Bandaid Outsourcing: The Big 3 Bloat and Kicking the Dead Dog

Friday, September 30, 2005
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For an international finance & econ class, I have found myself in the most hated of positions: that of doing a group project. This includes both a presentation and paper on the topic of outsourcing. However, I got lucky this time, and matched up with a single group partner (ok, I like small groups) with whom I enjoy working. He’s a fellow auto industry insider – one with some extremely interesting thoughts on the topic of outsourcing and manufacturing operations, especially as applies to the US auto industry as vs. the Japanese automakers.

Now you know I’m somewhat fond of bashing my hometown industry, for there’s always plenty to criticize. The bloated, bureaucratic, collectivized banks that happen to sell cars – GM and Ford – are becoming slag next to some of their foreign competitors. In this part of the world, GM, Ford, and DCX are God, and thus you dare not criticize them. So it goes. That said, I have two types of auto industry friends: 1) those that think along the lines of “American made = perfect” and 2) those that long ago woke up to the reality that the US auto companies are a collective toilet compared to most of their foreign counterparts.

Dennis McKenzie, my partner in crime for this research project, and a project engineer in the autoworld, conveyed some thoughts that I thought were spectacular, if not dead-nuts. As usual, interesting comments are great blogging material, with permission of the author.

The OEM’s are not building assembly plants outside of North America, they’re sending component work over there. Is that not the definition of comparative advantage? Toyota, Honda, DCX, Hyundai-Kia are building vehicle assembly plants within our borders. Tooling and subassembly work is moving overseas, and in some cases it makes sense. I’m assuming that until teleportation is all ironed out, it’s still cheaper to assemble vehicles close to your customer. Toyota was kicking our asses in the early 90′s when Georgetown was rolling along, and back then we did all of our tooling and component work right here.

I maintain that the move to outsource today doesn’t have a goddamn thing to do with economic theory; it is based on attempting to counteract inefficiencies. The OEM’s are so bloated and inept that this move toward “global pricing” provides a theoretical lower piece price, thereby allowing them to avoid any move toward competentcy, as the lower price buys more time to swim happily within the toilet that passes for “professional grade engineering”, and “quality is job one”.

GM has $1500 per vehicle in health care costs, and they are thrilled if two different vehicles can be built in the same plant (Honda can build 8 different lines, Toyota’s capabilities are around 5). It costs Ford $1.5 Billion to launch a new vehicle (Honda & Toyota around $500M). Rather than address that root cause, and demand that the UAW perhaps consider working for a living, as well as evaluating the oath of fealty blinding the management army, these clowns avoid real reform by chasing lower component costs. Outsourcing driven by this can’t end well because it isn’t tied to a firm foundation of increasing profits. It’s bandaid outsourcing.

That’s reality. That’s what our NASCAR building “Big Three” are perpetuating. To me outsourcing makes sense if you actually increase productivity and lower your costs of production, without sacrificing quality.

…..I’ve also seen GM, JCI, Molex, & now Ford source tooling overseas to satisfy a percent of offshore content, even if it increased overall costs significantly. This has never made sense to me. Perhaps it’s a complex accounting rule I’m unaware of, but to me a tooling package cost of $1.5M is still more than $980K. For some unknown strategic reason, the OEM’s and big integraters are happy to pay more as long as it’s from the Pacific rim.

Very interesting comments, especially concerning the counteracting of inefficiencies. The bureaucratic bloat at, say, GM, is such that the guy who gets the outsourced bid has a good-looking purchase document, but, in the end, he is relieved of any responsibility for things gone wrong in the long-term – things that cost the company profits in the end. Someone else down the line can pay a little hell, perhaps, if it even becomes an issue at all.

It happens that many, many of my friends and acquaintances are engineers for the Big 3. An Austrian economist friend, who is a design engineer for DaimlerChrysler, described his job this way:

Take a car air conditioner, for instance. It has a hell of a lot more BTUs than your average home air conditioner, but look at the size and space issues of each. Imagine the technology we need to make that thing work in your car. The mechanical engineers have to design it so it works, period. They don’t care where it goes. We don’t give a ____ if it works, we just care that it fits in the space allowed for it. You can say we put 10 lbs. of ____ in 5 lb. bags for a living.

In The End of Detroit, Micheline Maynard does a decent job of explaining why the Japs and others are kicking Detroit like a dead dog. In addition, these gas prices could spell the end good-time Charley in terms of Detroit’s big vehicle sales. I’ve always loved big-ass vehicles, and still do, but at $3+ per gallon, my 200,000 miles+ GM rig is beginning to tap out my wallet to the tune of $500+ per month. Ouch. But you’ll have to poison my coffee before you’ll get me to drive a Plymouth Neon, or similar.

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