Unlike with Korea or Japan, China’s auto industry is not a home-grown enterprise but rather relies on foreign direct investment (Tang, 2009). Volkswagen, GM, Japanese and Korean companies have all entered the Chinese market through JVs with local concerns (Ibid). The trend towards consolidation is driven by the increasing dominance of the world’s largest automakers. Smaller national automakers are becoming obsolete, and some nations have seen their automobile production decline to almost nothing (Finland, Serbia and Egypt for example, OICA, 2011).
Foreign automakers typically make use of joint ventures for a couple of main reasons. As the Chinese example illustrates, market access is a key factor. Many nations have highly protected auto industries or auto markets that make it difficult to set up greenfield subsidiaries. As a result, joint ventures with local firms are necessary to get around foreign ownership laws. In addition, joint ventures give the company better access to local parts suppliers, better access to local labor and helps them to overcome political and cultural barriers. The high risks inherent in the auto industry with its high fixed costs necessitate undertaking whatever strategy will reduce the risk. Automakers typically go greenfield when expanding to safe countries, for example Canada, but in the developing world most automakers seek the security of having a local partner.
Strategy and Structure
Automakers have covered the globe using two main strategies. They produce primarily in a handful of countries — usually major auto markets — and do so either on the basis of wholly owned subsidiaries or joint ventures. The latter decision depends on the political environment of the country in question. This model allows automakers to reduce expenses in two ways. The first that they can avoid many of the duties and other trade barriers that are levied on automobiles by producing in the major auto consuming nations. According to OICA (2011), the top auto-producing nations are China, Japan, the U.S., Germany, Korea, Brazil, India…the major auto consuming nations. This implies that the size of the local market is of critical importance in determining where automakers will locate their production facilities.
That the type of market entry for these production markets varies indicates that the type of market entry necessary to enter is not a determining factor in the market entry decision, implying that trade barriers probably play a bigger role. Global automakers also undertake the production and exportation strategy. The way that this is conducted appears to be moving from a single production source model to more of a hub-and-spoke model that emphasizes regional production. For most of the 20th century, automakers produced in their local markets and competed in global markets largely based on exportation. Today’s model still relies on centralized production and exportation, but the centralization aspect has been decentralized to regional centers of production rather than global centers of production. A nation such as Thailand has therefore become a production center for Southeast Asia, Turkey for the Middle East, Poland and Russia for Eastern Europe, India for South Asia and Brazil for South America. These regional production centers not only allow automakers to operate in the major markets, but to ship to the smaller nearby markets at a lower cost than would be possible with centralized production.
The next step in the strategy appears to be shifting production to low cost production centers and then exporting back to home nations. Should there be a shift in trade policy large enough to facilitate this, automakers would undoubtedly prefer to produce in low cost centers and then repatriate those vehicles to the home market. At present, the importance of auto industry jobs reduces the odds of gaining political acquiescence for such a strategy.
Key Success Factors
Automobile buyers are price sensitive, but firms can address this by lowering their own cost of production. They do this in part by lowering the barriers to entry with respect to key markets, usually by locating production in those markets. In addition, automakers can lower their cost of shipping by producing regionally rather than globally. This is a reasonable strategic response today because of the high volume of auto sales compared with decades past. Local production allows automakers to have better access to major markets, but it also allows in the long-run for automakers to shorten their supply chains. Suppliers are cultivated in the countries in which production is located, and the result of this is that the automakers have supplier arrangements around the world.
Another benefit of localized production that relates to the second key success factor is that the social environment is different in each country. With unique cultural traits, political/legal considerations and geographical/climatic conditions, the ability of auto companies to tailor their vehicles/lineups to each individual country is critical to appealing to the world’s large variety of consumers. Some models are produced around the world, but for the most part models are tailored to individual regions and countries. In addition, there are sometimes substantial differences in consumer preferences from one country to the next and localized production allows for better management of production levels for different products. If this function was centralized, it would be difficult to estimate global demand for a given product, and the errors could be financially catastrophic.
Another key success factor for automakers is cost containment. This encompasses a number of variables, including labor costs and production efficiency. America’s legacy automakers have very high fixed costs for labor and this has compelled them to move production to lower-wage countries. In addition, the use of production in multiple countries allows for more creative problem solving. Innovations in automaking today come not just from North America but Asia and Europe as well. For automakers, a presence in multiple countries around the world allows them to maintain competitiveness in production engineering by maintaining access to the industry’s best thinkers.
Most automakers today are highly internationalized. They are all dependent on their domestic markets for financial strength, and usually operate with a geographic organizational structure with centralized head office and R&D. Most automakers have geographically diversified production, however. Parts markets tend to follow production, so that a Ford car made in Asia may not have very much American content at all. That many overseas automakers are the result of joint ventures only further adds to the international influence in the auto industry. That said, the major players in the industry do tend to come from one of a half dozen countries in the world, lending the industry a strong influence from those nations, regardless of how many other countries may contribute to the inputs.
It is interesting that the level of internationalization of automaking has actually changed little in the past several decades. The industry is still fragmented internationally, with a handful of global players and a slate of national producers. More countries have become powers in auto production, and some of them have done so by encouraging foreign direct investment rather than by building their own industries, but there are still examples of the latter. Government involvement in the industry is generally high in either case, and there is no expectation that that will change any time soon, especially given that the U.S. government remains heavily involved in its auto industry.
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