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We are only scratching the surface...

Posted by: Dexter Roberts on October 29, 2006

“We are only scratching the surface in China,” Bill Ford said in Beijing last Wednesday. This time, he’s talking about sourcing auto parts, not his company’s business selling vehicles to the Chinese, something Ford has been doing since it first brought its Model T to the mainland market in 1913.

On October 25th while visiting Beijing, Bill Ford said his company intends to buy as much as $3 billion in auto parts from China this year. That compares to an already significant $1.6 to $1.7 billion last year. China parts already include everything from steering systems and suspensions to batteries.

Why buy from China? Well with labor costs a fraction of those in the U.S., it’s all about cutting costs, an imperative for a company which just announced a record $5.8-billion third-quarter loss. And of course, it’s not just Ford turning to the mainland for cost savings. A few days earlier, SA Peugeot Citroen said it also planned to double the value of auto components it buys in China, to $3.75 billion by 2010.

Given the low labor costs, what’s stopping them from going the whole hog and quickly moving most of their sourcing to China? Well it’s all about quality and getting China’s industry to improve that. And for many more complex parts, they simply aren’t being produced in China yet. but the local suppliers are quickly moving up the ladder. Again, hear it here from Bill Ford: “China is very key to our global sourcing strategy, particularly as the quality of the local suppliers ramps up,” he said.

Still, there is plenty of room to keep growing. Ford sources between $80 and $90 billion in parts a year. So Ford is going to have to keep scratching deeper to really tap the cost benefits of mainland sourcing.

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