Insourcing Trend Dead After One Month
Part of the fun of this job: remembering what people said. For example, exactly one month ago, the Detroit Free Press was all about "in-sourcing." "'Due to recent UAW concessions,' [Merrill Lynch automotive analyst] John Murphy wrote in a recent note to investors, 'these tasks [parts design and manufacture] can now be sourced to internal workers at comparable costs and without significant investment in infrastructure… We are convinced that an insourcing trend is emerging.'" Anyone who's been watching the domestics rush to send work abroad– from Chinese-made engines in Chevy's Equinox to Indian programmers taking over Chrysler's IT work— would be forgiven for calling bullshit. And now the Freep's sister paper ( The Detroit News) reports that "Auto suppliers will shoulder a bigger burden of research and development costs as automakers look to shift some of the billions of dollars in costs of developing high-tech features in future vehicles, executives said Monday at SAE International's 2008 World Congress." In fact, our man Don Walker of Magna, friend of the little guys, reckons auto suppliers' share of the carmakers' total R&D spend will jump from 40 to 60 percent by 2012.
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Automobile makers should only be concerned with two things: design and marketing. Everything else should be subcontracted out to the highest bidder (it is moving that way now, anyway). Shift all costs associated with manufacturing to the subcontractor market, where there would be no legacy costs or corporate overhead. Then watch automobiles as they become cheaper and better-made.
I don't know. I favor a car company actually building the car themselves. Henry Ford might have been crazy, but I think he was crazy like a fox when it came to knowing the lowest cost way of building cars. Even then, he farmed out his bodies for Model A's to Briggs and Murray (both of which paid more or less starvation wages and nearly worked their workmen to death). A better example was Peugeot, which manufactured more of their own car than virtually any auto maker, at least in the 1960's through the 1980's. Ask anyone who's been to Africa about the legendary strength of Peugeot 505 station wagons on what passes as roads on that continent. The other advantage of building all in-house is that you don't have American Axle strikes or Plastich plastics strikes crippling your company.
For anyone who's been following the aircraft industry lately, this theme is highly evocative of Boeing's strategy on their new uber-efficient airliner the 787. Outsourcing more of the assembly build process than ever before. Along with this, the major suppliers are heavily invested in many facets of design as well as production for this cutting edge technology. So how well is that working out for Boeing? They are now a year behind schedule bringing the product to market. They've expending thousands of their own (unplanned) workforce hours correcting problems and deficiencies coming out of several of their major business partner/suppliers and they're about to hemorrage massive amounts of cash to unhappy customers who are already lining up to collect on their late delivery penalties.
So, the CEO of one of the industry's largest suppliers is saying that supplier contributions to development are going to increase from 40 to 60% of the vehicle? Not exactly the most credible source. If the OEMs were saying it, like they were 10 years ago, then I'd believe it. Remember GM outsourcing interiors to Lear, C&A and one other big supplier? The much-loved interior of the Uplander was one of the products of that stroke of genius. They don't do that no mo'......