Chapter 11
The Automotive Industry
A 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
Geography of
Trade
• US
– Falls from 51% to
19% of worlds share
• However
– Production increased
by 148,000
• Japan
– from 7th largest to
worlds largest
– Over 50 times growth
• Slight decline in 2000
– Japanese recession
– Increase in overseas
production
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
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 •Variable amounts of
on hand, requiring
parts on hand, requiring
massive warehousing
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 “MegaMerger” 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 Industry
The 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 jointventures 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 reorganization 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 reorganization
• 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