The American Automotive Industry Supply Chain(3)

Given these circumstances, what will help U.S. suppliers adjust to the new reality? How can governments help them to become more competitive at home and abroad? The OESA/RB study cites a litany of changes that suppliers believe will help improve their competitive position relative to other countries, among them: front-loaded investment tax incentives; more effective education and training programs; lower healthcare expenses; more vigorous enforcement of international fair trade practices; a rebalancing of union/employer rights.

These topics also were identified in the Department’s Manufacturing in America report, which comes to the clear conclusion that government agencies should strive to assure that they provide the lowest-cost business environment, consistent with their obligations to the public welfare. OESA also draws attention to the need for a better coordinated regulatory process, perhaps via an Ombudsman, that anticipates and seeks to mitigate the often conflicting demands imposed by government agencies.

However, the OESA/RB study also notes that even if government agencies were able to deliver every change requested, U.S. producers probably would still face a significant cost gap versus most of our major Asian trading partners. In short, governments can help, but cannot solve the industry’s problems. Suppliers must adapt as well, making appropriate adjustments in their business plans and operating procedures to drive their costs lower and their standing on the value chain higher. As JIT principals become more pervasive in the assembly of vehicles, suppliers will need to follow their customers abroad or lose the business.

On the other hand, JIT principals also work against the wholesale transfer of parts production from the United States to other countries – with the possible exception of high labor/low technology content (i.e., commoditized) products. Producers can use that reality to their advantage by, perhaps, shifting their focus to the development and production of innovative products with proprietary technologies that help insulate them from price competition, or by restructuring their U.S. operations – completing low-tech high-labor manufacturing stages abroad, while maintaining higher value-added operations in their domestic plants. They must continually refine their business operations, and constantly improve their manufacturing processes. The Department’s Manufacturing in America report proposes that governments assist in these efforts by revitalizing the Manufacturing Extension Partnership program (which helps SME firms develop more effective production practices), and by stimulating the development of new technologies and industries.16

The Department should evaluate the utility of organizing a series of exploratory trade missions to introduce small and medium American Tier 2 and 3 suppliers to the senior purchasing officers of all of the international vehicle manufacturers and upper tier partners. However, rather than visit these companies’ individual plants in, for example, China or Brazil, the focus should be the global corporate purchasing offices, whether they are located in Tokyo or Seoul, Paris or Stuttgart. These missions would not attempt to generate immediate sales, but instead work to establish credentials and to seek opportunities for future business.

Note, however, that only those firms that possess proprietary technologies, or superior manufacturing processes and are prepared to compete on price, can expect to succeed with offers to supply these prospective customers via long-distance supply lines. Others must be prepared to invest in facilities in close proximity to their customers’ plants, doing so to develop corporate-wide economies of scale that will help maintain the competitiveness of their existing U.S. plants. Many suppliers would have difficulty raising the capital needed for such investments, because of the relentlessly competitive global environment in which they operate. Therefore, governments also should explore creating WTO-compliant programs to improve U.S. supplier access to venture capital.

But more important than all of this, the small and medium-sized U.S. supplier community needs help in developing new manufacturing processes, and for adopting and adapting global best manufacturing practices to their operations. Without first regaining their international competitiveness, trade promotion assistance may not produce significant results. Moreover, because contract awards are slow to develop in the automotive industry, because they require an extensive proving period for the prospective supplier, and because the contracts may involve vehicles or components not scheduled for production for several years, it would be a mistake to expect that the recent devaluation of the dollar will provide a significant sales boost for the original equipment market (unless the realignment becomes permanent).17

At the end of the day, the domestic auto parts industry will require fewer employees. Thus, governments also should focus upon assisting displaced workers develop new skills and find new employment opportunities, not upon sheltering them from progress. Every such effort, however well intentioned, from Smoot-Hawley right up to the (recently relaxed) restrictions on some steel imports, has always generated unanticipated consequences that pop up unexpectedly somewhere else, place a burden on someone else, and succeed only in reducing the overall competitiveness of the American economy and in reducing our standard of living.