Efficiency Can Halt Outsourcing

April 23, 2004
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ANN ARBOR — China has joined Mexico as a four-letter word for some area plastics manufacturers, especially those whose contracts are with domestic automakers or a large supplier that is tied to one of the Big Three.

Recent published reports had General Motors Corp. drastically increasing the number of parts it plans to buy from China in the coming years, up to $4 billion worth by 2009. Ford Motor Co. and DaimlerChrysler Corp. have said much the same: that both would raise the level of their parts business with Chinese suppliers.

Delphi Corp. and Lear Corp. have more employees in China and are spending more there today than a few years ago, and both predicted their presence there will grow in the coming years.

News like that has made local parts makers feel threatened.

But two reasons exist to believe the news just may get better for area manufacturers down the road.

First, the main focus of GM’s strategy isn’t to bring parts from China back into the U.S. for vehicles to be sold here. No, the automaker’s concentration is on applications in China.

“(There’s) some bringing back to the U.S., but most of that was really factored on the dramatic expansion that they are undergoing in China right now,” said David Cole, CEO of the Center for Automotive Research in Ann Arbor.

The automaker is showing a keen interest in the Chinese market because of the economic growth the country has had in recent years — up to an 80 percent jump last year alone.

“China has been exploding as a market opportunity, which means the manufacturers, as well as major suppliers, are going to invest there,” said Cole.

In 2003, China jumped into third place among nations with the most auto sales, as it passed Germany and only trails the United States and Japan. GM saw its auto sales climbed by 46 percent in China last year.

Second, Cole said the industry in this state is gradually building a wall against outsourcing.

What he means by that statement is, the more productive and cost-effective that Michigan suppliers become, the less reason there will be for an automaker or a supplier to look for parts overseas.

Cole used engines as his example.

In some cases he said it takes less than three hours to assemble an engine and, with that quick turnaround time, it doesn’t make much sense for a domestic maker to have an engine produced in China for a vehicle that will be sold in the states.

“The cost of the transportation, the cost of the inventory in the supply chain is significantly greater than even if the labor were free,” said Cole.

“What we’re seeing happen in vehicle assembly, manufacturing engines and many components is that we are becoming so good here that the incentive is minimal to go to other places in the world.”

Cole said other parts like seats and exhaust systems don’t have enough value per cubic foot to send across the globe, because the shipping charges would exceed the part’s value.

“Those (parts) are going to be done locally, and gradually more and more of the vehicle that we become very good at making is going to be sourced here,” he said.

“Some of the very high labor content parts of the vehicle have been gone for years; things like making radios and assembling wiring harnesses have been gone for a long time.”

Cole said the supplier situation is changing rapidly. In the short term it often looks like the change is for the worse. But at the same time, he pointed out that a longer-term gaze offers a brighter perspective.

“As suppliers and manufacturers get better and better at what they’re doing — that is, improve their productivity — what they in effect do is build walls against outsourcing because the transportation cost and the inventory cost are greater than the labor savings,” he said.

“I think the underlying principle that has been established over the years — and this has been an historic U.S. strategy — is that you build where you sell,” he added.

“More and more manufacturers are locating their manufacturing in the markets where they sell. It doesn’t mean they do that exclusively, but it is highly desirable to do that.”

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