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THE AUTO INDUSTRY: FROM UNFETTERED EXPANSION TO
SUSTAINABLE DEVELOPMENT. CHALLENGES AND OPPORTUNITIES°
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Giuseppe Volpato*, Francesco Zirpoli**
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Abstract
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This article provides an overview of the main consequences of the recent economic crisis on the auto industry and examines its implications for firms’ strategies in the
light of the recent turn of public policies. We show that the “industry of industries” is
still a potential source of organizational, strategic and managerial innovation. We also
submit that firms’ strategies and industrial policies would greatly benefit from a more
focused and analytical approach combining both micro and macro perspectives.
Keywords: automotive industry, corporate strategy, sustainable development, electric
car
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Parole chiave: industria automobilistica, strategia d’impresa, sviluppo sostenibile,
auto elettrica
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Jel classification: L22, L62, L53, L52
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Received: 22.1.2011
Final revision received: 15.2.2011
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This paper is the result of the joint work of the authors. However, Giuseppe Volpato wrote section one and Francesco Zirpoli section four. Introduction, conclusion, sections two
and three were written jointly.
*
Università Ca’ Foscari Venezia, Dipartimento di management; [email protected].
**
Università Ca’ Foscari Venezia, Dipartimento di management; [email protected].
Economia e Politica Industriale - Journal of Industrial and Business Economics
2011 vol. 38 (2): 5-24
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G. Volpato, F. Zirpoli
The auto industry: challenges and opportunities after the crisis
Introduction
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In 1946, Peter Drucker labeled the international automotive industry the
“industry of industries”, it being a cradle for technological, manufacturing,
commercial and organizational innovations that shaped also the structure of
many other industries. Today, this industry is undergoing a highly delicate
transition due to the overlapping of many competitive, geographical and environmental factors.
In Western countries, where the motorization process has reached hard-tobeat levels, the past twenty years (at least) have seen automotive demand take
the almost exclusive form of replacement car purchases. Conversely, other
countries, including BRIC (Brazil, Russia, India and China) and Eastern Europe, have entered a phase of high-speed motorization that is offsetting the industry’s potential decline.1
The financial crisis that hit the world economy in 2008 has further widened
the gap between Western and BRIC countries in the development of the automotive industry. The crisis has turned the West’s long-term concern of losing
jobs and manufacturing facilities to the developing countries into a pressing
need to save its automotive industry (and the economy as a whole), leading
governments to start an exceptional phase of state aid to support auto demand
and supply. This has been the case in the U.S., where the administration has
played a major role in saving two of the “big three” American automakers, but
also in Europe.
At the same time, the need for ecologically sustainable development prompted by the need to dramatically reduce both polluting and greenhouse-gas emissions is spurring a robust increase in investments in product and process innovations able to provide more effective solutions, such as natural gas-powered vehicles, new-generation electric vehicles, fuel cell vehicles, and the like.
The combination of the crisis, the complex interdependences between industrial trajectories in developing and Western countries, and the need to develop and market new technologies in favor of more sustainable mobility
opens up corporate policy and public policy to a wide range of possible alternative routes, all marked by high degrees of uncertainty. Nevertheless, the disparities in managerial visions across the different industrial groups and public
policy in the countries where the automotive industry plays a key role in economic development have led to fierce debate over the possible strategic options.
1. The global automotive industry has gone through a long and complex process of growth
and reorganization during which automakers have pursued different profit strategies. For a
comprehensive overview of this process see Freyssenet et al. (1998); Freyssenet, Shimizu
and Volpato (2003a, 2003b).
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For example, given the dependence of the automotive industry on hefty infrastructural investments to drive automobile development, many of the most
innovative “green” technological solutions will only deliver benefits to the
companies through state interventions centered on territorial planning and industrial policy. However, the complexity and timeframe of such interventions
are so great as to raise doubts over the willingness and capacity of the individual governments to complete them.
The article provides an overview of the main consequences of the recent
crisis on the auto industry and offers a set of implications for corporate policy
in light of the recent changes in public policy. We claim that the “industry of
industries” is still a potential source of organizational, strategic and managerial innovation and believe that corporate and industrial policy would greatly
benefit from an analytical approach that combines the micro and the macro
perspectives.
Section one outlines the recent market development of the auto industry
and how the crisis has helped to accelerate existing trends and create new
ones. Section two describes how public policy has attempted to counter the
impact of the international economic downturn. Section three presents the
strategic options left to automakers given the current scenario. Ultimately, section four sketches the possible evolution of the industry from the viewpoint of
the automakers and introduces this Special Issue.
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1. Market trends and the impact of the crisis on the automotive industry
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In order to understand where the market is going and the implications for
the automakers’ strategy, we must first provide data on the number of vehicles
per one thousand inhabitants and its evolution over time. This data not only
gives a simple and clear indication of whether the market has the potential to
grow or not, but also offers a straightforward indication to automakers about
the kind of vehicles customers are likely to buy.
Table 1 shows the number of vehicles per one thousand inhabitants in ten
countries, from which we can see that the distribution of cars per inhabitant is
extremely heterogeneous. Moreover, many commentators assume that the developing countries will soon close the gap with the Western economies.2 For example, while India’s 2008 data looks very much like Germany’s for 1950, India’s
GDP forecast of similar or higher growth rates to Europe in the 1950s and 1960s
implies that we can reasonably expect also the country’s auto market to spur
rapid growth. On the other hand, the data for the U.S., Italy and other Western
2. See Global Insight (2010).
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countries underscore the significant slowdown in market expansion. That is because when the number of vehicles per one thousand inhabitants surpasses three
hundred, the market then becomes a replacement market, i.e. the need for individual mobility is fulfilled and customers buy a new car only to replace their old
car (Volpato, 1983). Such a situation reduces the number of new vehicle registrations and customers change their attitude to buying a new car. The proliferation of automobile segments and the acceleration of new product development
cycles are some of the strategies implemented by the automakers to induce buyers to upgrade their vehicles and combat the shrinking in the Western markets.
Table 1 – Number of vehicles every one thousand inhabitants°
1950
1960
1970
1980
1990
U.S.
Japan
Germany
France
UK
Italy
Brazil
Russia
China
India
226
n.d.
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37
43
6
n.d.
n.d.
n.d.
n.d.
320
7
73
111
32
98
n.d.
n.d.
n.d.
n.d.
414
107
216
232
167
210
36
n.d.
n.d.
2
546
303
417
417
312
330
80
n.d.
2
1
752
456
512
495
454
507
87
n.d.
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774
566
553
564
526
629
109
164
12
7
2008
818
592
535
598
580
685
133
231
34
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including cars, light commercial vehicles and trucks.
Source: ANFIA (Associazione Nazionale Filiera Industria Automobilistica), UNRAE
(Unione Nazionale Rappresentanti Autoveicoli Esteri), CCFA (Comité des Constructeurs
Français d’Automobiles).
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In the 1990s, the same reason led the Western automakers to start looking at
BRIC as a possible new market. Most industry players interpreted the GDP
growth of these countries as the prelude to the growth of vehicle sales in the respective markets. An expectation that has been fully confirmed by the facts, given that China has become the number one vehicle market. However, the globalization of the auto industry has been a costly business. First, the automakers often have been forced to set up production plants in the developing countries to
gain access to those markets, which has led to an increase in global production
capacity and, as a consequence, the overall structural rigidity of the industry.
Production overcapacity has been the main reason for the low profitability
of all the automakers since the end of the 1990s, with overcapacity peaks of up
to 30%.3 Similarly, production overcapacity is the main reason why the growth
3. See PriceWaterHouse&Coopers (2010).
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in sales from forty-eight million light commercial vehicles in 1995 to fiftyeight million in 2003 was not accompanied by a higher profitability of the automakers.4 The impact of the recent crisis has exacerbated the overcapacity
problem. Table 2 shows that the global utilization of plants was just 63.7% in
2009 and that the outlook is unlikely to improve.
Table 2 – Global utilization of plants (%)
2007
2008
2009
2010
2011E
2012E
Asia-Pacific
EU
East Europe
North America
South America
Middle East & Africa
Total global assembly
Global utilization
24.6
18
2.7
15.3
2.9
1.7
65.1
80.4
27.3
17.5
3.3
12.6
3.7
1.7
66.1
76.2
24.2
14.6
2.5
8.7
3.4
1.5
54.9
63.7
27.2
15.3
2.8
10.8
3.7
1.7
61.6
68.3
30.2
16.6
3.4
12.7
4.1
1.9
68.9
73.2
32.4
17.6
4
13.8
4.4
2.2
74.4
77.3
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Source: PriceWaterHouse&Coopers (2009).
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Overcapacity is not only leading to a further profit squeeze at the automakers, but also is raising their operational risks, although the problem has
not affected all automakers to the same extent. Indeed, our computations on
the impact of such a situation on the automakers’ financial performance indicate that while the European and Japanese automakers managed to stay profitable, at least until 2008, the U.S. automakers were already experiencing a
decline in both sales and margins (table 3). So it is not surprising that, when
the crisis hit in 2008, the “big three” were the most exposed to the risk of
bankruptcy.
Table 4 provides a picture of the winners and losers by comparing the production levels and ranking of the major industry players in 2006 and 2009, i.e.
just before and after the crisis. The reason the crisis had such a heterogeneous
impact on the automakers’ production volumes and relative ranking is due to
the fact that the automakers have very limited possibilities to react to a crisis
in the short term.
As a result, regardless of their actual ranking, the 2008 crisis found some
automakers well positioned (financially but also in terms of product portfolio) to contain the loss of sales, while others took advantage of the market’s
crisis-driven changes and yet others found themselves in a much weaker position.
4. See Global Insight (2010).
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Table 3 – Automakers financial results°
Europeana OEMs* (million euros)
2006
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Sales
Operating income
Net incom
Capex
R&D costs
Number of employees
Units sold
Operating income on sales (%)
2009
2007
2008
2009
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289,727
294,573
318,024
297,776
23,212
22,722
23,969
852,000
18,105
17,789
18,450
- 4,541
18,391
17,118
17,236
19,311
13,367
12,727
13,439
15,192
653,937
691,310
716,889
719,795
18,373,000 19,184,000 20,339,000 17,935,000
8,01
7.71
7.54
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U.S.c OEMs (million euros)
2008
304,617
312,900
304,085
272,813
10,478
16,162
8,054
- 1,452
11,638
14,308
6,367
- 6,557
18,162
18,297
19,661
16,996
14,365
16,143
15,933
14,707
361,266
379,817
356,108
298,516
15,875,673 16,937,552 16,465,956 15,995,646
3.44
5.17
2.65
- 0.53
Japaneseb OEMs (million euros)
Sales
Operating income
Net incom
Capex
R&D costs
Number of employees
Units sold
2007
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Sales
Operating income
Net incom
Capex
R&D costs
Number of employees
Units sold
2006
2006
2007
2008
2009
291,256
241,216
185,994
- 18,929
- 5,906
- 16,395
- 11,621
- 28,114
- 28,807
11,389
9,209
n.d.
11,389
9,209
n.d.
550,441
521,588
456,000
15,690,000 15,923,000 13,894,000
6.50
2.45
- 8.81
154,725
- 7,753
- 77,721
n.d.
n.d.
407,000
12,295
5.01
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fiscal year for Japanese companies ends on March 31.
For diversified groups (Daimler, Fiat, Honda, Nissan, PSA, Renault, Toyota) data refer to
the automotive research.
a
European groups: BMW, Daimler, Fiat, Peugeot, Renault, Volkswagen; b Japanese groups:
Honda, Mazda, Nissan, Suzuki, Toyota; c U.S. groups: Ford, GM.
*
original equipment manufacturer.
Source: our elaboration on annual reports.
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Table 4 – Automotive groups: production of light vehicles and leadership ranking
Group
2006
Ranking 2009
Ranking Group
Toyotaa
Volkswagenb
GMc
Hyundaid
Renault-Nissane
Fordf
PSAg
Hondah
Fiati
Suzukj
8,932
6,383
8,689
4,357
5,916
6,333
3,473
3,634
2,269
2,226
1
3
2
6
5
4
7
8
10
11
1
2
3
4
5
6
7
8
9
10
7,139
6,266
5,460
5,335
5,242
4,335
3,173
3,014
2,386
2,169
BMWk
Daimlerl
Saicm
Changann
Mazdao
Chrislerp
Mitsubishiq
Fawr
Tatas
Cheryt
Ranking 2009
Ranking
1,402
1,541
569
409
1,309
2,570
1,202
433
379
323
13
12
16
18
14
9
15
17
19
20
11
12
13
14
15
16
17
18
19
20
1,315
1,235
1,197
1,159
1,035
958
687
645
534
518
Toyota brands in 2009: Daihatsu, Hino, Lexus, Scion, Toyota; b Volkswagen brands in
2009: Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat, Skoda, Volkswagen; c GM
brands in 2009: Buick, Cadillac, Chevrolet, Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saturn; d Hyundai brands in 2009: Hyundai, Kia; e Renault-Nissan brands in 2009: Dacia, Infiniti, Mahindra Renault, Nissan, Renault, Sansung; f Ford brands in 2009: Ford, Lincoln, Mercury, Volvo; g PSA brands in 2009: Citroën, Peugeot; h Honda brands in 2009:
Acura, Honda; i Fiat brands in 2009: Abarth, Alfa Romeo, Ferrari, Fiat, lancia, Maserati,
Tofas; j Suzuki brands in 2009: Maruti, Suzuki; k BMW brands in 2009: BMW, Mini, Rolls
Royce; l Daimler brands in 2009: Maybach, Mercedes, Smart; m Saic brands in 2009: Nanjing-MG, Roewe, Ssangyong, Wuling, Shangai Huizhong; n Changan brands in 2009:
Changan, Harbin Hafei, Landwind; o Mazda brands in 2009: Mazda; p Chrisler brands in
2009: Chrisler, Dodge, Jeep. Ram; q Mitsubishi brands in 2009: Mitsubishi; r Faw brands in
2009: Faw; s Tata brands in 2009: Jaguar, Land Rover, Tata; t Chery brands in 2009: Chery,
Vortex.
Source: our elaboration on data from ANFIA, UNRAE, CCFA.
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Table 5 shows the possible reasons why some automakers suffered from
the crisis more than others; it also shows how the crisis has triggered a marked
shift towards the basic and small-size car segments.
Table 6 reconciles the data from tables 4 and 5 and indicates how the market trends have indeed favored some automakers (at least in Europe), in particular, those with a product portfolio of small cars (e.g. Renault, PSA, Nissan,
Fiat) and/or those which offer low-cost vehicles (e.g. Kia and Dacia). Similar
trends are reported in the U.S. (see the paper by Helper in this Special Issue),
where the market shift towards compact cars and hybrid and bi-fuel cars has
favored the Japanese and Korean manufacturers.5
5. Hybrids cars combine an internal combustion engine with an electric engine. Bi-fuel
cars use engines that can work with different fuels, such as compressed natural gas and
gasoline.
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Table 5 – Car segment trends
Basic
Small
Lower medium
Upper medium
Near executive
Executive
Luxury
Sports car/Coupe
People carriers
SUVs
Mini-buses
Utility
Unidentified
Share (%)
1,886,100
4,074,800
3,867,900
851,600
767,100
280,500
35,700
185,200
179,700
1,129,600
105,700
246,300
19,100
2008
13.8
29.9
28.4
6.2
5.6
2.1
0.3
1.4
1.3
8.3
0.8
1.8
0.1
1,420,000
3,674,900
4,254,800
945,200
986,400
339,600
42,100
205,200
231,700
1,104,200
140,300
200,000
17,300
Share (%)
Change(%)
10.5
27.1
31.4
7.0
7.3
2.5
0.3
1.5
1.7
8.1
1.0
1.5
0.1
32.8
10.9
- 9.1
- 9.9
- 22.2
- 17.4
- 15.3
- 9.7
- 22.5
2.3
- 24.6
23.2
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Source: AID (Automotive Industry Data) (2010).
Brand
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6.6
- 7.0
- 3.9
16.9
0.5
3.0
5.7
- 9.4
0.7
95.0
- 5.1
14.9
7.2
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Volkswagen
Audi
Seat
Skoda
Peugeot
Citroën
Ford
Volvo
Renault
Dacia
Opel-Vauxhall
Chevrolet
Fiat
2009-2010
- 6.6
1.7
- 4.7
- 3.2
- 0.4
- 4.5
- 13.3
12.6
3.4
10.2
- 5.5
- 6.4
- 18.8
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Table 6 – Most successful brands in Europe in 2009 vs. 2010 (% change)
Lancia
Alfa Romeo
BMW
Mini
Toyota
Mercedes
Smart
Nissan
Hyundai
Suzuki
Honda
Kia
Chrysler
2008-2009
2009-2010
6.4
8.0
- 15.3
- 5.3
- 0.3
- 13.3
- 7.4
10.8
32.3
10.6
- 4.1
8.3
- 41.4
- 18.2
- 0.4
6.5
3.9
- 16.5
0.1
- 14.0
9.7
4.7
- 21.7
- 13.5
4.5
- 26.8
Source: ACEA (European Automobile Manufacturers’ Association) and ANFIA.
2. The role of public policy in Europe and the U.S.
The main aim of the post-crisis public policy has been to save as many jobs
as possible and avoid a snowball effect. In fact, a collapse of the automotive
industry might have had a huge propagation cost across the whole economy,
along with the relevant social consequences. Table 7 shows the job loss trend
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in the U.S. automotive industry in the last ten years, highlighting the crisis-driven acceleration of the reduction in the workforce of both the automakers and
their suppliers after 2007. The data is similar for Europe, where around one
hundred and thirty thousand jobs were lost between 2008 and 2009 (Volpato
and Zirpoli, 2011).
Table 7 – U.S. employment trends°
Motor vehicles (NAICS code 3361)
Year
Annual
Motor vehicle parts (NAICS code 3363)
Year
Annual
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
ng
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data type: all employees, thousands.
Source: Bureau of Labour Statistics.
100%
92.3%
87.4%
84.3%
82.4%
80.8%
78.0%
72.4%
64.8%
49.9%
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774.7
733.6
707.8
692.1
678.1
654.7
607.9
543.7
418.7
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100%
95.6%
91.1%
90.8%
87.8%
85.0%
81.2%
75.5%
65.8%
48.9%
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291.4
278.7
265.4
264.6
255.9
247.6
236.5
220.0
191.6
142.5
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Following, we outline the main measures taken by the EU and the U.S. to
counter the effects of the crisis.
In Europe, no comprehensive and coordinated industrial policy for the automotive industry has been formulated by the European Commission and the
European Parliament, mainly because the interests of the EU members diverge
all too often, making it impossible to develop a unitary approach. As a consequence, current European policy centers on two goals: to push the automakers
towards a cleaner product portfolio and to deter the member states from introducing policies that create competitive imbalances within the EU.
To achieve the first goal, the key European Directive 441/1991 introduced
a maximum noxious vehicle emissions level and a continuous increase in the
limit from the “Euro 1” emission standard (the first limit) to the “Euro 6” standard in 2015. The relative EU directives also call for the levying of fines on
those automakers that fail to comply with the standards, i.e., by selling cars
whose noxious emissions surpass the established threshold. Nevertheless,
these restrictions are a double-edged sword for the European automakers. On
the one hand, the restrictions reduce the attraction of the European market to
foreign automakers (such as the Koreans). On the other, European products are
more expensive and, consequently, pose a problem in the export markets. ProN.B. Copia ad uso personale. Non ne è consentita la condivisione
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vided that mostly small cars are imported to Europe (which can more easily
comply with the stringent European emissions regulations), the combined effects
of the severe EU regulations and sanctions seem to be negative for European automakers. That is not to say that the directives that combat noxious emissions
have a negative effect on the automakers, but suggest the need for a more comprehensive EU policy on the matter. Currently, European policy is unfolding
along the three main lines below:
1. support green technology research and development (R&D);
2. promote the introduction of incentives to buy green cars;
3. propose a common approach to encourage the adoption of electric cars
through the development and standardization of a recharging infrastructure,
the development of electric smart grids, and the updating of the rules on
battery recycling.
Quite surprisingly, there is no policy initiative to support methane or GPL
as a short-term solution for environmental problems, despite the many advantages of such solutions (for a discussion see Stocchetti and Volpato, 2010).
The crisis has hit the U.S. in a more dramatic way than Europe. As shown
in table 3, above, U.S. automakers were already reporting negative results before the crisis reached its peak. While in Europe many jobs were at risk but no
automaker risked bankruptcy (with the exception of Opel, owned by GM), in
the U.S. the whole auto industry and, with it, the industrial future of the country seemed to be seriously threatened by the crisis. That led the Obama Administration to push Ford, GM and Chrysler into submitting a reorganization
plan to obtain government support. And while Ford, thanks to its wise financial strategy, was prepared for the crisis and would have been able to overcome it with its own resources, the recovery plans presented by GM and
Chrysler were considered inadequate. The Obama Administration wanted GM
to replace its CEO and formulate a much more radical rescue plan but believed
that Chrysler’s chances of a turnaround were slim. In fact, GM had the right
size (especially in terms of sales volume) to recover and presented positive results in some key geographical markets (such as Asia and South America). But
Chrysler’s situation seemed desperate. First, Chrysler’s sales were insufficient
to cover its costs, even if it had implemented a major cost-cutting plan. The
company presented very limited R&D resources (R&D talents had left the
company after its acquisition by Daimler and the subsequent takeover by the
Cerberus investment fund). Second, its product offering had no cars in the
small, compact and green segments that – in 2008 – were considered essential
to survival, even in the U.S. (while the strength of GM in this market both in
Asia and in Europe meant it could easily import fuel-efficient cars to the U.S.).
Finally, Chrysler, with no access to the international markets, showed an overreliance on the U.S. market.
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Unlike GM, which obtained financial support from the U.S. Administration, Chrysler risked being left to its fate, i.e. to fail. After a highly contested
decision, the task force mandated by the Obama Administration to deal with
the automotive crisis decided to give Chrysler a chance if it could find an industrial partner capable of counterbalancing Chrysler’s structural weaknesses.
At which point the option to involve Fiat in Chrysler’s bailout took momentum. In March 2009, Chrysler and Fiat were given an extra month to present a
credible rescue plan to the task force. The plan was eventually accepted and
Chrysler obtained funding. Fiat was, in fact, considered in a position to offer
complementary resources to Chrysler, including access to the European, Asian
and South American markets, small-size engine technology, and the managerial expertise needed to get through the bailout. In this latter respect, the fact
that Fiat had just succeeded in turning itself around provided an assurance that
Fiat’s top management had the right skills and enough experience to deal with
Chrysler’s problems.6
In both the GM and the Chrysler case, the workers played a relevant role in
the bailout by agreeing to accept much less favorable salaries. However, there
is no dispute over the fact that the state’s intervention played a major role, the
depth and financial extent of which were unprecedented in U.S. history. This
marked a relevant difference between the EU and the U.S. approach to the crisis. The EU – with the exception of France which offered direct funding to
OEMs and suppliers in exchange for the rationalization of their activities and
to keep investments in France – approached the crisis through short-term policies, such as the car-scrapping incentive. In the U.S., the whole system, from
the blue-collar cost per hour to the rationalization of the distribution channels,
was revolutionized and suffered hefty structural cost-cutting. This approach
seems to be paying off at present: both GM and Chrysler seem to be out of risk
and have presented positive operational and financial indicators. On the other
hand, in Europe, the end of the car-scrapping incentives is threatening the
profitability of the generalist automakers with negative peaks in the Italian
market and for Fiat.
3. Automakers reaction to the crisis
Overall, the crisis has produced some clear effects:
1. a dramatic fall in car sales, especially in the U.S. and the EU compared
with the growth of the Chinese market;
2. a reduction in the global utilization of plants;
6. For an overview on how Fiat managed to turnaround see Volpato (2008); Volpato and
Zirpoli (2006); Zirpoli (2010).
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3. a shift in customer preferences to low-end and small cars; and
4. a new form of competition among governments to seize investments in the
auto industry, marked by the highly heterogeneous approach of the U.S.
and EU governments to support the industry.
Automakers, on their side, have adopted different measures to stem falling
sales and shrinking profit margins. Below, we identify the four main options
open to the automakers:
1. Consolidation through mergers and acquisitions (M&A) and joint ventures.
Consolidation is a typical outcome of crisis and can bring fruitful results on
both the industrial and the commercial fronts. First, from an industrial
viewpoint, an M&A can provide the opportunity to rationalize global plant
utilization. Only the most efficient plants of the merged companies are
maintained, which can generate significant productivity gains on a global
scale. Second, product development costs can be rationalized through the
sharing of common platforms and components across more models and
brands. The leverage of common components across models can lead to a
10% cost saving on the development of a new model. This cost saving derives from both the rationalization of engineering activities and the
economies of scale that can benefit the suppliers in the development, the
industrialization and then the production of fewer components in higher
quantities.7 In terms of the commercial implications of an M&A, the advantages and opportunities regard the possibility of offering a larger product portfolio, the concentration and higher efficiency of distribution channels and the broadening of the markets served. These are precisely the rewards being reaped by, for example, Fiat and Chrysler after their merger.
Fiat has expanded its product portfolio to encompass SUVs and D and E
segment cars, while Chrysler has finally got an offering of compact and
small car segment options. Fiat is using Chrysler’s distribution channels to
sell its vehicles in the U.S., while Chrysler is using Fiat’s distribution network in Europe, Asia and South America. Consolidation via joint ventures
is the strategy chosen by some low-volume manufacturers, i.e. companies
that sell less than two-three million cars per year, including premium manufacturers like Mercedes and BMW and generalist manufacturers like PSA
and Fiat. These companies are trying to set up joint ventures to overcome
the limits of their small volumes using commercial and technological
agreements to share platforms, engines, and distribution channels.
2. Major investments in product and process technologies to gain technological leadership. This second option hinges on the development of R&D and
7. The benefits of such rationalization are mainly gained by suppliers but are usually shared
with automakers that usually hold a higher bargaining power within the value chain.
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manufacturing expertise to outperform competitors by raising the pace of
new product launches and the technological contents of products. In this respect, the need for a “greening” of the industry has given some automakers a
window of opportunity to seize technological leadership. Two strategies
seem to be the most promising: the first is to offer a full line of hybrid vehicles; the other is to focus on pure electric vehicles. Toyota, for instance, is a
pioneer of the former, with Honda hot on its heels. In fact, Toyota is the sole
producer to offer a complete line of hybrid products through its two brands
(Toyota and Lexus). Today, after Toyota, most automakers offer hybrid variants of some models. This seems the only viable short-term option to comply
with the strict regulation of noxious emissions in Europe and some U.S.
states, such as California. The second option, i.e. the “pure” electric strategy,
is more controversial. The well-to-wheel cost is still higher for pure electric
cars than for some combination of traditional fuels and hybrid technologies.
Moreover, the well-to-wheel cost varies depending on the cost of electricity
in each national state (see the paper by Freyssenet in this Special Issue). In
this respect, automakers’ R&D investments and strategies must deal with a
long series of variables, among which: public and private research funding;
the R&D efforts of the suppliers to develop efficient batteries (often non-automotive); consumer preferences and market trends that are not homogeneous and clear-cut in global markets; national policies and regulations that
are still not totally geared to the support of pure electric vehicles; the need
for cross national standard-setting institutions for the recharging structures
and interfaces; trends in the demand and supply of oil and other (alternative)
sources of energy; and the political uncertainty related to access to new raw
materials, often located in countries characterized by high political turbulence. Despite these open questions and in stark contrast to Toyota’s more
gradual approach, the Nissan-Renault group is betting on the pure electric car
backed and supported by the French state, where public demand is high
enough and which has introduced an incentive-based policy that will probably help Nissan-Renault to recover their initial investments.
3. Geographical expansion of markets served. This strategy leverages the
high growth potential of the BRIC countries, leading both established automakers, such as Volkswagen, which started investing in markets such as
China long before its major competitors, and new local players offering
low-cost cars to benefit from the resulting growth in BRIC car sales. Another typical example is the Hyundai-Kia group. Hyundai is betting on the
fact that traditional power train technology will still be the dominant paradigm for many years yet and is focusing on the BRIC markets through high
quality/price ratio products. That strategy enabled Hyundai-Kia to become
the fourth biggest manufacturer in 2009.
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4. Internal growth and expansion. All top ten automakers are pursuing a mix
of the three preceding options, leveraging the opportunities provided by
forms of consolidation, investing in green technologies, and seeking to tap
into the BRIC markets. However, the case of the local players in China and
India (as well as in Russia) is different. These companies are not only enjoying the effects of the two-digit expansion rates in their own countries,
but are also using this growth as a springboard to expand abroad. Indeed,
this strategy has led, for example, to the acquisition of some historical European brands: Volvo, formerly owned by Ford, was acquired by Geely, a
Chinese carmaker; Nanjing Auto, the oldest Chinese car manufacturer, established in 1947, acquired the MG-Rover marque in 2005; similarly, Tata,
a major Indian industrial group, acquired Jaguar and Land Rover from
Ford in 2008. This acquisition is worth mentioning because of the symbolic impact of an Indian company buying out two premium British brands
and the fact that the two brands are significantly improving their performance under Tata’s management leadership.
The combined impact of this complex set of strategies is difficult to envision at the moment. For example, the different approach towards the green
technologies of Toyota and Renault-Nissan has the potential of benefiting one
group or the other in relation to where the pendulum will swing. Similarly, the
growth of Chinese and Indian manufacturers might impact the expansion strategy of some established automakers. Table 4, above, shows the considerable
change in the top automakers’ ranking between 2006 and 2009. The outcome
of the technological bet made by some automakers, the merger of others, and
the expansion of Chinese and Indian markets and companies might result in a
new equilibrium.
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4. The post-crisis auto industry: introduction to the Special Issue
As shown above, the recent crisis has accelerated existing trends and
pushed the automotive industry towards higher concentration, a two-speed
global market with the BRIC markets taking off and the Western countries
markets shrinking, and the expansion of newcomers. All of which has happened in a scenario that sees many Western governments trying to reduce both
their dependency on the foreign oil supply and the negative environmental impact of vehicle emissions. And, in pursuing these goals, pushing towards the
development of new power train technologies.
What will the auto industry of the coming years look like? What will be the
key competitive driver for the companies? These are complex questions whose
answers call for an analysis that takes into account the complex interdepen18
dences between the technological, market and political aspects mentioned earlier. Despite the crisis, the current technological and competitive scenarios offer the automakers new and unprecedented opportunities, some of which based
on a fundamental reconfiguration of the vehicle manufacturing business. We
believe the battle will be played on three fields:
1. the capability of automakers to take full advantage of the new technological opportunities to develop, manufacture and market new vehicles;
2. the pace and direction taken by the market for hybrid and electric cars; and
3. the competitive role played by the BRIC markets and companies in the international arena.
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4.1. Taking full advantage of technology becomes an organizational competence
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The first issue at stake is the role that will be played by what so far has
been a key competitive factor, i.e., economies of scale, in the future auto industry. There is much evidence that the key challenge for the automakers will
be to handle complexity rather than exploiting scale efficiencies (see also the
paper by Fujimoto in this Special Issue). In fact, the auto industry of this century differs profoundly from that of the late 20th century because the manufacturing, design and engineering of cars are no longer performed in vertically integrated companies but in highly fragmented vertical networks (MacDuffie,
2008; Zirpoli and Becker, 2011). This change has dramatically increased the
flexibility of the automakers’ cost structure and has made the need for standardization within each single model design, engineering and production
much less pressing. However, it has also led to an increase in competitive tensions within the value chain (not least, the growth of supplier bargaining power),
while the higher number of actors (automakers, first and second-tier suppliers,
and research centers, etc.) has increased the complexity of the coordination effort. So it will come as no surprise that only a few producers – notably Toyota –
have taken full advantage of a more distributed mode of production in the industry with some, like Fiat, forced to back source design and engineering activities
after having experienced the complexity of managing a distributed product development process (Becker and Zirpoli, 2003; Zirpoli, 2010).
Other technology driven opportunities include the reduction of the minimum optimal dimension of plants thanks to the adoption of flexible manufacturing systems and lower product development costs. For example, new production technologies have eased joint production in the same plant with the
same tools and equipment used for the different models lowering the breakeven points. Indeed, the new Fiat Bravo compact car breaks even at one hundred and twenty thousand units per year (far less than the previous compact
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car made by Fiat), while the flexibility of production technology has enabled
Fiat and Ford to produce the Fiat Panda, the Fiat 500 and the Ford KA in the
same plant.
Lower break-even volumes and higher flexibility are also the result of the
lower costs of new product development processes. In this regard, along with
the use of competent suppliers, as mentioned earlier, the new tools for designing and prototyping new cars play a key role. In fact, the growing use and accuracy of virtual development and simulation tools has been a major driver of
cost reductions in new product development projects (Becker, Salvatore and
Zirpoli, 2005; Thomke and Fujimoto, 2000), enabling the automakers to enlarge and differentiate their product portfolios without efficiency losses.
The sustainability of an aggressive marketing strategy based on the proliferation of niche models and model variants depends on the sharing of components and platforms across these models and is the only way to keep the industrial costs at a sustainable level. To achieve this, the challenge is to leverage economies of scope in both competences and components, which is no
easy task from the organizational standpoint. In order to develop models that
share components and systems of components without sacrificing their differentiation for customers, a company must introduce several constraints to the
design, engineering, and manufacturing activities and ensure close organizational integration between internal functions, product development platforms,
and external suppliers. So far, few automakers have fully succeeded in this endeavor (e.g. Toyota and Volkswagen) hindered mainly by the ensuing organizational complexity.
Overall, considering the new methods of designing, producing and marketing cars, consensus acknowledges that the major challenge has switched from
managing manufacturing efficiency by leveraging economies of scale to governing complex value chain relationships and integrating new product development efforts. The papers by Takahiro Fujimoto and Susan Helper in this
Special Issue both address this point in light of the recent crisis. Fujimoto observes that the crisis can be explained as a long-term consequence of the gap
between division-of-labor type capability and integral vs. modular type architecture of cars in different countries. Accordingly, the competitiveness of the
small Japanese cars of the late 20th century is shown as the fit between the
path-dependent accumulation of coordination-type organizational capability
and the stricter safety-energy-environmental vehicle regulations enforced by
the advanced nations. Toyota’s recent recall is seen as a problem of product
complexity overwhelming the company’s organizational design capability.
Taking the current U.S. auto crisis as her starting point, Susan Helper
reaches a similar conclusion on the U.S. front. Collaboration with suppliers is
crucially important in the auto industry. Without close collaboration with sup20
pliers, it is difficult to achieve the tight coordination needed to build a car,
since cars have a fundamentally integral design. Helper observes that, despite
the massive recourse to outsourcing, U.S. automakers substantially squeezed
their suppliers for short-term gain and underinvested in long-term design,
quality assurance, delivery methods, and innovation. The lack of awareness of
the need to develop effective inter-company coordination practices and a lack
of a consistent organizational strategy among the U.S. manufacturers are considered the main reasons for the growing competitive gap between U.S. and
Japanese manufacturers.
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4.2. Is the future electric?
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As shown above, the crisis has accelerated the “electrification” process of
the auto industry.8 To reduce the dependency on oil, the auto companies and
national governments alike have implemented plans to accelerate the development of new forms of power train. The reason is twofold: first, swayed by the
increasing focus of public opinion, governments are putting pollution and Co2
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emissions at the top of their agendas;9 and, second, the growth of vehicle sales
in the emerging markets, such as China and India10 coupled with the Western
countries’ fear of being oil-dependent are spurring both the demand for and the
cost of oil,11 making it necessary to develop a portfolio of alternative energy
sources and to push R&D funding.
What conditions will foster the development of the electric car? The paper
by Freyssenet in this Special Issue compares the current situation with the historical conditions that enabled the internal combustion engine to become the
dominant power train technology. Freyssenet suggests that today’s commercial, geopolitical and economic factors will lead to a “Second Automobile
Revolution” driven by the widespread adoption of the electric car and that this
will trigger a sea change in the architecture, industry, geography, economy,
geopolitics and sociology of the automobile.
Such a scenario makes it tough to fully assess the strategic threats and opportunities the “greening” of the industry poses to automakers. In fact, we still
need to better understand the issues at stake, the many opportunities and challenges that automotive industry companies will face, and the implications for
their strategic action and the evolution of the automotive value chain as a
8. See Deutsche Bank (2009).
9. See ETC/ACC (European Topic Centre on Air and Climate Change) (2009).
10. See Deloitte Touche Tohmatsu (2009).
11. See Hazeldine et al. (2009).
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whole. This issue is tackled by Enrietti and Patrucco whose paper provides an
overview on the consequences of the development of hybrid and electric power train technologies in the division of labor between automakers, component
manufacturers, and infrastructure providers, and how the industry actors are
likely to interpret the changes deriving from “electrification”.
Overall, considering both the current market trends and the actual evolution of the technology, newcomers, including the providers of complementary
assets, are unlikely to upset the industry’s fundamental status quo, also due to
the persistence of high entry barriers. Moreover, the industry and its major
players, i.e. the automakers, are not new to the need to incorporate technologies based on knowledge domains exogenous to the auto industry (i.e., electronics, new materials, nanotechnology, etc.) and to the need to modify their
system integration competences accordingly. In this respect, corporate strategies most likely will be influenced by exogenous factors, such as public policies, on both the demand side (e.g. incentives to buy green cars, anti-pollution
regulations, etc.) and the supply side (e.g. network infrastructure development,
selective R&D investments in specific technologies, etc.) and, as argued by
Fujimoto in this Special Issue, by the architectural differences between pure
electric vehicles and hybrid vehicles.
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Many commentators have noted that Russia is failing to keep its promise of
high growth, while Brazil’s competitive arena is stabilizing as Volkswagen, Fiat
and GM maintain their lead positions. A number of reasons therefore underpin
the expectation that China and India will become the key BRIC markets in the
years ahead. The high pace of GDP growth in these countries and a relatively low
level of motorization means we can expect even faster growth in vehicle sales
than in recent years. The winners in these markets will become the world leaders.
Indeed, the case of Volkswagen shows that scaling-up to become the first producer in the world might actually start with being the first automaker in China.
However, the German producer’s case is also linked to the long-term policy
of the German government, which started to invest in commercial relationships
with China at the end of the 1980s.12 Western latecomers will find it hard to emulate Volkswagen’s success, also because of the advances made by the local producers in the meantime. Moreover, as Fujimoto explains in his paper, the characteristics of the market must match the competence of the automakers. The
modular nature of the locally designed Chinese vehicles, as well as the integral
12. Schmidt’s (2010).
22
nature of an Indian low-cost vehicle, is indicated by Fujimoto as a source of competitiveness for Chinese and Indian manufacturers in their respective countries.
Conclusion
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References
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This Special Issue focuses on the impact of the recent economic crisis on
the automotive industry and proposes a set of implications for corporate policy
in light of the recent shift in public policy. The papers published in the Special
Issue confirm that the “industry of industries” is still a potential source of organizational, strategic, and managerial innovation and, moreover, underscore
how corporate and industrial policy could greatly benefit from an analytical
approach that combines micro and macro perspectives. This approach is a kind
of common thread that links the four papers despite the very different backgrounds of the researchers: even the most visionary macro approaches to the
future of the industry, which envision the end of the current way of satisfying
individual mobility and an inevitable shift towards a more sustainable mobility based on a new system populated by new actors, must face the important issue of how this transition will be managed. A better understanding of the micro issues inherent in such a transition, i.e. the evolution of the architecture of
future cars, the capabilities of the automakers, and the organization and governance of vertical and horizontal networks, is essential if we want to identify
meaningful implications for the corporate and public policymakers.
©
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