Now more than ever, a case for local sourcing

Globalization of manufacturing makes perfect economic sense in a perfect world. However, the auto industry last week got yet another painful reminder of the vulnerabilities in an imperfect global logistics network when the Felicity Ace — a ship hauling a few thousand Volkswagen Group vehicles across the Atlantic Ocean that were bound for U.S. dealerships — was stopped by a weeklong blaze.

This situation must be frustrating for inventory-starved dealers who had vehicles on the boat, which was filled nearly to its capacity of 4,000. Some of those retailers persuaded car buyers — who are accustomed to instant gratification by showing up at the lot and driving off with their new vehicles — to wait out the lengthy custom-order process. Now those deliveries, and revenues, are pushed off for a few more weeks or even months.

While nobody can reasonably expect the entire global automotive manufacturing system, built on cost-effective specialization, to be completely unwound — that would be economically unfeasible — recent events have shown there is wisdom in regional production of vehicles and their parts. Simply put: The farther products travel, the greater risk of damage or delay, such as from a border blockade.

For more than a year now, overreliance on a relatively small number of Asian factories for microchip production has created an unprecedented bottleneck in automotive assembly. It took this crisis to prompt an investment of $20 billion in new chip-making plants in Ohio. But the complex, announced in January, will take years to build.

One benefit we're seeing from the electric vehicle industry revolution is the regionalization of battery factories, placing them in close proximity to U.S. assembly plants. General Motors, Ford Motor Co., Volkswagen and others are setting up battery assembly plants. Toyota Motor Corp., which has announced a battery plant in North Carolina, appears poised to add a vehicle assembly plant to the site in the future, giving it a U.S. base for EV production.

Post-COVID-19 and post-chip crisis — one, two, five years from now — production and logistics could look like nothing ever happened. But given recent history, it might be more appealing to build where you sell and source where you build.