The news in itself isn’t that dramatic. Ford Motors is going to start assembling Ford Taurus instrument panels in a Chicago facility rather than outsourcing them. But, according to an automotive insourcing article by Sarah Webster of the Detroit Free Press, this is “ominous news” for Tier 2 and Tier 3 members of the automotive value chain. Why? Because it’s the first manifestation of what is expected to be a significant move back to insourcing .
What’s driving this trend is the recently-inked UAW contract, which includes a lower pay level of roughly $14.00 per hour for new hires. This is about the same wage that many suppliers to Ford, Chrysler and GM pay their workers and, as Webster reports, about half what the Detroit 3 pay their “regular” workers. The bottom line, quite literally, is that there is no longer a cost advantage to outsourcing – at least not when the work is outsourced to U.S. companies. In fact, even the cost advantage of low-wage countries, pegged at about 17 percent by manufacturing productivity experts at the Michigan Manufacturing Technology Center, may go away.
The Detroit 3 are so sure that insourcing will work that they collectively guaranteed in their new UAW contracts to insource 5,025 jobs. This is tough news for suppliers. It should also serve as a wake-up call for every supplier in every large-scale value chain.
There are a few lessons here. The first is that competing on price alone is very risky over the long term if you’re an American company. As we’re all painfully aware, today’s global economy makes price competition difficult to impossible, and things are likely to get worse before they get better.
The second is that your best chance of success is by adding value through brain power and experience. A senior Ford executive specifically singled out engineering and technological knowledge as factors that would weigh heavily in the choice of suppliers whose components would continue to be outsourced.
The third is that depending on a single value chain as a source of business makes you vulnerable, and it’s wise to look for these opportunities before a crisis ararives. Suppliers in the automotive value chain, for example, could look to markets in marine equipment, exercise machines like treadmills, off-road vehicles, motorized recreational gear and so on.
Having run a small business myself, I know how hard it is to find time to pursue new opportunities when you’re dealing with a late shipment, a disgruntled employee, an upset customer and an urgent phone call from your account about a tax problem. It’s not easy. That bears repeating. It’s not easy. But, as the events in Detroit demonstrate, companies that don’t set aside time for building a broader customer base may find themselves with no customers at all.