In U.S., a New Model for Auto Industry
In the ever-more competitive global economy, China is now in the driver’s seat -- literally.
The world’s most populous country is setting the price these days for automotive parts. And that is raising questions about how long auto parts manufacturing can continue successfully on American soil.
One answer may lie in an unusual venture taking place in Toledo, Ohio, at DaimlerChrysler’s Chrysler division.
The company announced last week that it was erecting a new factory on the site of one of its oldest U.S. plants. Its aim is to build new models of the Jeep and other vehicles. But notably, it is not doing so alone.
Three suppliers, two from Germany and one from South Korea, are investing $300 million to join Chrysler, which is sinking $900 million into the endeavor.
Meanwhile, the United Auto Workers union is negotiating contracts with the newcomer firms. They will feature lower wage rates than those in the master labor agreements that have been signed with Chrysler and other giant car manufacturers.
The arrangement is nothing less than “a modification in the business model” that the industry has followed for decades, says J Ferron, senior analyst at PricewaterhouseCoopers’ automotive consulting practice. The setup, he adds, has the potential to forever change the way American car companies finance their factories and develop their products.
Indeed, the venture is unprecedented in a couple of significant respects. First, suppliers have never before invested alongside their customer in putting up a U.S. factory complex, although they have been called on in recent years to assume responsibility for making more parts for vehicles.
In Toledo, Kuka Group and Durr of Germany and Hyundai Mobis of South Korea each will own and run a major operation -- the body shop, the paint shop and the manufacturing line for chassis, respectively.
“Suppliers want to be involved,” says Jeff Schuster, a consultant to auto parts companies for J.D. Power & Associates. “Pressure to reduce their costs won’t go away, but having ownership can be a stabilizing factor in their business.”
In other words, buying into the place should help ensure that they’ll be around for a while.
About 1,100 Chrysler workers will become employees of the three supplier firms. Chrysler will retain 2,900 employees to work on the Jeep.
“This is ‘insourcing,’ not outsourcing,” notes Chrysler spokeswoman Mary Beth Halprin.
Whatever you call it, it’s a departure for the UAW as well.
The union traditionally has objected to any attempt by the Big Three to send more work to suppliers because wages at the auto parts firms tend to be relatively low. But with global competition intensifying, the union now sees things in a different light.
“We want jobs to be here,” says Lloyd Mahaffey, the UAW’s leader in Toledo, “and we will do whatever is needed to make that happen.”
Even with somewhat lower pay scales, of course, it would seem that U.S. parts operations would be hard-pressed to go up against their rivals in China, where the going wage is about 600 renminbi a month -- equal to about 45 cents an hour. UAW assembly line workers, by contrast, make $16 an hour, and that doesn’t include health and pension benefits.
Comparisons with China are not mere abstractions. Ford Motor Co., General Motors Corp. and other automakers are beginning to rely more and more on Chinese-built parts, entranced by their low costs. In turn, they have been pressuring their U.S. suppliers -- car-interior maker Lear Corp., wheel supplier Superior Industries International Inc. and many others -- to get their prices in line. Profit margins are being squeezed, leaving some to wonder how long the U.S. production of auto components and systems can last.
But low wages, it turns out, are only one part of the equation. “You have to look at more than China’s per-hour labor costs,” Ferron says. “You have to take in transportation and other costs, particularly the risk to your supply chain of sourcing from China.”
He is referring to considerations of quality and reliability of deliveries -- areas in which companies in the U.S., if they are smart and nimble enough, can gain an edge.
It is in this spirit that a dozen suppliers are setting up manufacturing facilities near the Chicago car plant that Ford is renovating to churn out new models. The goal is to speed up the delivery of parts and add flexibility to production schedules, concepts that first bubbled up decades ago among Japanese car manufacturers.
In the end, the big automakers are going to go wherever they need to go to boost their bottom lines. And the parts makers will follow, with more and more U.S. companies sure to open their own operations in China in the coming months and years.
But as the efforts underway in Toledo and Chicago make clear, the “made in America” stamp for auto parts isn’t in the rearview mirror just yet.
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James Flanigan can be reached at jim.flanigan@latimes.com. For previous columns go to latimes.com/flanigan.
