Is outsourcing a birthright for manufacturers?

Jan. 1, 2020
Determining an auto part's country of origin is no longer a black and white issue. Some components are manufactured in one country and assembled in another nation, blurring the once distinct line used for gauging a product's birthplace.
Determining an auto part's country of origin is no longer a black and white issue. Some components are manufactured in one country and assembled in another nation, blurring the once distinct line used for gauging a product's birthplace.

Outsourcing labor and development operations for parts makers has become a widely used technique; however, it is still a sensitive issue, as this topic drew reticence from many hard parts makers when broached. Perhaps their reluctance was out of fear of rebuke from the industry's more patriotic contingent. But the truth is, quality of parts has vastly improved since the days of the maligned Chinese rotor, regardless of where they are made.

"Global sourcing is here to stay," says Jay Burkhart, senior vice president, global aftermarket for marketing for Federal-Mogul Corp., who has discussed this topic in previous interviews with this magazine. He adds that outsourcing is an opportunity for many manufacturers: "I don't think it's a necessarily negative phenomenon."

"If you've built the brand, it doesn't matter where the part is made," says Aaron Shaffer, marketing manager for KYB, who adds there will always be a need for both premium and value lines.

Indeed, a recent report issued by the Automotive Aftermarket Suppliers Association (AASA) concludes that where a product is made is "not the determining factor of a product's quality. Who develops and stands behind that product is."

Some of the current "hot spots" in which to outsource parts include, predictably, China, but some we spoke with say Eastern Europe and Australia have seen a booming auto parts manufacturing presence. Others point to a number of Asian epicenters, like Korea, Singapore, Malaysia and Thailand. One could actually place a finger on any section of a globe and discover a burgeoning automotive market there.

ACDelco, a global parts-making leader, does business in more than 100 countries around the world. "We've experienced annual double-digit growth outside of the U.S.," says Marketing Director Nancy McLean.

Delphi reps say regardless of where the company makes parts, quality is always top of mind.

"Whatever we produce (globally) is produced to Delphi quality standards," says Frank Ordonez, president of Delphi Product & Service Solutions and vice president of Delphi Corporation. "You've got to have a strong quality policy."

A healthy number of countries still keep research and development stateside, some for fear of subjecting themselves to intellectual property theft in other areas of the globe.

India is a country that could be changing this trend, however. This far eastern nation relies on much more than the sheer physical labor potential seen in a country such as China.

As reported earlier in this magazine, India has the world's second-largest English-speaking population.

"India is light years ahead of (China) in technological and development issues," says Dan Smith, president and CEO of Capstone Financial Group, who adds that India, Vietnam and the Philippines are leading countries when it comes to engineering and "mind power."

Many blame outsourcing for the decrease in job availabilities stateside, but to blame the economy on one particular industry is hypercritical, as a number of wider economic factors are in play.

Besides, as labor rates fluctuate throughout the world, the United States could very well become a more appealing option for manufacturers.

Foreign automakers are following this path by "in-sourcing" parts-making operations and setting up factories in the United States.

In North America, there's a trend wherein Japanese OEMs are setting up shop in the Southeast, says Wolfram Schmid, industry and product marketing manager of global automotive for Infor, an enterprise software provider with a prominent place on the global stage.

Other outsourcing trends involve an indirect route. "What some of the OEMs are going to do are source from other U.S. companies that are sourcing in China (rather than sourcing directly from China)," says David Solomon, co-CEO of Lazard Middle Market. "That's going to challenge the margins for people who are nimble," he says, adding this indirect outsourcing works best for manufacturers with a particular expertise, whether it's drivetrains or brakes.

Companies looking to outsource are strongly urged to do their homework before setting up stakes in an unknown locale. "I think you need to create a business plan," recommends Schmid from Infor, who adds suppliers need to look at the total costs involved in making parts overseas. "You have to complete the complexity of the business process."

And for distributors involved in outsourcing, they should be aware of the additional costs and longer lead times for deliveries, as well as the fact that they could be held accountable for product liability lawsuits, according to the AASA report.