Auto Service World
News   May 13, 2020   by Allan Janssen

Recent events may accelerate ‘near-sourcing’ trend: panel

The outsourcing movement may have been disrupted by recent tariff disputes, but the coronavirus may actually reverse the flow.


By Allan Janssen

The coronavirus pandemic could accelerate a fledgling trend of near-sourcing by automotive component suppliers, according to well-placed panelists at the Automotive Aftermarket Suppliers Association’s recent Vision conference.

The conference, held online over two days in April, featured a panel discussion that predicted the repatriation of auto part manufacturing, raised questions about intellectual property protection, and emphasized the value of face-to-face relationships.

The panelists, moderated by Jeff Jorge, a principal at Baker Tilly Virchow Krause, LLP, were Howard Laster, executive director and general manager of North American aftermarket for Continental; Selwyn Joffe, president, chairman, and CEO of Motorcar Parts of America; and Jay Burkhart, president of the Trico Group.

“With everything that’s happened over the last couple of years, including the current virus situation, I believe there’s going to be more focus on North America-sourced products serving the North American aftermarket,” Burkhart said. “Everyone’s looking for silver linings these days. I think that’s going to be one of them.”


Supply chain efficiencies


He said in order to service the increasingly sophisticated vehicles that will be hitting the aftermarket in the coming years, supply chains will have to be shorter, nimbler, more transparent, and more reliable.

“With the recent tariffs and now this problem, I just have to believe that more and more of the product that is consumed in the North American aftermarket is going to be made somewhere closer to where it is consumed,” he said. “I think that’s part of the lesson of what has happened in the last couple of years.”

The panelists were agreed in their concern about over-reliance on China as the default manufacturing hub for the automotive aftermarket. In fact, Joffe acknowledged that a number of concerns, including freight availability, tariffs, inflation, and supply chain disruptions, have for years now led his company to minimize its exposure to China.

“There are a lot of variables related to China,” he said. “We, like everyone, source from all over the world, looking for the most efficient manufacturing and highest quality product. And today it’s not just a Chinese market, it’s a global marketplace.”


Intellectual property


With the growing sophistication of automotive technology, Joffe said the protection of intellectual property is a particularly serious matter.

“There is a significant concern that as you share your intellectual property with contract manufacturers or component suppliers that you run the risk of not being the only one to have that proprietary information,” he said. “I would call upon the demand channel to be very sensitive because I think that if the supply chain is not handled very carefully, it will get significantly weaker for North American companies.”


High-technology products


Laster agreed, saying that as the complexity of these parts becomes greater, the supply needs to be closer in proximity to the customer.

“When you talk about the coming technologies, you’re talking about software. You’re talking about ADAS. You’re talking about technology that goes far beyond ADAS. When it comes to these technologies, intellectual property become very dicey,” he said. “I think the temperature of what we’re used to in the traditional aftermarket will change and how you’ll supply that and where you’re getting it and how comfortable you are with the liability of it all.”

Joffe maintained, however, that not all product lines will be able to withstand the increased cost of near-sourcing.

“In the pure hard parts arena, where you have a diversity of parts, you’re going to have to weigh out proximity versus labour costs,” he said. “Depending on the competitive environment relative to the labour portion – how much labour goes into the product – it becomes trickier.”

Indeed, manufacturers have been forced to focus on lowering prices for many years, and it may be time to resist that demand from customers, the panelists agreed.


Pricing and profit


“All North American suppliers have been so conditioned that we have to go to China to stay alive because our customers are beating us up for lower and lower prices,” Burkhart said. “There was a little bit of inflation finally in the industry last year with the tariff issue. Some of the categories moved up ever so slightly in price but the bottom didn’t fall out of demand.”

He suggested there might be some room for further inflation to secure a shorter supply chain.

“Maybe there is some pennies difference in the total price that would allow more local sourcing,” he said. “If you listen to earnings calls, there are an awful lot of questions from investors about ‘where do you get your product from’, and ‘how reliable is your supply base.’”

“I think the aftermarket desperately needs some inflation,” agreed Joffe. “There has been a tough pricing environment for a lot of years. I think inflation across the board is healthy for everybody. Consumers have been getting a disproportionately fabulous deal. So I think there is a little bit of room for movement.”


Pipeline transparency


Burkhart said another benefit of near-sourcing is improved transparency in the supply chain.

“When you’re far away from the core governance of the company – whether it’s China or elsewhere – I think at times like this it is incredibly challenging,” he said. “You start to lose visibility in terms of what is happening on the ground. You can see product coming out. You can see the product arriving. But you’re not really sure what’s going on there on the ground, and that’s a big problem right now.”

He acknowledged, however, that manufacturing capacity could be an issue in the near-term.

“We don’t even have the capacity here right now, but I still think directionally, the current virus is going to add to the momentum of more locally made or sourced product,” he said. “A lot of the things we see happening right now should be adding momentum to the fact that more products should be made closer to home.”

Jorge said the dialogue was meant to be a springboard of ideas during a difficult time for the industry.

“We have a common challenge right now as a human race. It’s also an opportunity to come together as a sector to figure out how we become stronger, how we become unified – even more than we were before,” he said. “To quote Winston Churchill, to never let a good crisis go to waste, we’re going to help empower, equip and embolden each other.”


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