Toyota and India — Proof That Specialization Still (Often) Trumps Local Sourcing

When we look back on the past few years of craziness in the currency markets, booming transportation (and oil) prices and a general trend toward government sponsored protectionism (even China and India have been especially guilty of protecting their agricultural sectors), I suspect that the concept of local sourcing will once again revert back to being the exception rather than the rule for many companies. Unlike today, where a return to near-shoring and local sourcing is all the rage, true global sourcing – not just based on low labor costs but overall competitiveness and the specialization of particular countries or regional economies – will ultimately make local sourcing less and less attractive in industries and markets that are free from government meddling in trade affairs.

There's even proof of this today. Consider how Toyota is launching a new small car in the Indian market but plans to import the engine used in production. According to the story, a spokesman at Toyota India notes that "initially, the company would import engines from its facilities in Thailand or Japan … [Toyota India] would start manufacturing engines here only after the volumes touched around 2.5 lakh vehicles per annum." In addition the spokesman notes that Toyota will only look at increasing local sourcing in the region "provided it matched the quality and cost parameters" required.

In my experience, Toyota's practice is most likely the rule (not the exception) when it comes to best-in-class Spend Management companies entering regional markets with the intent to sell locally. Without question, in certain categories (e.g., indirect, MRO, pallets, etc.) sourcing from outside a local market will rarely if ever make sense (especially in lower cost countries like India). But when it comes to something specialized like integrated circuits, LCD/plasma displays or even automotive or aerospace parts and components, specialization and automation will often lead specific regions and markets to become dominant on a total cost basis.

Indeed, more localized sourcing is something we can all strive for, but just as the pendulum swung toward low-cost labor-based sourcing five years ago -- and given that it is swinging to more near-shore environments today thanks to transportation and currency issues -- it will ultimately reach an equilibrium based on total cost factors that will play specifically to overall global competitiveness.

- Jason Busch

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