Most folks in the U.S. have never heard of Shanghai Automotive Industry Corporation (SAIC). They will. SAIC has a joint venture with General Motors and another with Volkswagen to build cars in China and other places in Southeast Asia. While it may have come as a surprise to the people running things at GM and Volkswagen, no one else will be particularly stunned to learn that SAIC has had an ulterior motive.
While GM may have thought SAIC was merely peddling cheap labor for the good of GM, it turns out that SAIC was learning a little bit about manufacturing cars in the process. SAIC now expects to sell 50,000 cars of its own design, with their own brand in 2007. I don’t imagine it will be too long until SAIC cars will be here, reaping the benefits of all of the intellectual capital GM gave away in their single minded pursuit of cheap labor.
Same thing happened a few years back when Schwinn outsourced its bicycles to Giant Corp. of Taiwan. Lo and behold, Giant learned all about bicycle making and became Schwinn’s leading competitor.
It would seem obvious that a company has to add value somewhere in order to make money. When GE succeeds in outsourcing all of its manufacturing and all of its engineering – which should be soon at the rate they are going – the question on the table will be, "Who needs GE?" A customer will be better off going directly to the third party design firm and the third party contract manufacturer and doing business with them. Why pay a middle man?; and a middle man or a glorified importer is all a company is that has outsourced its core value adding work.
Outsourcing – especially offshore outsourcing – may be a good idea for a commodity type component here and there, but when a company outsources its core value adding activities, it might as well close up shop and send everyone home. No matter how strong brand is, without value adding to back it up, it is a hollow shell. Better to end it all at once than to drag the employees and stockholders through a long, slow and painful, but inevitable, death.
Rick Van Velden says
Interesting commentary on the outsourcing of America’s manufacturing sector to developing nations such as China. While I agree that companies electing to outsource elements of their core competency may endanger their own existence, I think the author is overlooking a key transition underway. Automakers have long since transitioned from manufacturers to masters of the business process. One of GM’s core business strength is that it has become a channel for marketing and distributing automotive products and services. I can foresee the day when China is producing many of the cars and trucks consumed worldwide, but sold through channels such as GM or Ford.
Bill Waddell says
Of course, you are right, Rick. GM has been driving toward becoming a marketing and distribution company ever since 1923 when Alfred Sloan declared manufacturing to be a commodity. The question is why a GM or Ford dealer will be willing to pay GM or Ford much of anything when the dealer can buy the same cars and the same parts directly from an outfit like SAIC who designed and bult the car in the first place?
The dealer network exists only so long as it perceives value from a relationship with GM or Ford. When GM and Ford add no value to the product, their role in the marketing and distribution channel becomes insignificant. It strikes me as an ominous sign for both companies that their most profitable entities are Ford Financing and GMAC. If there is a commodity in this world, it is money. People will finance a car at any bank that is offering .1% lower interest. A company makes money in a supply chain, in the long run, only to the extent that it adds value to the supply chain. Perhaps GM and Ford think their dealers maintain a relationship with them because they love them so much. Those dealer networks will remain intact for as long as it economically makes sense, and not a minute longer.
Bil waddell says
And here they come. In today’s news –
Honda dealer in New Jersey signed to sell Chinese cars: Dealer Tim Ciasulli has invested $2 million in entrepreneur Malcolm Bricklin’s plan to sell Chinese vehicles in the United States.
Bill Waddell says
And in today’s news . . .A Chinese auto-parts company plans to open an R&D operation west of Detroit. Century Automotive, a division of China-based Tempo Group, has purchased a 425,000-square-foot parcel of land in Canton Township, Mich., according to a Wayne County official.
Karen Wilhelm says
I would not be the first to say that the long lead times involved in outsourcing to China are a big obstacle to lean manufacturing — if your market is in the US.
To be lean and flexible, with minimal investment in inventory throughout the supply chain (think total system cost), you can’t have the time between order and delivery as much as six months long.
Every supplier in the chain must be able to respond to changes in order mix, engineering change orders, safety or defect conditions, etc., immediately if not sooner.
The risk of piracy of intellectual property is not small in a country with no history of patent or copyright law.
The logistical problems include overcrowded ports, like Long Beach, delays in breaking down shiploads to truckloads or railcar loads, and the risk of interruptions such as strikes (remember that one?).
If your market is in China, manufacture in China. If in Europe, manufacture in Europe. If in North America, manufacture here.
The apparent advantage of low wages is dwarfed by the unconsidered costs of a poorly linked supply chain.