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OEMs Have Long Enabled China to Out-Compete the US

May 18, 2021
Since the 1990s, theirs has not been a well-thought-out strategy.

In my April 29 column, I outlined my take on the federal’s government role in enabling the Chinese to become both our primary competitor in world trade and creating the overwhelmingly negative balance-of-trade the United States has with that country. In this column, I lay out how I see Original Equipment Manufacturers (OEMs) having contributed to these same two results.

Corporations are driven by the financial performance expectations of Wall Street, which are typically reported quarterly. That’s a pretty short horizon for planning and driving financial results. (While the United States Supreme Court has classified corporations as “citizens,” I doubt whether many people focus their lives almost exclusively on increasing net income, as do corporations.)

Added to this are standard accounting principles that place purchased material cost variance above all other factors in assessing the performance of the purchasing function. These two factors—Wall Street and today’s financial constructs—have led corporations to an almost exclusive focus on piece-price in source selection decisions. And as such, they have positioned U.S. corporations to be a willing partner in what has been a severe undercutting of small- and medium-sized supplier/ manufacturer base.

I was a sourcing manager in the 1990s when OEMs started their sprint to source in China. It was a confusing time. It was not a well-thought-out strategy. At one company I worked for, our VP of Supply Management—who wasn’t satisfied by the pace of our outsourcing to China—mandated that at a minimum one-third of the dollar value of all new sourcing had to be with suppliers in “low cost” (translate: low-piece-price) countries, regardless of quote comparisons. This resulted in some of our domestic suppliers losing business with us even though they were price-competitive with overseas sources—or, in fact, offered lower prices!

As a consequence of losing OEM business—especially in such a short-fuse manner—many SMEs went out of business. The rapid acceleration of OEM re-sourcing didn’t allow for them to react to the new business reality.  And OEMs, for the most part, didn’t give their incumbent suppliers a real chance to compete.

Back then I heard self-appointed “wonks” and corporate executives explain the piece-price competitiveness of Chinese suppliers by explaining that China represented the “wild west” for capitalism. I know differently. If you doubt this, refer to my February 26, 2016, IndustryWeek articl,e where I detail how Chinese government policy was helping their manufacturers undercut the pricing of our small-and-medium sized (SME) domestic manufacturers

I was interviewed in the late 1990s by the business editor of a major newspaper.  When he asked my opinion about how OEM sourcing in China had accelerated so quickly, I compared purchasing managers to lemmings—unthinkingly joining a mass movement, in a headlong rush to destruction.

The same day that the article came out, my boss at the time pulled me into his office and asked me if I considered him a “lemming.”  I wanted to keep my job, so I replied, “No.” 

The point being that the pressure on purchasing to re-source from U.S. based SMEs to Chinese suppliers was overwhelming.  At the time, if you questioned this as a strategy you were called “rogue.” In fact, I once was in a discussion with a colleague where I made the point that while piece-price was important, perhaps other factors should be considered in source selection, which I thought was a pretty reasonable statement.  My colleague’s reply was, “Oh, you’re one of those.”

What has befuddled me even more was that during the whole rush to source in China, supply management basic practices—such as setting up sourcing Plan Bs in the event of incumbent supplier sourcing issues—were abandoned by most. We’ve felt the consequences of that during our battle with Covid-19. On the other hand, there were some companies that, having learned the hard way prior to this, put Plan B’s in place.

Read more of Paul Ericksen's supply chain management articles.

Toyota, for instance learned the need for this following the March 11, 2011 Fukushima earthquake / tsunami, which severed their supply chains. As a result, they realized the lead time to stockpile caches of strategic components—including semi-conductors—as a type of insurance policy. And while this hasn’t completely accounted for their shortfall in this product, it has mediated the impact on Toyota production and, in the process, given them a competitive advantage.

Another common supply management Plan B strategy that wasn’t, for the most part, applied in the rush to source in China was dual sourcing. Specifically with one of the suppliers being domestic. I outlined my thoughts on this in my April 6, 2020, article, Plan B vs. Contingency Plan:  Which Supply Chain Fallback is Best?.

I’m not saying that OEMs shouldn’t strive to increase profitability. However, there is a downside to such a strategy if it isn’t based on common sense. And by ignoring all else other than piece-price, OEM sourcing in China devastated SMEs, the under-pinning of U.S. industrial strength. The result of their actions is that this country will need to do a lot of heavy lifting to address losing the competitiveness gap it has with China and, in turn, start reversing its substantial balance-of-trade status with them.

I spell out in detail my thoughts on the overall cost of doing business with suppliers—above-and-beyond piece-price—in my upcoming book “Better Business: Breaking Down the Walls of the Purchasing Silo”.  Watch the IndustryWeek website for the announcement of its availability as well as a link to how to order it.

Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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