Profit and Laws and our book, Birth to Buyout, examine issues facing businesses – everything from web contracts to building prototypes. Occasionally, we’ll be posting stories from the real world that illustrate a particular issue or law. Up this week? Manufacturing. And perhaps an argument that sometimes it’s best to stick with “Made in America.”
After entertaining offers of capital assistance from several U.S. cities, John DeLorean decided to build the assembly plant for his new sports car in Northern Ireland. The Northern Ireland location had several advantages, most notably stronger backing by the government and cheaper labor. For instance, he raised $175 million to finance DeLorean Motors: $12 million in equity and $156 million in grants and loans from the British government. In exchange, DeLorean agreed to locate the DMC factory in Northern Ireland.
Production started two years late and with minimal training and oversight. Many DeLoreans, especially the first ones, had poor quality and sloppily produced interiors because there hadn’t been time to train the plant’s workers how to build cars. Doors leaked, and the car had electrical gremlins, among other problems. This forced the DeLorean operation to set up several U.S. “Quality Assurance Centers.” They did major reworking of the autos before delivery to dealers and ate heavily into company profits. At one point, it took 140 hours to make the DeLorean suitable for sale–at a cost of up to $2,000 per auto.
The car hit the market in 1981 and was $26,000 – $8,000 more than the Corvette. To break even, DeLorean needed to sell 12,000 cars per year. But, for the first 6 months, he had sold only 3,000. By 1982, the company was in receivership, and the British government shut it down.
The Producers of Back to the Future.
Moral of the Story
Manufacturing in another country might save money in the short run, but the eventual cost depends on the quality of the workforce and management. And, wherever you manufacture, you need mechanisms in place that will detect quality problems at every step.