In the EU Automotive Sector, Local Sourcing and Production Pays

My eye was caught by a recent article in the WSJ that suggests that currency volatility presents companies with an additional type of supply chain risk when they fail to localize their supply chains within the EU. The story cites the case of Mazda, which, despite slashing "procurement and production costs and localizing more manufacturing" like other global automotive OEMs, is still struggling to overcome the hurdle that a strong yen creates in the EU. The main challenge for Mazda is that when compared with competitors such as Nissan, which claims that "87% of its cars sold in Europe will be manufactured there this year … [and which will feel] no impact from the weak euro on operating profit … Mazda has no production in Europe." The euro has steadily declined over the past two months, and the depreciation will further "highlight the weak spots" between those OEMs that have localized procurement and production, and those that have not.

From a supply chain perspective, local sourcing runs counter to many of the strategies espoused by GM and others during the rush to embrace strategies predicated on labor-cost arbitrage -- and potentially, arbitrage driven by material cost, based on local government pricing manipulation/subsidies. While Mazda might have taken a less aggressive approach than others to localizing its supply chain in Europe, other automakers clearly are beginning to once again see the benefits of local sourcing for local consumption. I just wrote about the subject as it pertains to the UK market, quoting a study that suggested automotive companies in that market wanted to source more local content.

Commenting on the UK news, I suggested that the study results "reflect a new trend in the market towards pushing for stability in the supply chain vs. stretching it to its cost limits … With organizations developing a better understanding of all of the risks inherent in a stretched global supply chain (e.g., currency, logistics, variable energy and commodity costs, supply availability, inventory, supplier financial/operational viability, etc.), I have no doubt that we'll see more and more of these headlines in the coming years." Mazda's case of EU currency volatility and its inability to source and produce locally for local consumption in Europe makes smoothing out the peaks and troughs of local currency and commodity markets more challenging. Just as important, it highlights the importance and benefits, from a supply chain standpoint, of getting closer to the markets in which you want to compete.

Jason Busch

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