Automotive Subassembly Outsourcing and Who Really Made Your Car

What This Article Covers

  • Who Produces Most of the Cars that We all Drive?
  • The Structure of the Auto Industry Manufacturing Network
  • What Does this Mean for the Evaluation of Service Parts Networks?

New Information

In a previous post, we wrote about the inefficiency of automotive service parts networksThe line of reasoning of the article was that manufacturers were unnecessarily outsourcing the management of service parts too low in the supply chain – at the dealer level and the auto, service parts could be significantly improved in their management through a national and regional system of service parts management. Furthermore, those dealers were incapable of creating useful service parts websites and that this function should be centralized as well.

Structure of Auto Industry

What we learned from the book Who Made Your Car, by Thomas H Klier and James Rubenstein, is the following interesting tidbits of information:

  • 70% of the parts of automobiles are made by suppliers
  • Manufacturers are now primarily assemblers of sub-assemblies produced by vendors.
  • Much of the intellectual property and complex component manufacturing is owned and provided by the supplier/component manufacturers

Who

Suppliers Actually “Make” the Car

Vendors are producing most of the car and providing many different manufacturers with similar items. This is explained in the graphic below which provides a great insight into the many various places that the car’s major components are coming from. The sourcing pattern seems identical to, although far more complex than that of laptop manufacturers. (although laptop manufacturing is even more outsourced, with contract manufacturers producing HP and a number of other major brands out of the same factory and sometimes the same production line.

Camery

From Automotive Weekly

We took the example of one vendor called Dura. A visit to their website demonstrates that they make numerous automotive components, which they sell to many different manufacturers.

Dura

Dura’s Part Distribution Model

Dura does not sell parts directly to retail customers, but they do to dealers and independent shops. (However, dealers do have a stranglehold on the industry, and many parts are carried only by dealers) This is one of some areas where business are opposed to “free markets,” and instead select tying agreements and monopolistic competition. I keep hearing about how so many people and companies are for free markets, but when it comes to real life examples, it seems monopolistic arrangements are the preference.

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eBay

Why Doesn’t eBay Own the Auto Aftermarket?

eBay is the largest service parts database in the world. However, for some reason, eBay is not prominent in automotive service parts. The fact that automotive service parts are expensive, yet only a modest service component market has developed on eBay is an indication that there are significant restrictions on who can get access to parts. And that there are all likely substantial restrictions on part suppliers, in the context of their agreements with manufacturers as to who they may sell parts to in the aftermarket. No such restriction exists for computer components, where anything can be found and purchased on eBay.

eBay

Even the most esoteric service parts for computers are available at low-cost on eBay.

What This Means For Service Parts Network Design

What this means is that the dealer system for distribution is even less efficient than we originally thought. People are going to dealers to get parts they think are made by manufacturers (Honda, Toyota, etc.), that are made by suppliers. All of these middlemen could be eliminated from the system and actually should be. These suppliers are the creators of these components, and they should not be controlled by manufacturers, much less have to go through dealers – so dealers or independent repair shops can add an extra markup with no value add – to service parts. If the product is not produced by a company, that it cannot claim ownership of it or should not be able to be the sole source of the product, particularly if they do a poor job of it, and if they charge a high price for doing this job badly.

References

Who Made Your Car, Thomas H Klier and James Rubenstein, W. E. Upj0hn Institute, 2008