The automotive industry in developing countries

[CSpec]

The automotive industry in developing countries

VOX

The 2008 and 2009 recession started in the US, but due to a globalised financial sector and strong international trade linkages, its effects were felt around the world. Of particular importance for developing countries was the impact on global value chains. Reduced demand in the US and Europe directly affected developing economies due to the important production steps that are located there. In addition, Yi (2009) and Bems et al. (2009) argue and provide evidence that vertical linkages over distinct production steps amplified the trade shocks.

The financial crisis forced Western governments to intervene massively in the financial sector. While the form of intervention was widely debated and often criticised, few argued with the necessity. More controversially, governments also propped up manufacturing firms in several sectors to avoid large-scale bankruptcies in the midst of the recession. The recent book by Evenett, Hoekman, and Cattaneo (2009) contains case studies for agriculture, textile and apparel, services, and most notoriously, the automotive industry. A cyclical industry even in normal times, many automotive firms had to be showered with cash infusions, subsidies, and cheap credit to make them survive a total collapse in demand (Sturgeon and Van Biesebroeck 2009).

Foreign direct investment in developing countries by large multinational firms had accelerated dramatically since the late 1980s in a range of industries. At first these investments were mainly for export back to the developed world, but more recently the focus has shifted to burgeoning local markets as well. A common view of global value chains of this sort is that innovation and design functions – the higher value added activities in the chain – can remain in industrial countries while production migrates to the developing world. In this “win-win” scenario firms in developing countries can upgrade their capabilities by participating in global value chains while knowledge-intensive jobs continue to grow at home. As a result, trade and investment rules have been liberalised to support the development of global value chains (see Tanaka 2009).

Yet national- and regional-scale production has remained durable in some industries, and knowledge work is gradually coming under greater pressure from globalisation. In the automotive industry political pressure – in the form of indirect, latent protectionism – drives automakers to hedge their bets by locating production as close to end markets as is practical. Because automakers are few in number and therefore powerful, they have been able to force their largest suppliers to follow them abroad as they have globalised. This facilitates just-in-time production and design collaboration. Yet while this provides local content, it also makes it hard for local suppliers in developing countries to compete.

Indeed, as we argue in a recent paper (Sturgeon and Van Biesebroeck 2010), policymakers in the developing world seeking to cultivate the automotive industry have limited options. Political opposition to large-scale finished vehicle imports, combined with high minimum efficient scale in production, means that local market size dictates the potential for the industry’s growth. The dream of a viable, fully blown national automotive industry lies beyond the reach of all but the very largest developing countries, such as Brazil, China, and India. And even in these countries it seems inevitable that multinational firms will continue to dominate the domestic industry for a long time to come.

But we suggest that there are several other avenues open for development.

• First, a few midsize developing countries, such as South Africa, Thailand, and Turkey, are large and rich enough to support vehicle assembly for their domestic markets as long as they can export to their wider regions as well.
  
• Second, several developing countries are close enough to developed countries to supply parts on a just-in-time basis within regional trade blocs, such as Mexico in NAFTA and several eastern-European countries in the EU. These countries have become export hubs for labour-intensive parts and more recently for the export of low-cost vehicles as well.
  
• Third, there is a growing possibility for local automakers to leverage the new, relatively open global supply base to rapidly become more competitive locally and, perhaps, in world markets. For example, Chery Automobile, a small, state-controlled company based in Wuhu, China, has been able to develop and market a line of Chery brand vehicles within a remarkably short time by tapping the expertise of first-tier global suppliers with operations both in China and in the West. Chery obtains a full range of inputs from the global supply base, from parts to production equipment to design and system integration expertise. But since learning is relatively shallow, the sustainability of Chery’s approach will need to be proven over the long term.

Even when local firms have opportunities to move up the automotive global value chain, learning tends to be slower than in other industries because new vehicle programmes typically have four- to six-year life cycles. In addition, winning significant new contracts with multinational assemblers can require that suppliers collocate engineering work in or near the world’s main automotive design centres, southeast Michigan, Stuttgart, and Tokyo/Nagoya. Such investments are beyond the reach of local suppliers in poor countries.

Nevertheless, as the markets for motor vehicles shift to the developing world and production inevitably follows, more development and design work will shift as well. The automotive cluster in Shanghai has only a few important design centres so far, but local Chinese firms are trying hard to fill the vacuum. In India domestic firms have deeper engineering capabilities, and the small, bare-bones vehicles that dominate the local market comprise a segment that has eluded most multinational firms so far. It remains to be seen whether these vehicles can be successfully exported. The prospects for local companies in automotive global value chains are still less promising than in other industries, but the future could eventually become significantly brighter.