forany OEM looking to limit liabilityand maintain value in emergingor temporary markets

Collect,and con!- CKD isabout rr'autamoconstrueasy as.

Full-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 maybe punitive. But with most developed country

markets fiat-lining, ignoring even small-scale growthopportunities is unthinkable. One solution is CKD.

Actually, CKD (or Completely Knocked Down) is, asRobert Bommers, Director Asia-Pacific at BLG InternationalLogistics explains, both a misnomer and just one end ofa spectrum of techniques that can help carmakers exploitnew or difficult markets. Other variants include SKD (SemiKnocked Down) and 'part for part' supply.

SKD is easily understood, and involves the partialdisassembly of a vehicle after it has been substantially built.Bommers explains: "SKD is used by OEMs to enter marketsprior to commencing local production, and where there areimport tariff concessions that are dependent on the degree oflocal employment generated. Each destination country hasits own rules for what level of re-assembly activity qualifies,so it might be as simple as refitting tyres and batteries, orrather more involved: doors, for example. But it will all besimple steps that don't involve severe technologies such aspainting, welding, or robots. We receive the vehicles, carryout the disassembly, and ship the resulting kits of parts to there-assembly operation in the destination country."

Tackling the tariffsUlrich Schorb, Managing Director at Rhenus Automotive,concurs that a major driver of SKD operations is to amelioratevery high import tariffs, intended to protect local added value,so that the OEM can identify, develop and capture marketswhile local plants are still being planned and built. Schorbsays that typically the requirement for local content will rampup year-by-year, while the OEM "earns" tax relief on Its futureplant. So, for example, Volkswagen moving into Russia will do100,000 SKD units to gain market until its production plantis finished. He adds: "There is a very thick 'book' for localcontent - five per cent local in the first year, ten per cent thenext, so the local content will start with tyres, glass and so onand build from there.

"Or SKD flows may be fully assembled and thendisassembled, or in some cases assembled without thepowertrain. We pack into sea containers and ship to the finalassembly plant, cleared through customs," says Schorb.

"IT to support SKD through customs is crucial. Therewill always have been matters of negotiation with customs,mostly negotiated by our customer - OEMs are quite goodnegotiators!"

Kit logisticsCKD is more complex. Misleadingly, the vehicles are notknocked down at all - they have never been assembled in

Automotive LOGISTICS • November/December 2007

the first place. The destination plant will be involved in somecapital-intensive processes, typically paint shop. Bommersexplains: "We supply complete sets of parts - like an Airfixmodel 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 ITinfrastructure involved.

"We know the contents of the kit, and that there arecertain minimum volumes [for economic use of containersetc] which might be ten or 20 of the same specificationvehicle. So the order is for say a lot of 20 cars: we put the kitstogether, mostly called off direct from the supplier althoughsome parts may be delivered from the OEM, and we controlthe material flow."

Typically the lead time from order to Free On Board theship (or whatever Incoterms apply) is from six to eightweeks, although "there are some rush orders and we haveways of speeding up the process". But the main drivers ofthe process are IT-based - "crucial to ensure we meet all therequirements, not just of OEM and destination, but of all thedifferent Customs and import regulations," says Bommers.

Logistics at its bestSchorb of Rhenus says CKD is normally a follow-onfrom successful SKD operations. "We will collect partsfrom 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 isadded as production goes on, and car manufacturers willbegin 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 forpart' operation for all or part of the input. "In this case, theassembly plant at the destination has control of the stockcontrol function, and they will re-order engines, doorsor other parts" as they anticipate the requirement and ineconomical quantities, but not in discrete vehicle kits. But"all the orders are pull orders, triggered by the destinationfactory - that allows logistics at its best".

The market is growingBLG manages a range of such operations globally. Bommerssays: "We serve mostly developing countries or marketswhere a full factory would not be appropriate, but there arealso flows to test the market for a new range into developedcountries. Across all three modes, we shipped the equivalentof 250,000 cars last year, which pack into 90-100,000 TEUs ofcontainer, and we expect to ship 300,000 units in the currentyear. So the market for such services clearly continues togrow."

Bommers reckons the company fills its containers prettywell and says it carries out its own packaging development."We are continually thinking of ideas to maximise volumeutilisation," he says.

Flows are not exclusively from suppliers and OEMs indeveloped countries - Bommers explains that OEMs often

have suppliers in or near to the destination countries, as partof trade agreements or as part of a global sourcing strategy.This entails a degree of backfiow, although this tends tobe mostly in 'part for part' operations, which has a majorinfluence on the choice between one-way or returnablepackaging.

Balancing isn't just a case of physical fiows - fiscal mattersare equally important. Schorb at Rhenus gives the exampleof South Africa, where buying 1kg of iron can be set against€2 ($2.80) of customs duty -"so we need to see if we canbalance imports and exports".

The main CKD/SKD fiows, says Schorb, are designed tobuild market share, tax-efficiently, to the point where setting

"IT to support SKD through customsis crucial. There will always have beenmatters 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 ayear). But there are also many niche markets, where a fullyindigenous plant is unlikely ever to be economic. BMW inIndonesia, for example, builds 10,000-15,000 of the 7 Seriesmodels through CKD operation, brought in as a body-in-white with the associated kit of materials. On the other hand,CKD has little attraction for the truly premium brands: "Ifyou are Ferrari, you and your customers are prepared to paythe 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 r

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

in Bremen and Bremerhaven."We need to be close to theports and preferably in a free commercial zone," Bommerssays. "But there are situations, especially with the move ofOEM production towards the East, where it might makemore sense to have our warehouses closer to the centre ofgravity of the product flows."

Such decisions are far from simple. CKD solutions aremostly tailor-made for the requirement and the linksbetween IT and physical operations are critical. Yet CKD,and more especially SKD, operations are characteristicallyshort-term: "In six months it may all be gone, or there maybe downturns In volume and then a later surge, so we haveto retain our operational capability. They are by definitionvery volatile markets - that is why OEMs use thesechannels."

Knocking down trucksBLG's operations mostly involve cars, but commercialvehicles, from light vans to heavy trucks, can also be aconsideration, precisely because of the small volumes."Configurations can change immensely from country tocountry" says Bommers. "Two trucks may look the same, buttheir components may be completely different."

It might be thought that such relatively small-scaleflows would lend themselves to end-to-end operation byspecialised logistics service providers. In practise, saysSchorb, this doesn't usually work out. "The big OEMs say'Iwant to have one partner for the whole operation' but nota lot of companies can perform the whole pack, ship anddeconsolidate process across countries or continents, sooften the task is split into two, three or four portionsfor packing, freight forwarding, and deconsolidation.OEMs are certainly looking more and more for integration,

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 bigmarkets like Russia or India it could just be 30 months".On the plus side, CKD can give LSPs an entree:"lx gives usa big chance to be a player in the second phase [of marketdevelopment]; also, we have had to handle situations atborders, for example, so we will have gained so muchexperience that it is difficult for the OEMs to changepartners. A knowledge of a combination of automotive, localcustoms (and Customs) and local labour practises - thereare perhaps only five or six companies worldwide that aregood at that."

Packaging the promiseWith more global markets, the prospects for growth in SKD/CKD operations look promising, sometimes in surprisingdirections. 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]. Andwhile, at perhaps $2,000 per container, it would appear tobe prohibitive to ship car kits from Brazil to India, the taxsavings are so enormous that it can be worthwhile!"

Trans-continental shipping isn't getting any cheaper, sohyper-efficient packaging is crucial to CKD/SKD operations.Working out the optimal packing of containers is very muchIT-based, but backed by physical testing to see if the theoryworks in practice and BLG is for ever testing potential newpackaging concepts and materials. There is also much workinvolved in devising the most appropriate protection andanti-corrosion treatments. The aim is, of course, to presentparts, and thus the finished vehicle, in the same conditionas if it had been completed in the OEM's plant. But, saysBommers: "The containers may pass through all theclimatic zones: humidity, especially for the bodyshell, is abig problem, and generally parts take more protection thanwould a finished car."

Schorb agrees that humidity control is, next to damageprevention, at the top of the list.

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

Automotive LOGISTICS • November/December 2007

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

No dumpingWhether returnable packaging is practicable remains amoot point. "If you can turn the packaging around morethan three times a year it may be viable," he suggests.Weight considerations are important, so Rhenus favourswood, paper and cardboard, but many countries, China forexample, but also Australia, have strict laws on the woodsand other materials you can use, and what treatmentsare required.

"We use more and more returnables because ofenvironmental laws: in markets like Russia or India, wheredocumentation is a big burden, this applies to packagingtoo, including rules on dumping wood and cardboard, someof which will be special papers, or chemically treated, forproduct protection. There are a lot of rules and regulations;usually our OEMS take care of the specification, but westill have to operate the system, and pick up insurance andliability issues."

Quality to marketEnsuring part quality is a major issue. By definition, if apart is damaged in transit, the re-assembly plant can't takeanother out of stock. The need to ensure thatparts are in good condition going into the system extendssupply chain lead times upfront. It means allowing »

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CKDPack started with a vision of bringing innovation into industrial packaging and logistics, focusing on intercontinentalshipping of automotive parts and CKDs around the giobe.

We are the first company to design, develop and patent a modular container packaging system which is completely adaptablefor different parts of all types of vehicles. With our approach, one style of container system can be used to pack engines,transmissions, sheet metal parts, electrical, hardware and virtually every part in the same C-Kontainer system.

Shipping automotive CKDs andparts internationally.

Reducing packaging costs andimproving the environment.

Developing innovative returnablepackaging designs.

Returnable packaging forautomotive CKDs, subassembliesand components.

Implementing return fleet logisticsmanagement for global returnablepackaging.

Consultants for packagingcosts reduction and zero wastepackaging implementation.

To reduce packaging costs forour customers by at least 25%compared to disposable packaging.

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.ckdpack.

PACKING CKD - CASE HISTORYCkdpack was founded in 1999 by Arun Modgil, initially inAustralia, but now based in Mississauga, Ontano and as thename implies, it specialises in developing packaging solutionsfor the CKD trade.

Modgil started by offering plywood-based returnable packaging,and found that invariably the OEMs believed they requiredpackaging to suit their, already devised, production plans - ofwhich CKD might be a very minor component. In pursuit of,in particular, GM contracts (GM has CKD flows covering 60countries}, the real requirement was somewhat more complex -for example, needs for containers to withstand quite long lay-bysin outside storage. The solution, Modgil felt, was to design arange of steel, returnable, container that could readily be adaptedfor all sorts of parts from engines to roof lines.

Theplywoodcollapsiblecontainerscould onlybe used forone type ofcomponentand wereoftendesigned around those specific parts. We designed somethingmuch more global and versatile, and they're being used acrossseven countries from Brazil and North America to Thailand andGermany," he says.

Ckdpack also does non-returnable packs, especially todestinations such as Kenya or Turkey where the returnsinfrastructure is not really in place. Modgil notes a "minor" trendtowards the part-for-part mode, which can allow for much tightercontainer loading: "With CKD, you ship a set of say 12, regardlessof any spare space in the container; with part-for-part there ismore scope to optimise the cube - a big improvement in logisticsmanagement."

On the other hand, Modgil acknowledges that there are a lotof reasons for CKD, not least that "production systems cost a lotmore than packaging" and moving to part by part is, at least at

"With CKD, you ship a set of say 12, regardless ofany spare space in the container; with part for partthere is more scope to optimise the cube - a big

improvement in logistics management"- Arun Modgil, Ckdpack

the systems level, a long way towards creating a self-standingplant, with the responsibilities for materials storage, inventorycontrol, demand planning and so forth.

And as outlined earlier, though the CKD picture has got muchmore complex and global, solutions may be lagging. "No-one'sable 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 fromelsewhere [ie not from the normal linefeed] you're lost!"

This matters. Ckdpack is involved in a contract for 10,000Hummer 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 lotof activity for a niche market. And it is dwarfed by the CKD and

- relatedactivities ofthe majors.He alsoreckonsDaimler areshipping100

- containers aday just for

CKD sedans; GM perhaps 200 or 250 a day, and he reckons thewhole spectrum from SKD to part-for-part is growing at aroundfive to six per cent a year.

One main thrust, he points out, is the reduction in the numberof platforms that the global majors are supporting, allied toglobally diversifying component and assembly supply chains,

What is happening in some real sense is that many vehicleproduction chains are reversing to a part-for-part, or evenCKD mode: pure assembly plants gleaning the fiscal rewardsof offering local employment, but supplied with 'kits of parts'brought together by a third party from worldwide suppliers. Howlong can it be before the OEMs outsource even final assembly,and hecome purely design, marketing and brand managementcompanies? As Modgil puts it: "All you need is tax benefits and apiece of land." Oh! And a decent logistics partner.

BLG's 0 | J I . : J1 ; J I I . ; ; . ^ ^ i ; , , , : , ^ , . L . ^ ^ I ^ . but commercial UCIIILIL;., from light vans to heavytrucks, can also be a consideration because of the small volumes

time for more rigorous checks on parts and theirpackaging than would be considered absolutelyessential for a conventional line-side feed. It alsodemands that all parts are on hand when neededfor consolidation. As Schorb notes: "If a day'sworth of engines isn't available for packing, it'sgoing to cost €500,000 ($700,000) in airfreight!Who pays for that?"

Schorb sees Russia and India as the majormarkets for SKU/CKD (China, he suggests, has acar market so far developed already that an OEMis unlikely to get a sufficiently decent price to offsetthe additional costs - and anyway, most firmstrying to crack the Chinese market are alreadythere). But, contrariwise, the'next big thing'couldconceivably be 'reverse CKD' - basic vehicles in kitform flowing from low-cost, low tech plants to theWest for assembly and customisation. The futureof the MG plant at Longbridge? ••

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