Tuesday, February 26, 2013

U.S. Auto Manufacturing

In this week’s readings we learned about many considerations that must be made when designing the geographic layout of a supply chain.  These include labor costs, landed costs, transportation time, etc.[1]  Many manufacturers, of electronics in particular, are shifting operations offshore to capitalize on cheaper labor costs.  While it is common for American manufacturers to stop making products in the U.S., some foreign automakers seem to be shifting operations to the U.S.  The topic of this blog will be to consider the reasons why car makers have chosen this supply chain strategy.

Auto manufacturing is a huge industry that really has a global presence.  In the past, car manufacturers served as part of a country’s national identity and pride—Ford of America, Toyota of Japan, Mercedes-Benz of Germany, Fiat of Italy.  At the present level of globalization, auto manufacturers no longer use their home countries as the sole location of their manufacturing operations.  The positioning of assembly operations within the supply chain has become more of a strategic decision, rather than a matter of patriotism.  This can be observed in a list of the ten “most American-Made cars”:

U.S. Assembly Location
Last Rank
Georgetown, Ky.;
Lafayette, Ind.
Dearborn, Mich.; Claycomo, Mo.
Marysville, Ohio
Princeton, Ind.
Lincoln, Ala.
Lansing, Mich.
San Antonio
Toledo, Ohio
Lansing, Mich.
Lansing, Mich.

As you can see, Japanese car makers hold half of the top-ten rankings for “most American-Made cars”.  This list is determined by each car’s percentage of domestic parts content, total U.S. sales and U.S. assembly.[2] Given that labor costs are so high in America,—especially compared to places like China—why have Japanese car manufacturers chosen to source parts from and assemble vehicles in the U.S.?  According to Goel et al., there must be a tradeoff between labor costs and landed costs.[3]  For these auto makers, savings in costs like freight, shipping, and tariffs must outweigh additional expenses incurred for higher labor costs.  The Capgemini publication in this week’s readings suggests other motivations for these decisions.  This could include sustainability issues such as energy consumption and CO2 emissions.  Not having to transport millions of automobiles half way around the world could result in huge reductions in these two factors.

As you can see, foreign automakers have many reasons why assembling cars in the U.S. may be attractive, even at the expense of high labor costs.  I’d like to draw your attention to one more aspect of the “most American-Made cars” index.  Notice that only one Ford vehicle is found on this list.  This might be explained by Ford’s significant commitment to Mexican auto manufacturing.  For example, in 2012 Ford invested $1.2 billion in its northern Mexico plant (Sarmiento, 2012).  By strategically placing assembly facilities in northern Mexico, Ford might actually have lower landed costs to major markets like California.  This is because NAFTA simplifies trade between the U.S. and Mexico.  Also, logistics costs would be low due to the close proximity of northern Mexico and Border States.  So, if auto makers like Toyota could cut labor cost and control landed costs by shifting operations to Mexico, why do you think Toyota allows Camry to be the “most American-made” car on the market?


[1] (Goel, Moussavi, & Srivatsan, 2008, p. 35)
[2] (Mays, 2012)
[3] (Goel et al., 2008, p. 34)

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