Ford Reevaluating Lowest-Cost Location Strategy on Suppliers After Trade War
The trade war initiated by the U.S. has forced Ford Motor to reevaluate the strategy of sourcing parts that are easily shipped from countries with the cheapest prices, said Hau Thai-Tang, chief operations officer for the company, during a Feb. 3 session of The Economist's World Trade Symposium.
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Many automotive components have to be sourced locally, either because they are too heavy to ship economically, or because the country has local content requirements, such as in South America, he said. But aside from those parts, Ford's approach was to source from one supplier who could produce cheaply and at high volume, “typically, in the lowest-cost country.”
But he said the hiking of import duties “really exposes you as a manufacturer,” and said Ford is “migrating away from sourcing to the lowest-cost location.” The trade-off, he said, is that you have to spend more upfront when you're providing machine tooling in multiple locations, and it's possible that the efficiency will be less when you're producing from several plants at lower volumes.
The Ford executive said the pandemic has taught the company the necessity of coordinating closely with governments where they operate, and gave the example that at first, Michigan did not include auto manufacturing as an essential business, so plants in Kentucky and Kansas City also could not operate, since the supply chain is so concentrated in Michigan. The fact that China closed first, then Europe, then North America “really highlighted the interdependency of our global supply chain,” he said.
Ford is asking its Tier 1 suppliers to provide Ford more information about where they buy components and materials, and to map out their own lead times for production. “Suppliers are a little reluctant to do that,” he said, as they fear it may either give Ford insight into their providers' cost structures, or that Ford may do an end run around the supplier once they know that supplier's suppliers.
But the microchip shortage that is hurting the auto industry -- he called it a crisis -- shows how necessary it is. “If we can’t produce vehicles because of microchips, it hurts everybody,” he said, even non-technical suppliers. “We're in it together.”