Strategic capacity planning in automotive production networks under duties and duty drawbacks

High tariffs and complex customs procedures for automotive goods have a crucial impact on global production strategies. Global market growth forces automotive OEMs to invest significantly in capacity adjustments to their worldwide production networks. To ensure future profitability, capacity utilization and customs have to be balanced. The overall duty expenditures can be reduced by claiming duty drawbacks when imported materials are used for export manufacturing. In this regard, OEMs have to decide on where to build up production capacity, where to produce components and where to manufacture the vehicles. Motivated by real-world planning problems of a major OEM, we develop a mixed-integer model that simultaneously considers strategic capacity adjustments and duties and drawbacks for multi-stage, multi-product production processes. As for the accurate consideration of duty payments, an exact tracking of the routes and the location sequence of the particular production steps are required. We present a path-based formulation of alternative production options. In a numerical case study, the impact of duties and drawbacks on strategic capacity decisions is highlighted. The results provide practical implications on how to design production networks while capitalizing on economies of scale through the central production of components. The results clearly demonstrate the significant financial impact of duties and duty drawbacks and the changes to the production network.