Mirror, signal, manoeuvre. The automotive sector is indicating and moving to cross into the fast lane, but it may have neglected to take a look in the mirror.
The West is awash with a glut of cars. Over capacity in the sector is making it tough work for volume car manufacturers to make a profit and although consolidation continues with the possible alliance between the global giant, General Motors, and Renault and Nissan, OEMs are faced with a strategic choice in order to stay competitive – whether to assemble cars close to market and source components from further a field, or move the production lines to low cost economies.
The problem with moving to a global sourcing policy for automotive components is one of supply chain complexity. Local suppliers were able to offer JIT by their close proximity, but managing the flow of parts over an extended supply chain moves away from the JIT production philosophy and results in a greater dependency on inventory holdings. Logistics service providers with expertise in traversing the globe may be able to offer visibility and slick management, but OEMs are driving a hard bargain with suppliers, a policy which is hardly conducive to ‘partnership’.
Keeping assembly close to the market probably fits best with the higher end of the market, where customer choice and tailoring works well with build to order production methods. However, here too complexity rules as sophisticated planning and scheduling is required to respond quickly to the customer’s needs.
The alternative strategy, to assemble in a low cost economy – such as Eastern Europe – presents its own set of problems. Transport infrastructure is still an issue, and although labour rates are presently low by comparison with Western Europe, this will not always be the case. In this scenario strategic planners need to balance the capital costs of setting up production and the rise in labour rates over time. Car makers are keen to keep moving further East but can capital costs, and importantly, logistics partner’s set up costs be mitigated against cheap labour.
But the one to look out for is the one coming up in the fast lane. China has a pool of cheap labour, a growing middle class and a booming economy running at over 11 per cent growth per annum. There could come a time soon when cars assembled in China undercut the West’s volume car market and although, intellectual property and fine design skills may still reside in Europe, who knows who will be in the driving seat in the future. Watch out.
Nick Allen, Editor