An apparently encouraging article appeared in GlobalAutoIndustry this week reporting that US domestic die casters were seeing a rising trend of parts which had historically been made offshore being brought back to the US. The article credited the trend to three main reasons; concerns about part quality, customer-supplier proximity and overseas logistics. We would not take issue with any of these drivers of change we would suggest three other developments have probably been of greater influence.
First, as volumes have declined the economics of low cost country sourcing become less tenable. The low piece part price is partly a function of high production volumes for which the Chinese have long held a reputation for being well positioned. As volumes have fallen, particularly for automotive which is the main focus of the article, producers unit prices will rise. Further, as volumes fall, the unit freight costs rise as shippers accommodate lower volumes as part container loads or have to consolidate shipments in order to continue to secure competitive freight costs.
Second, there is a huge aversion to risk which has manifested itself in a number of ways. Suppliers to Tier 1 and Tier 2 companies do not want to be carrying the same levels of inventory in their supply chain for fear of client failures or bankruptcies, so it makes sense to buy in smaller volumes domestically and carry less inventory on their own books.
In addition companies are finding it is harder and more expensive to borrow, so financing an extended supply chain where goods may need to be paid under a Letter of Credit is less attractive than working on 60 days terms from a domestic supplier, even if you are paying a higher piece part price. The IMF has found trade finance costs have increased for both domestic buyers and developing country exporters. For domestic buyers the theme seems to be better to trade on lower profit than not to trade at all.
Depending on the Chinese producer, quality has been both proven and questionable for the last ten years. We have seen supporters and detractors in equal measure. We doubt quality has suddenly taken a turn for the worse just when Chinese suppliers are trying to hold onto every customer they can get, but if I were a domestic Tier 2 or 3 company in the US, I would probably sight quality as one of my reasons for bringing a part back home when opening negotiations with a domestic supplier ” it sounds much better than saying we can’t afford to finance an extended supply chain or we have worries about our client’s long term viability and don’t want to carry inventory for them.