Automakers begin insourcing work

Automakers are starting to take back work they had sent to suppliers.

DETROIT FREE PRESS

DETROIT — For decades, Detroit automakers have outsourced parts work — from axles to cup-holders — to suppliers that employ thousands of workers nationwide, and increasingly, in low-cost countries such as Mexico and China.

The suppliers develop and build the parts. Then they ship them back to the automakers, where they are assembled into shiny new Ford F150 pickups and Chevrolet Malibu sedans.

But this spring, Ford Motor Co. will start assembling its own instrument panels in Chicago for its Ford Taurus and new Lincoln MKS sedans.

It’s a small step in what is expected to be a dramatic shift to insourcing for all Detroit automakers — but it’s an ominous one for the already-struggling parts-making industry.

“We believe that suppliers ... risk losing substantial business once their current contracts expire,” said John Murphy, an automotive analyst with Merrill Lynch.

He said the decision to start insourcing work is a direct result of the new four-year labor contract with the UAW.

The union negotiated several terms in the contract, such as a second, lower tier of pay that would protect the UAW from more outsourcing — a trend that has diminished the union’s membership and influence.

“Due to recent UAW concessions,” Murphy wrote in a recent note to investors, “these tasks can now be sourced to internal workers at comparable costs and without significant investment in infrastructure. ... We are convinced that an insourcing trend is emerging.”

As Joe Hinrichs, group vice president for global manufacturing at Ford, said, “We are ... looking at every single part and every single plant and every single product over time to see what may be candidates” for insourcing, “as we committed to with the UAW.”

Fritz Henderson, General Motor Corp.’s chief financial officer, said that GM “might do some subassemblies” in-house in the future, but he was reluctant to discuss the company’s insourcing considerations or plans in detail.

“That needs to be evaluated on a case-by-case basis with the UAW,” he said.

Chrysler officials could not provide immediate comment on what work they might be insourcing as a result of its new contract.

It’s easy to see why bringing work in-house might begin to make more sense now.

The new UAW labor contract with the automakers establishes lower, second-tier wages for new hires, or noncore workers, at about $14 an hour.

That is about half of the salary of current autoworkers. Benefits are less lucrative, too.

More importantly, though, the lower pay level is about on par with what many suppliers pay their workers. In some cases, experts told the Detroit Free Press, suppliers even pay more.

The new price differential alone would give automakers a strong incentive to consider making a variety of parts in-house with UAW labor.

But the UAW also got Detroit automakers to agree to insource a certain number of jobs — 3,000 at GM, 1,500 at Ford and 1,025 at Chrysler — and to explore insourcing thousands more.

Several of the automakers also promised the union access to confidential business information that informs their decision-making on whether to outsource or insource a part.

“The union will now have the ability to present all business cases related to insourcing opportunities directly to applicable company decision-making parties,” UAW leaders at Ford wrote in a flier to its members last fall. Similar language was sent out to workers at GM and Chrysler about insourcing.

That means suppliers essentially will be bidding for auto-parts work against the UAW, who will be making a tough, new business case using the automaker’s own plants and assets.

But even if the suppliers don’t actually lose their contracts as a result of this new competition, several experts said, they certainly will face increasing price pressure as a result of the new situation.

With even more pricing pressure, and less work being outsourced by the automakers, the already-intense battle for business among suppliers only will get tougher.

Over time, Murphy said he expects this new situation will result in a further restructuring in the supplier community and a shift of workers from suppliers back to automakers, where they are certain to be paying union dues.