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Automotive company: Causes and effects of importing most of its materials from foreign manufacturers

In the new global economy, nations have gained the potential to become increasingly specialized in terms of how and what they produce. For many companies outsourcing everything from the component parts of their products to helplines offers a way to cut costs, lower prices, and increase demand. However, these decisions have many hidden costs. "As stated by the new market research report on Automotive Component Outsourcing, Asia-Pacific remains the most prominent regional market for automotive component outsourcing, with revenues from the region waxing at a CAGR of about 12% over the analysis period" (Global automotive component outsourcing market to reach $1.09 trillion by 2017, 2012, PR Web). An overreliance upon overseas providers of materials can have the unintended long-term effect of a reduction in quality, even if in the short-term the drive to find the cheapest parts possible might seem to make financial sense. The major cause of outsourcing, the drive to make cheaper cars for consumers, has the unintended effect of producing lower-quality cars that consumers are less driven to purchase.

Outsourcing's apparent advantage is to enable car manufacturers to save money. Lower-cost materials means more profits for the organization. Additionally, these lower costs can be passed onto consumers, and offering lower-cost vehicles is of particular necessity in a recessionary economy. But these apparently reasonable causes for outsourcing can result in losses over the long-term. Firstly, when an automotive company begins to import most of its materials from abroad, it grows more dependent on other nations. Political instability and national disasters can limit supplies.

Additionally, the use of outsourcing means less quality control. The toy manufacturing company Mattel found itself in hot water when it was revealed that some of the components of its toys had toxic substance such as lead in them. The parts had been manufactured by a Chinese firm. "That brings up the P&L question of whether out-sourcing manufacturing to Chinese companies is really less expensive over time. If Chinese work quality is too low for most U.S. companies the cost of monitoring and inspecting these products could sky-rocket. And, this could off-set the advantage of China's cheap labor force" (McIntyre 2007).

In the short-term, buying lower-cost input goods allows an automotive company to discount its product, pass on these savings to the consumer in a difficult and potentially recessionary market, and sustain its profits. Other contributing causes of outsourcing include the desire to streamline operations if outsourcing firms can make the products more easily, and the desire to build relationships with manufacturers in other nations where the cars are sold. But the long-term impact upon quality must be taken into account. Even if the firm imposes extremely rigorous quality control standards upon the actual assembly of the vehicles, if the materials are of poor quality, problems may arise. Furthermore, a faulty car component is not like a toy or even a handheld electronic device that can easily be recalled. A recalled component within a car can cause months of additional work, as consumers bring their vehicles in to be serviced, to have the part replaced.

The impact upon the reputation of the car company can last for years. Unlike low-commitment purchases like buying an item at a fast food restaurant, people make purchases of cars only every five to ten years, and if the car manufacturer is known for using inferior parts and materials, consumers will look elsewhere. The loss of a reputation for quality is thus another unforeseen effect, caused by a shift to outsourcing. The immediate effect upon the American consumer is a dangerous vehicle and the long-term effect upon the American economy is the damage to the reputation of the firm and all American car companies.

Reputation is also something to consider regarding the branding of the car as 'made in the U.S.A.' Although the reputation for American vehicles has not regained its former status either at home and abroad, promoting the vehicle on the bass of its 'Americanness' may be problematic if the materials are known to contain outsourced parts made abroad. Even in other nations, aware of the problems of quality of Chinese manufacturers, the knowledge that the parts were manufactured abroad can have the unintended consequences of causing the American firm to lose its reputation for quality. In China, "another problem for end-users is the quality of the auto parts and services. The qualities are very inconsistent among the auto maintenance/repair sector and some repair shops often use fake products. The customer may pay a high price but cannot be guaranteed quality of service" (Outsourcing automotive parts in China, 2004, Outsourcing Institute). American firms have had the right to sell and distribute parts to Chinese firms since 2005, and Chinese consumers have shown a marked preference for American goods. Outsourcing can thus damage America's reputation for quality abroad as well as also hurt international consumers.

A full evaluation of the economic situation of consumers is required when contemplating outsourcing. "Despite the fact that outsourcing represents a best business strategy during a downturn where operational/business flexibility becomes crucial to survival, the component outsourcing market weakened during the recession weighed down heavily by the crushing effect of reduced automotive production. The value and volume of outsourced auto components decreased steeper than total vehicle sales as consumers also migrated from high-content SUVs and trucks to lower content passenger cars. Smaller, cheaper, economy cars have fewer parts/components than their high-end counterparts. Elimination of value added features to produce low-cost vehicles have therefore impacted business opportunities for component outsourcing" (Global automotive component outsourcing market to reach $1.09 trillion by 2017, 2012, PR Web). If consumers are requesting fewer additional features and demanding less expensive, more streamlined vehicles, it might ultimately behoove companies to focus more on producing items in-house.

Regardless of economic conditions, however, some firms have found it advantageous to not to outsource to foreign manufacturers as part of their standard business operations. The Toyota manufacturing company has fostered close relationships with its suppliers as part of its JIT (just-in-time) manufacturing strategy. Toyota adopts a low inventory strategy, which reduces waste and ensures that unused inventory does not needlessly pile up. However, to ensure that it can get materials shipped very quickly, it tends to rely upon suppliers located very close to its premises and emphasizes building a relationship with suppliers, rather than relying on suppliers abroad. "When working with suppliers to develop technology, Toyota creates a guest engineer program -- suppliers send engineers to Toyota's facilities to work alongside its own engineers for two or three years. This extensive training allows suppliers to fully integrate with the manufacturers' processes, and eventually, develop design ideas of their own. In addition, the experience makes the suppliers more technologically advanced, and increases their value to Toyota" (Carey 2004). This is the antithesis of the 'cheaper is better' model that has driven so much of the outsourcing of materials, but the end effect of the Japanese model has been cost savings and higher-quality and more innovative products for all consumers.