Globalization: in Auto Sector

INTERNATIONAL BUSINESS STRATEGY
GLOBALIZATION
In Auto sector
Aditi Sheel Roll No 2
Automotive Industry has been one of the key driving sectors of most economies. Since it is
closely tied to other sectors, it becomes all the more significant in supporting the economy. For
example, they are the prime buyers in basic industries such as iron and steel etc. Further, it also
requires complex and multidisciplinary technology. There has been intense competition in the
market because of which all auto companies have been investing in R&D very aggressively. It is
also one of the fastest developing sectors in the global economy.
Globalization and the auto sector-
Since 1800s when most of the automobile companies were in Europe, to 1900s with US mass
production, to now when globalization is the key for all manufacturing activities of the auto
sector, this sector has gone through a lot of changes.
In the early 1980s, the labour unions in the US argued that underpaid, exploited Japanese
workers were taking away the jobs of American workers. While the numbers of non-union
automotive assembly workers in the United States has climbed, employment at the Big 3-
General Motors, Ford and Chrysler and at many of their suppliers has been in a permanent
downward spiral. This made the Big 3 to shift work from assembly plants to competitors based
overseas or to North American transplant assembly plants and to Mexico and the Asia Pacific.
The crucial role of FDI notwithstanding, the automobile industry of new competitors developed
under strikingly different conditions. In China, which opened up to FDI in the process of market-
related reforms starting in the late 1970s, automobile production continues to be dominated by
national companies. Korea set up an indigenous automobile industry (Daewoo/Ssangyong and
Hyundai/Kia) which successfully penetrated world markets. In contrast to Mexico and Spain,
Korea's exports of automobiles were not focused on neighbouring high-income countries, but
regionally diversified. As a consequence, traditional producers were affected by competitive
pressure from Korea both in their home markets and in third markets, including in the developing
world.
On the other hand, the development of an indigenous automobile industry rendered it more
difficult for Korea to become integrated into global sourcing networks of automobile
multinationals. Apart from assembling automobiles, locations such as Mexico, Spain and Central
European countries increasingly supplied traditional producer countries with automotive parts
and components. Low-income countries have become relevant suppliers of automotive inputs for
the automobile industries of Germany, Japan and the United States. According to detailed
country studies, trade in automotive inputs with low-income countries expanded particularly on
the regional level.
With cost the only meaningful determinant of survival, the entire auto industry is on a relentless
quest to lower costs. Chinese auto assemblers and component producers earn hourly wages
below $1.00 for skilled workers. India, with its highly educated, low paid workforce has
belatedly attracted automotive investment. In the short term, India might even be a more
attractive country because it offers superior quality and world-class research and development
and engineering, India is attracting investments by auto and auto parts makers that take
advantage of the technical expertise in a nation where skilled workers speak English.
Globalization of the auto industry forces companies not just to invest abroad to develop new
markets for their products, but more importantly to transfer more work offshore. Automotive
companies have learned first through outsourcing that they did not need to and could not control
most component technology. With the progress in technology that has significantly improved
logistics and supply lines, it does not matter where almost anything is made, as long as it is cost
competitive.
Some of the features of the industry are-
- Highly labor and capital intensive

- Majority of costs for producing - Labor - Materials – Advertising
- Oligopoly industry
- Significant contribution to national production and development, employment and level
of technology
Main trends
The boom in vehicle production in 1990s and 2000s

As mentioned above as well, from a geographic point of view, the world automotive industry is
in the midst of a profound transition. Since the mid-1980s, it has, like many other industries,
been shifting from a series of discrete national industries to a more integrated global industry.
Global integration embeds firms in larger regional and global-scale systems of production,
consumption, innovation, sourcing and control. These global ties have been accompanied by
strong regional structures at the operational level. Market differences sometimes require
automakers to alter the design of their vehicles to fit the characteristics of specific markets (e.g.,
right vs. left hand drive, more rugged suspension and larger fuel tanks for developing countries,
pick-up trucks for Thailand and Australia, etc.). While many vehicles are designed with global
markets in mind, an increasing number are developed with inputs from affiliated regional design
centres, where designers and engineers help to tailor vehicles to national and regional markets.
Regional integration of production

On the production side, the dominant trend is towards regional integration, a pattern that has
been intensifying since the mid-1980s. Automakers and large suppliers of vehicle parts are
deeply engaged in multiple regional production systems. In North and South America, Europe,
Southern Africa and Asia, regional parts production tends to feed final assembly plants that
produce finished vehicles for regional markets.
Several factors contribute to the importance of regional production in the automotive industry.
The high cost of automotive products, especially passenger vehicles, can provoke political
backlash among the general population if imported vehicles account for too large a share of
vehicles sold and when local producers are threatened by imports. More importantly, powerful
local lead firms and industry associations, large-scale employment and relatively high rates of
powerful unions increase the political influence of the automotive industry in many countries.
This explains why automakers from Japan, Germany and Republic of Korea with plants in North
America have not concentrated their production in Mexico and Canada, even though these
countries have lower operating costs and preferential market access to the USA because of the
North American Free Trade Agreement (NAFTA), enacted in 1994.
There are other reasons, more technical and economic in nature, to keep production close to final
markets. First, motor vehicles and many of their main parts, such as seats, engines, transmissions
and body panels, are large, heavy and sometimes fragile, which increase transportation costs.
Second, the industry-wide implementations of ‘lean’ production techniques and increasing
product and module variety since the mid-1980s have kept parts production close to final
assembly. Just-in-Time (JIT) parts deliveries that keep working inventories low and reveal
defects quickly are an important element of lean production.
National and local elements
Despite intensifying regional integration, the automotive industry retains several national and
local elements. Consumer tastes and purchasing power, driving conditions, labour markets
regulations, standard requirements and public policy (incentives and taxation) can vary widely
by country (and even within countries). Consumers in high-income countries are more
demanding and require specific features, even for small cars.
Consumer preferences also reflect the characteristics of particular societies and are the result of
path dependence.
Globalization and Supply Chain
As the automotive industry shifts from a traditional local business model to a global one, OEMs
and suppliers are among those experiencing the most disruption.
Major automotive players are in various stages of transformation from a localized

“buy/make/sell” model to a global “buy/move/make/move/sell anywhere” model. This transition
is being undertaken in order to achieve greater scale and cost efficiencies while capitalizing on
rapidly expanding markets such as China and India. Companies must maintain or enhance supply
chain flexibility and customer responsiveness despite these major shifts in the automotive
industry.
As a result of globalization, more and more supply chains originate in low-cost countries,
primarily in Asia and Eastern Europe, while largely continuing to terminate in North America
and Western Europe. As a result, traditional organizational structures and business practices are
being challenged.
Key challenges faced by automotive companies include:
 Transforming from local to global organizations and processes:

 Total landed cost sourcing:
 Transportation focus:
 Supplier collaboration, visibility and event management

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INTERNATIONAL BUSINESS STRATEGY

Globalization and the auto sector-

Some of the features of the industry are-

- Highly labor and capital intensive

The boom in vehicle production in 1990s and 2000s

Regional integration of production

Globalization and Supply Chain

Major automotive players are in various stages of transformation from a localized

Key challenges faced by automotive companies include:

 Transforming from local to global organizations and processes:

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