Automakers’ Global Supply
Chain Configuration
Field Study
Country of Origin for VW Models Sold in U.S.:
Major Components and Final Assembly
Touareg
Passat
Jetta
Beetle
Golf
Engine
Germany
Hungary
Germany
Poland
Mexico
Mexico
Hungary
Transmission
Japan
Japan
Argentina
Japan
Argentina
Japan
Argentina
Final
Assembly
Slovakia
Germany
Mexico
Mexico
Brazil
Jetta
Engines
Customers
Transmissions
Assembly
Global Supply Chain for Jetta
U.S.
Poland
Customers
Engines
Japan
Transmissions
Mexico
Assembly
VW International Strategy - Touareg
Japan
U.S.
Transmission
Marketing
Slovakia
Germany
Final
Assembly
Steel & Engine
Hungary
Misc.
VW International Strategy - Jetta
U.S.
Japan
Marketing
Transmission
Mexico
Germany
Final
Assembly
Misc.
Poland
Engine
The Context of Global
Strategy and SCM
Reasons to “Go Global”
Proactive Reasons
Reactive Reasons
o Exploit factor-cost
o Competitive pressure
differences across
o Overcapacity
countries
o Declining domestic
o Unique product
sales
o Technological advantage o Saturated home market
o Economies of scale
o Under attack from
o Growing foreign markets
foreign rivals
o Exclusive information
o Attack rivals on home turf
Going Global: Effect on Bottom Line
ROI
% Foreign Sales/
Total Sales
Factors/Issues of Globalization
Economic
Political
Cultural
Legal
The Context of Global Strategy and SCM:
Today’s Topics
o
o
o
Globalization and Its Effects
Comparative Advantage
Global Supply Chains for Selected Automakers
The International Political Economy (IPE)
o Trade & Investment Policy
o Role of Regimes (NGOs and Treaties)
o Economic Integration
o Foreign Exchange
What is Globalization?
Perspective of Countries
o
o
o
o
o
How are countries connected globally?
How big is globalization?
Why does it happen?
Who’s doing it?
Is it connected to prosperity?
Foreign Policy and A.T. Kearney
Annual Globalization Report
Global Top-20
Ireland
Singapore
U.S.
Czech
Republic
Globalization Index =
Politica
• Political Engagement +
• Technology Contact/Transfer +
• Personal Contact +
• Trade and FDI
Merchandise Exports
France
Japan
U.S.
Germany
(US$ billions)
UK
Kor Mex
Ire
Merchandise Imports
(US$ billions)
France
Japan
Germany
U.S.
UK
Kor Mex
Ire
Foreign Direct Investment - Out
(% of World Total)
France
Japan
Germany
U.S.
UK
Foreign Direct Investment - In
(% of World Total)
France
Germ
U.S.
UK
Comparative Advantage
o
Germany:
o 10 units of factor inputs (labor & capital) to produce
1 keg of beer
o 2 units of factor inputs (labor & capital) to produce
1 box of pretzels
o
United States:
o 15 units of factor inputs to produce 1 keg of beer;
o 5 units of factor inputs to produce 1 box of pretzels;
Which country should manufacture
and export only beer?
Which country should manufacture
and export only pretzels?
Comparative Advantage
Germany:
10 labor  pretzels = 5 pretzels per beer *
beer
2 labor
=
US:
15 labor  pretzels = 3 pretzels per beer *
beer
5 labor
=
* Opportunity Costs … price of beer in terms of pretzels, using labor
as common denominator
Comparative Advantage
Germany:
10 labor  pretzels = 5 pretzels per beer
beer
2 labor
US:
15 labor  pretzels = 3 pretzels per beer
beer
5 labor
o
o
o
Germany has absolute advantage in both beer and
pretzels
U.S. has comparative advantage in beer, and should
manufacture and export beer to Germany
Germany has comparative advantage in pretzels, and
should manufacture and export pretzels to the U.S.
Growth in Trade
Indexed: 1950 = 100
1600
1200
Trade
800
GDP
400
100
1950
1960
1970
1980
1990
2000
Fair Trade and Outsourcing
…in the media
…in politics
Countries don’t trade, companies do.
What is Globalization?
Perspective of Multinational Corporations (MNCs)
o
o
o
o
Motivations for global operations and reach
How are companies engaging in
globalization?
How big is their involvement?
What are the effects on managers, customers,
employees, profits, etc.?
Rank
Firm or Country
1
United States
2
Japan
3
Germany
4
France
5
United Kingdom
6
Italy
7
China
8
Brazil
9
Canada
10
Spain
11
Russia
12
South Korea
13
Mexico
14 Microsoft
15
Australia
Value (in $bil)
$8,110.9
4191.5
2104.6
1394.1
1288.2
1145.4
902.1
802.1
618.3
531.3
449.9
438.2
409.6
407.2
390.8
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
India
Netherlands
General Electric
Argentina
Taiwan
Belgium
Sweden
IBM
Indonesia
Austria
Exxon
Royal Dutch Shell
Wal-Mart
Turkey
AT&T
Intel
Cisco Systems
380.8
360.5
333.1
326.4
283.4
242.4
227.8
214.8
214.6
207.5
193.9
191.3
189.5
186.4
186.1
180.2
174.1
Extent of Globalization for MNCs
Foreign Sales as
Percent of Total
Foreign Assets as
Percent of Total
Exxon
72%
64%
IBM
57%
44%
Ford
31%
44%
General Electric
32%
48%
Citigroup
35%
41%
Hewlett-Packard
55%
52%
Orange = Percentage of exports
to the U.S. by intra-firm
trade (via FDI) to total exports
(This is NOT volume of
total exports)
Green = Globalization Index
Growth in Trade and FDI
Indexed: 1950 = 100
1600
1200
Trade
800
FDI
GDP
400
100
1950
1960
1970
1980
1990
2000
Trade and Investment Policy
Free Trade?
Free Trade?
Global Linkages Model
Management Linkages
Country
A
Policy Linkages
Trade and Investment Linkages
Country
B
Managers choose to…
Attack new markets
Entry modes
Shift manufacturing
Alliances, Mergers, etc.
Country
A
Governments try …
Tariffs, quotas
FDI Regulations
Effects are …
Persistent Trade Deficit
Loss of Jobs
Higher Domestic Prices
Country
B
How Nations Influence Trade and
Investment Activity Through Policy
o
Overt/Visible Policies
Supporting/Strategic Policies
o
Follow-up Questions:
o
o How well to these policies work?
o What are the side effects?
o Retaliation?
o How might managers of MNCs respond?
USTR Definition of Trade Barriers
o
Government laws, policies, or practices
that either:
o Protect domestic products from
competition
o Artificially stimulate exports of particular
domestic products
Overt Policy Alternatives
o
o
Restrict Imports (tariffs, quotas, VERs)
Restrict FDI
o Incoming (F/X controls, local content)
o Outgoing (tax code, expatriation disincentives)
o
o
o
o
Restrict Exports (DoD restrictive munitions)
Export Promotion (subsidies, tax credits)
Import Promotion (tax credits, favors)
FDI Incentives (subsidies for infrastructure,
training & development, market access)
o
Preferential Govt. Procurement
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
World Price
Domestic
Demand
Domestic
Quantity
Produced
Domestic
Quantity
Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Tariff Price
World Price
Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Deadweight
Loss
Tariff Price
World Price
Extra Revenue
Tariff
Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Deadweight
Loss
Tariff Price
World Price
Extra Revenue
Tariff
Domestic
Demand
# Jobs saved?
At what price?
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
Cost to Domestic Consumers
per Job Saved
Extra Revenue for Firm
Tariff Revenue to Government
+ Deadweight Loss
$800 million
$800 million
10,000 jobs
=
$80,000
/job
What is Globalization?
Perspective of Consumers vs. “Regular Joes”
o
o
o
Outsourcing
Cheaper Products vs. Job Loss
Fair Trade -- Product and Production
Standards
o Working standards
o Living wage
o Environmental standards
“Voluntary” Export Restraints
Managerial Responses to VERs
TMM-K Georgetown
 Shift
 Sell
Production to U.S.
pricier, more profitable cars
1971 Honda
2008 Acura MDX
Global Linkages Model
Management Linkages
Country
A
Policy Linkages
Trade and Investment Linkages
Country
B
FDI: Host Country Perspective
Primary Impact
Capital
Employment
Favorable
Aspects
Capital
inflow
Unfavorable
Aspects
Loss of
control
Creates
new jobs
Career limits/ Employment
low wages
regulations
Entrepreneurship Creates new
industries
Technology
Government
Revenues
Policy
Response
Ownership
restriction
Displaces
local ideas
Restrict
market acess
Appropriate
techology??
??
Increase tax
Foreign
base
dependency
??
Access to
new
technol.
FDI: Home Country Perspective
Primary Impact
Favorable
Aspects
Unfavorable
Aspects
Capital
Profitable
opportunities
Capital flight
Employment
Access to lower
wages
Export
jobs
Technology
Government
Revenues
Expand usage
Lose control
into new markets
over
sensitive
technol
Tax income on
Loss of
profits
domestic
wage tax
base
Globalization-related “Regimes”
Who “governs” or has extraterritorial
policy reach for the following:
o
o
o
o
o
Cross-border Internet
commerce
Ocean floor
magnesium nodes
Sea of Tranquility
Microsoft’s copyright
Windows XP in China
Mineral deposits in
Antarctica
o
o
o
o
Greenhouse gases emissions
Geo-synchronous satellites
International airline routes
Dolphins killed in tuna nets
Regimes as International “Soft Law”
Management Linkages
Country
A
No Policy
Trade/Investment Linkages
NGOs and Treaties
Country
B
Law of the Sea Treaty
o
Outside territorial waters, anything goes
o Early provisions:
o
o
o
Anti-piracy efforts
Access to and protection of shipping routes
Fishing rights
o Recent:
o
o
o
Pollution
Over-fishing
Exploration and extraction of resources
o (Oil, manganese, etc.)
Global/Comprehensive Regimes
o
United Nations
Functional Regimes:
Military - Security
o
o
o
o
Nuclear Nonproliferation Treaty
NATO
Geneva Convention
Warsaw Pact (defunct)
Regional/Associative Regimes
o
o
o
o
European Union
NAFTA
ASEAN
OECD
Functional Regimes:
Environmental
o
o
o
o
o
Montreal Protocol for Greenhouse Gases
Law of the Sea Treaty
Moon Treaty
Antarctica Treaty
UN-based Consumer Protection Guidelines
Functional Regimes:
Economic
o
o
o
o
o
o
Air transport
Ocean shipping
Telecommunications
GATT / WTO
IMF
Gold standard (defunct)
Future Regimes
o
o
o
o
Internet commerce?
Animal rights?
Human rights?
Fair trade?
Non-Governmental Organizations
Common NGOs that influence trade/FDI:
o
o
o
o
o
o
o
International Olympic Committee
Greenpeace
United Auto Workers Union
World Council of Churches
Save the Dolphins Organization
National Rifle Association
Amnesty International
Economic Integration
Global Linkages
Management Linkages
Country
A
Policy Linkages
Country
B
Trade and Investment Linkages
Global Linkages
Management Linkages
Country
A
Integration
Country
B
Trade and Investment Linkages
Regionalization of Economic Activity
o
Levels of Economic Integration
o Free Trade Area
o Customs Union
o Common Market
o Economic Union
o
o
o
Effects on trade and FDI patterns
Evolution toward worldwide integration
Impact on management of MNCs
Trade in Isolation
20%
15%
Prevailing
Tariff Rates
on Imports
10%
33%
40%
100%
Free Trade Area
Consequences
o
o
No tariffs
among
members
Tariffs with
non-members
unchanged
20%
33%
100%
External Tariffs?
Trade Creation?
Trade Diversion?
Regional content?
Export jobs?
Trade and Investment in Isolation
33%
40%
Cheapest
Producer
Trade Creation from FTA Formation
33%
Cheapest
Producer
Trade and Investment in Isolation
Cheapest
Producer
33%
40%
Trade Diversion from FTA Formation
Cheapest
Producer
33%
Customs Union
o
o
FTA plus...
Common tariff
policy for nonmembers
33%
33%
33%
Common Market
No Non-Tariff Barriers
o
o
Customs
Union plus...
Reduction of
non-tariff
barriers among
members
Shift in International Strategy
Common Market
National Currencies
Consequences
• Strain on F/X rates
• …tax rates?
• …growth?
• …trade?
ÖS
£
DM
FF
DkK
Economic Union
o
o
o
Common Market
plus...
Single currency
Harmonization of
Monetary and
Fiscal Policies
Multilateralism in Trade and
Investment Regimes: WTO
Pacific
Rim
Europe
North
America
Regionalization/Triad: Building
Block or Stumbling Block?
Pacific
Rim
European
Union
NAFTA
F/X
Trade, FDI, and the Economy
Computers
Cash $$
o
o
o
o
Increase demand for Japanese computers – trade deficit
Increase demand for computer inputs (components,
labor, etc.) – inflationary
Increase demand for Yen – appreciates
Stronger Yen increases U.S. prices – decreases demand
for Japanese computers
Foreign Exchange
o
o
o
o
What is it?
Why does it change?
Risk for international managers
How to manage risk
A Medium of Exchange:
The Linkage Between Currencies
World Market
for Euros
Price = $ / €
Price = € / $
World Market
for Dollars
S
S
€ .77 / $
$1.30 / €
D
Same “market”…different perspective.
D
Foreign Exchange Fluctuations and Volatility
Index of Swiss Franc vs. Dollar
1990 = 100
1980
1990
2000
Sharply Depreciating Peso vs. Dollar
Medium of Exchange for Foreign Goods
German Market for BMWs
Price of a BWM
in Euros
S of BMWs
€ 100,000
D for BMWs
Global Market for BMWs:
Americans want to import BMWs from Germany
Price of a BMW
in Euros
S
€ 110,000
€ 100,000
D
D’
World Market for Euros
Price of a Euro
in Dollars
S of Euros
$1.30 / €
D for Euros
World Market for Euros:
Americans need to convert Dollars to Euros
Price = $ / €
S
$1.35 / €
$1.30 / €
D
D’
Linkage Between Currencies
Price =
$/€
World Market
for Euros
Price =
S
$0.77/ €
€ /$
World Market
for Dollars
S
€ 1.30/$
D
D
Linkage Between Currencies
Price =
$/€
World Market
for Euros
Price =
€ /$
S
$1.35/ €
$1.30/ €
World Market
for Dollars
S S’
€ .77/$
€ .74/$
D
D’
D
Other Forces Causing Change
o
o
Foreign Direct Investment
Foreign Portfolio Investment
o
o
o
o
MNCs
Government Debt Instruments
Currency Arbitrage and Speculation
Governmental Intervention
o
o
o
Official and Unofficial “pegs”
International Agreements (e.g., G-7, the Euro)
Posturing (e.g., “talking” the dollar down)
The Big Mac Index
Big Mac: in Implied
US$
PPP Rate
%
Under/
Over
Value
Big Mac:
Local F/X
Actual
F/X Rate
U.S.
$2.55
–
$2.55
–
–
EU
℮ 2.44
℮ 1.08/$
$ 2.26
℮ .96/$
- 11%
Japan
Y 253
Y 118.2/$
$ 2.14
Y 99.2/$
- 16%
England
₤ 2.99
₤ .69/$
$ 4.33
₤ 1.17/$
+ 70%
Poland
Z 1.34
Z 4.12/$
$ .32
Z .52/$
- 87%
www.economist.com
Short-term F/X Management
o
Currency Hedges
o
o
o
o
Forward Contracts
Options
Negotiation of Ratcheted Pricing Schedule
Adjustment of Prices and Target Profits
o
o
Lower foreign prices to keep market share when
home currency appreciates … lowers profit margin
Raise foreign prices to keep profit margins when
home currency depreciates … less price competitive
Today: US Dealer to Import BMWs
o
Sales Contract:
o
o
o
o
Quantity: 100 BMW 750s
Price: € 100,000 each
Payment: Due in 3 months
Value of Sales Contract =
o
o
o
€ 10.0 million
Spot Rate = $1.30 / €
$13.0 million
In Three Months: Payment is Due
Uncovered Transaction
o
Euro appreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $1.35 / €
€ 10.0 million
“Risk penalty” = $0.05 per € traded
$13.5 million
US Dealer’s Loss = $500,000
Today: US Dealer to Import BMWs
Hedged Transaction
o
Sales Contract:
o
o
o
o
Quantity: 100 BMW 535s
Price: € 100,000 each
Payment: Due in 3 months
Value of Sales Contract =
o
o
o
o
€ 10 million
at 90-day Forward Rate = $1.305 / €
“Insurance premium” = $0.005 per € traded
$13.05 million
In Three Months: Payment is Due
Hedged Transaction
o
Euro appreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $ 1.35 / € (Doesn’t matter!!!)
€ 10 million
Locked-in Forward Rate = $ 1.305 / €
$13.05 million
Cost of Hedge (insurance premium) = $50,000
In Three Months: Payment is Due
Hedged Transaction
o
Euro Depreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $ 1.25 / €
€ 10 million
Locked-in Forward Rate = $ 1.305 / € (Spot better!!)
$12.5 million
Currency Windfall - Cost of Hedge = $450,000
Medium-Term F/X Management
o
Balance sheet hedge
o
o
Match foreign assets with same level of foreign
liabilities in same currency
Cash flow hedge
o
Match foreign A/P with A/R in same currency
Long-Term F/X Management
o
o
o
Shift sourcing and procurement
Shift production
Cut costs / improve productivity
Volkswagen’s Global Supply Chain
Revisited
Key Strategic Choices
Location of Value-creating Activities and
Linkages (flow) between VW Units
U.S.
??
Mexico
??
Germany
??
Shift in IPE
o
o
o
o
How does a change in the IPE faced by VW
force it to reconfigure its global/North
American supply network?
NAFTA
F/X
Other factors?
Key Strategic Issues Facing VW
Regional content
o Over-reliance on German imports
o Lack of US or Mexico supply network
o Increased competition in Mexico and US
o Instability of Peso
o Labor instability
o
Changes in Currency
DM per $
1991
Peso per $
2000
1991
Peso per DM
1991
2000
2000
Location and Flow:
What do YOU recommend?
U.S.
??
Mexico
??
Germany
??
What other strategies should VW try?
o
o
o
o
o
New models
Consolidate components & platforms
Marketing
HR policies
Other stuff?
New Products
Product Evolution
Missed Opportunities?
Design and Production Convergence
Golf
Beetle
Standard Components
and/or
Single Platform
Jetta
VW Changes
o
o
VW Mexico makes $1.0 bil investment: 1990-95
Cut supply costs
o Reducing VW suppliers from 1,000 to under 100
o VW suppliers shifting production to low wage
countries (including Mexico)
o
Considering US plant if 10-15% growth achieved
VW’s U.S. Marketing Efforts
o
o
o
o
o
o
o
Cross-promotion of Irish folk/new age band
“Clannad” (1993; music in commercials)
$45 million U.S. advertising campaign focuses on
popularity of Golf /Jetta in Europe (1993)
J.D. Power ranks Golf as “best in class” (1995)
Pushes “test drive outings” vs. rivals’ cars (1995)
Major focus group effort vs. rivals’ cars (1995)
“Drivers Wanted” campaign signals VW’s focus
on 17-30 age group; $45 million (1995)
“Duh, Duh Duh” … $70 mil ad campaign (1997)
The VW Family
o
o
o
o
o
o
o
Audi
Bentley
Bugatti
Rolls-Royce
Seat
Skoda
Volkswagen
VW’s North American Sales
Number of Units