How to Source Car Components in China (for a Premium Car Maker)

- Joachim Schadel, Dr. Martin Lockström, Prof. Dr. Roger Mose, Supply Management Institute

Despite China being the world’s leading “workshop” for high labor content goods at low costs, certain car components may cost up to 50% more to produce in China. Sourcing car components in China is a burning issue among supply managers for two reasons: First, producers want to participate in the Chinese domestic car market; second, and more importantly, managers are eager to tap China’s cost reduction potential. However, China is not always “cheap” when it comes to sourcing for the automotive industry because marginal labor costs do not necessarily translate into lower overall production costs. Therefore, how can companies ensure that they source efficiently in China?

The first reason that labor and production costs are not necessarily correlated is that the automotive industry is capital-intensive. Despite China’s sheer market size, it is no exception to this rule. To fully understand total costs, it is necessary to quantify the financial impact of less visible China-specific cost factors have on supply chain performance. Some such factors include lower on-time delivery rates and higher volatility in quality.

Planning and implementing sourcing activities in the automotive industry can be quite challenging. China’s market transparency is low, intellectual property rights are difficult to enforce, and local suppliers often lack the ability to meet quality requirements on a constant and high level. All industries in China face these issues; however, the process complexity of the automotive industry makes it particularly difficult to find suppliers that can closely collaborate with car manufacturers in either production or product development.

Successful purchasing managers usually answer the following questions when deciding whether to source a given part from China:

Can car companies effectively reduce their overall costs by sourcing components with high labor content? First analyze which components are driven by labor costs in the automotive industry.

How difficult is it to organize the inbound and outbound logistics processes when doing business with a supplier? There are logistics costs, such as warehousing, transportation, etc.

Are there Chinese suppliers that have the sufficient product and production technology for a component; or, does the supplier need to import most of the parts? If the latter, this often will result in higher total costs due to tariffs and transportation costs.

Can the supplier manage the supply chain complexity related to produce the component? Module suppliers normally manage a supply network consisting of up to 300 suppliers. It is important to work with suppliers that manage relationships with their own suppliers well. Inconsistencies regarding the product specifications or on-time delivery lead to production downtime, higher inventories, and lower overall efficiency.

Can the level of quality of the component be achieved at a continuous high level? This could result in waste production, obsolete processes, production downtime, losses in revenues or even could damage the brand image.

How predictable is the demand for a given component? In the beginning, it would be helpful to start with components with a predictable and continued demand pattern. Most car makers in China therefore refrain from implementing make-to-order strategies into the production processes, thereby reducing complexity and gearing toward high order volumes.

The following chart illustrates the above factors:

Supply Management Institute (SMI) is an international research and training institute focusing on the fields of purchasing, logistics and supply chain management. With more than 50 employees at offices in Frankfurt, Bangalore, Shanghai and Moscow, it is one of the largest research institutes of its kind in the world. SMI targets problem areas that Purchasing and Logistics Managers face on a daily basis. Through collaboration with renowned top universities, hands-on yet rigorous solutions are developed and deployed. The strength of SMI is its ability to follow the adage “Think global, act local”: by conducting research on-site, the applicability of research results can be greatly enhanced. Many MNEs have also realized SMI’s strength to leverage its knowledge throughout its affiliates and meet international requirements. Another important area is professional training, where SMI leverages its expertise from on-campus teaching to managers in the industry; last year, more than 800 professionals participated in SMI training courses across the globe.

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