It's big in textiles. It's big in electronics. And China is rapidly becoming a major player in the automotive industry, a development that has enormous implications for automakers around the world. Automotive supply chains and distribution networks will inevitably undergo sizable shifts as China ramps up production of both automotive parts and finished cars—and develops a big appetite of its own for automobiles.
China's production of automotive products has lagged behind its output in other areas. Writing last year in McKinsey & Company's quarterly newsletter on China and India, analysts Marcus Bergmann, Ramesh Mangaleswaran and Glenn A. Mercer reported that OEMs around the world had been reluctant to use Chinese or Indian suppliers, largely because of quality concerns. As recently as 2003, the McKinsey report said, China exported just $4 billion worth of auto parts, and most of those were low-quality aftermarket items.
That is changing, albeit slowly. Driven in large part by the growth of their own car markets, Chinese and Indian parts suppliers have improved the quality of their goods (and the efficiency of their operations). Automakers and their top suppliers, which are leaving no stone unturned in their search for cost-cutting opportunities, have taken note. Mercer and Stefan Knupfer, a McKinsey director, wrote in a McKinsey newsletter in September that U.S. imports of Chinese parts alone now total about $4 billion a year—a figure growing by about 25 percent annually. That's still a small piece of the action. The U.S. automotive supply industry produces about $250 billion in parts each year, according to McKinsey.
The shift to Chinese or Indian sources may be slow, but the McKinsey analysts believe it could have a huge effect on automakers' costs. "The cost savings may be enormous: carmakers could cut their parts bills by up to 25 percent," they wrote last year. "A company that manufactures about five million vehicles a year could theoretically lighten the tab by more than $10 billion annually."
But even as they issued those heady savings projections, the consultants cautioned that shifting to overseas suppliers carries some risks. For one thing, the savings could be largely offset by high shipping costs. For another, there are the potential delays caused by an immature (although fastdeveloping) logistics infrastructure in China and by constraints on the U.S. transportation infrastructure's ability to handle the surging tide of imports.
Staying the course
One company that's keeping a close eye on developments in China is Vector SCM, the lead logistics provider for General Motors. Vector SCM, a five-year-old joint venture between GM and CNF Inc. (and part of CNF's Menlo Worldwide third-party services division), manages GM's logistics supply chain in North America, overseeing the flow of production materials and finished goods. The company also jointly manages supply chain operations with GM in Latin America, Europe and the Asia-Pacific, where Vector SCM is firmly established. The company's Asian operating divisions include Vector SCM Asia-Pacific, which is based in Singapore, and Vector SCM China, which is based in Shanghai.
Greg Humes is president and CEO of Vector SCM, based at its Novi, Mich., headquarters. "There is a great focus on China," he acknowledges, but he warns that the rush to source low-cost parts from overseas raises some problems of its own. "One is infrastructure capacity," he says, "not only international capacity, but import and export capacity as the supply base footprint [shifts more to] China ..." Humes is particularly concerned about the implications for ocean freight."Have we got the ocean capability and capacity?" he asks. "Are [the carriers] able to keep up with the [fast-paced growth]?"
A second worry—one that bedevils importers regardless of industry—is U.S. port capacity, both at the docks and at landside operations. It's an open question right now, says Humes, whether the ports will be able to handle shipments on a timely basis. Faced with the prospect of congestionrelated shipping delays, Humes and other supply chain executives say their challenge is to find alternatives to some of those bottlenecks. That won't be easy. Despite their size, automotive giants like GM and Ford have less leverage with ocean carriers than you might expect. The automakers ship a relatively small volume by ocean compared to, say, the big retailers.
Even so, Humes reports that this year, his company hasn't experienced any major problems in the flow of goods from the Asia-Pacific into North America. But that doesn't mean he isn't worried about the future. "What becomes more of an issue is staying up for the future, the protection of supply," he says. "We're constantly monitoring things." Right now, he reports, Vector SCM monitors the flow of goods at 19 checkpoints for any hint of supply disruption.
Despite the uncertainties, Humes' faith in outsourcing remains unshaken. He insists that GM and Vector SCM have no intention of abandoning offshore sourcing and stockpiling inventories closer to home. "Our strategy is to watch those critical milestone points to maintain lead times," he says. "GM is not planning on building up huge inventories in its plants or warehouses."