Globalization and supply chain networks:
the auto industry in Brazil and India
Abstract The automotive industries of emerging markets were transformed in the 1990s by trade liberalization and large investments by global assemblers. The impact of these investments was decisively influenced by government policies aimed at promoting local production and assembly of vehicles and by changing assembler– supplier relationships in the global auto industry. The cases of Brazil and India show how the assemblers created new linkages between operations in emerging markets and their global operations through the adoption of follow design and follow sourcing policies. These policies were hard to implement in practice, but they decisively transformed the components industries in both countries.
In the 1990s, the auto industries of developing countries were transformed by trade and investment liberalization policies and the global expansion of the auto industry. The protective instruments (tariffs, quantitative restrictions, investment controls) that once shielded auto industries in developing countries from international competition were partially dismantled, even though governments remained active promoters of the industry through investment incentives, local content requirements, export incentives, duty drawback schemes and tariffs. At the same time, the major auto assemblers invested heavily in the emerging markets, building new capacity and modernizing existing plants. They were attracted not only by the short-term strong sales growth and by the long-term growth prospects offered by economies with low levels of motorization, but also by the potential reductions in costs that might be obtained through integrating low-cost manufacturing locations and spreading the cost of vehicle development across a greater number of markets.
This looks like a simple story of globalization. Protected national automotive markets were opened up to global economic forces. Imports and exports of built-up vehicles increased, and the updating of both production facilities and model ranges in developing countries led to convergence across markets. Transnational companies extended their influence and integrated their global operations. However, the processes at work were much more complex than this. On the one hand, trade in vehicles and components remains limited, and in most emerging markets vehicles were assembled locally for local and regional markets. On the other hand, the position of transnational assemblers in the emerging markets was neither a continuance of the multi-domestic strategies typical of the import substitution period, nor simply an extension of the ‘glocalization’ strategy (Ruigrok and van Tulder 1995: 180) of creating regional research, production and sales systems.
Global Networks 3, 2 (2003) 121–141. ISSN 1470–2266
© 2003 Blackwell Publishing Ltd & Global Networks Partnership
In this article I examine the transformation of the assembly and component manufacturing sectors of the auto industry in emerging markets using a global value chain 1
analysis. In particular, I examine globalization in the context of changing assembler– supplier relationships in the auto industry. To do this, I adopt a global value chain approach, which provides two particular insights. First, it pays particular attention to the ways in which economic activities are coordinated across national boundaries, considering in particular the different ways in which the interrelated activities of formally independent firms can be coordinated in the global economy. Second, it focuses not only on production, but on the broader range of activities involved in bringing products to market, including the organization of component supply, design and marketing.
In this article I analyse changing governance structures in the auto industry at the global level in order to explain how the automotive industries of Brazil and India (and by implication other emerging auto markets) are being transformed by two major developments: (i) the integration of developing countries into global auto production systems, and (ii) the emergence of global component suppliers who are increasingly responsible for designing and delivering component systems at multiple locations around the world. In both countries, the automotive industry was transformed by trade liberalization and foreign direct investment inflows. However, domestic markets remained protected. How did the globalization strategies of automotive assemblers and suppliers interact with trade policy and the characteristics of local markets? Global value chain analysis
The basic idea of a value chain is very simple. Products have to go through a sequence of activities in their journey from raw materials to the market. However, one key question is how the different activities taking place along the value chain are coordinated. The key initial insight of global value chain analysis was that new forms of coordination were becoming more important in the global economy in the 1970s and 1980s. Gereffi’s article on the organization of the global garment industry (Gereffi 1994) highlighted the role of global buyers, often retailers or brand-name companies that might themselves own few or no manufacturing 2
facilities, in coordinating global production and distribution systems. This emphasizes that there are new agents in the global economy, exemplified by companies such as Nike and large retailers that source globally (for example, supermarket chains), and that these agents play a role in coordinating networks of design, production, distribution and marketing activities. They do not buy at arm’s length.
This type of organization contrasts with the producer-driven chains typical of capital- and technology-intensive industries, where barriers to entry are greatest in production and in the development of core technologies:
Producer-driven commodity chains refer to those industries in which transnational corporations (TNCs) or other large integrated industrial enterprises play the central role in controlling the production system (including its backward and forward linkages). This is most characteristic of capital- and
Globalization and supply chain networks: the auto industry in Brazil and India technology-intensive industries like automobiles, computers, aircraft and electrical machinery.
(Gereffi 1994: 97)
This type of value chain has received less attention from global value chain researchers. However, the way in which transnational companies organize global production and trade merits more attention. This, too, has been transformed in the past two decades by increased outsourcing and the increasing integration of production and sales in developed and developing economies following trade liberalization. The automotive industry is a good example of these developments. Historically, the leading assemblers in Western countries produced 60–70 per cent of the value of cars in-house and controlled the design process, distribution (through dedicated dealers) and consumer finance. However, this system is changing. In particular, assemblers in Europe and North America have outsourced an increasing proportion of car production; first-tier suppliers have taken on a much greater role in the design process. How is this reflected in the configuration and coordination of global value chains in the auto industry? It will be argued in this article that such changes have had significant consequences for auto industries in emerging markets. In order to understand how the global auto industry is restructuring, and the consequences of this for automotive industries in emerging markets, it is necessary to further clarify governance issues in global value chains. First, what is coordinated when value chains are characterized by explicit coordination of activities? This question is addressed by Humphrey and Schmitz (2001). They argue that the three critical coordination decisions are what is to be produced (product design), how it is to be produced (specification of processes) and logistics issues (how much is to be produced, when and how it is to be delivered). The second question concerns why firms might go to the trouble and expense of coordinating the value chain. Under what circumstances are global value chains coordinated explicitly? The reasons clearly relate to what is coordinated:
Product design is coordinated when buyers play a role in design. In the auto industry, outsourcing of key components and systems means that while the component manufacturer may supply the basic design and technology, coordination is required because of the interface between different components in the vehicle. Coordination of processes in industries such as garments, and also in the food industry, relate not only to quality control, but also to performance with increasingly stringent safety, labour and environmental standards. Logistics issues arise in the auto industry predominantly in relation to justin-time delivery. In part, this issue is solved through proximity, but whatever the distance involved, the concern with inventory reduction requires coordination of production schedules.
The third question concerns the inter-firm relationships put in place to achieve this coordination. Drawing on the work of Sturgeon (2002) and Humphrey and Schmitz (2002), it is possible to distinguish two particular types of relationships between customers and suppliers in global value chains. Captive suppliers are subordinated to more powerful
buyers who specify many of the parameters of product, process and logistics. Modular suppliers have specialized competences and work for a variety of customers. Sturgeon argues that contract manufacturers in the electronics industry that supply sophisticated services to many different customers are a good example of a modular supply relationship. These considerations lead to three questions. First, how is coordination changing in the auto industry? Second, how do these changes affect the way the auto industry globalizes? Third, what are the consequences of these changes for industry structure, particularly in emerging markets?
In the next part of this article I focus on the transformations in relations between assemblers and suppliers in the auto industry. In the fourth part I examine the transformation of the auto industries in Brazil and India in the context of changing assembler–supplier relations and trade policy. In the fifth part I examine the impact of these changes on the components companies in Brazil and India and the limits to the globalization strategies of assemblers and suppliers.
Assembler–supplier relationships in the global auto industry Over the past two decades, relationships between suppliers and assemblers in the West have been transformed. First, there has been a shift towards the supply of complete functions (‘corners’, systems, modules or sub-assemblies) rather than individual components (Laigle 1995; Sadler 1999: 111). A first-tier supplier assembles parts and supplies them as complete units (such as dashboards, rear axle assemblies, body panels and seats). Operations previously carried out in-house by the assembler, such as the production of seats and exhaust systems, are transferred to the first-tier supplier. Second, component manufacturers have taken an increasing role in the design of components and systems (Laigle 1995; Sadler 1998: 319). First-tier component manufacturers have become more involved with their customers and have moved towards providing ‘black box’ parts or systems. While the assembler provides overall performance specifications and information about the interface with the rest of the car, the supplier designs a solution using its own technology, often adapting a 3
basic design to the customer’s specific requirements. This shift has enabled vehicle assemblers to transfer research and development costs to component manufacturers and to benefit from the specialized technological skills of these manufacturers. These relationships are very different from those that characterized the North American and European auto industries in the period up to the 1980s. Previously, assemblers in North America and Europe had two basic types of suppliers: subcontractors and ‘catalogue suppliers’. The former were given specific tasks to carry out following detailed instructions provided by the assemblers, who were responsible for product design. Contracts were short-term and awarded predominantly according to price. The assemblers drove down costs by sourcing the same part from a number of different suppliers. This meant ensuring that alternative sources of supply were available through keeping design capability in-house and placing orders for easy-tomake parts that were then assembled in-house (Helper 1993: 143–4). The suppliers could be described as ‘captive’ suppliers. The second type of components’ supplier was the catalogue supplier. They ‘produced and designed a “catalogue” produ...