The World of Automotive SKD
In this post we have a closer look at the world of Automotive SKD. For starters a quick disclaimer that we use the term Semi-Knocked Down, or SKD, as a generalization for an array of Knocked Down classifications where, most importantly, the bulky vehicle body is transported from manufacturing plant to assembly plant; more on the different classifications below.
Automotive Manufacturers have relied on SKD assemblies since the early days of the automotive industry, where i.e. Ford started early on to box up vehicle kits to be shipped to remote domestic and overseas locations for final assembly. The second world war saw a further increase in the use of SKD transports as American and Canadian built military vehicles were broken down in modules and shipped overseas to be assembled closer to the frontlines. With the decentralization of the motor industry, the practice of knocked down vehicle exports is still very prevalent today, although today the reasons behind are more related to the financial and regulative side of things.
Vehicle Import Classifications
When looking at the field of Knocked-Down vehicle export and assembly there are different classifications used, mainly related to policy or process purposes. When looking at Policy Purpose classifications the most common ways of categorizing vehicle imports to markets are CBU, SKD, and CKD. These all relate to how much local input is required for a finished product to be ready for customer. If we look at Process Purpose classifications, terms like MKD and DKD pops up along with the more common SKD term. These terms are often loosely thrown around, and we find that different markets and different OEM's use these terms somehow overlapping with each other. See below for a better explanation of each:
CBU - Completely Built-Up:
The importation of a Completely Built-Up vehicle is pretty straight forward. A car-maker builds a car in Germany, the car is shipped overseas in a finished state, taxes and levies are applied, and the car is sold to final customer in the market of import. This does not enable a lot of local value creation, and can often be subject to heavy taxation.
SKD - Semi Knocked-Down / DKD - Disassembled Knocked-Down:
SKD and DKD imports are both used to describe this process. In general, a fully functioning vehicle is complete, built at manufacturing plant in home country, before being transported to a workshop where it is disassembled or "knocked-down". The level of knock-down depends on regulation in the country of import; a higher knock-down level requires more work to re-assemble which in turn creates more jobs and value creation locally in the market of import. The knocked-down parts will then be loaded in containers, either as car body, engine, transmission, exhaust system, tires, electrical panels, and any other parts belonging to the same vehicle all in the same container, or with different type of parts being loaded together in separate containers. The knocked-down vehicles are shipped to country of import where they usually benefit from preferential import taxes as opposed to CBU imports. Cars are re-assembled at local assembly plant, mainly through assembly procedures not involving painting or welding. This SKD process is most common in completely new markets where there is no local supplier base, and the volume of imported vehicles are relatively low.
MKD - Medium Knocked-Down / SKD - Semi Knocked Down:
MKD/SKD imports are pretty much the same as the DKD/SKD imports described above, however, the processes vary slightly. Here the vehicle is never completely assembled before leaving the home country. In most cases welded and painted car bodies will be packed in containers and shipped to country of import. This requires more specific processes to be established at origin plant as compared to the DKD/SKD solution but does in turn reduce the overall required work input. Other parts like engine, transmission, electronics, etc. can be shipped either directly from supplier in home country/OEM's own manufacturing plant or sourced locally in country of assembly. This does then allow for a higher localization rate, and a higher level of local value-added activities to be applied. This solution is more common in markets that have a more developed supplier base and a relatively higher assembly volume than the former mentioned knock-down solution.
CKD - Completely Knocked-Down:
CKD import and assembly is the last stage in automotive manufacturing development before moving to full-scale localized manufacturing and sourcing. In a CKD setup, most parts will be shipped in boxes and crates before being welded, painted and assembled in country of import. This requires high financial investment into specialized manufacturing facilities like a stamping plant, welding facilities and a paint shop. The localization rate for CKD assemblies will usually be much higher than SKD, and a range of parts can be sourced from local suppliers, while more high-value and advanced technical parts of the vehicle will be supplied from home country. Pending the state of the automotive industry in the import country, CKD imports will usually offer the greatest tax incentives out of the different import methods, but some countries can be selective in which type of parts will qualify for such incentives and which will not. If Thailand has strong local supply base of engine manufacturers, they will likely prefer to see engines being localized as opposed to imported.
Financial Reasoning for SKD Import
Perhaps the biggest motive behind SKD assembly is the financial benefits that can be achieved through SKD importation as opposed to CBU importation, often through government tax incentives. Taking the Ghana Automotive Development Policy which was first issued in 2015 as an example. The Government of Ghana outlined this Auto Policy to encourage global car-makers to establish assembly operations in the country which would provide jobs and ultimately improve the nationwide vehicle fleet improving road and personal security. To do so a time-based Tax Holiday was offered to OEM's setting up assembly operations, where no import tax would be applied to any SKD or CKD cars imported on a time-frame decided by the level of local investment applied by the OEM. The import duty for CBU vehicles was, at the time, 35% of CIF value, whereas the Tax Holiday would completely remove import tax for SKD and CKD cars.
This would in effect mean that a vehicle with a CIF value of $30.000 USD would carry a cost of $40.500 USD before being available in the market, in other terms there is a $10.500 incentive which could be used to cover assembly processes, additional logistics activities, lower end price to customer, and higher profit margins for the OEM. Pretty much a win-win across the board.
However, tax incentives are not the only reasoning behind SKD export/import activities. Car-makers setting up assembly operations in new markets often rely on a gradual buildup of their plant infrastructure, in line with development of the overall vehicle demand in the market or region where the a new plant is established.
The final assembly operations of building a vehicle is far less capital intensive than having a full stamping plant, welding-shop and a paint-shop, operating all on the same location, especially before a certain market volume can be realized. It therefore makes sense to start with SKD, before slowly moving over to CKD and full-scale manufacturing as a market matures and demand increases.
As has been outlined above, SKD, export/import, and assembly activities do require some additional procedures as opposed to direct CBU export. Whether vehicles are disassembled knocked-down, or if car body and other parts are shipped directly before being assembled from a medium knocked-down state, there are supply chain concerns which have to be addressed in order to run a responsible and cost efficient solution. We explored some of these considerations in a previous post: "Containerization Introduction".
The biggest efficiency loses in this field comes from overuse of expendable packaging and under-utilization of container transports. This is where Kar-Tainer's SKD solutions come in. Not only do we help reduce waste generated through expendable packaging and optimize load factor in each container shipped, our systems also ensure that operational efficiencies are being kept at a peak both at packing and receiving facilities. The design of our SKD systems have an extremely high focus on safety, both for the vehicle bodies/kits being shipped, and for the personnel involved in the packing and loading activities. Bodies and parts are fixed in position external of the container before being safely maneuvered into container with a forklift. Loading procedure and the base of our cassette systems are standardized, while the fastening points and top structure is customized for the specific model being shipped. This allows for a wide range of vehicle models to utilize the same equipment, while ensuring uniform loading operations at all times. We offer SKD loading solutions for any type of vehicle; Sedans, Hatchbacks, SUV's, Pickups and Vans. Vehicles can be loaded in a 2-car, 3-car or 4-car configuration, either with only the vehicle body on, or with full vehicle kits as seen in the above picture.
Potential for cost optimization in SKD supply chains are often not fully recognized by automotive shippers. One of our long-term partners implemented our SKD Solutions for their SKD exports some years ago, before shipping their car bodies on Kar-Tainer cassettes, they were using wooden skids to load their SKD vehicles for container transport to overseas markets. Since, they have realized yearly cost savings of almost $3.000.000, cut CO2 emissions with 1.900 ton, reduced wood usage with 1.200 ton and have had Zero damages since start of operation. One of the great examples of the potential within SKD Logistics to "Go Green while Cutting Cost".
If you have interest in our SKD Solutions or want to learn more about Automotive SKD in general, get in touch with your closest Kar-Tainer representative or reach out to us through the website contact forms.