BRINGING BACK MANUFACTURING
Current Trends in Marketing Assignment
Prepared by Team 1: Leina Carrero, Ashley Khan, Shannon Mitchell, Vincent Perrone, Scott Sitterly
Advanced Marketing Management, MAR 6815-100, CRN 61144, 2018 Summer Term 1
June 29, 2018
Dr. Cynthia Rodriguez Cano
BRINGING BACK MANUFACTURING
Since the 1800s, the United States (U.S.) has grown to be one of the largest manufacturers in the world, second only to China. After U.S. manufacturing reached its peak in the late 1970s, manufacturing employment steadily declined (Short, 2011) as American companies moved production offshore to cheaper labor and materials outsourcing alternatives. Mary Strain (2018) defines outsourcing as “the movement of work that was formerly conducted in-house, by employees paid directly by a company, to a different company. When a company hires another company to provide work such as manufacturing, outsourcing occurs. Offshoring occurs when businesses own the company or manufacturing plant providing the work outside of the country.”
Outsourcing and China
U.S. companies control production costs by outsourcing. According to Amadeo (2018b), China is the world’s largest economy with the largest population, enabling it to produce many consumer goods at a lower cost than other countries. China can maintain its competitive pricing, which appeals to companies, because: 1) China has a lower standard of living which means it can pay lower wages to workers, and 2) the U.S. dollar is partially fixed to the Chinese exchange rate (Amadeo, 2018b). This competitive pricing is appealing to many companies seeking to keep the cost of products down (Amadeo, 2018b).
According to Transparency Market Research (n.d.), the primary factors in global automotive manufacturing outsourcing are the abundance of labor and resources and their low costs, opening in developing markets, and variations in the foreign exchange rate. China and India are regarded as the regions with the most growth potential, which can be attributed to the growing infrastructures and the availability of trained and educated workers, in the global outsourcing market for automotive manufacturing (Transparency Market Research, n.d.). To stay competitive and cut costs, several automotive manufacturers have set-up plants in China and India (Transparency Market Research, n.d.).
Impact of Outsourcing
Outsourcing offers business advantages including a high rate of investment return, improved efficiencies, lower cost, and in-turn pricing for U.S. consumers (Brace, 2015; Flatworld Solutions Pvt. Ltd., n.d.). Supporters for offshore businesses stress topics such as the importance of the free market, forecasting significant increases in the cost of products, and potential adverse impacts on political standing and the decline of the U.S dollar in global markets.
As a global economy, the U.S. runs on a well-diversified base through investments in the automotive manufacturing industry. The analysis highlights numerous opportunities, threats and measurable risks that influence strategic investment decisions. Automotive manufacturing investment firms seek future success based on the trends within the U.S.
The current paper investigates outsourced manufacturing; primarily as it relates to the automotive industry. The following discussion addresses the current trend.
The dramatic shift to outsourcing is prevalent in the U.S. automotive industry. Even with the costs associated with outsourcing, the U.S market for outsourced products and services continually increases (refer to Exhibit 1); the automotive market is the second largest application and is projected to increase in the coming years (Grand View Research, Inc., 2017). The automotive industry is one of the largest manufacturing industries in the world with production centers located worldwide. Automotive companies typically offshore and outsource to reduce costs and price. Environmental regulations are a contributing factor as the U.S. and Europe have been enacting stricter standards to limit vehicle emissions. The cost to produce new vehicles has also increased significantly due to the addition of new technologies. While some manufacturing locations are driven by cheaper labor and the costs to produce the goods, other locations may be more advantageous for tax purposes and proximity to customers. Even with the costs associated with outsourcing, the U.S market for outsourced products and services continually increases.
Exhibit 1: Trends in Outsourcing of U. S. Companies
Source: Grand View Research, Inc., 2017
World Trade and U.S. Policies
The current administration has proposed a 20% to 25% tariff on imported European automobiles and automotive parts in response to the notion of an automotive trade imbalance (Shepardson ; Chiacu, 2018). European automobile exports to the U.S. are estimated at $44 billion annually (Isidore, 2018), while U.S. exports to Europe are approximately $299 billion annually (Petroff, 2018). Irwin anticipates Europe to retaliate with tariffs on “iconic U.S. brands and politically sensitive agricultural products” (as cited in Petroff, 2018).
It is probable that European leaders will challenge the legality of any U.S. tariffs on European automobile exports at the World Trade Organization (Petroff, 2018). Automakers also warn tariffs will negate any benefit the recent tax cuts provided to consumers (Shepardson ; Chiacu, 2018). Tariffs on European automobiles also have the potential to reduce automobile sales, which could negatively impact employment at car dealerships (Isidore, 2018).
Automotive Industry in the U.S.
According to Hill, Cooper, and Menk (2010), the U.S. heavily depends on the automotive industry as it contributes 3.0% to 3.5% to the overall Gross Domestic Product (GDP). According to Amadeo (2018a), GPD is “the best way to measure a country’s economy” and is “the total value of everything produced by all the people and companies in the country.” GDP and the automotive industry have a direct correlation (Kallstrom, 2015), so increases in automobile sales also increase GDP.
The U.S. relinquished its standing as the largest automotive market in the world to China in 2009 (Ho, 2010). Exhibit 2 shows the rate of increase in China’s market in comparison to the U.S. Although China holds the lead in the automotive market (Khaitan, 2017), the U.S. is the second largest for vehicle sales and production.
Exhibit 2: Vehicle Sales China versus U. S.
Source: Khaitan, 2017
The U.S has many modes of transportation including bicycles, motorcycles, trains, buses, planes and more. The passenger car is the most used vehicle in the industry with 133 million passenger vehicles in 2015 (Statista, Inc., n.d.). Exhibit 3 shows the leading automakers in the U.S. in 2017; General Motors (GM) leads the market with 17.6% of the market share. Approximately 1.7 million people in the U.S. are employed in automotive manufacturing and related operations from the design aspect to advertising and sales (Hill et al., 2010).
Exhibit 3: Market Share of U. S. Auto Companies
Source: Statista, Inc., n.d.
Role of Outsourcing in Strategic Planning
Four points to consider before outsourcing are profits, market growth, management, and costs. First, consider how outsourcing impacts profits. While company profits may increase when outsourcing to countries with lower wages and costs, a company also gives up a certain amount of control over the quality control process (Ray, n.d.). Outsourcing allows a company to build a more substantial profit margin into its strategic planning budget even though it may concede some quality control (Ray, n.d.). Next, market growth has an impact on business strategy when outsourcing. If a company outsources to countries in which it uses plant space, hires local workers, and has offices, it creates the opportunity to grow its market share (Ray, n.d.). While an increase in market share creates more opportunities for a company, entering the global market does not come without risks. Companies must prepare for competition from existing companies offering similar products or services. Creating and implementing marketing strategies is necessary to attract and retain new customers. Third, companies must take into consideration management when outsourcing. Managers should visit outsourcing sites to sustain the profitability expected of outsourced products or services, and to allow for growth opportunities resulting from the growth of outsourcing responsibilities (Ray, n.d.). Finally, before deciding on the outsourcing location, the cost of doing business overseas must be evaluated to maintain a satisfactory profit (Ray, n.d.). Ray (n.d.) points out several costs to consider when outsourcing, including travel and communication, tax and tariff, and the political stability of the outsourcing partner’s location. Fenton (2018) believes outsourcing is a necessity and gives businesses a better chance to grow and implement different products and ideas (refer to Exhibit 4).
Exhibit 4: Benefits of Outsourcing
Source: Fenton, 2018
Apple, Nike, Cisco Systems, Wal-Mart, and IBM are among the leading companies engaging in manufacturing outsourcing (ITI Manufacturing, 2017). According to ITI (2018), these five companies opt to outsource their manufacturing operations to China. Although China is the primary source of overseas manufacturing, Nike retains plants in Thailand, South Korea, Vietnam, and India (ITI Manufacturing, 2018); China and India are the greatest beneficiaries of Cisco Systems (ITI Manufacturing, 2018).
Automotive manufacturer, BMW, also outsources assembly activities. Munich, Germany based BMW outsources the assembly of its BMW X3 to Magna Steyr, located in Graz, Austria (Weber, 2006). According to Weber (2006), Magna Steyr also builds cars for DaimlerChrysler and General Motors Corp, both located in the United States.
Ford announced it is sending the manufacturing of its Focus to China and will then ship the vehicles back to the U.S. (Goldsberry, 2017). Ford Executive Vice President, Global Operations, Joe Henrichs stated “finding a more cost-effective way to deliver the next Focus program in North America is a better plan, allowing us to redeploy the money we save into areas of growth for the company-especially sport utilities, commercial vehicles, performance vehicles as well as mobility, autonomous vehicles and electric vehicles” (Goldsberry, 2017). Goldsberry (2017) points out that the global nature of manufacturing is not a new concept and would not expect to see companies rushing to re-shore manufacturing, especially in the automotive industry. While some manufacturing will remain in the U.S., Goldsberry (2017) believes some will go to China and Mexico; it remains a balancing act.
In March 2018, the current administration imposed a tariff on steel and aluminum imports (Sink ; Mayeda, 2018) citing a need to “protect domestic steel sector” (Gros, 2018). Europe responded with retaliatory tariffs on several U.S. products, including an additional 25% tariff on motorcycles which directly affects Harley Davidson (Fredericks, 2018). Europe is Harley Davidson’s second largest market (Grant, 2018). In response to the European tariffs, Harley Davidson has announced a plan to increase international production (Grant, 2018). Harley-Davidson will not pass tariff costs to its dealers and customers, so the shift in production will alleviate some of the impact (Fredericks, 2018).
Impact on Marketing Management
Advantages of Outsourcing
Outsourcing provides companies with several significant opportunities for their business, including expanding international connections, growing the brand name, increase in advertising and testimonials, and it is an efficient method for growth (Myers, 2017). Increasing the number of international business connections allows a company to temporarily fill a position that it may not be able to afford to hire as a permanent, full-time employee (Myers, 2017). The international connections may provide additional resources and even potential future business. Supplier-customer companies often develop close relationships, which frequently include purchasing reciprocity. Outsourcing also allows the company to spread its brand name across a greater area (Myers, 2017). Increasing awareness for the brand name would help to generate advertising or a buzz about a product or service the company offers. An increase in awareness may lead to higher revenues for the company. The increase in brand awareness correlates to advertising and testimonials. Myers (2017) asserts testimonials are one of the most influential marketing tactics companies can utilize. Outsourcing also affords companies an effective method to grow the business. Outsourcing allows companies to make progress that it may not have otherwise made (Myers, 2017).
Companies outsource overseas to lower costs, which in-turn makes products more affordable to U.S. consumers. For products to remain appealing to the consumers, companies need to remain aware of the existing and future needs, requirements and adjust to maintain a competitive cost advantage. Companies can maintain a competitive advantage by adapting to a dynamic market. The automotive industry is continually changing such as; engine technology advances, emission regulations, and technology (Business Case Studies LLP, n.d.)
According to Barley (2018), the current administration’s tariff policies have increased inflation fears. Tariffs increase the costs of importing countries, which limits the products a country welcomes. When imported products become more expensive, demand for domestic products increases; this, in turn, drives up prices of domestic products (Hall, 2018). On the other hand, when countries implement tariffs, U.S. companies must adapt like Harley Davidson. Minor inflationary increases can benefit the U.S.; for instance, wages slightly increase (Applebaum, 2017). However, overinflating the economy is detrimental to the market if it happens too quickly. Outsourcing manufacturing decreases the probability of inflation (Appelbaum, 2017).
According to Shepardson and Chiacu (2018), if the U.S. imposes a 25% tariff on imported vehicles, it would cost car buyers approximately $5,800 per vehicle. The current tariff on imported passenger cars from Europe is 2.5%, and there is a 25% tariff on imported pickup trucks (Shepardson ; Chiacu, 2018). An increase in the tariffs imposed on automotive manufacturers would lead to an increase in the purchase cost of their vehicles, which would be passed along to the consumer.
CEO and Chairman of AutoNation, Mike Jackson, told CNBC “Automotive tariffs will make steel tariffs look like a company picnic. These tariffs could unleash, a real trade war because the numbers are just so much bigger. It will raise prices dramatically for consumers in the United States. It will be inflationary” (Belvedere, 2018). Jackson further said that automotive tariffs would cause a “trade war.” Jackson says that with BMW, Mercedes, and Volkswagen have plants in the United States, implementing a tariff on imported vehicles would not make any sense because these companies are currently investing in America (Belvedere, 2018).
Any additional tariffs, or an increase in tariffs, would cause an increase in the vehicles prices. The increased cost would then be passed on to the consumer. The company would be trying to recover the additional costs the tariffs imposed on importing the vehicles to the United States.
Outsourcing is not a new activity for businesses. Companies utilize outsourcing for many aspects of the business. Amongst these is the outsourcing of automotive manufacturing. The research and analysis presented in this paper describe the benefits of outsourced manufacturing and illustrates that outsourcing remains a viable option for manufacturing. The research discusses current trends in the automotive industry, marketing activities, outsourcing in practice, and the impact on marketing management. The paper delves further into the research and provides analysis of the role of outsourcing in the strategic planning process, adaptive positioning, pricing strategies, and the advantages of outsourcing.
Amadeo, K. (2018, May 23). What is gross domestic product? How it affects you. The Balance. Retrieved from https://www.thebalance.com/what-is-gdp-definition-of-gross-domestic-product-3306038
Amadeo, K. (2018, June 14). U.S. trade deficit with China and why it’s so high. The Balance. Retrieved from https://www.thebalance.com/u-s-china-trade-deficit-causes-effects-and-solutions-3306277
Appelbaum, B. (2017, July 24) U.S. inflation remains low, and that’s a problem. The New York Times. Retrieved from https://www.nytimes.com/2017/07/24/us/politics/us-inflation-remains-low-and-thats-a-problem.html
Belvedere, M. (2018, June 27). Trump auto tariffs would make steel tariffs ‘look like a company picnic’: AutoNation CEO. CNBC. Retrieved from https://www.cnbc.com/2018/06/27/trump-auto-tariffs-would-start-trade-warautonation-ceo-mike-jackson.html
Brace, R. (2015, February 5). Measuring the ROI of outsourcing. Raconteur. Retrieved from https://www.raconteur.net/business/measuring-the-roi-of-outsourcing
Business Case Studies LLP. (n.d.). Responding to a changing marketing environment | A Castrol case study. Business Case Studies. Retrieved from https://businesscasestudies.co.uk/castrol/responding-to-a-changing-marketing-environment/
Fenton, F. (2018, March 6). The benefits of outsourcing your critical business process. Bean Ninjas. Retrieved from https://beanninjas.com/blog/the-benefits-of-outsourcing-your-critical-business-process/
Flatworld Solutions Pvt. Ltd. (n.d.). Benefits of outsourcing. Flatworld Solutions. Retrieved from https://www.flatworldsolutions.com/articles/benefits-of-outsourcing.php
Fredericks, Bob. (2018, June 25). Harley Davidson to shift some production overseas. New York Post. Retrieved from https://nypost.com/2018/06/25/harley-davidson-to-shift-some-production-overseas/
Goldsberry, C. (2017, June 29). Globalization, including offshoring, is here to stay in the automotive industry. Plastics Today. Retrieved from https://www.plasticstoday.com/automotive-and-mobility/globalization-including-offshoring-here-stay-automotive-industry/145649520357061
Grand View Research, Inc. (2017, June). Engineering services outsourcing (ESO) market | industry report, 2025. Grand View Research. Retrieved from https://www.grandviewresearch.com/industry-analysis/engineering-services-outsourcing-marketGrant, K. (2018, June 25). Harley-Davidson to shift some U.S. production in wake of tariffs. The Street. Retrieved from https://www.thestreet.com/investing/stocks/harley-davidson-to-shift-some-united-states-production-in-wake-of-tariffs-14632120
Gros, D. (2018, May 8). How Europe should respond to Trump’s steel tariffs. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/trump-steel-tariffs-voluntary-export-restrictions-by-daniel-gros-2018-05
Hall, M. (2018, June 11). Governments’ influence on markets. Investopedia. Retrieved from https://www.investopedia.com/articles/economics/11/how-governments-influence-markets.asp
Hill, K., Cooper, A., ; Menk, D. (2010, April). Contribution of the automotive industry to the economies of all fifty state and the United States. Car Group. Retrieved from https://www.cargroup.org/publication/contribution-of-the-automotive-industry-to-the-economies-of-all-fifty-state-and-the-united-states/Ho, P. J. (2010, January 12). China passes U.S. as world’s top car market. Wall Street Journal. Retrieved from https://www.wsj.com/articles/SB10001424052748703652104574651833126548364Isidore, C. (2018, June 22). Tariffs on European cars would hurt US auto jobs. CNN Money. Retrieved from http://money.cnn.com/2018/06/22/news/companies/trump-european-car-tariffs/index.html
ITI Manufacturing. (2017). Which five companies do the most overseas manufacturing? ITI Manufacturing, Inc. Retrieved from https://www.itimanufacturing.com/news/five-companies-overseas-manufacturing/
Kallstrom, H. (2015, February 05). Why GDP and automotive industry growth are related. Market Realist. Retrieved from https://marketrealist.com/2015/02/gdp-automotive-industry-growth-relatedKhaitan, R (2018, June 23). The 5 biggest automotive companies in the world’s largest car market. Frontera. Retrieved from https://frontera.net/news/asia/the-5-biggest-automotive-companies-in-the-worlds-largest-car-market/Myers, G. (2017, May 18). Four reasons why outsourcing is the new marketing strategy. The Marketing Scope. Retrieved from https://www.themarketingscope.com/four-reasons-why-outsourcing-is-the-new-marketing-strategy/
Petroff, A. (2018, June 25). Tariffs: Europe’s options if Trump targets German cars. CNN Money. Retrieved from http://money.cnn.com/2018/06/25/news/economy/europe-auto-tariffs-retaliation-trump/index.html
Ray, L. (n.d.). How does global outsourcing affect business strategy? AZCentral. Retrieved from https://yourbusiness.azcentral.com/global-outsourcing-affect-business-strategy-27067.html#
Sink, J., & Mayeda, A. (2018, April 30). U.S. extends steel tariffs relief for EU and other allies. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2018-04-30/trump-keeps-allies-guessing-on-steel-tariffs-as-deadline-looms
Shepardson, D., & Chiacu, D. (2018, June 26). Trump says finishing U.S. study on tariffs on cars from EU. Reuters. Retrieved from https://www.reuters.com/article/us-usa-trade-autos/trump-says-finishing-u-s-study-on-tariffs-on-cars-from-eu-idUSKBN1JM1GQ
Short, D. (2011, September 05). Charting the incredible shift from manufacturing to services In America. Business Insider. Retrieved from http://www.businessinsider.com/charting-the-incredible-shift-from-manufacturing-to-services-in-america-2011-9
Statista, Inc. (n.d.). Topic: U.S. automotive industry. Statista. Retrieved from https://www.statista.com/topics/1721/us-automotive-industry/
Strain, M. (2018, April 13). Advantages and disadvantages of outsourcing production. Chron. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-outsourcing-production-18244.html
Transparency Market Research. (n.d.) Outsourcing automotive manufacturing market – Global industry analysis, size, share, growth, trends, and forecast 2016-2024. Transparency Market Research. Retrieved from https://www.transparencymarketresearch.com/outsourcing-automotive-manufacturing.html
Weber, A. (2006, June 1). Outsourcing the line. BNP Media. Retrieved from https://www.assemblymag.com/articles/84382-outsourcing-the-line