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Automotive Industry

Globalization: myths, speculations & what you need to think about

Automotive Design & Production, Oct, 2005 by Kim Korth

Over the last three years, IRN has written several articles for AD & P focusing on the continued globalization of the automotive industry. For obvious reasons, there has been a particular emphasis on the rapid emergence of China, both as a growing new market opportunity and as a major competitive threat to many North American suppliers. While China has dominated most of the media, the other major issue driving globalization in the automotive industry has been the continued consolidation of the automotive OEMs. While we would argue that the only truly global OEM player is Toyota, there are now a number of multi-region organizations such as Daimler-Chrysler and Nissan-Renault that are driving the industry to think beyond regional boundaries. 2005 has become something of a watershed year in terms of globalization. Virtually every major industry issue--from the rapid rise in price increases for steel, oil, and plastic to the design of future platforms and powertrains--can be traced to some kind of global driver. The key for any company is to figure out which issues to ignore and/or monitor and which ones may have a profound impact on your business.

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Keeping Globalization in Context

There is a very popular book making the rounds right now called: The World is Flat: A Brief History of the Twenty-First Century by Thomas L. Friedman. It takes a look at a number of current trends and economic disequilibriums and makes some fascinating predictions about the future. It takes much of current conventional wisdom about what our new global world will look like and turns it on its head. It makes a compelling case, for example, that some of the current major global outsourcing trends will become equally significant insourcing trends in the not-too-distant future. This book reminds us of numerous books that came out in the mid- to late-1980s predicting the total economic dominance of Japan. As with all books of this type, they did quite a good job of describing current issues and a pretty lousy job using these issues to accurately predict the future.

Our obvious point is that business leaders need to be careful making too many macro prognostications about the future. Most of the time you are going to be wrong. At IRN, we are great believers in reading everything possible about an issue so long as you follow a core belief of a colleague of mine: "All theories and models are wrong; some of them are useful." The automotive industry has a very bad track record of jumping on the latest conventional wisdom and making numerous bad business decisions as a result. Given all the economic pressures of the last 2-3 years, we are concerned that we have entered another one of those periods of treating theories about the future of this industry as if they were facts. A few of the key "factoids" that appear to be driving major industry decisions:

All Significant Manufacturing Globally Will Soon Be In China

There is no question that China will continue to grow as a major base for manufacturing and that for certain segments, the ability to compete with China from manufacturing bases in either North America or Western Europe is unlikely. It is equally true, however, that there are compelling reasons why certain sectors and types of manufacturing are likely to continue in these developed regions. One of the best books ever written on globalization is Michael Porter's The Competitive Advantage of Nations. One of the fundamental theories of his book is that the least sustainable competitive advantage is lower labor rates. While we are aware that there is a lot more to the explosion of Chinese manufacturing in the last 10 years than just lower labor rates, it has been a huge competitive advantage for China in the short term. The question is how long this advantage will last and when will the success of their economy begin to bring their cost structure more in line with the rest of the world.

Which leads us to one of IRN's fundamental automotive theories (which means it may be wrong but hopefully it is useful). We believe the industry is on track for three major automotive-producing and -consuming regions: North and South America, Europe and Africa, and Asia (there is some debate on whether you put India in the European region or the Asian region, but for purposes of this discussion, it doesn't really matter). Based on this assumption, it is likely that each region will need a local supply and assembly base to support their needs. It may be economically viable to produce some highly commoditized parts such as low-end fasteners and wire harnesses in one region and then ship them globally, but even these types of products are likely to end up in the low-cost location for each region. This would suggest that eventually Mexico and Central America will end up being the low-cost region for North and South America and that most Chinese facilities will be supporting the Asian region. Whether this happens in two years or 10 years is the predictive challenge.

Automotive Industry

Globalization: myths, speculations & what you need to think about

Automotive Design & Production, Oct, 2005 by Kim Korth

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