Although the world's big carmakers have had global reach for decades, they have been slow to take advantage of low wages in China and India to supply inexpensive parts to their assembly plants in Europe, Japan, and North America. The OEMs neither trusted the quality of Chinese and Indian components nor regarded the companies that manufacture them as any more efficient than the reliable existing suppliers in geographically closer countries such as Mexico and the Czech Republic. As recently as 2003, China exported just $4 billion worth of auto parts—mostly low-quality aftermarket items rather than original-equipment components used in the assembly of cars.1
Yet auto manufacturers are now rapidly shedding their skepticism. As domestic car markets in China and India took off in recent years, suppliers there made such big strides in quality and efficiency that the best of them are close to meeting world-class standards. Moreover, for certain components, locations such as Eastern Europe and Mexico are no longer as competitive as they once were. Meanwhile, cutthroat market conditions are forcing auto manufacturers into perpetual belt-tightening mode. They have no choice but to trim their costs constantly, since over the next ten years the price of a base-model...