How Serious is the Threat?
MiBiz • May 30, 2005
by Jim Gillette
General Motors, Ford, and, to a lesser extent, DaimlerChrysler, have been harping on their major suppliers for over three years that if they don’t cut prices, the automakers will buy massive amounts of parts from China or other low labor-cost countries. To some, this is a serious threat. Not all North American suppliers, however, will be equally affected by “cheap labor” imports.
First, let’s look at the numbers. Auto part imports from “China area countries” (including China, Taiwan, and Hong Kong) grew from $2 billion in 1998 to a little over $4.2 billion in 2003 (the most recent year available from the Department of Commerce). Anecdotal evidence since 2003 suggests that the 14% compound annual growth rate has not slowed. Parts imports from the China area that represented only 8% of non-NAFTA imports in 1998 had grown to 12.1% by 2003.
There is no question that Asia in general and China specifically is becoming increasingly important to the global auto industry. Few are still arguing as to whether the China expansion will continue. The only question remaining is, how fast?
It is, however, too easy to overstate the threat to US suppliers. First, not all automotive components are equally susceptible to being imported. Second, automotive production, the end use for OEM auto parts, will remain strong in North America, although the customers are changing as the traditional Big Three are being supplanted by the New Domestics.
A simple “threat” checklist
Here is a checklist to help suppliers determine the import susceptibility of a particular automotive component:
- What is the direct labor content? In the US, direct labor accounts for roughly 15% of the cost of a component. Highly labor-intensive parts, such as wiring harnesses, have already left our shores en masse.
- How complex is the product? Simple stampings (e.g. radiator caps) are easily produced in low labor-cost markets with a minimum of capital investment.
- How easy and inexpensive is it to ship the product? Is the product easily packaged and does it have low weight-to-value? Sun visors are a good example of an easy to ship product; fuel tanks are not.
- Is there a Just-In-Time or sequencing requirement?
- Is the product evolving into a more complex module? Headliners are being loaded with additional equipment including HVAC ducts, entertainment systems, and complex wiring and controls, all of which add complexity and JIT requirements, making it difficult to import.
- Is there a local advantage of material cost or availability or of some other input factor such as electricity? Emerging markets often lack critical inputs at any cost. This local advantage tends to be fleeting, however.
- Are there qualified producers readily available in low-cost countries? Production facilities for many components either do not exist in China or their quality is below world-class. This, too, will change over time.
- How great is the need to protect propriety content?
According to government statistics, the dollar value of parts produced in the US per light vehicle assembled here is remarkably stable. In 1998, the average was $16,689 compared to $16,889 in 2003. This is especially notable because, with the extreme cost pressure on suppliers, you would expect the same number of units to command a lower price.
Growth from the New Domestics
Somewhat ironically, gains from the New Domestics, who have been pushing hard to increase the North American content of their vehicles, are being mitigated by Ford and GM, who have been seeking more off-shore sources. During 2000, for example, 70.4% of light vehicles assembled in North America contained an engine sourced here while, by 2005, that number has grown to 86.2%. New Domestics are expanding their North American engine factories, creating more opportunities for engine part suppliers while Ford and GM bring in six-cylinder SUV engines from Europe and China respectively.
CSM vehicle analysts forecast that North American light vehicle production will reach 17.1 million units in 2008 from slightly over 15.7 million this year. Growth in demand from the New Domestics will more than offset declines in Ford and GM. Hyundai’s Alabama plant has only just opened and the company is already shopping for a truck plant location in Northern Mexico. Nissan has plans for a new plant in Texas while Toyota will build in Arkansas and maybe Canada. While there are no announced plans, Honda will reach a point soon where either a new plant or significant expansion of existing plants will be necessary to meet demand.
As noted above, the physical characteristics and economics of part production dictate that much of a vehicle’s content be made in relatively close proximity. Numerous components and systems will be 100% (or close to it) in the region where final assembly is done. This will include, instrument panels, seats, sunroofs, door trim panels, headliners, and glass, to name a few.
The rule for the successful supplier is, as always, pick your product and your customer carefully.