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History of the automotive industry
The following article originally appeared in the GAPConnection, a quarterly publication of A.T. Kearney's Global Automotive Practice.
The history of the automotive industry looks a lot neater than it was. Indeed, it has been a tumultuous ride in which the growth of economic interdependency and global competition has had two trigger points. First, the mid-1960s, certain international agreements laid the foundation for an era of industry internationalization and changed the nature of competition from national to international. The GATT agreements progressively opened trade and are key to the emergence of Japan. The EEC allowed companies to begin to operate as Pan-European, not just German, British, or French. The landmark U.S./Canada auto pact was a model for internationalization.
The second trigger point was in the late 1980s. It laid the foundation for true global competition. The disintegration of the Soviet bloc and the liberalization of centrally controlled economies from Central Europe to Latin America to Asia coupled with a continuing dismantling of trade barriers through bi-lateral and multi-lateral agreements has totally changed the ball game.
In this paper, the author has discussed how today's industry is reacting to global opportunities and how the future industry is likely to react.
Emerging Markets
Today, the industrialized nations have only 15 percent of the world population. The developing countries with very large populations are industrializing and millions of people are coming to the city to join the global economy. By 2000, the combined urban populations of eight countries-China, South Korea, Indonesia, Turkey, Mexico, Argentina, India and Brazil-will exceed one billion people and grow GDP at rates well above average through 2005 and beyond. The various emerging countries can all be placed somewhere on the continuum of automotive industry development stages. Vietnam, which is just now opening to complete knock-down (CKD) assembly investments is leaving stage one and moving to stage two. In the early stages, there is demand for a high percentage of trucks. Then as the domestic industry moves beyond import substitution policies requiring high local content to export promotion and lower tariff barriers; demand for small cars kicks in from the emerging middle class.
What is the result when more and more households reach the car buying threshold income level and the price level itself is failing? Explosive market growth. With huge populations striving to become middle class and continued trade liberalization and productivity improvement in the domestic assembly industry-growth is sustainable.
Different criteria for manufacturers and component makers
The criteria used when considering an investment in an emerging market country is ranked by importance. The criteria reveal substantial differences between passenger car/light truck manufacturers and component makers. Component makers consider the export market potential to be very important, indeed more important than the domestic market.
Light duty vehicle builders rank export market issues much lower. They base investment attractiveness on the potential of the domestic market, the hope for a substantial amount of trade protection from imports, and the availability of a good local partner. In general, vehicle builders can dabble in developing countries because their up-front investment in starting a CKD operation is relatively low. Furthermore, the history of doing business in developing countries indicates that vehicle manufacturers need to get in early or they won't get in at all.
Japanese companies, in particular, seem very adept at exploiting such small market opportunities.
What Do Small Markets Have to Offer?
Small markets have a low-investment, high-reward potential for vehicle manufacturers. This explains why the opening of Vietnam has attracted so much interest. Why do global players fight for positions in a market that in the near-term is at best 40,000 vehicles per year? There are more than 70 million people in Vietnam, so vehicle manufacturers can make profits importing parts kits and operating effectively at low-scale while waiting for the emergence of a Vietnamese middle class.
By contrast, parts builders have to be more strategic and not as opportunistic in selecting a country for investment. Southeast Asia is a good example. Generally, few countries today have a big enough market to justify the investment in a world-class plant. As component suppliers look at the volume necessary to get a return on investment, they must look at exporting immediately. Thus, in southeast Asia, for example, the component supplier is more likely to invest if inter-regional trade barriers drop. Finally, the component supplier must find a local partner who can be trained to run a quality operation and is trustworthy (component suppliers must entrust much of their relevant know-how with the local partner). Technology transfer issues concern western component builders more than Japanese component makers.
When asked where in NAFTA they would invest, the U.S. is first and Mexico is second. Outside North America, China looks to be the most attractive investment opportunity to North American auto executives over the long-term (i.e., 2005). Brazil is the only other non-mature market country that even makes the list.
Criteria For Supplier Selection
Suppliers will be selecting customers strategically, not opportunistically. What will they look for in a vehicle manufacturer now that supply relationships are becoming long-term partnerships? A quality player, with global presence, and a good business partner (one that requires limited investment in managing the relationship).
In this new environment, A.T.Kearney's research indicates that winning suppliers have followed strategies or have superior capabilities in specific areas of the business. Recently a number of suppliers have achieved growth by consolidating their product/market segments via acquisitions to become one of the big remaining players.
The reality is that under the new "extended enterprise" model of competition, most suppliers can achieve world-class manufacturing and supply chain scale operating in only one of the three mega-regions. After all, each region is a market of 10-to-20 million vehicles per year. As roles and responsibilities have changed, and continue to change, technology has become a commodity that is increasingly controlled and transferred by suppliers globally. The strategic alliances among suppliers that began in the 1970s and have now become commonplace usually focus on technology transfer or risk sharing in new technology or new product ventures. Basically, suppliers face a strategic decision in the new structure of the industry. Do they compete as tier one systems integrators/modular suppliers, in which case they must be global players? Or do they focus on being tier two suppliers, in which case optimizing operations within one of the three mega-regions might be a defensible and profitable position?