Automotive companies continue to push efforts to localize their supply bases when serving global markets, often at a rate that appears significantly higher than other industries. This makes sense for a number of reasons, starting with the ability to create a natural hedge in buying materials and selling goods in the same currency. But the real reason for buying locally often comes down to a combination of the cost advantage of local suppliers, government incentives (or requirements) to source locally due to offset requirements and the added expense of importing supplies from an inherently longer supply chain. In India, Ford is one of the companies leading the local sourcing charge. According to the above-linked article, "Ford India's commitment to launch a new product in the country every 12-18 months will see the company strengthening its domestic supplier base ... The carmaker's latest offering, Ford Figo, is a case in point. With an eye on capturing the thriving small car market, the product has been competitively priced with about 85 per cent of its components procured from domestic suppliers."
Ford also sees an opportunity to mitigate commodity price risks by working with local suppliers in India, specifically. "Consolidating the local supply chain could also help Ford India cushion the imminent rise in raw material prices that is already threatening to cut into the margins of carmakers globally," the story notes. How is Ford doing this? One possibility is that Ford, like other automotive OEMs and tier one suppliers, is getting involved in demand aggregation throughout its local supply chain, to negotiate better pricing and terms with local suppliers. These strategies also mitigate risk by funneling business to fewer, larger raw material suppliers who are likely to favor Ford's supply chain partners over other customers in capacity constrained markets (e.g., in situations where allocation scenarios could occur).
Still, Ford's story of local sourcing in India is not just one of cost savings and risk reduction. It's also one of working with suppliers in higher value areas. Ford and others are increasingly relying on local suppliers for more complicated and higher cost parts and assemblies. This suggests regional suppliers are moving up the food chain by investing in types of production and manufacturing capabilities that higher margin and dollar volume parts and components require. In the case of the Ford Figo, "For the first time [for Ford in India], domestic suppliers have undertaken the production of the blockhead castings for the petrol and diesel variants of the vehicle."
Given this move upstream among suppliers, one wonders how quickly India will become a household name with its own set of OEM exports. Of course they'll first have to solve the problem of the little Nano going up in smoke when it comes to Western safety standards. Perhaps the irony here is that as Ford ramps up its own sourcing and production efforts in India, the competitive Indian OEMS are dealing with their version of the exploding Pinto.
- Jason Busch