Developing countries and the future of the automobile industry

World Development, Vol. 13, No. 3, pp. 39,~407, 1985. Printed in Great Britain.

11305-750X/85 $3.00 + II.00 © 1985 Pergamon Press Ltd.

Developing Countries and the Future of the Automobile Industry D A N I E L T. JONES*

Science Policy Research Unit, University of Sussex, Brighton, UK and

JAMES P. WOMACK

Massachusetts Institute of Technology, Cambridge, Mass., USA Summary. - - T h i s paper reassesscs the controversial view which has assumed that, at some point in the future, thc global automobile industry, having reached maturity, would naturally migratc to the leading developing countries where the markets are growing more rapidly and wages arc substantially lower. The authors argue that thc lhreshold facing a developing country seeking to establish a domestic automobile induslry hits riscn because of two recent developmcms: lhc rise of Japan as a major automobile produccr; and a n c w wave of technological and organizational innovation. This involves use of state-of-thc-art microelectronics and flexiblc manufacturing systems, as wcll as complete restructmg of component supply resulting in considerable nni! cost and lead-time advantages. Thc authors look at what these trends mean for both the OECD and the developing countrics. They outline the conventional view in more detail and then present an ahcrnativc analysis of thc evolution of the industry. New policy options for the devclopmg countries arc spotlightcd. 1. I N T R O D U C T I O N T h e objective of this p a p e r is to explore the implications for the d e v e l o p i n g countries of a new c o m p r e h e n s i v e analysis of the global automobile industry. For m a n y years, there has b e e n little a r g u m e n t a b o u t the direction in which this industry was moving. A t some point in the future, it was widely a s s u m e d that this industry, having r e a c h e d maturity, would naturally migrate to the leading d e v e l o p i n g countries where the m a r k e t s are growing more rapidly and where wages are substantially lower, l t o w e v e r , the exact timing of this move was n e v e r quite a p p a r e n t : and the t h r e s h o l d facing a developing country seeking to establish a domestic automobile industry seems to have risen, not fallen. D e v e l o p i n g countries that h a r b o r e d a m b i t i o n s of building substantial export sales to the O E C D countries have so far not met with great success. To what extent does this situation simply reflect a p r e m a t u r e j u d g m e n t of the prospects for the d e v e l o p i n g countries or have conditions m this industry c h a n g e d to such an extent that this view n e e d s overhauling'? In this paper, we argue that the c o n v e n t i o n a l wisdom does need overhauling, in particular because the rise of J a p a n as a m a j o r a u t o m o b i l e p r o d u c e r and a new

wave of technological innowltion have set the industry on a new path and in a different direction. T h e s e two recent d e v e l o p m e n t s have, we c o n t e n d , f u n d a m e n t a l l y t r a n s f o r m e d the situation and prospects for the industry in b o t h the O E C D a n d the d e v e l o p i n g countries. Because these d e v e l o p m e n t s are so i n t e r r e l a t e d , it is necessary to look at what these changes m e a n for both sets of countries. In doing so, we draw on our analysis p r e p a r e d for the final report of the M I T F u t u r e of the A u t o m o b i l e Program. I A f t e r outlining the c o n v e n t i o n a l view in more detail, we then present o u r alternative analysis of the evolution of this industry and of recent d e v e l o p m e n t s before spotlighting the new possiblities this o p e n s up for the d e v e l o p i n g countries. We do not intend here to discuss the much b r o a d e r question of w h e t h e r or not mass m o t o r i z a t i o n is a desirable strategy for developing countries to follow or w h e t h e r they should go for alternative light c o m m e r c i a l vehicles instead *Daniel T. Jones is a Senior Research Fellow of the Science Policy Research Unit of the University of Sussex and the UK Team Leader of the MIT Future of the Automobile Industry, James P. Womack is a Research Associate of the Future of the Automobile Programme at MIT. 393

394

\~()RI.I)

I)iVI!I.()f'MI~NI

o f ~iutomohilcs. N e i t h e r do w e a t t e m p t ;i comf~lchcnsivc r e v i e w of lhc situation and prospects of

itlm atitol~lohilu h]dti~;(lv in each of lhm main d e , e l o p i n g countries,. \~t/ll;.it wc ~il-t' conc'crncd with hci-c is to pose ~OilIC llCV, d qticslion~> for consider:ilion h} poliQ-makcr,~ in the de,
2. T f l I L ( ' ( ) N V I { N T I ( ) N A L VIEW ( ) [ £ ( ' I ) C()I. ! N T R I I!S

F()R Tltl{

I-ur the ( ) E ( ' l ) countries, the ctm\cniioi]~i[ x i c ~ Call hc Mlilllll~lrizt_'d ;.is folio\vs. The nlarkcl~, of N o r t h Alllcric:.l. ~t_'stt_uil l-]tlil)pc ;llltI Japall, ~ic'ct)tlnliilg fin- ~()'I{. of w o r l d ticnlailtl. ~llt_' ~ipprtiaching saturation as SOillC 70'!,, of sales ill tilt'so m{irkcls arc' n o w for l-cpJilCUlllUii ! purpo~,c~,.: Fhc~c il];irkc'l~, arc onl~ c x p c c l c d l~> glO\v Lit b¢{;vct_'ll 11]'!0 It) 2']{> pCl illllltlm in vohlrnc lcrlns l h r o u g h o u i the lt,l~Os. T h e o p c n i n 7 up of v¢orltl aUtOlnobilu li:.tdL', w i t h the rcsul! it~:ii ncarlv 4iFID o f ati~,onlobilus producc'd ~.llC ilO\ ~, t r a d e d bch,¢t_'cn counli-io;, hax Ictl to ;l giovcing i n t e g r a t i o n o f w o r l d nlarkc'l~; and for lhc firsl l i m e to c o n ] p e t i t i o n on ~i g l o l x l l sc'~llc hct,Accn auloilltll~ilc rlroducor~,. ~vlorco'~cl, lilt_" It)73 :.iiltl 1cJ79 oil shocks have I)louglH about a Ct>llVt.'rgLUlCt_' in tt¢illand in tl]esc illill-kCt~, ~Ul ~,lll~ll], fuul-c'fficienl mitOil~ohilt.'s, pai-ticulaily in the U n i t e d ~lalt_"~ w h e r e n~ut_'h I;lrgcu-~iutonll~hilc,, h:id hccn die llOI'lll. For tt¢c'~idcs prtidtlct l c c h n o l o g ) has hct_ul Illoviil 7 {li ~1 Mt_'adv. llOl vcrv i-~t]~i~'l i n c r c n l c i l l a ] pace and mantifaclurcrs" designs have hr.'COllie ii]ci¢~lsingl}' sinlilur. -Flit? p r o d u c l liar,, t l i c r c t o i u . be'con]t_' illOrC and IllOrL" like ;l c o m m o d i l ~ , hi which c-onlpctition focti~,c~, p r i n l a r i ] ) t ) l l price. st,,,lin<, 4lid lh¢ quatii,i of the service and ctistril~ution nL'tvvork.' A c l l i c ~ i n g c'coilOllliC~, o f ~,t_'~iJt_'in clc~ign lind m a n u f a c t u r i n g ~ll-C lh¢ key Io co~t reduction. i The high cost of designing ~l nova' auiomohilc (lhc Ford Sicrr~ for inshincc cosl EOUOnl to hring to the m a r k e t ) , has led to the conccpl ol the "world car." where design costs can bc sprc:ld ovcr :l much higher ,;olumc p r o d u c e d in many different countries. Examples of these ',H-c the Ford Escort :rod the (;¢ncrM Motors Chc;'ctlc and Cavalier. all of which ~trc p r o d u c e d in imu]v countries on several continents, l tigh-volumc ,mlltinational p r o d u c e r s ~irc in the host posilion to rc~lp the benefits of model range ~,tandardiz;tlion across their o p e r a t i o n s ~llld CCOllOllliOs O1" scale in production. It has been cstilmited ila;ii the m i n i m u m efficient scale of production ranges fron~ an annu;.t] output o f 25(1,0(1(I in ~isscillh]y, t h r o u g h 51)(I,(t01) in cngine~ lo 1 m i l l i o n in

sitlnlping. ¢ W h e n all of these scale cclmtm~ics ;11u c o n l h i n c d with CCOllOllliUh in i l l a r k c l i l l g and d i ~ t r i h u t i o n ~llltt lhc ncctt for a m u l l i - n l o d c l i~ingc spanning all ihc n l a r k c l ~,cTnlcill~;, it ~iis itrgticd thai :i n l i n i n l u l n xc' ~t~, ptlrl of a hirgcr g r o u p . Fhc concL'nlr:.ilion <~f t)rodticlitul in ihc h;tilch, of :i fuw l:irgu l)rochicur~, and lhc c l i n l i i ] a l i o n o l lhc ~,lll;_lllt_'r p r o t h l c c l <, ~.~,;i~, largcl_x ct~n]t)lc.tcd in the U n i t e d Similes I~\' the niicl-lU)(l~, and lhc I~i~ lhrc'c' (icncu;.ll M o l o r ' , . l:ord ~illcl ( h r \ s l c i h a \ ¢ cic'couiltucl f ol 0;~'!<> o l the auh~nlohiic <, hLlili in Ihc { l n i t c d ,~lat¢', c v c i ~incc. /\ Silllilal p;lllcrn of COl/CL'lll.rHl, ion \vll', o h s c r \ c d in L'tich t)l lh¢ in.:iin l{tirol~Cail countries chiring lh¢ lCJh()<, and ltJf~lls and ~t_'lll c'>Cll furlhL'r on ~1 i!tirol~cIin ~,c~lic' in the 197(Is after ihc c~lMqi~,hmcnt uf the 1{1{(. t3,,' IU82, tile ',ix Itii-gcsl r~rothiccr <, hi l { u r o p ¢ Pxcil~iult. Pt_'ugcot, V t l l k s ~ a 7 v n . f:ial, t:ord anti (;cnciu.iI M o t o r s huili Nll0h t)l the '4tllonlol~ilt_ '<, t~l-oducud in \¥'t_'stL'rll t{tlrol~C. S i l n i h u l \ , in .llipiii/ NN ~>1 p r o d u c t i o n x~,'~l~,in lhc h~lllcl~, o l tl~c [ollr laigcsI t)l(~ttttt.'t_'lS r o \ . o l ~ l . Ni~,S~ll]. I IollcJci cillcl M~izcla. \Viih ihc glol~al iritc'71-~ilion ~)1 ihc indu,,I t\ Ctll¢.l lilt_" ]~IL",Mli¢ hi rc;ic'h ~1 \ohllllm o l _~ m i l l i o n c~iry, :1 x,u;tr, ii ;~,;.is xvid¢l\ c x p c c l c d lhil( il si m i l ar r a t i o n a l i z a t i o n ~ o t i l d noxv t:ikc place Oll il global level ~lnd ihai ~illcr :i tx_'riod o l l i m e ',l nc~>, stahlc oli;opol_~ x~otild he" csl;lhlishcd w i i h ~l lc\~ nlcga-comi)~iiliCS on the lines ol ( f u n e r a l ~.l~>lOlS clonlinalin 7 the industr\' world~idt_' ~ The t~rin c'ipal ohjcctivc~ of l)olicy-n]itking in ",tlCll it ~;iltl;ltion \VC'I'L' x~ith Ill;tillt;iinJllg a tlolnc'~,ticaiI\ . ovcnt_'d iirnl in tilt_' hti~;illt_'~,s of ruochlcing autom o h i l c s , t h c r c h y h o p i n g lo ~,cC'tll-C' ~1 phlcc in lh¢ filial w o r l d o l i g o p t l l y . ;ind w i l h a n l i - l i u ~ l ixllicing of c o m p c i i t h c coi]clition~ in the nlarkcllqaCc.

3. T I l E ( ' O N V E N T I ( ) N A I . \."IIZW I : ( ) R TI IE

I)EVFA O P l N ( ; ('()I_INFRI t.:S

Fhc convention:if wi~;dum for tiiL'd c v d o p m ~ COtlnl.rics, derived its dleorctic;fl b;~sis from lhc litcnlturc on the product c,,clc ale',eloped first hx Vernon and from tr',iditionldcomparalix.c ;id,~;tnt~lgc trade ]itcr.:.tturctheir focuses on the rch,tivc costs of l~tcto~sof production in different types of countries." In hricl:,the Hr~tlIllCIIIhinged on two key observations. The tir~t is theft, while the markets of the ()I~CI) coumric5 ~irc n~Y,',mature. those in the developing countries arc clcarl} n~i. Dom~md in the developing countries ~rcv,' ~t n<% per Lillllillll d u r i n g the 1970s. ~ h i l t it g r c ~ ~li o n l \

] l i e AUT()MOIIlI,E INI)USTRY 1.5% per annum in the O E C D countries (and nluch of this in the poorer OI2('D member stales such as Spain). Given the limited opportunities for expanding market share or volume in the O E C D countries the multi-national automobile companies must, therefore, be attracted to thcsc morc rapidly growing markets, lit almost all cases, this means establishing a local production base to stumount differing degrees of local protection. The maturity (if the product and of both the technology ::lnd the mculagement of rite production process nle::nls that it is relatively simple for a multi-national producer to Ir::msfer these to developing countries. The second key argument revolves around the labor intensity of automobiles production and the low levels of skills requircd, in countries such ::is South Korea or Mexico, wage levels were between $1 and $4 an hour in 198(); however, wages in the motor vehicle industry in Western Europe and North America ranged from $S to $16 all hour. These differences are probably great enough to offset any productivity differenccs between the O E C D and developing countrics. Therefore, iit the absence of political prcssurcs or oligopolistic collusion, it was felt that this industry would progressively move to such countries where employccs would bc prepared to perform routine, monotonous jobs for thcse relatively low wages. Thus, automobiles would go the way of the tcxtile industry, find tile industry wouM naturally decline in the O K C D countries ::is thosc countries moved to more high-tcchnology industries. The ulajor complication in this scheme ,,if things is usually the rather limited growth of the dornestic rnarket in even the largest developing countries, t towever, it is agreed that above a certain threshold it becomes attractive to [ocatc production in these markets with the restllt that the industry subsequently 'takes off." Before this threshold is reached, the market would be too small for efficient production. It couM not support enough producers to ensure competition in the domestic market, and cach '`if thcse producers would have to produce a range of models ::it quite inadequate voh, nles. If the perpetual infimt industry syndrome is to be avoided, the solution is to encourage produccrs to locate plants with minimum efficient scale in those economies ahead of the growth of domestic demand and to at least initially export a large part of the output. This could be eithcr for the assembly of finishcd units or for the production of components. Trade would be mainly back to the O E C D countries, but some exports cou[d go to other developing countries if political obstacles could be overconle. In this way, a pattern of

395

cross supply between plants of econontie scale would develop around the world, and the developing countries would become htcreasingly integrated into the workt economy. Developing countries wouM specialize lit lalmr-intensive activities that required less skill; and tlle ( ) E C D countries would focus on more capital, skill and technology-intcnsivc products. A final dcveMpntcllt of the 1970s, tile convergence hi delllantt patterns between tile OlV,('D cotultrics on smaller cflrs thai constitute the bulk of devcloping country sales makes the concept of thc 'world car' one that can be readily extended to inchide tile dcvcloping countries.

4. T I l E S I T U A T I O N O F T t I [ { I N D U S T R Y IN 'FILE D E V I z I . ( ) P I N ( ; C ( ) U N T P , Ifl.S Before turning to our alternative analysis, it is appropriate to review the situation of the automobile industry ill the dcveMpmg countries. Automobile production in the dcvch/ping countries did take off in tile l~)7()s: Table I shows, however, that it only accountcd for 4.5% of world production in 198(). This has changed very little since. Only four countries achieved full production (with a local coritcnt of over t)0'}~,): Brazil, Argentina, South Korca and India. Table 2 shows that all thc other countrics imported part or fill of their requiretnents. The time lor the export of complcted (fully built) autonmbiles front the developed to thc dcveMping countries seems to he over, having stabilized at around 8()0,()0{) units since 1970 (sce Table 3). This is likely, to continue, althouohe its composition inav. well change. In the future it will comprise upmarket luxury cars (i.e.. Mercedes Bcnz) for the developing country elite, mass market cars to countries too small to warrallt dontestic production (although these will also come from other developing countries) and line balancing within the multinational firms (swapping exports of one model for imports of another to fulfil trade balance requirements). A number (if developing countries are on their way to building an automobile industry with increasing levels of local content. The Philippines, Taiwan, Malaysia and Iran have joined Mexico and South Africa in upgrading their production from assembling fairly complete kits (CKD) to a reduced dependence on imported components (KD sets). Both the assembly of C K D kits and KD sets have increased during the 1970s and will be the main route towards increased production in the developing countries in tile 1980s and 1990s. Table 3 shows that according to our estimates

396

WORLI) DEVEL()PMENI" Table 1. World automobile production a#td exports 1929-80

(million Liilil%) IU2g

lU38

1950

World ~lutomolfilc production North America 4.8

2.1

7.()

7(i

7,>

7.2

~¢~'cslcln I~.uropc

0.tJ

1.1

II. I

0.1

5. I 0.2 0.3 ll3

Ilia 3.2 0.4 O.7

Ilia 7.(i {L5 2. I

II. I

I1.¢~

I.

2Sf~

().(~

Japan O t h c r OE('I):' Centrally planncd l)cvcloping

]otal production World aulonlobilc cxpoils Inlra N. l\nlcrican t~xpolts Irolll N. Aiilciica [illia ~.". [~tlropc:itl Exporls fronl ~,". [~tllOpC

5.4

19hit

l~)7/i

It)£(I

3. I

,'4.2

13.It

22.S II.tJ

I. 1

II.d -

(}.2 ILl

I1.1 i1.2

II.I I.II

li.I _.,,~~

ILl

0. I

tl. I

0.4

1.2

I.N

3.7 1.3

11.7 I 2

3.
(i. I

J ap;+lnes¢ exports ()ther exporis"

I o l n l cxpoil ~,

(I.(~

(1.4

().7

2.~

h.4

I(I.U

[{xptlrts :is a propollit+ll ol produclion

11~ll,

13",>

tr!,

IN'!,,

2,~",,

~N"<

S~,ltircc~,: SMMT, M V M A , L'Argus, AtllOlllOlivc Ncw~,, .lAMA, ('Olllucon Y e a r b o o k s . and author% cstimatc~. i\uslralia, Yugos[avill and "['urkc\. ;]llc]udcs illlr~l-('~mlCC~l/ lrad¢ oI (I. ] ~llltl t l ) milli~m unil3 ill ]~7{I ;lilt] IUSII rcspccli~ ely.

dcv¢lopJng countries ill'l" lltlW satisfying soln¢ I')l}'Jl, of ltlcJr ci¢illand clt>nlcslically, up froill 2ll",'o ill 19f~0 ;illd 41}':~, in 1970. So fill, ¢xpt)rt>. Troll1 developing ¢olilllrics hav¢ nol bccn significant and ila\'e been principally directed towards o l h c r t i c \ ¢ h l p i n g COtlllHJcs. Brazilian exports of atllOmobil¢s wcrc 135,li00 in 198l nnd 17,2()0 fronl Souttl Korea. No doubt in tile nlodiuill tCrlll the prospects for dcinand gro\vth in the d c v c l o p m 7 counliics arc good, rising tttml 3.4 tnillit)n in 19NIl tt) 5.2 million in 1990 illld 11.5 million by the \,¢;.i1 2t)(i(1 (see Table 4). During this decade, however, tile bulk of the iilcroasc iil dcnland will still be in tile' dc\'cloped countries of the O E ( ' D . One of ihc biggest uncoriahliies, of course, is ('hina, which offers a potentially largo mark¢l in tile IOllgCr tenn. Tile problenl for the developing countries is what strategies it) adopt 1o exploit this g r o w t h in the 199()s.

5. T t l R E E T R A N S F O R M A T I O N S IN T t t E [tlSTORY OF TIlE INDUSTRY

The p r i m a r y interest of our project was to try io evalualt_, and interpret /he ilnp~l¢t o f / h e lllally

[actors that arc" bcginllhlg to chatlgc th¢ ilattlr¢ o l ¢ o n l p c i i i i l l n in this hldustr\,, and hcnc¢ hs strtlgturl2, ()%vnt_'l-ship and location in the 198(}s nnd 19c)(Is. ( ) u r approach could b¢ b l o a d l \ described ilS ll¢O-~chtlnlpctcrJall, ftHIo\vhlg the w o r k of SUCh iltltllt)l'S ~.lb, Nt_'lsoll ililCl Dosi. 1)t~si c'xtcildcd the ilolJon of StlCCt'ssi\'¢ scicnlifi¢ pliriidiglns tH Kuhll Io lcchlloltlgy- ~\c: ¢Xlulld lhis to inchid¢ both m a j o r I~rcakthroughs in tcchnolog) {llld in iI1~.1ni1~¢111c11lovcr ti111¢.7 The fundanl¢nlal idea is ihat prcscllt dev¢lopnlellts hi lhis i n d u s t r \ aild ~llc relative strOllglhs and ~\¢akilessc's of the partJcipailts gilll best b¢ tllltlgrstt)t)d through till analysis of the m a j o r Icchnohigical and 111
TIlE AUTOM()BILE INI)USTRY

397

Table 2. Production and assembly in the developing countries 1960-80 ( 'Ol)O units) Local 196(I

1970

1980

62.2 30.3 24.8 6.5 -

343.7 163.4 13(~.7 48.0 211.7 7.7

977.7 204.4 303.0 94.11 29.(I 43.(I

123.8

720.2

1651.1

India S. Korea Philippines Taiwan Malaysia lran Indonesia Thailand

19.1 2.9

37.4 14.5 7.6

30.5 57.2 26.6 132.{) 81 .I)

Brazil Argcntina Mexico Vcnczuela Chile Colombia Latin America

0,4

na

2.5 2.0 -

7.5 3 l.S 2.t) 6.6

Asia

26.9

1{17.4

473.3

S. Africa Nigcra

87.4 -

195.0 7.1

277.11 151 .(I

238.1

1(129.7

2552.4

Total

80.(I

41 .(I 25.0

content ( % ) 98 95 60 40 40 2(I

lOll 9(1

70 60 50 50 4t) 35

50 30

Sources: See Table 1. ~'This table includes all those countrics in thc dcvcloping world producing and assembling more than 25,000 automobiles in 198(I. plmes, including economics, m a n a g e m e n t , politics and i n t e r n a t i o n a l relations. In our analysis of the history of the auto industry, we identify t h r e e m a j o r t r a n s f o r m a t i o n s that have s h a p e d it. Each arose from a creative b r e a k t h r o u g h by a particular set of p r o d u c e r s in technology and on the organization of the industry that facilitated a rapid growth of d e m a n d and led to a powerful export t h r e a t t o p r o d u c e r s in the rest of the world. T h e first of thesc transf o r m a t i o n s was the b r e a k t h r o u g h by A m e r i c a n producers, a r o u n d 191[I, from a custonr-buildmg to a mass-w)lume industry. T h e second occurred in W e s t e r n E u r o p e from the late 1950s when E u r o p e a n p r o d u c e r s c o m b i n e d mass production with an e m p h a s i s on product renovation and differentiation to challenge A m e r i c a n - b a s e d p r o d u c t i o n for the first time. T h e third comm e n c e d in J a p a n in the late 1960s, when J a p a n e s e p r o d u c e r s m a d e d r a m a t i c breakt h r o u g h s in p r o d u c t i o n organization that soon yielded a lower cost product of far greater m a n u f a c t u r i n g accuracy. T h e c o n s e q u e n c e of each t r a n s f o r m a t i o n was that a new region of the world seized the initiative in shaping the future of the industry

worldwide. At tile same time, the r e m a i n i n g p r o d u c e r s e m b a r k e d o n a process of catching up as new best practice was diffused to o t h e r producers, often in association with strong g o v e r n m e n t m e d i a t i o n to stem thc trade flows resulting from the b r e a k t h r o u g h and hence superior c o m p e t i t i v e n e s s of those producers. A b e r n a t h y describes the confluence of product and process i n n o v a t i o n s that were c o m b i n e d by l t e n r y Ford in a unique way to create the mass p r o d u c t i o n a u t o m o b i l e and the flow line production system/s T h e s e were c o m b i n e d with a n u m b e r of social and organizational innovations, such as the i n t r o d u c t i o n of the e i g h t - h o u r day and much higher wages, and a t h o r o u g h application of the scientific m a n a g e m e n t principles of Taylor and o t h e r s in s e g m e n t i n g the work process and routinizing the work tasks. This division of labor of the work process was later e x t e n d e d by Alfred Sloau in G e n e r a l M o t o r s who a d d e d a highly differentiated m a n a g e m e n t pyramid on top of the basic shop floor organization of Ford. '* in this way, m a n a g e m e n t functions were differ e n t i a t e d and refined, leading for instance in the m a r k e t i n g area to a wider range of product offerings to cater for different m a r k e t s e g m e n t s

39S

W ( ) R I I ) I)I'.VEI.()I'MEN 1' l a b l c 3. At~tomobih. i)roductio#~, a.ssemblv arid i.lport.s i . the del'elolm ~, ~oltmri~.LS 1950 ,SO ..'llllOSllol~ih' ]~rodllclt(m a*td asscl#lhlx' ill l/l~' der('Iolu.,,g co..Iric~ (million units) 19511

Full production

"l'otul dcinand

I ~J7t I

I t)8l

-

ILl

0.6 0.3

1.3 (I.7

c)l} llll)%> 50 70%,

0.1

11.2

II.f~

21,~ 511",,

0+3

0.5

I).,S

11.8

~

07

l.tJ

3.4

Asscmbly (KI)):+ Kit assembly ( C K D ) BLIill tip imports

I t)(~l )

I)cx eloping t'OLiilll \ t'onlClll i

Proporlioil of demand product-'d locally §

20%

45'11,

(~0'!,,

B.ill Ul? i.lp(.l~ 17
I).3

0.5 (0.6)

II.S (I.H)

II.S (I.4)

Source: Scc Table I. ' Whilc there is a considcrablc variation, phc main diffcrcncc bctv, ccn tl3c assclnl+lv ot a kit (('KI)) hiM :l set O1 conlponcPllS ( K D sct) is thai the latter Illily conlprisu' illaior IIIcch{illiC{ll {llld clccPl+icai COlllflOllmllt,, (such ~.ly,lhu' t_,ngmc, gearbox aild inslrunlt.'ntatiOll) ~hilc the forlllcr also includes a hill sol ol Mainpill~, alitl a grc:.ilt-'r ntirnl'~t_'r of other c()nlpoI1clliS,. i Local conlclll rt.'fcrs to lilt_' dcw_,hlpmg COill/ll+V coiltcnl ol ll'ic llit_'lory ~ilc' price in illosc Cotlnlric~,. ~This ,a.as arp-ivt-'d ill t'l}' valuii] 7 produclion at 11111%. KI) asscnlbl~ ~il (ltl
All of these organizational i n n o v a t i o n s when c o m b i n e d r e p r e s e n t e d an essential b r e a k t h r o u g h that c n a b l e d the d e v e l o p m e n t of such a complex mass p r o d u c t i o n industry. T h e results of these dcx c l o p m c n t s were ;t rapid gl+O\vth of p r o d u c t i o n to 5.4 million units it3 192~,L a c o n c e n t r a t i o n of product]oil in the h a n d s of t h r e e p r o d u c c r s and a flov¢ of exports to W e s t e r n f{uropc (see T a b l c 1). A b c r n a t h v dcscribcs hms. after the initial b r e a k t h r o u g h s , tl'ic dcvch)pmcu3t of industry in the U n i t e d States settled down tt+ an c \ c r more i n c r e m e n t a l r c l i n c m c n t of the original concepts, right up until challenged in the mid- 1c)7()s, i,, The ['~u]opcan response was to mediate thcsc tr',tdc flows resulting from the competiti,~c ]rob;tlance with the l.hlitcd States by erecting trade barriers. T h e A m c r i c a n p r o d u c e r s in turn i'cn p o n d c d by b u i l d i n g m o d e r n plants it] l-~tiropcitt] t o u t ] t r i e s whcrt-" t h e y w e r e a l l o w e d to+ and l]tlropc'ap] p r o d u c e r s i n c o r p o r a t e d w h a t tilt_'\, had lcarnt-'d fronl v i s i t i n g D e t r o i t . T h e full b c n c i i t s of scientific plls_lplagcpllcnt alld mass p r o d u c t i o n techn o l o g y , h o w e v e r , had to ax~ait tlic opu'ning tip t)f the [7.tlropcan m a r k e t in the po,,t+var pt-'riod ~ / h c n the t~uropcai+ rct:ovt-,r,, It>ok place a f l c r

WorM War II, the u u t o m o b i l c industr,, grew rapidly, l l o w c v e r , circumstancus in eaci+ cotmtrv wcrc quite different, lc'ading to different kinds of products being built in those countries. T h e s e differences have largcly persisted to the present, where p r o d u c c r s it] each CotlntI+\ h;A\c ac'cunlulatt-'ci quitt-" different technical, design and styling expertise. T h e o p e n i n g up of the t!utopean m a r k e t allowed a vci-v substantial itltcr l:.uropcat] trade in c o m p l c m c n t a r 3' products to develop and led to [:Airopcan pt+oduccrs tuking over the d o m i n a n c e oI: ;,,otM autotnol'61c trade for the first 25 \'cars after W o r l d W a r II (scc T a b l e I). T h o u g h thc o p e n i n g up of the l{ttro pcan m a r k c t was necessary to exploit thc benefits of the scalc CCOllOilliCS off~:rcd by prodtictiol] alv.t organizational techniques d c v c l o p c d m thc !Jllit,,.?d Sta|cS the diversity ol ['ittropcat] pro dtlcCiS, COlltral-V to thc cC,llvcntioil[il wisdoll] of +The A m e r i c a n ('hallcngc" of the lC)(+(ts, \,,;t'., to b e c o m e its greatest sti-cngth. I~ As A m e r i c a n firlns helped open up lhc t{uropcan tmtrkct. somc ELll+i:,pc~lll firnls 111t)tilltCtt ~i I'owcr|ul challCll,,C to /\lllCrican itldtistrv in the small car s c g m c n l prcxiotisb¢ ignored Ii,v the { !nitcd %tutcs producers. T h e r e x~cic many call?, ir+ lhc I. IN l~+l oO\cFn-

399

THE AUTOMOBILE INI)USTRY Table 4. World automobile demand and Jbreca.~t demand 195{>2000 World automobile demand

(million units) 1971) 1980

1950

1960

OECD countries Centrally phmncd Developing

7.8 0.1 {).3

12.0 {).3 (I.7

2t).6 {).6 1.9

Total*

8.2

13.11

23.1

Incremental demand

1950-60

1990

2001)

23.9 2.0 3.4

2q.0 2.8 5,2

33. I 4.2 11.5

29.3

37.0

48.8

1961)-711 1 9 7 1 > 8 0

1981>90

199()-2110(I

OECD countries v Centrally planned l)cveloping

4.2 11.2 0.4

8.6 0.3

3.3 1.4

5.1 0.8

1.2

1.5

1.8

4. I 1.4 6.3

Total

4.8

10.1

6.2

7.7

11.8

Sources: For 195(>1980 as for Table 1: tk)rccasls from A. Alishuler el al., "lJw f'uture q l t t w Automobile, MIT Press, 1984, p. 115.

~:The difference in totals between lhis and Tablc 1 reprcsenls thc asscmb[v of sets of components (KD sets) in the developing countries (see Table 3) where the local comen! is not high enough to be counted as production thcrc or as produclioll or cxports in the OE('D countries. +In the OECD countries in particular incrcmental demand from 197{)-8(I and It)Nil-90 is understated and overstaled respectively as 1980 was a relatively depressed year ill this induslry. Had 1979 been chosen mslcad as a peak year. as it was Ior eonslrucling ihe Iorecasts, the incremental demand figures for lhc OECD counlrics would have bccn 3.9 and 4.5 million respectively. m c n t m e d i a t i o n to stem this t]ow of cars fronl E u r o p e . T h e s e were, however, forcstalled by the general b u o y a n c y of the world e c o n o m y and the dewiluation of the dollar in 1971 .just as European wages were rising, which lrallsfornled a trade flow into a flow of investment as Volkswagen o p e n e d ils first phmt m the US, and the arrival of the first Anlerican-madc small cars. This diversity of the European producers was to prove a continuing strength. When the Jap:.lneso captured tile small car nlarket in the US in the 197()s, some European producers went upmarkt_'t and created an entirely new high-price luxury segnlcnt. Currently, alnlost all the 20(),00{) cars zi )'car sold in the US priced at over £20,0()1} conle from West G e r m a n y , Sweden or the IlK. G o v e r n m e n t policy was i n s t r u m e n t a l in prioriiizing the a u t o m o b i l e industry for dcvelopnlent in J a p a n after W o r l d W a r II, and the mdus'
'lotal quality control." W h e n c o m b i n e d with tile J a p a n e s e institutional structure of tmsiness organization, mimely their relationships with suppliers and m e m b e r s h i p of the K E I R E T S U industrial groups, they created a uniqtte system for the organization and t11anagement of sucil an industry. O v e r time, as this system was refined+ a much c h e a p e r product of much higher qualily resulted. This competitive a d v a n t a g e was reinforced by a shift to smaller cars in tile US following tile 1973 and especially the 1979 oil crisis. T h e J a p a n e s e quickly came to d o m i n a t e world trade by 1980 (see T a b l e 1). By i981, this had led to some form of formal or informal a r r a n g e m e n t to restrain or control J a p a n e s e imports in all the m a j o r car-producing nations of N o r t h A m e r i c a and W e s t e r n Europe. Since t h e n , the J a p a n e s e p r o d u c e r s have be,,un establishing p r o d u c t i o n o p e r a t i o n s or joint ventures in a n u m b e r of countries, including the US, C a n a d a , the U K , italy and Spain. W i t h m t h r e e years, the four m a j o r J a p a n e s e producers have a n n o u n c e d plans to produce up to one million cars a year in N o r t h A m e r i c a by 1988. M e a n w h i l e E u r o p e a n and A m e r i c a n p r o d u c e r s arc beginning to adopt nlan\' of the advances pioneered by the Japanese, eittler through direct copying of what they have seen in J a p a n , t h r o u g h colhlboration with the J a p a n e s e (as Austin R o v e r is doing with ttonda for instance), or by observing the

400

W()RI.D I)[!VEI.()PMI{NT

activities of Japanese-owned plants ill their own countries. [{arly results suggest that much of the Japatlesc nlailagenleilt paradigm is tralisferablc and foreign dircct iilvestineilt by the Japanese ~s.ill have a powerful dcillOnslraliOll effect in diffusing it It) tilt' West iiild in twercolllillg final icluctailce or resistance fl-Oill illall~igcmcnt alld the workforce.

both

iniddle

n. "I'tlE J A P A N E S E T R A N S F O R M A T I ( ) N

AND TIlE I)EVELOPING C()UNTRIES There is no doubt that tile Japanese developed "arl' of organizing autonlobile production is a major lcap forward from past best practice. Their ultimate goal was to develop a conliiluous flo~ frt)in lilt" shcet steel t)r roll and foundry to the delivcrx to custonlcrs, without any iulcrmedJatc buffers or inventory, alld to integrate the supply of conlponents fl-om outside firths into the production process. The full adoption of the "Kaitbail" or 'just-in-time" s_vslcnl depends iu part on having contponcnt suppliers located nearby, btil ittore inlportantly on ovcrturMng il iltinlbci of basic aSSUlllptions held by production engineers in the West. lit lg.uropc and tilt' {iS, buffer stocks aild illVCntories are heM bccatlse of the slowness in tooling chan-cse, fear of cquipnlent breakdown, supplier non-delivery or other dis ruptions to tile svstcin. In Japan, tilt_' absence el buffors and the fact thai tile wholc production system depends on tltc bottlenecks being highlighted illttl tackled quickly has lcd nlallufaciUlCrs lo fine-tune lh¢ s_vstein to a high degree. Stich ii sVStelil also depends t)ll ~1 zero defcc'ts policy, v+hcrc the elimination of defecls also clhltinalcs problems at lhc next stage and lhc nccd loi expensive o f f - l e e rectification. This ct)lltlaSt>, with file COlltillt)IllV held aSStlml)lioli that h) clinunatc ihc hist percentage of defects raises costs and slo~s productiou. Quite the rc\crsc is trtie \~,hen onc gets rid of iildependeni mspcclors, expensive lest filcilitics alld the man hours spclll in filUll rectification. lit addition to ildvailces in production organization within tile plant, the Japanese c{lr firlns have developed a unique set of rchliionships \~ith their suppliers Chill overcomes IllallV v+t.,akness t)[ veriicall.,, integrated companics m the West and arlnsMcngth relations with independent suppliers. The cross-ownership links between ,hipaitcsc ciir firths (llt)l majority sharcholdings) and their suppliers are built around the coordhlation of Ml-ategy, cooperation ill R& D and pl odtlct de~clopnleni and tight production scheduling. Suppliers remain independent business units and so full costs are known, unlike many traditionally

vertically integrated conlpanies. I~,chitionships are by definition of a hmg-tcrm character emphasizing the nlaxJlnu111 flow of inforlmition and the rapid diffusion of new managerial practices and new technologies such as computeraided design (CAD). Mcmbership of the large KEIRILTSI.] groups. such its the Mitsubishi. Sunfitotno and Mitsui gl-OtlpS, aJso confers illlpOl-talll adviilllages [o Japanese car firms in relation to financing, htbt~r force flexibility and access to other a,cas e l tcchnology in other group companies (such its clcctt onics). Competitiotl bet~een these KEII,tFgFS!,! groups across a whole range el industries is strategic in llattlre, aud ilo group h~ls hecn willing to exit an imporlanl industrial sector. Therefore, compclition bct\vccn these groups is extremely intense and. with little chance of forcing a compulitt~r to exit. h~cuscs on long-term market share, qualit} and efficiency. This intcnsc competition within .lapau spills over into expotl m:lrkcts and has not led to the conccntrathm of production in tile hands el a lcx~ conlpanics as has occurred elsewhere. When combined, tile :ld\allCeS in in-plant organi/alions, in relations with suppliers and the industrial group organization in .lapan reprcsclJt a completely ncxx managmcill paradigm ;is significantly ditfcrcnt from what went before as the scientific lnanagcnlcnt of mass production developed b~ Ford, Sloall Hlld others \~as o\er previons tcchniqucs. ('ousidelahlc literature ilm~ exist> oil the .lapanesc approach to Ill{lSS producilon orgtlniz iltiOll and ;I lltUt'Iber of studies haxc ict~{~rlctl on detailed aspects of tllc svstcin. I-~ liven ',iflci installation of the inosl inodcrn uquipnlcnt, ~i Icnglhy learning process is necessary before \\u achicvc lhe >lime dcgrcc of fine {tillil)g the ,hipalk'se rcaclk'd in the last decade. In tile' nleantJine, the ,hipancse ',ire nol standing still. The completely ilcw slailthirds el tlrgaililalioil al efficiency cstablished bv lilt" .lapancsc llano pulled tilt' rug otit front ilndcr the lcet of tile dc~eloping cotuttrit's. Bel;'~eCli 1771)aild 17~1, tltc Japanese reduccd ihc tolal ilumber of hours needed to buikt :i car floln 25ll io 130, \~ilh further intprovenlcnts since then. Not onh' h
THE AUTOMOBILE INDUSTRY wage rate. The Korean Ministry of Commerce estimated that in 1979 Hyundai's production cost for the Pony built in Korea was $3972, compared with an estimated cost of $230(1 for a Toyota Corolla made in Japan.

7. ELECTRONICS AND NEW MATERIALS - - A FOURTH TRANSFORMATION While still coping with the dramatic consequences of the third transformation, the automobile industry is also well into a fourth transformation. After a long gestation period in the aircraft and computer indust,rics, microelectronics are opening up new possibilities m the automobile industry. in contrast to the last twenty years, there are a whole range of new technologies being incorporated into new designs of automobiles. As a result of a signficant investment in R&D over the last decade by the automobile industry and the advent of a range of advances in electronics and materials technologies, a broader and growing shelf of new technological alternatives arc currently available to the automobile designer. I~ Although these new technologies will be incorporated step-by-step over the next decade or so, the result will be that the car of the early 1990s will completely differ in almost cvery respect from the car of the early 198lis. In a period of rapid technological evolution in every part of thc automobile, it is impossible to predict what the winning combination of all these developments will be. Therefore, the scope for many different producers to select unique combinations of new technologies and to create quite distinctive cars is enormous. Moreover, there is no reason to think that all the cards are in the hands of the very large producers with huge resources at their disposal. In the past, many important advances have been introduced first by smaller and medium sized producers. We expect this process to continue. The product is, therefore, not mature and is unlikely to become so in thc foreseeable future. In addition to a major change in the pace of technological change in the product, a similar revolution is also occurring in m!ljor items of production tooling. Until recently, the trend in production technology was towards ever more dedicated automated lines for producing bodies or machining engines. These lines were geared to high-volume continuous output of a standardized product. They were in no way flexible and the tooling had to be completely replaced for a new model or engine. 14 In the late 1970s, the introduction of computer controlled production

401

lines plus the introduction of much more flexible automation involving robots, automated handling, machining cells, etc., have changed the economies of scale in production dramatically. The use of robots instead of dedicated multiwelders, for instance, gives those plants a greater degree of flexibility to switch models in response to demand and redtices the cost of introducing new models and wtriants. A similar degree of flexibility has also been incorporated into new automated stamping lines, allowing rapid die changes so press runs can be shorter, saving considerably oil inventory costs, ltaving substantially transformed the stamping, welding, painting and machining operations, flexible automation is now spreading to the trim shop and the assembly of components, sub-assemblies and final assembly. Volkswagen claims that 25% of the final assembly of the new Golf is now automated, with engine, brake linings, batteries and wheels fitted automatically, and Austin Rover is now automatically fitting windscreens in their new Montego. All of this assembly antomation is readily reprogrammable for new models and variants. This flexibility is cxtremely important if models have to be changed more frequently to keep pace with the rapidly changing state of the art. A flexible line of robots can be replaced piccemeal as new generations of robots become available. Robot lines give greater scope for refining the production layout and organization as the learning process with this equipment allows one to fine tune the production process along ,lapanesc lines, particularly as production control becomes more automated. A more moduhir approach to production also allows the addition of subsequent production modules, rather than the much morc expensive commitmcnt to a completely dcdicated line for the mtiximum anticipated w)lunle ahcad of demand. Although the initial cost of switching from dedicated to flexible automation is high, the subsequent investment in designing and introducing flew models and variants will probably be lower than in the past. Likewise, the cost of updating production tooling step-by-step with new technology will be substantially lower than with dedicated systems once the initial switch has been made. The growing use of high tensile steel, aluminium and plastic parts has already reduced the number of welds required. Further adwmces by the end of the decade may drastically alter production techniques. Diffusion of new flexible automation has been very rapid since the late 1970s: and by the mid-1980s, almost all the major production facilities in Europe, Japan and the US will have been

402

W ( ) R I D I)EVF I,()t'MI{N I

substantially retooled hi this way. A second wave of plant r e t o o l m g is now occurring m the c o m p o nents industry. T h e m a j o r e o n s e q u e n c c of thcsc advances in production technology has bccn to reduce the e c o n o m i e s of scale it] p r o d u c t i o n , t h e r e b y decreasing the pressure for a m i n i m u m o u t p u t of 2 million units. A full rangc of cars can ilOW be prodtlced ill OllC o1" two phltlts at a much lower total volume at a c o m p e t i t i v e cost with much hu-ger producers. This has bccn the biggcst factor that chLlllges the fol-tutles of smaller and rhodium sized producers. Smaller producers, such as Saab and A u s l i n Rover, arc pioneering the d e v e l o p m e n t of smaller scale p r o d u c t i o n to(Hmg that will not be such a high priority lor htrgcr p r o d u c e r s like (,; M, Ford and Volkswagen. T h e s e new flexible p r o d u c t i o n t e c h n i q u e s arc, t h e r c f o r c , o p e n i n g tip a l]luc]l wider choice e l production possihilities at quitc dilfcrent prochlction volutllCS in COlIIl+ast [0 the c o n x e r g e n c e in tcchniques and scale economics with dcdicatL'd production automation. Moreovcr, we ha',e only bcgun to see the changes in prtn_luetion techn o l o g y morc are m prospect. [~conotnics of scale are also chan~in~ in the dcsion acti\itx, throu,,h the adveiit of C A I ) , ( ' A E and ( ' A M . Thus. the p r o d u c t i o n tooling is also not m a t u r e , and econonfics of scale will not be such an i m p o r t a n t driving force as m lhe past.

8.

TIIE FUTURE OF TIIK INI)USTRY TIlE ()ECD COUNTRIIES

IN

( ) u t + a t l a l y s i s o f the future ol this industry ,,va+ ¢ o m p l c t c d by cx:unining the composititm of delllat]d and trade m auh)mobiJes. It is llllC that the mllJcipatcd growth o1 the m a r k e t m all thc m a i o r ( ) t E e D eounh+ies will be much lower that1 in the past and that a high p r o p o r t i o n arc for r e p l a c e t n c n l purposes: but thc Ctu]IpositiOll el this dcl]]al]d is IlOt at all I]lLlttlrC, alld paltCll/S J,)[ dclndl]d arc not converging b e t w e e n eotlt]trics. Figure 1 shows thc p a t t e r n of d e m a n d m the main m:.ukcts for 1973 and 1982 and reveals that+ apart front the big shift to smaller cals in the t.JS, tl]e p a t t e r n of d e t n a n d was rehlti',el,, stable in tilL" o t h e r countries. M o r e o v e r , Figure I also shows tl]at the p a t t e r n s of d e m a n d in each o l these m a r k e t s arc and have r e m a i n e d quite diftcrcnt lrom each o t h e r . National prodtleel+s wit0 all rely hea\,'ilv on their domestic m a r k e t for a lar,,c ])roportioll of their sales h;l\C Ct)llCClltlaled till producing the types of ear'-, most in tie111illld ill t h c h h o m e n]arkcts and have often found great difficultics in d e v e l o p i n g the skills and expcrlisc to compete in different market segments. Fiat and R e m m l t , for instance, with expertise in small

cars, have n e v e r d e v e l o p e d a successful prcsencc m m a r k e t s e g m e n t s for larger cars. Producers m o v i n g h) completely new m a r k e t s e g m e n t s typically require three product g e n e r a t i o n s to catch up with tile leaders m that segment. This fILlS heel1 [IUC Of the J a p a n e s e p r o d u c e r s i]1ovh]g up-market into larger ears and the American p r o d u c e r s moving down to smaller ears. (J¢llelal Motors c o n c e d e s that it will be the hde IUS()s before their phmts can produce their o,an small car competitively in the US, a d e c a d e after the 1979 oil shock. In addition to the lack of c o n v e r g e n c e in p a t t e r n s of d e m a n d b e t w c e n coui]tries, we ol~sem-ve a c o n s i d e r a b l e ehanoe m the \~a~ the m]larket is scgmllel]ted. 111 the past, t h e r e was a simple correlation b e t ~ e e n htrgc size and luxur,+ and small size and utilit\'., Now the s e g m e n t a t i o n looks more like a matrix with luxury, sports, lamilv and utility cars in each size class. We arc. t h e r e f o r e , witnessing a divcrgencc in the t~,pes of cars I'~eing d e n l a n d e d rather thau a c(mvcrgcnec on a few basic and increasingly simihtr "world car" designs. The majority of ~ o r l d trade in automobiles in the post x~r~ ]" period can bc e h a r a c t e r i z ¢ d as intcr-industrv trade. Some 77% of all ears traded in It)N() wcrc b e t w e e n the m a j o r c a r q ) r o d u e i n g nations of the ( ) [ X ' D , and n+o',t of these b e t w e e n the produch~g nations thcmsclvcs. As a rcstlil e l the o b s e r v e d specialization e l each p r o d u c e r on thc type of car most in d e m a n d in thc domestic m a r k e t , the p a t t e r n of trade bctwecll the l)J oduchie nations has been m c o m p l e m e n t a r y products. i.c.. the ( ; c r m a n s exporting large cars ~uld the French and Italians exporting stnall cars. This i', shown by the filet that import p e n e t r a t i o n is It)west ill each eotlntrv_ in those inarkcl s e e n / e l l s m which the domestic p r o d u c e r specializes. The a b o v e analysis rcvc:tls that, m COIllI;ISl tO the c o n v e n t i o n a l xicx+ outlincd first, all the IllH]Of e l e m e n t s e l c o m p c t i t i v e n e s s in this i n d u n t r \ arc in a state of great flux and change: tile markets, lhc prodtlet, lhe plOdtlctiol] eqUipl]lCm and lhc way tile h~duslrv ix matlaged are all no longer 111a[tlrc. M o r e o v e r . this lack oI lllLIttllity plCScIlls gl-eal o p p o r t u n i t i e s for specialist alJd IllCditl111+ size prodtLccrs that did not previousl> exist. VVe foresee I]O stable glol+al oligopoly e m e r g i n g in lhe l]eXl decHdc el + two. In this period of delnaturit 3 over thc next t,ao decades, wc conclude that most of the exi-,tmg auton]obilc l'm)ducems will p r o b a b l y survive in SOlllC fOllll. \~+"¢ t i e n()l, el]\isagc illill}'v llCW cI]tlitlllS, howe\reF, hee;.ltlSC the ;tCCtll]ltlJLl{i+,)lle l experience and skills in c o m b i n i n g complex sxstems into a h a t m t m i o u s package is difficult to acquire, the initial imp+esttncnt required is high

THE AUTOMOBILE INDUSTRY

I00

t973

0

2

4

i

i

i

4(13

Market size (million units) 6 8 I0 12 14 16 18 20 22 i

I

I

I

I

I

[

I

I

-

9080706050-

~

403020-

Very Large

~----~ Large

I0-

O-

~

g

o~

i ]'+ht

a~

1982

Medium

IO0

. . . .

9O 80 70 60 50 4O 30 20

II

I0 0

+

++ ++

++ +++

Figure 1. The .structure qf automobile demand in the automobile producin~ nations. Note: These segnlents ha,,e been eonstructcd by considering vehicle weight, wheelbase, engine size and t-elative prices m the domestic market. Source: D. T. Jones. SPRU databank o[" the Autontobih" Industry (1983).

and the risk of failure is great. The only likely route would be through a supplier of radical new component technology that moves into final assembly when its new technology redefines the product or production system to such an extent that it provides a competitive opening. The move from systems supplier to assembler is difficult. Moreover, we do not foresee the kind of radical one-step technological development, such as an electric car competitive with existing products, being manufactured in substantial volume in the next decade+ Although we envisage most of the existing medium-size producers surviving this decade,

their surviwfl will be precarious and testing: and they are still under various constraints. In particular, medium-sized producers are not in a position to finance all the activities a larger producer can. A medium-size producer, therefore, must identify both its particular strengths and the capabilities that must be retained to remain an independent automobile producer. The answer to these constraints lies in a mixture of buying in major components, joint development and procurement of others, cooperative design with another producer and a substantial reliance on the acquisition of technical knowLedge from others. In other words, one has to

404

W()RI.I) I)EVEI~()t'MENI

trade in one's weak areas. To do so successfully depends on retaining a strong engineering capability to make the correct technical choices ill purchasing decisions, to Colnhine skillfully the different inputs and to be able to absorb tile technology acquired froln others. The key to survival, thercfore, is flexible inanagement with good internal COlnlnunications, eonlbmcd with a strong technical base. A silnilar p'tttern of cooperation is also elnerging between the hirger producers, with a host of joint ventures in engines, transmissions and new lnodels in recent years, as well as an increasing cross tr;ide between nlanufacturers in major COlllpollents, inchldillg engines and eveil Iiccnsc production ventures. In addition, one is beginning to see wider forms of cooperation inwHving whole areas of strengths and weaknesses, such as lhe provision of inanufacturing know-how in return for market access allOt/or a broadened distribution system. An example is the GM Toyota ioint venture in Prceinoni, ('alifornia. Toyota wants to gain experience in lllillltlfacttlring under American conditions and broader access to tile US market; (}M wants a delllOnstralion plant for liCW mailufacturiilg teehniques alld staffing levels and new products in slnall lnarkcl SCglllelltS (ill {is tilt" eOlllp{llly dcvelops llt_'w small ear designs for tile hite 1981)s. Thcsc patterns of cooperation in tile short rtlll in lilt" context of competition o~er the lOliger run will be a major new characteristic of this industry in the next decade or two. ('ooperiition in some iireas in the short telIll, ill fact, set'ills tO lllak',_' COlltinuing colnpetition alnong a hlrger nunlber (if final aSSelnblcrs possible in the longer tcrnl. I)enlaturity is also fundanlentally ehangillg tile rchltilulship between tile e~lr assenlbler and tilt" C()lllponent supt~lier. First, car asseillblers are tending to specialize m aSSelnblv, only alld arc withdra~ing froln conlponent aetivities. Second, the design aild developnlent function, and in illallV eases also tile research ~liltt develolmlent function, is involving the coillponent produeers It) a much greater extent. More (if these activities are now being perforined by colnl~onent firlns lind lonoere term rehithmships, along Japanese lines, are essential for this to develop. This involvenlenl in R & D and design alld developlllt'llt is particularly relevant for systenl conlponents where certiiin hirger component suppliers design wilole subsystems that arc incorporated into tile increasingly moduhirized dcsigll ¢lf the finished vehicle. The trend towards systelns etHllpOllell[ suppliers will increase the possibility (if some component firms developing an independent and appropriable technological position. This is lead-

ing to the situation where conlpanies like Bosch and Lucas establish plants in all the nlain produetion I(/eations Oil the basis of their proprietary technology. The trend towards recentralization of tilt' production of nlajor conlponerits around each production location is inevitable if the 'just-intime' system is to be fully deveh/ped on lilt" Japanese inodel. Examples of this are the [Juiek ('it)' experinlenl ill the US alld tile new ,hipanesc plants being built there. At tile SanlC tilnc, wc have observed that econonlies of scale ot production are also coming down ii1 colnponcnt production with new flcxiblc production tooling and phmt organization. This also facilitates the replication (if corllponent production fiieilities in each of the major production locations. These challgeS ill ecorlOlllies ol scale are nOW relev{lll{ 1o tile COlllpOllClltS illdustlv LlS the seColld wave ot ilew investment and phult organization sv,'ecps through tile COlllponelit illdustrv.

9. T I l E F U T U R E O F T I l E I N D U S T R Y IN TIlE DEVELOPING COUNTRIES What, in tile light of these devehlptncnts+ is the future for tile production of automobile colnponcnts in tile developing countries? A u t o m o b i l e conaponents can be divided into three types in tcrlns of theil- suitability for production in the developing countries. Maior nlcchallit2aJ COIllpOllelltS, lie(ably engines and transllliSSiOiis, icquire heavy initial investnlents and are highly iltltOmated with low ainounts of direct labor. "Finislf parts, such as exterior body stanlpiilgS, seats and dashboard inoldings, are bulky to ship alld llltlSt fit very precisely. In addition, ii is critical thai lheir finish qualii), itlltl co]our preeisely il/oet specifications. Minor nlechanieal conlponcnts, inehlding starters, radiators, springs and wiring harilesses, recjtlil'12 nltlch silnpler illantlfaCttlrillg techniques. Major nlechanical conlp()llelltS require technically skilled labor to fUll the C(/lllplex phult equipment. In addition, the size of the investmellt lind tilt" inlportancc of ullinterrupted suppl,,+ nlakc political and econonlic stability, often termed "country risk," an iniportant factor in location. Thus, only a few sites ill low-wage arcas are suitable, hi Korea, tile nlost favorable of these illOilS, {1 cost saving of abollt 2()~{, could he achieved on engines (as of 1980) by Anlericanbascd producers after shipping and addilionat inventory costs are tilkcn into account. This is a significant saving, to be sure, although not nearly so hu-ge as one inight have expected, t lowever, it is not apparent that any htw-wage site can now

THE AUTOMOBILE INDUSTRY produce major mechanicals more cheaply than Japan. 'Finish' parts are expensive to ship because of their bulk, and producing them at remote locations creates quality control problems. Indeed, the remote sourcing of these parts runs against the strong desire of most auto makers to centralize production at the point of final manufacture. Minor mechanicals are the components best suited to low-wage sourcing. As of 1980, starter motors could be manufactured in Korea and delivered to Detroit for 35% less than they would cost to manufacture in Detroit. The saving on wiring harnesses made in Mexico was 25% (Mexico was the lowest-cost site for delivery to Detroit because of the relative bulk of harnesses and the greater shipping cost from Korea or Taiwan). However, developing countries" costs are currently not lower than Japanese costs except for a few items; and minor mechanicals are also the components most suited to automated manufacture as flexible manufacturing systems achieve the "seeing and feeling" capabilities needed for automated machining and assembly of parts. In sum (see Table 5), only a small adwmtage can be gained presently through sourcing in low-wage areas, and the number of components on which costs can be saved is likely to decline as O E C D factories are more highly automated and O E C D production systems are more tightly centralized. For the developing countries, the third and fourth transformation mean that the product cycle is not coming their way. In fact, the future for anyone plotting a low wage, high labor content strategy to gain world export markets is bleak. However, the fourth transformation does lower the economics of scale thresholds in

4(15

automobile and component production so that countries with domestic markets traditionally thought too small to support an automobile industry might have adequate scale in the future. Developing countries seeking a future in automobile manufacture must try to avoid three traps. The first is buying into obsolete patterns of production social organization that leave the industry well behind Japanese organizational efficiency with little hope of catching up. The second is buying obsolete production technology (i.e. high labor content, dedicated automation) in an effort to create jobs in a newly developing automobile industry. Instead, the objective should be to maximize the amount of wealth produced per worker using the state-of-the-art social organization and production technology and to crate jobs by expanding volume. Because both organizational techniques and production technologies are moving ahead so rapidly at this point, to do anything else means to fall further behind rather than to catch up. At present, the notion of using "appropriate technology" is dangerous and unlikely to result in an exportcompetitive industry. The third trap is to get stuck with a product that can only be sold at bargain prices (often, in fact, at a loss) against essentially second-hand cars in the O E C D markets. The dilemma is to find a product suited to local needs that also has export potential. This suggests products that are able to find a niche in the increasingly differentiated markets of the O E C D countries rather than 'third world mobiles" frequently advocated by those who place less stress on the importance of cross-national learning in the development of this industry. Brazil's development of unique expertise in alcohol-powered vehicles has so far not shown any export potential. However, as other

Table 5. Cost savings in US auto mam~fiu'ture ]?om remote sourcing ~f auto compom'ms in low-wage countries (198(I)*

Component Engine Transmission Body stampings (set) Starter motor Radiator Coil spring Wiring harness

Labor cost saving

Additional shipping cost

Net saving

Net saving/ value added (%)

Cheapest country

$89.00 55.[)(l 911.00

$44.00 21.00 64.00

$45.00 34.00 26.0(t

2(1 29 12

Korea Korea Mexico

3.03 0.97 1.61 1.00

1.65 1.14 1.41 0.59

1.38 - . 17 0.20 0.41

35 -6 25

Korea Mexico Mexico Mexico

Source: Derived from published and unpublished data including Rath and Strong, Harbour and Associates, US Department of Transportation Systems Center. *Compiled by W. Johnston, see W. Johnston (19821.

411(~

W()RI.I)

I)I{VIr'I_()I'IMI{N

developing countries face the balance of paymenls constraint of importing additional oil to sustain the growth of the domestic car flout, this could open new opportunities for Brazilian exports of cars, A v o i d i n g these traps will IllCall ilot li-ym 7 Io go it aloilc ill a t l t o m o b i l e iI];.lllilfaCltll-O because such all approach will i)iovidt-• veiv limited learning. hlsl¢ad d¢vcloping countries should lllakc intelligent use of the multinationals to get the illaXillltinl lr;.insft-'r of social alld technical kilo\vIcd<,c This tactic COlllrasts w i i h lhc usual foe!is on required levels of local content which affect ~,uri:a¢c synll:~tOlllS and nol tiildcr]yhlg industrial fundanlcnla]s. ( } c l t m g the multhlationals to provide their knowledge will obviously require bolh a hire aild sonic intelligcnl shopping. In IllOSl C~.lSCS, the lure is access to a growing donlcMic lllal-kct with vohlnlc potClltial alld SOlllt-" rcasonablo options for repair!at!tin of profits. iritolligeni shopping ,,,+'ill invol~c cart_'hil sit!dr of the Sllengths and ~vcakncssu's of each of the nlultinafiOllals. A t the 111o111¢11t this nlcans lhc [:~uropcans (including |:ord and t I M in [-]ur,,)pc) in product Icchnology, the .lal)ailmSC in r~rodtlc !toll organizalioil and a hosl of compallit-'s across the OF, C D in p r o d u c t i o n technology. Therefore. bilateral or lrilatcral .joint vl2111tlrcs in developing COUlllri,2s m i g h t be all inlorosting al'lpi-oach. The ('hincsc have received excellent product tcchllOtog) fronl Volkswagen ill the Santana. but will lhcy learn abOtll: Japallc'sc p r o d u c t i o i l oigalliZat!on if Nissall (vcho also ])roducc's lhc ~alltaila tlilCtel-license) dose not opcralc the plant'? Ford of Mexico was recently forc0d to switch plans for a plailt in Portugal 1o Mexico 1o illect ils trade balancing r e q u i r c m c n l . The plant will be a copy 1o iho latest Ja|lanost-, plailt (the Mazda Fllant al l l o f u ) , will be rtill hy Mazda and will builct ii

I

Mazda-based design for export allllOM cntirolv to the US. l \ r o u i l d this "island of best practice" the Mexicans will also attract a series of best practice SUl)plier plants and gai!l first hand cxpcricnct-" that can be diffused to other t_'llgineering ith.tnts. The Iongcr ft.'l-ill OtliCOlllC of all lhc tlcTlds outlint-'d abort_" ix for final assenlblv to bc located m the l11;lrkt_'t (if sale (in hoih the dcw_'lopcd and the developing COlliitrics), COllccntratc'd production al fllal point and lhc 7iovvih o[ i n t c r n a l i o i m l a u t o m o b i l e Iradc i!1 finished units largely coinp r i s m - ill;li-giilal p i o d t l d lines. This nlt_'ans lhal visions of massive> finished tlilit exports, cvcn fronl developing t_'OUiltFics who rapidly Icain bcsi practice from lhc world's m u l i m a l i o n a l ~ , art_" ilOl realistic. JaFKIII is still the lowest cost Iocalion for ;.iulonlobilc p r o d u c l i o n . Big illC'it';isc:s in cat)acil } planned by IJS and .lar~ant_'s¢ producers in ,South Korea ;!lid Taiwan arc only occtirrilig 1o 7c'1 arOtllltl the I.JS ,l;l[~;illC, st_, vohliltarv c x p o i l rcMl-ahlt il~lCc'lllClll and n o t , ~.15 COllllnOllh Sl.lpposed, for producFcyclc iC~lSOllS, hn[)ort curbs can easily he c×tolldcd to otht-'r COUlltrics, alld Aillc'ricall alld iZuropu'an pl-odu¢crs Ill;iv \~cll have cauEht tip wilh the ,lapalic'su' by ihc t-'all'+ 1990s. New t/tltlCts lllav, theru'forc, ila',c to I+c_' fiitllld foi + this capacity, either clsmwhcrc in the T h i r d ~'oi+ld or m expanded domestic markcls. ~Olllt: export growth #;.lil bc expected, I+articu larly from countries with prospcds for very rapid lllai-kct growth who can charge the nlultinalionals :.idlnission ill the form of export ~tl;_ll;llllC't_'S, t l o w c v c r , the sheer size it[ tilt_' alltOlilobilc hldilslry, prcsclll mid p!-oicclcd, argtics IOF ;i ~rt-'al m a j o r i t y of p i o d u c l i o t / !lear thc point o l sale. (liven tilt-" earlier demand lorccasls (in Table 4), tilt_" developing tout/tries do have a bright [ulurc ahead of them. but ilol ihc ltlll.lrm they
N( )1 t:S 1. Scc Ahshulcr ct a/. (19<<';4). For ;i nlorc' limi!cd. bu! ~inlilar, approach, st'c ]]avt_'s and /\l~cinalhv (19SII). Abcrnaihv ut a/. ( 19,S1) and Joilc,, (1t)$3)

2. Scc ()1"('I) (1t)84) for recent lolcca,4s ol o~crall vOltll/lC levels. 3.

/\bcrnalhy (97,g).

4

I~hm,kcir (ltkSli).

5.

/hid.

6. The product c~clc ,.va,, oliginally dc,.cMl~cd b\ Vernon (1966 and 197]). 7. l h c apl)roach lollows lhlil ~11 iNl_'lnOli and \,Vinlcl(l<),g2), l)osi (l

Shim] (1~J62). /\bcrilalh~, (It)7,~).

I 1. ,%cry;inSchrcibcr (Ig69). 12. "lhu' bcsl rclc'l'cnc'cs lhal ~,unullarJ/c lhc .lapancnc sv:,,it.'lll, arc: ,"4,l:llOlll'~ClEcr(IC)~2), ('lark (l*J7
/\hcin;iihv (I~JT~) clc',ciibcs this tlilcinnla dcail~.

IHE

AUT()MOBILE I N D U S I R Y

407

REFERENCES Abernalhy, W. J.., The t'rodlwm,ilv Dilemma (Baltimore: Johns Hopkins University Prcss. 1978). Abernathy, W. ,i., K. (7. Clark and A. M. Kantrow, 'The new industrial competition,' thlrvard Bt~'ine~s Review (Septembcr-Octobcr 1981). Altshuler, A., M. Anderson, I). Jones, D. Rous and .I. Womack, The Fut,re o f the Autonlohih,: The R~7~ort o,I MIT'v International Autonlohih" t'rol~ramnle (Cambridgc: MIT Press, 1984). Bhaskar, K.. 771e Future e)/' the World ,4,tonl¢~hilc hldltslrv (Lonclon: Kogall Page, 198111. Chn-k, R., Hw .hq~anese Company (New I larch: Yale University Press, 1979). l)odwell and ('ompany, lmhlslrial Groutmlg,~ bl .hll?el#l (Tokyo: Dodwell Marketing Consultants, 198U). Dosi, G., 'Technological paradigms and technological trajectorics: A suggested interpretation of thc alternatives and direction of technical change." Re.watch Policy (Junc 1982). Dosi, G., Technical Changes and lmllLslrial TransJbrnlalion (London: Macmilhm, 1984). Itaycs, R. tl. and W..I. Abernathy. 'Managing our way to industrial declinc,' Ifarvard Bu.si;le~'s Rm'i~,w (`luly-August, 1980). ttorton, E. ,i. and W. D. Compton. 'Technical trcnds m iiutomobilcs,' Sciem'e, Vol. 225 (10 August 1984). `iohnston, W., "Issues in multinational sourcing of production,' Paper presented at the Second Intcrnatiomil Forum on the Future of the Automobile, Ihlkone, Japan (1982). Jones, D. T., Maturi O' and ('risi.~ in the European Car hMustrv (Brighton, UK: SERC, 1981).

Jones, 1). T., 'Technology and thc U.K. automobilc industry," Llovd.s' B~mk Review (April 1983). Klein, B., lJwlanlic Ec+monlic.~' (Cambridgc: [larvard University Press, 1977). Magaziner, 1. and M. tfout, Japanese hldllstrial Polio' (London: Policy Studies lnstitutc, 1980). Nclscul, R. and S. Winlcr, All Evohllionarv Ttle+nv ~{I t(cmlonlic Change (Cambridgc and london: lhuyard Llniversity Prcss, 1982). OE('D, Long-lernt lYrv~ecliv~,~' ¢~1 the' World Automobile lndllslrv (Paris: OECD. 1984L Schonbcrgcr, R. J., Jal)am'~e Mam(li,'Hiring 7i'ch*liqm',~ (New York: Frcc Press, Macmillan, 1982). Servan-Schreiber, J.-`l. T/ic American ('halh'llge (1 larmondsworth: Penguin Books, 1969). Seiffert, U. and P. Walzer, 771e l~'ulure qlAutoolot~ih' Tecltnology (London: Francis Pinlcr, 19841. SIoan, A. P., My Years leith (;~'lteral ,'flolor~ (New York: Anchor Books, 1972). Vernon, R., 'International trade and intc'rnation;fl investment in thc product cycle," ()uarlerlv .lour#lal oJ' Ecollontic,~, Vol. S(} (May 19661. Vernon, R., Sovereigmv al Bay (New York: Basic Books, 1974). Walker, D.. l)e~ign l'roces,ws emd lb'¢*dm'Ls: ('arv (Milton Kcyncs: Open University, 1983). Whilc, M. arid M. Trcw~r, U, uh'r Japanese Mamlgemerit." 771e Exl~cri~,ncc ~t BritMI Workers (Ltnldon: Heinemann, 1983).