Affinia's experience in China sourcing

Affinia, an aftermarket supplier to the automotive industry, has made “Raybestos” brakes and “WIX” filters in China at Longkou Haimeng Machining Co., in which Affinia owns 85% stake. Affinia holds a Global Supplier Conference at Shanghai, China on Mar 22, 2010. The following is the interview on that day.

David C Sather (right) in the interview

Gasgoo.com: China auto market has been the biggest in the world and is playing a more and more important role. Will that influence your customer base development plan?

David C Sather: The majority of our customers today are in North America, the single largest aftermarket. Opportunities are still in North America. But for the future, our customer base will be in Asia. This is where the growth is, and where there will be more cars and more people repairing cars in the future.

It is expected that there would be about 84 million new and used cars sold in the world. But in America, there are still 15-16 million cars produced a year on average with 240 million cars, pickups and SUV’s registered. In America, it’s very common for consumers to have three or four cars, which have to be repaired. In China, the new car sales are growing, but there is still far more cars in America that need to be repaired, which is good for the aftermarket business that we serve.

In the long term, the market will be in Asia, but today the market is still in North America. However the U.S. market will continue to shrink.

Gasgoo.com: How is your sourcing team structure different from the OE suppliers’?

David C Sather: We are structured much differently than the OE suppliers. We control all our own testing and validation, because we ultimately are responsible for our quality, it is not dictated to us by the OEM, so consequently we have sourcing people based in the regions, such as here in Shanghai. We have an office with sourcing people that assist the headquarters which is located in McHenry, Illinois. We control more of the sourcing activities and strategies much more so than the OEMs will.

Gasgoo.com: The automakers and OE suppliers in North America have been reducing the number of suppliers, especially when new car sales hit bottom in the financial crisis. But the aftermarket situation is not that bad. What’s Affinia Global Brake & Chassis business’s strategy on supplier number?

David C Sather: Our strategy is also to reduce our supply base. We want fewer suppliers; it has nothing to do with the economy. We want to consolidate for two reasons. One is because of the sheer number of suppliers we have, we have far too many, we want to reduce them. But we also want to leverage our spend. If we can have fewer suppliers that are vying for a greater volume, we get better economics, usually.

Every year we have a goal of 20% fewer suppliers in total. We started that five years ago.

Gasgoo.com: It seems that OE suppliers normally have longer relationship with their suppliers, than the aftermarket suppliers do.

David C Sather: True. But the Affinia philosophy is that we want long term partnerships. We are trying to do more LTAs (long term agreements) with our suppliers, that our view with a supplier is more in long term, and we invest a lot in developing the capabilities of that supplier, we send people in from the Shanghai office, spend time with their manufacturing process and capabilities. For us to move from supplier A to supplier B every year is very costly. We would prefer to develop a long term relationship.

We try to share with our supplier that what kind of pressure we get in the market place, from our customers around the world, but primarily North America. Payment terms are getting extended, it’s very common today in North America to get a 100 or even 180 day payment terms from our customers. It’s important that our strategic suppliers understand that, not that they can necessarily do anything about it, because of VAT and etc., but they need to understand what the market demands. If there is a way that we can find another value, and offset the payment term issue great, we want to do that, and again we want to be long term. We want them to totally understand Affinia; we want them to understand our challenges, and what the picture looks like a year or two years out. It is very important to us.

Gasgoo.com: How long can your relationship with your suppliers last?

David C Sather: We have some that are very long (10 to 15 years is not uncommon), and others that are reviewed annually to make sure the fit is right. But we have a very open relationship with our suppliers, constantly communicating via Webinars, conference calls, email, or personal visits by our people on the street. Again it is very important for our suppliers to understand our competitive challenges. Even though a supplier may be in a high cost country, we continue to do VAVE (value analysis, value engineering) kind of activity, to look to take cost down in the product or the process. For a supplier to be with us “long term” we need to keep them and Affinia competitive!

Gasgoo.com: Will you choose the supplier of the lowest price?

David C Sather: Not necessarily.

Gasgoo.com: But you will let your suppliers competing with each other?

David C Sather: Yes. But again with our long term relationship, as we develop that supplier, we give them kind of first right of refusal. It means if you are a certified suppliers to Affinia, when we develop a new item, we give it to you first, you tell me if you can make it and what’s the cost before I go to another supplier. You deserve to have that first opportunity to make that product, because you have proven to Affinia that you are capable, you are competitive, your quality is good, and you deserve the product.

Gasgoo.com: Will you increase sourcing in best cost countries?

David C Sather: Yes, we have to survive. That is the only way we can compete.

Gasgoo.com: The best cost countries are not necessarily low cost countries?

David C Sather: No.

Gasgoo.com: What is your understanding on “best cost”?

David C Sather: It depends, it varies. If oil is trading at 180 dollars a barrel, our best cost country could be in North America, because it would cost me three extra dollars to ship the rotors to America, when the rotors’ production cost gap is getting smaller and smaller. Best cost could be in Mexico, if it is shipping to the United States. If the market is in the United States, maybe the best cost is in the United States, when you add the inventory cost, the transportation cost, exchange rates, etc..

I get 180 day payment terms from my North American suppliers. I cannot get that from my supply base in China, because of the VAT requirements, my suppliers here in China have to be paid in 90 days, so they can reclaim or recover the VAT. But I can get 180 days with suppliers outside of China or outside of Asia. So I weigh that in my calculation.

So when I add the payment terms, the inventory, the logistics and the transportation cost, the best cost country may be Brazil, Argentina, Mexico, in some cases maybe even in the United States. Best cost can be determined by several factors, like inventory, logistics, energy, currency, etc..

Gasgoo.com: Besides cost, what are the other factors that you will consider before increasing sourcing from some countries?

David C Sather: We have to weigh the political or external environment, it’s another factor. Some of the things we struggle in China for example, are energy curtailment that we encountered this year. It is partly due to the snow in the north and the ability to get coal to the factories, but at the end of the day, if I cannot produce and get rotors which are what we primarily make or buy in China, I lose sales. If I can’t get it in China, I may be better off to pay a premium price in another country. Other factors are the country’s infrastructure (how easy is it to move goods within the country or region). As good corporate citizens Affinia is concerned about the environment. We want to deal with suppliers that share our same concern for people and the environment they live and work in.

Gasgoo.com: Can you name some parts that you are sourcing from China?

David C Sather: We source hydraulic hoses, wheel and master cylinders. 98% of all our drums and rotors come out of China. We are importing millions of rotors per year from China with superb quality.

Gasgoo.com: In value, how much percent does the commodity you sourced from China account for?

David C Sather: 60% of our spend is from Asia, including China and India. About 50% of our global dollar spend is from China.

Gasgoo.com: All the commodities you sourced from China are for global use?

David C Sather: Yes. 100% export. But we have made a commitment to build the infrastructure in China for the domestic market. A new plant for domestic consumption of various products will be built in the next 12-18 months somewhere in China.

Gasgoo.com: How do you control quality?

David C Sather: We have a team of SQEs(Supplier Quality Engineers) that are based around the world, they spend time at our facilities or at the suppliers, to not just to check the products, but to also help and offer advice on how to make their system more robust and the process more capable. It’s important to know that we have SQEs in the region, and their primary job is to spend time with suppliers developing their processes.

Gasgoo.com: Do your SQEs have to spend more time in developing Chinese suppliers?

David C Sather: Yes.

Gasgoo.com: Some Chinese suppliers can supply a small amount of products in good quality, but when the order becomes larger, quality issue comes.

David C Sather: It certainly depends on the complexity of the parts. In some times, the part has many operations, which make them very complex. For example, Rotors today are very sophisticated.

About five years ago, the rotors made in China were very inferior to those made in Europe and the United States. Today the quality of rotors coming out of China is equal to what it was five years ago in Europe and the United States. So in certain commodities, because of the work the companies have done, with help from their partners, they have come a long way with very dramatic improvements. That can be said to many components we buy. Rubber hoses, for example, we have just awarded a Chinese supplier that manufactures hoses for us that had zero PPM for the past twelve months.

Gasgoo.com: What is your biggest challenge in China sourcing?

David C Sather: The biggest challenge is speed to test, validate and get to market. A lot of Affinia’s engineering work is done in America, so it’s difficult to accelerate that kind of activity. We find the source, and we feed data back to the engineering people in America. It’s a slow process. That’s one of the biggest challenges we have today. We’re considering hiring some engineering people here in China which will take some of the work load off of their NA counter parts. This will shorten that cycle time and improve that process.

Gasgoo.com: Maybe you can set up an R&D center in China.

David C Sather: Yes, we have been doing some R&D work already in China but hope to expand and some day build a satellite independent facility to do that.