Whitepaper | Auto Parts Manufacturers: Considerations for Serving Foreign Automotive Companies in the United States and Canada

By Doug Donahue In today’s global economy, more and more foreign automotive companies from both Europe and Japan are building automotive production plants and assembly facilities in the United States. In fact, companies including Honda, Toyota, Daimler (Mercedes Benz), BMW, Toyota, Honda, and Nissan have all produced some of their vehicles in the United States. […]

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By Doug Donahue

In today’s global economy, more and more foreign automotive companies from both Europe and Japan are building automotive production plants and assembly facilities in the United States. In fact, companies including Honda, Toyota, Daimler (Mercedes Benz), BMW, Toyota, Honda, and Nissan have all produced some of their vehicles in the United States. Because of this growing trend, automotive parts suppliers, especially those with only non-US facilities, must now seriously consider the long term implications of continuing to manufacture all of their automotive Original Equipment Manufacturer (OEM) components outside of the North American automotive market.

From currency values to logistics, labor costs to growing competition, global issues must be considered by OEM suppliers when deciding how to strategically source their automotive components for their existing customers who have built auto production facilities in the United States.

Stable Currency Values

A growing number of major automakers, BMW is a prime example, will only contract with tier-one suppliers that have manufacturing facilities and production plants within the North American Free Trade Agreement (NAFTA) region. A major reason for this is to eliminate currency fluctuations since supplies and components may be purchased in US dollars, instead of foreign currencies that fluctuate in value.

Low-Cost, Skilled and Stable Labor Force

With the continuing increase in globalization, many OEM suppliers in the automotive industry must find the most competitive labor pools that can not only provide high quality output, but do so with a relatively low wage base and a stable workforce. Offering competitive labor costs, India and China have become major sources of automotive parts and components and are often the first countries considered when choosing manufacturing locations. However, workforce stability and the availability of qualified technical managers to support the development of a strong production facility and long-term manufacturing locations continue to be in question for both countries.

Transportation Cost and Supply Chain Logistics

With the continuing increase of oil prices, transportation costs and supply chain logistics are major concerns when choosing a source for automotive components. While shipping across the Pacific in large container ships continues to be economically sound, events outside regular production can be incredibly costly for an organization. As an example, reworks or recalls must be air freighted in order for production to continue.

Supply lines are always at risk and automotive manufacturers continue to be sensitive to supply chain logistics, such as we saw with the 2011 earthquake and tsunami in Japan. And because moving items from West Coast ports to Midwest and the South add additional costs in the supply chain, both Canada and Mexico offer significant advantages. Not only are both a part of NAFTA, but each provides a close proximity to most US auto manufacturing facilities.

Intellectual Property Protection and Operational Control

A major area that has become increasingly important in recent years is intellectual property protection. While India and China are poised to become major automotive markets, both have poor reputations in regard to intellectual property protection and many automotive industry executives are increasingly concerned about protecting their intellectual property, technology, and processes. With advanced car designs from increasingly sophisticated electronics to hybrid and electric technologies, the loss of these competitive technologies and manufacturing processes could pose a significant competitive threat. To mitigate that risk, many companies want to own and maintain control of their manufacturing equipment as they consider sourcing alternatives. Countries like Canada and Mexico provide unique opportunities to do both.

Opportunity for Market Expansion

Although one area that continues to attract automotive parts suppliers to countries like India and China is the growing market for automobiles in those countries, the United States and North America continue to be the largest automotive markets. Because of this, one consideration that automotive suppliers should put into the mix is the ability to expand into other auto manufacturers supply chains. When an organization can do so, they can provide lower costs, better quality, and conveniently located automotive components.

Mexico Gaining Competitive Advantage

After considering all of these factors, Mexico offers a number of strategic advantages for automotive parts suppliers. While India and China may initially be attractive, continuing issues with quality, economic policies, regulations, and transportation costs begin to make these countries less attractive in serving the North American automotive market. For many manufactures, Central and South America are a better choice. Due to its participation in NAFTA and close proximity to the United States, especially automotive production facilities located in Texas and across the South, Mexico truly stands out as a location that provides safety, efficiencies, and opportunities for auto parts manufacturers.

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