Overcapacity--and growing

Global Finance, Oct 1998

The auto industry is often cited as driving the worldwide notion of overcapacity-too many plants churning out too many vehicles. Each of the top five manufacturers in the Most Global Companies survey already reports a direct presence in at least 150 countries.And each one continues to build capacity in out-of-the-way, high-growth countries as its home market matures. Led by the transplant strategy of the Japanese, US and European companies are rapidly securing market shares in China, India, and Brazil.

But another phenomenon is also on the rise as buying power in emerging markets wanes, at least temporarily: a renewed emphasis on healthy, developed markets. Faced with the Asian downturn, Nissan in May announced plans for US restructuring as it prepares for a product onslaught in North America. Second-ranked Ford, which nurtures its domestic US market carefully, is also pushing to expand its European and Latin American operations. Strategic pairings such as the recent $39.5 million megamerger of Daimler-Benz and Chrysler promise to accelerate globalization in the automotive sector even more.

While the Most Global Companies are opening more local assembly lines, the car companies also are drawing on local research and engineering talent to make sure that products are tailored to the local market, points out Ashok Boghani, a vice president in the automotive practice of Arthur D. Little in Cambridge, Massachusetts. Nissan, for example, is launching eight new models during 1999, including a new sport utility vehicle, one of the hottest models in America today.

While tailoring their production to new markets, car companies are also buying components from local manufacturers in order to avoid high import tariffs.That makes parts manufacturers in Asian and Latin American countries, such as China, Brazil, and Mexico, tasty preys for other component manufacturers-or for the automakers themselves. Such companies may complement each another in regional markets and product niches, but their consolidation can strengthen global networks.