Evolving relations between carmakers and their parts suppliers have resulted in local, regional, and international shifts in the location of production. An upcoming Chicago Fed conference in Detroit will examine these ongoing structural changes, which are affecting the prospects for the U.S. auto industry’s continued concentration in the Midwest.
Motor vehicle production involves two types of firms: makers of parts (suppliers) and assemblers of finished vehicles (carmakers). The latter are better known to consumers because they market the vehicles with their brand names. However, suppliers employ three and a half times more people and add about 60% of the value of a finished vehicle.
Over time parts makers have taken on more responsibility in the vehicle production process so that an increasingly important factor influencing the competitiveness of carmakers is the strength and constructiveness of their relationships with their suppliers.
This Chicago Fed Letter sets the stage for a conference on this topic, titled “The Supplier Industry in Transition: The New Geography of Auto Production,” which is to take place on April 18 and 19, 2006, in Detroit (for details, please visit www.chicagofed.org/ news_and_conferences/conferences_ and_events/2006_auto.cfm). Structural changes in supplier–carmaker relationships have produced geographic shifts in production on three scales. On the local scale, close spatial networks and time-dependent relationships have formed between vehicle producers and key parts suppliers. On the regional scale, production has shifted from the Midwest to the South as new vehicle producers and parts suppliers entered the U.S. market and as sales of longtime domestic players declined. On the international scale, vehicles assembled in the United States contain an increasing percentage of parts produced overseas.
Local scale supplier–carmaker networks
Carmakers traditionally made most parts themselves and purchased the remainder through annual contracts with the lowest bidder. Now they outsource entire integrated modules to suppliers on multi-year contracts.
This shift in responsibility from carmakers to suppliers is reflected in employment changes. In 1990, 239,000 assembly plant employees and 653,000 supplier employees produced 9.5 million vehicles in the United States. In 2000, after a decade of record high production, 237,000 assembly plant employees and 840,000 supplier employees produced 12.3 million vehicles (figure 1).Suppliers are now required to deliver integrated modules to final assembly lines on a just-in-time basis, that is, with short order-to-delivery lead times. Accordingly, some suppliers have found it necessary to locate production within minutes of the final assembly plant, while others have located within a one-day driving radius of several hundred miles. Still, others have remained beyond the one-day radius, though they often depend on logistics specialists to facilitate timely pick-up and delivery of their products.
In general, engines, transmissions, seats, and large body stampings tend to be produced relatively close to final assembly plants. Honda’s two central Ohio final assembly plants, for example, receive engines, transmissions, and seats from suppliers within a 25-mile radius. Other key supplier plants, producing parts such as instrument panels, wheels, lighting, glass, and exhaust systems, are found within 200 miles of an assembly plant.
Finally, electrical components, as well as subassembly parts delivered to seat and powertrain plants, are more likely to be located farther away.
this geographic pattern is typical of the supply structure of an assembly plant located in the auto region.
Accordingly, assembly plant openings or closings exert a concentrated geographic impact that radiates outward. Recent trends show no abatement in this regard.
The assembly plants that opened in the deep South during the last few years seem to rely to a larger extent on dedicated supplier facilities, often located in supplier parks adjacent to the assembly plants themselves. Some of these dedicated supplier operations in turn are geared toward primarily performing logistics functions, such as kitting and sequencing the delivery of parts produced elsewhere to the assembly line.
