Chapter 11The Automotive

IndustryA Case Study

Tyson Boylan and Geoff Stupple

Outline

• Overview of the Auto Industry• Development of the industry

– Global Trends

• Production styles• The Role of the State• Concentration of production

– Mergers, acquisitions, joint ventures

• The new Asia – Producers and Consumers

The Production Chain

• Producer driven– Assembly industry

• 3 main components– Bodies– Components– Engines & Transmissions

Stages in automobile development

• Global Triad of Production• Asia, Europe and North America produce 80%

of worlds share• Japan, Germany, U.S.A. produces 50%

• Exports– German/Japan leaders –

significant drop in last 10 years

– Can/Mex/Spain/S.Kor. increased in last 10 years

• Trade – an indicator of geographical concentration of production– Top15 exporting

countries = 92% of exports total

• Imports– US growing reliance on

imports – trade deficit– Japan/Germany clear

trade surplus

• Japan– from 7th largest to

worlds largest– Over 50 times growth

• Slight decline in 2000– Japanese recession– Increase in overseas

production

• US– Falls from 51% to

19% of worlds share• However

– Production increased by 148,000

Geography of Trade

Mass Production

Mass Production

• Fordist Mass Production– Limited Selection– Rigid methods– Low skill level for workers – repetitive work

• Changed very little from Henry Fords 1913 and 1970

• Massive amounts of time and investment required to change models

• Vertical integration with parts and suppliers

Lean Production

• Introduced by Japanese producers in 70’s– Flexible methods using modular components

• Component sharing• Introduction of the platform

– Multi skilled “team” work environment– Just-in-time delivery from suppliers

Audi A4 Volkswagen Passat

Honda’s flexible manufacturing

• “Honda has probably gone furthest down the road to flexible global manufacturing. Not only are all its car factories capable of making several models, they are also now equipped to switch from one model to another very quickly. It takes Detroit between four and six weeks to alter models in a factory, re-jigging the robots and other tools. Honda can now do it overnight, simply by changing the software in the robots. To achieve this it has installed one single global manufacturing system.”

Economist – February 23, 2002

Just-In-Case vs. Just-In-Time

Just-In-Case Just-In-Time

•Short term distant relationships btw. manufacturers and suppliers

•Long term close relationships btw. manufacturers and suppliers – increasing integration

•Large amounts of parts on hand, requiring massive warehousing

•Variable amounts of parts on hand, requiring less warehousing

See table 4.2 and 4.3

Just-In-Case

• Lends itself to the Lean System of Production, as it is more flexible

• Automaker and Supplier are far more integrated and closely consult one another

• Automaker and Supplier are also geographically closer

• This system is especially being pursued at plants in Brazil where 3 major plants have been setup– GM “Automotive industrial complex”– VW plant at Resende– Fords plant at Bahia

GM’s “Automotive Industrial Complex” at Gravatai, Brazil

• Consists of 17 plants, only one of which is operated by GM, the rest are occupied by suppliers

• Cars assembled at the plant use 85% locally made parts• Compare this to other assembly plants where usually

only 40% of parts are local

VW and Fords Brazilian plants

• VW Resende plant– Component makers fit products directly onto

chassis• Increases suppliers responsibility

• Fords Bahia plant– 19 suppliers in same building– 12 other suppliers located adjacent– Total of 60% local content

Role of the State

• Can be involved in 2 ways:– Limiting the degree of access to market

• Historically important

– Financial support to domestic firms• Subsidies, part ownership

State as a barrier

• Historically high Tariff’s were used to protect local markets– Branch plants were required– Protect local manufactures

• Limiting access to foreign firms

• Favoring domestic producers

• Environmental and Safety regulations

• Local Content requirements

State as a contributor

• Western European countries very involved in automotive industry– Direct Financial support– Part ownership (Renault – France)

• State involvement in plant location– Large subsidies to locate in desperate areas

North America

• 1965 - Auto Pact– Continental production system

• 1980’s Japanese auto manufactures enter market

• 1990’s German auto manufacturers enter market

• 1994 NAFTA

Japanese FDI in NA

• 1982 Honda establishes first Japanese based manufacturer in NA – Marysville Ohio

• 1983 Nissan plant at Smyrna, Tennessee• 1984 Toyota goes 50/50 split with GM in

Fremont, California• 1986 Honda – Alliston, Ontario• 1987 Toyota creates Georgetown,

Kentucky and Cambridge Ontario

German investment

• 1993 Daimler-Benz Tuscaloosa, Alabama

• 1994 BMW Spartanburg, South Carolina

• 1998 Daimler-Benz acquires Chrysler

Global Mergers

• Japanese Companies have traditionally grown ”organically” by themselves to expand in other markets– When entering the North American market

Japanese companies first imported vehicles from Japan, then later built them in North America

Global Mergers

• On the other hand U.S. and European companies have traditionally grown to other markets through acquisitions and mergers

• This system of expansion has been going on pretty much since the automobile has taken off– GM acquired The McLaughlin Carriage Company in

1918 to gain access to Canada

Global Mergers

U.S. and European Companies have continued to gobble up other companies

from around the globe

• GM owns Saab and Daewoo

• Ford owns Land Rover, Jaguar and Volvo

• Volkswagen Auto Group (VAG) owns Seat and Skoda

And The Big One…Daimler-Benz bought Chrysler in 1998 to

become Daimler-Chrysler

•Significant as this was the first real “Mega-Merger” in the auto industry

•This was the first time 2 global automotive giants joined

Other Inter-Firm Relationships

• Collaborative Agreements and Ventures are another way of having relations between firms.

• Collaborative Agreements…– Supply parts to each other (World Car)– Produce the same car jointly under license

• Ex. Isuzu Hombre and Chevy S10 – Same truck, different manufacturer

– Engage jointly in Research and Development

Collaborative Agreements

• However smaller firms have become increasingly dependent on these alliances with larger firms for survival

• GM and Fiat– GM became involved in a cross-shareholding alliance

with Fiat, in response to Daimler-Chrysler– GM recently paid $2 billion to axe the deal, due to

Fiat’s financial troubles

The Future Of The IndustryThe Rise of S. Korea

• Hyundai is now the 11th largest manufacturer in the world• Korean brands Hyundai and Kia (owned by Hyundai) have

come out of no where in the past 15 years • They are relative newcomers and have had massive expansion• How Has This Happened?

The Rise of S. Korea

• As we all know South Korea is one of the 4 little tigers – It is industrializing at a rapid pace

• The Korean Government has been very heavily involved with planning its auto industry and setting export targets

• Importantly The Korean Government has also heavily subsidized this industry

The Rise of S. Korea

• Most Importantly: Industrial Location

– Korean cars can compete effectively, due to the fact that wages in S. Korea are lower than post-industrialized countries, thus they can be sold at a lower price

– 96% of Hyundai’s production is still in S. Korea

The Rise of S. Korea

• Korean makers gained control of the market in South Korea and other newly industrialized countries in the region – due to cheap price

• This relatively cheap price also translates well to the North American Market, where most of Korean cars are now exported.

• While Hyundai is really the only true Korean auto-maker left, its success has given a great boost to this potentially economic dynamo

China

• As you know China’s economy is booming, this does not exclude cars.

• Not unlike post-war North America, China’s growing middle class is fueling this boom in Car sales

Look At The Increase Here – That’s Massive!Source: National Post Business Magazine, January 2005

China

• Foreign car makers are scrambling to establish themselves in China to meet this high demand

• Auto plants are constantly being built in joint-ventures btw. The Chinese Gov. and the particular auto-maker

• It makes sense to build plants in China instaed of importing as…– Labour is inexpensive– The potential market is so large

China

• Volkswagen got the early lead but is quickly losing ground to increasing competition– In 2000 they controlled

45% of China’s market, this has slipped to 32%

• Even GM has a Buick plant in China – There’s demand for larger cars as well!

The End Of U.S. Domination?

• In 2003, Toyota overtook Ford to be the world’s #2 car manufacturer

• GM has been #1 for around 100 years, some predict by 2006 Toyota will end GM’s domination

This Is Huge!

The End of U.S. Domination?

“The Big 3” Are Struggling

There are many reasons why this is, but a few stand out…

• They tend to build big cars for a society that has relied on cheap oil

• This oil is constantly reaching new price highs• The Japanese tend to be more innovative

– Ex. Hybrid Technology

That Concludes Our Presentation

K.I.T.T. Says…

Any Questions

?

Role Playing Activity

• Explore the Strategies of international automobile firms, and changing international markets.

• As car producers, we would like to know your decision making processes!– Each group will examine and respond to two

different scenarios.

North American Producer

• You are a Major US automotive producer in the early 1920’s. High Canadian tariff's means you have created 2 assembly plants in Canada that produce a limited variety of cars for that market. You have also used the Canadian produced cars to ship to the UK (because the UK has high tariffs against the USA, however not for Canada). You would like to enter the European market in a major way, and the cost of shipping cars (even CKD) adds too much to be competitive. What would be your approach, and why?

(Consider expansion, or acquisition).

The Ford Approach

• Expansion took place by Ford in 1911

• Global expansion by opening new plants using the Ford name

• Opened plant in Tafford Park, Manchester

• 1913 Bordeaux plant was built

The GM approach

• Expansion by acquiring existing firms and retaining their brand identity– Acquisition of Vauxhall motors in England in

1925– 1929 purchase of Adam Opal company

North American Producer

• Now that you have major production facilities setup around the world (Germany, Spain, UK, Belgium, Brazil, Mexico) you find a lot of repetition in production systems. How might you streamline your production?

(Consider figure 7.6)

World Car

• In the mid 90’s Ford attempted a global re-organization called “Ford 2000”– US: Large RWD cars, Large FWD trucks, light

trucks, heavy duty trucks– Europe: responsible for developing

small/medium sized FWD cars

• Reduces duplication of platforms, engine and transmission development

Fords 1999 restructure

• 1999 – Ford announces a different re-organization

• Aim to become “a relationship business” instead of a “nuts and bolts business”

• Separated business units:– North America– Europe– Asia-Pacific– South America

• Chapter 7 - Local-Global tension

European Producer

• As a European producer, you find that Europeans have a high affinity towards domestic vehicles. Therefore, you decide to acquire manufacturers in other regions, and preserve their name and reputation. You find producers that create similar styles of vehicles, as to make any transition easier. What advantages and disadvantages does this have?

Volkswagen Auto Group (VAG)

– Volkswagen– Audi– Seat– Skoda

• Allowed for common use of platforms and component sharing

• Eventually out-grew home markets– Caused direct competition between

companies

VAG restructure - 2001

• Split competing divisions

• Separated into:– Audi – Seat – Concentrate on “sportier” cars– VW – Skoda – More traditional – also will

produce commercial vehicles

European Producer

• It is the early 1990’s, you are producing cars under various names in Europe. You have just witnessed the Japanese move into the US market successfully. What type of vehicle can you offer that is different, and in high demand?

Luxury Car Market

• Daimler-Benz creates Mercedes plant– 1993 Daimler-Benz Tuscaloosa, Alabama

• BMW creates plant– 1994 BMW Spartanburg, South Carolina

• This was the second wave of FDI in North America. The first being Japanese lean production, and the second German luxury cars.

Asian Producer

• You are an Auto Maker from S. Korea and the sales of your cars own a significant chunk of S. Korea’s market. Building on this you are planning to expand into the North American market. What could you offer to this mature market that makes you unique and competitive?

(consider international labour costs)

Hyundai

• Vast Majority of production is located in S. Korea

• This takes advantage of Korea’s cheaper labour costs

• The end result is cars that are comparable to Japan in craftsmanship, but are cheaper in price

Asian Producer

• You are a Japanese producer in the 1980’s looking to the US for expansion. How could you enter this saturated market competitively?

(Consider production methods)

Japan

• US producers haven’t changed their methods since 1913!!

• Introduction of Lean Production– This means your company can adjust to the market

faster and reduce overhead costs– Remember:

• Flexible methods using modular components– Component sharing

– Introduction of the platform

• Multi skilled “team” work environment• Just-in-time delivery from suppliers