Automotive Supply Chain's Extreme Cost-Cutting Leads to ？
Automotive Supply Chain's Extreme Cost-Cutting Leads to Substandard Materials and Frequent Component Failures
"Some new energy vehicle manufacturers have upended the entire industry's ecosystem. During the Spring Festival, we visited seven or eight automotive OEMs, and all of them complained about cost pressures — and how to manage product quality under such circumstances."
This observation comes from Liu Li, who heads technical service support for an automotive industry firm in China. He told China Business News that he receives inquiries and technical support requests regarding various "failure issues" almost every week — either from components failing during production and assembly, or from vehicles already on the market.
The most common failure issues include cracking of hot-formed parts during production, as well as corrosion appearing in components shortly after vehicles enter service. In such cases, automakers often first suspect that the quality of the steel sheet — the raw material — is to blame.
In automotive manufacturing, steel sheet is the most widely used material, forming the main body of the vehicle body and hundreds of components. In 2024, key enterprises produced 40 million metric tons of automotive sheet, of which approximately 29 million tons were cold-rolled and galvanized products.
The price war among automakers in recent years has been shifting cost pressures upstream through the supply chain. The increasing prevalence of component "failure" issues reflects the cost-reduction and quality-control pressures facing the entire automotive manufacturing chain — pressures that, in turn, drive sharp increases in hidden costs such as production, quality, and management expenses.
Liu vividly recalls a consultation from an automaker just a month ago. The automaker had discovered problems during the welding process: some hot-formed parts had already cracked in certain areas.
The problematic part was a cross member of the vehicle's underbody.
These parts are purchased as raw material by tier-one suppliers, who fabricate them into components before delivering them to the OEM for welding and assembly. When the components are delivered, the material certificates accompany them to the OEM.
However, when Liu and the automaker went back to review the certificates for this batch of parts, they discovered that the steel had been purchased from the secondary market — i.e., as off-specification material.
Generally speaking, steel mills sell slightly defective products into the secondary market at a 20–40% discount compared to prime material. However, much of this secondary-market steel is unsuitable for automotive applications. Without meticulously inspecting each certificate, the true source of the steel cannot be verified.
"In the past, OEMs strictly specified which materials had to be purchased. The OEM would procure the material centrally, sell it to the tier-one supplier, and then buy back the finished component — all to ensure quality traceability," Liu explained. But some automakers have adopted a different procurement model: they allow tier-one suppliers to source their own materials without specifying which mills to use. The only requirement, in some cases, is that the material meets the specified strength targets.
Multiple OEM insiders also told China Business News that some brands once had well-established supply chains. They would sign direct agreements with steel mills and supply raw materials to their captive or affiliated tier-one suppliers. Such brands would screen raw material suppliers that met their quality standards and apply their own inspection protocols to outgoing steel sheet. The qualification process was lengthy — sometimes taking three years to finalize a long-term supply agreement — and once a supplier was in the system, the OEM was reluctant to change.
But starting about ten years ago, the vast majority of domestic automakers shifted to a model where tier-one suppliers procure steel sheet on their own. RFQs typically specify a cost range, quality requirements, and strength parameters. Any qualified supplier can bid. Later, the OEM's quality department conducts spot checks on incoming steel, but not every coil can be inspected.
"Many automakers use a lowest-bidder approach, sometimes running five or six rounds of bidding," Liu said. "The impact on steel mills and tier-one suppliers is this: if I insist on maintaining material quality and management standards, my costs will be higher, and I won't win the bid — unless I have a truly unique technological advantage." Moreover, bidding is typically conducted annually. A new model's production lifecycle is generally three years, and if the supplier changes every year, how can product consistency be maintained?
A sales director at a tier-one supplier also revealed that OEMs have centralized procurement strategies, but they don't control which steel mills a tier-one supplier buys from or how they buy it. "The reason this happens is that, in an environment of razor-thin margins, everyone is scrambling up and down the supply chain to find ways to squeeze out additional profit."
This is precisely why the OEM described above discovered material problems only during the welding and assembly stage. A quality department insider at another automaker admitted that while tier-one suppliers provide material certificates with their deliveries, it's often a pro forma exercise. Only when a production problem arises does anyone think to re-examine the certificates.
The head of a small tier-one supplier also confirmed that the practice of delivering components without meaningful certificate checks — and, when checks do occur, using counterfeit certificates — does exist. "As long as the price is low enough and you can win over the OEM's SQE (Supplier Quality Engineer), it's fine."
However, other automakers say they strictly inspect certificates upon receiving components and re-inspect before manufacturing. "If you don't catch problems early, the downstream consequences — including potential recalls — are much worse. It's better to spend the extra time upfront to verify component quality."
Cracked Parts Already Appearing During Assembly
Liu vividly recalls a consultation from an automaker just a month ago. The automaker had discovered problems during the welding process: some hot-formed parts had already cracked in certain areas.
The problematic part was a cross member of the vehicle's underbody.
These parts are purchased as raw material by tier-one suppliers, who fabricate them into components before delivering them to the OEM for welding and assembly. When the components are delivered, the material certificates accompany them to the OEM.
However, when Liu and the automaker went back to review the certificates for this batch of parts, they discovered that the steel had been purchased from the secondary market — i.e., as off-specification material.
Generally speaking, steel mills sell slightly defective products into the secondary market at a 20–40% discount compared to prime material. However, much of this secondary-market steel is unsuitable for automotive applications. Without meticulously inspecting each certificate, the true source of the steel cannot be verified.
"In the past, OEMs strictly specified which materials had to be purchased. The OEM would procure the material centrally, sell it to the tier-one supplier, and then buy back the finished component — all to ensure quality traceability," Liu explained. But some automakers have adopted a different procurement model: they allow tier-one suppliers to source their own materials without specifying which mills to use. The only requirement, in some cases, is that the material meets the specified strength targets.
Multiple OEM insiders also told China Business News that some brands once had well-established supply chains. They would sign direct agreements with steel mills and supply raw materials to their captive or affiliated tier-one suppliers. Such brands would screen raw material suppliers that met their quality standards and apply their own inspection protocols to outgoing steel sheet. The qualification process was lengthy — sometimes taking three years to finalize a long-term supply agreement — and once a supplier was in the system, the OEM was reluctant to change.
But starting about ten years ago, the vast majority of domestic automakers shifted to a model where tier-one suppliers procure steel sheet on their own. RFQs typically specify a cost range, quality requirements, and strength parameters. Any qualified supplier can bid. Later, the OEM's quality department conducts spot checks on incoming steel, but not every coil can be inspected.
"Many automakers use a lowest-bidder approach, sometimes running five or six rounds of bidding," Liu said. "The impact on steel mills and tier-one suppliers is this: if I insist on maintaining material quality and management standards, my costs will be higher, and I won't win the bid — unless I have a truly unique technological advantage." Moreover, bidding is typically conducted annually. A new model's production lifecycle is generally three years, and if the supplier changes every year, how can product consistency be maintained?
A sales director at a tier-one supplier also revealed that OEMs have centralized procurement strategies, but they don't control which steel mills a tier-one supplier buys from or how they buy it. "The reason this happens is that, in an environment of razor-thin margins, everyone is scrambling up and down the supply chain to find ways to squeeze out additional profit."
This is precisely why the OEM described above discovered material problems only during the welding and assembly stage. A quality department insider at another automaker admitted that while tier-one suppliers provide material certificates with their deliveries, it's often a pro forma exercise. Only when a production problem arises does anyone think to re-examine the certificates.
The head of a small tier-one supplier also confirmed that the practice of delivering components without meaningful certificate checks — and, when checks do occur, using counterfeit certificates — does exist. "As long as the price is low enough and you can win over the OEM's SQE (Supplier Quality Engineer), it's fine."
However, other automakers say they strictly inspect certificates upon receiving components and re-inspect before manufacturing. "If you don't catch problems early, the downstream consequences — including potential recalls — are much worse. It's better to spend the extra time upfront to verify component quality."