Although North America will remain one of the largest automotive markets through 2010, cost pressures and globalization will make it more and more important for U.S. companies to develop global manufacturing footprints. Due to globalization, U.S. companies need to successfully sell their products to North American market winners while also selling in overseas markets. To build profitability in this environment, businesses must reduce costs by sourcing and producing in low-cost countries. However, outsourcing has several potential drawbacks that auto companies should consider when developing a global footprint.
Building a “hub-and-spoke” network
When expanding to low-cost countries, companies should develop “hub-and-spoke” networks to optimize their global footprints and value-added processes. This will allow firms to operate successfully in today’s global marketplace. A typical hub-and-spoke network includes a global “lead” center for research and development; regional “hubs” for pooling, sharing, and managing various key functions; “local spokes” for just-in-time manufacturing and assembly operations at nearby customer plants; and shared service centers for engineering, drafting and overhead functions. New developments at global lead centers can be implemented across global operations. At the same time, engineering back office activities can be outsourced in this type of network.
Potential outsourcing pitfalls
The rush of outsourcing to individual countries such as China poses opportunities as well as problems. Many large global companies are establishing sourcing offices in China to take advantage of the country as a low-cost supply base. Companies are achieving double-digit percentage savings on exports to the US and to the European Union for products such as capacitors, cable and precision-machined castings.
However, low productivity levels remain a major issue in China. Though increasing, productivity rates in China are expected to remain far below productivity levels in most western or even eastern European countries for the foreseeable future.
In addition, intellectual property issues in China are a major concern for many western companies. For example, a recent study by Roland Berger Strategy Consultants in China showed that 56% of all vehicles in China are equipped with counterfeit components.
Furthermore, automotive parts suppliers often feel they are under-supported by original equipment manufacturers when asked to locate facilities to new locations, such as China or India. For example, OEM support was less than expected in areas such as commitments to production volumes, allowances for investment recovery, long-term agreements and pricing guarantees. Local information sharing and logistical support from OEMs was “underwhelming.” Also, cooperation on local product development and specification issues was non-existent.