Automotive suppliers face growing pressure to simultaneously meet two conflicting customer demands: to cut costs and to open more factories in fast-growing emerging markets to be closer to their customers’ production plants. Achieving the right balance between cost and proximity in global manufacturing networks will be one of the industry’s greatest challenges, according to a new report by The Boston Consulting Group (BCG), conducted in partnership with the Fraunhofer Institute for Manufacturing Engineering and Automation IPA.


A recent BCG survey of auto suppliers found that most of the respondents—86 percent—are under increasing cost pressure from their automotive customers. These suppliers will bear the brunt of deeper-than-usual cost reductions mandated by large automakers, some of which plan to cut annual spending by four to six percent, according to the report, “The Proximity Paradox: Balancing Auto Suppliers’ Manufacturing Networks.”


At the same time, suppliers are also under intense pressure from their customers to localize production. Suppliers surveyed for the report note that they expect to increase their number of global manufacturing sites by an average of nine percent over the next five years.


Meeting these cost targets will be especially difficult because auto suppliers’ production networks have been growing more globally dispersed and complex. For example, in 2009, the suppliers that the report’s authors interviewed had 66 percent of their manufacturing sites in the “triad economies” of Western Europe, the U.S., and Japan. That share is now down to 58 percent—and is expected to decline to 47 percent in 2019.


The study also found that more suppliers based in triad economies are becoming truly global players. Indeed, the number of companies in the study with lead plants, the sites of core manufacturing operations, in China is expected to double in five to 10 years. The BCG researchers found that the number of lead plants is also expected to increase 29 percent in Mexico, by 50 percent in Eastern Europe, and by 50 percent in the rest of developing Asia—a region that includes India and the Southeast Asian nations.


To address what the authors call the “proximity paradox,” they recommend that suppliers adopt a more comprehensive approach to adjusting their manufacturing networks. This approach should balance the necessity to have certain production close to customers with a cost analysis that goes beyond direct factors such as labor rates, materials and shipping. A manufacturing-network-optimization program should encompass improvements to the global supply chain, organization structure and manufacturing processes, the authors write.


“To be really successful, these programs must be on-going so suppliers have the flexibility to adjust their manufacturing footprints in response to shifts in global cost, market demand and technology trends,” says Frank Lesmeister, a BCG associate director and one of the report’s coauthors. “For many suppliers, this will require at least some transformation of their organizations.”


Suppliers should begin by gaining a full understanding of the strengths and weaknesses of their current manufacturing network and their ability to make adjustments. The authors recommend that suppliers conduct a thorough “health check” of their optimization programs that assesses the past performance of the network and whether current capacity in a region can meet projected demand. The health check, the authors explain, should also evaluate capabilities and managerial responsibilities across the network, examine the tools and methods used to identify and quantify improvement opportunities, and determine whether the capabilities and processes are in place to implement the strategy and adjust the network.


If you work for an automotive supplier, do you agree with the industry assessment stated in the report? If your company is under pressure to cut costs and also move production closer to customers, whether you are in the automotive industry or not, what do you think of the authors’ assessment?