Tuesday, February 15, 2005


The Cato Institute Takes On The Auto Parts Industry

The Cato Institute weighs-in with their opinion on "transplants" (foreign auto companies, or OEMS, who build their product in the US) and whether or not they should be forced to use components from domestic auto suppliers instead of from foreign component manufactures who have US operations. Being the supporters of free trade that they are, of course they state that no government intervention is necessary.

Interestingly enough, though, protectionism wouldn't even serve much of a role in this case. Since the domestic OEMs aren't increasing their production in the US and are going overseas for many of their supplied component needs, there simply is no room for parts suppliers in the US (foreign or domestic in ownership) to get additional business with them. So naturally, they'll be fighting for the ever-increasing amount of business, and that the domestic parts suppliers will win some portion of this, and that foreign-owned suppliers will win some portion. But ask any component supplier in the US where their real opportunities lie, and they'll almost certainly tell you that increased amounts of business from the transplants will be key to their success.

If the protectionist really want to do something, go address the issue with domestic OEMs outsourcing their components. I've got a hard time calling something like the Chevrolet Equinox "American" when it's got a Chinese engine, Japanese transaxle, and who knows what elsewhere in the vehicle.

One minor complaint about the Cato article. They claim:

The Japanese and U.S. automotive industries operate differently. Japanese
manufacturers typically ask suppliers-- regardless of location or national
origin--to assume more responsibility for engineering design. In many cases, the
Japanese automakers do not own patent rights to the designs for the parts they
use, so that the parts suppliers must be quite specific. By contrast, American
automakers usually provide detailed designs and ask suppliers to bid on a part.
This is a fact of life in the auto parts industry, and complaining about it will
get American suppliers nowhere. Those American suppliers--and there are
many--who take it upon themselves to provide the designs and compete for the
business will succeed; those who don't will fail.

From my extremely limited experience, this is not the way things are done. If anything, the Japanese OEMs possess more knowledge about their supplied components than the American OEMs. Oh, sure, when it comes to which is more likely to crawl through your shorts in a disruptive manner, it's likely that it'll be someone from the Big Three, but I would not go so far as to suggest that they are more involved in the design process. When your company is rotating through release engineers (the guys at the customer in charge of making sure that purchased parts will do the required job) every year or so (it's not unheard-of to go through 3 or 4 release engineers during a 24-month program), then those folks are not likely to learn the nitty-gritty of the parts that they're in charge of overseeing. I would go so far as to suggest that the recent spate of recalls at the domestic manufacturers is the direct result of their lack of product knowledge.

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