MALAYSIA INSTITUTE FOR SUPPLY CHAIN
INNOVATION (M.I.S.I)
Dr. Javad Feizabadi
[email protected]
Automotive Global Value Chain and upgrading policies
for developing countries
A presentation on Asian Development Bank Conference, Kuala Lumpur, 2014
Agenda
§  Global Value Chain in Automotive Industry
§  Automotive GVC and Developing
Countries
§  Future Trends in Automotive Industry and
Its Impact on GVC
Sec$on1
GVCINAUTOMOTIVEINDUSTRY
Introduc;on:GVC…
§  General trend of moving from producer-driven GCC to buyer-driven
GCC
§  In automotive industry: shifting from a producer-driven GCC to
component supplier GCC or at least toward a producer-supplier
driven GCC
§  Automaker-supplier relationship changed from a vehicle maker
having thousands of direct (tier1) suppliers towards a hierarchy of
suppliers (tier1, tier2, tier 3 suppliers and so forth)
§  Automaker deal only with first tier supplier which again steered
second tier suppliers and so on
§  This structure paved the way for close collaboration between
automaker and its suppliers (relational governance) and modular
production and governance (modular manufacturing is not
understood as delivering turnkey products)
§  New mechanism of overall GVC governance: The emergence of
quality standards with accompanying certification processes and
agencies (ISO 9000 and TS 16949)
key determinants of value chain governance §  Three key determinants of value chain governance
patterns:
q 
q 
q 
Complexity of transactions (seeking JIT supply by lead firms,
increasing product differentiation by lead firms)
Codifiability of information (Tacit and Explicit)
Capability of suppliers
GVCgovernanceandsupplierupgrading
Complexityof
transac;on
Codifica;onof
transac;on
Capabilityof
supplier
Governance
type
Upgradingof
suppliers
Low
High
High
Market
Independentof
chain
High
High
High
Modular
Open-ended
High
Low
High
Rela$onal
Open-ended
High
High
Low
Cap$ve
Product,
Process
High
Low
Low
Hierarchy
n/a
GVCsintheautomo;veindustry:anested
structure
§  Global integration in vehicle design and development
q 
q 
To leverage engineering effort across products sold in multiple end markets
Supplier’s design center located near to OEMs
§  Regional integration in automobile production
q 
q 
q 
q 
Political and technical reasons
North America, South America, Europe, Southern Africa and Asia
Local production pressure by government for setting up assembly
plants in many of established market
A precondition for suppliers to have a global presence
§  Within region: gradual investment shift toward locations with
lower operating costs
q 
q 
Mexico and US south in NA, Spain and Eastern Europe in Europe,
South East Asia and China in Asia.
Automotive parts are more heavily traded between regions than
finished vehicles.
§  Within countries: automotive production and employment are
typically clustered in one or a few industrial regions.
GVCsintheautomo;veindustry:anested
304
Sturgeon et al.
structure
.
A global industry:
Automakers and global suppliers
form buyer-supplier relationships
on a global scale. Inter-regional
vehicle and parts trade is
substantial, but capped by political
and operational considerations
Regional production systems:
Intra-regional finished vehicle and
parts flows are the dominant
operational pattern in this industry.
Local clusters:
National production systems:
Domestic production is still very strong in
this industry, and still dominates many
national markets.
Figure 1.
Activities tend to be
concentrated within clusters of
specialized activity, such as
design and
assembly
The nested geographic and organizational structure of the automotive industry.
GVCsintheautomo;veindustry:anested
structure
§  Global integration: at the level of buyer-supplier
relationships
§  Production tends to be organized regionally or nationally
q 
q 
Bulky, heavy and model specific parts production concentrated
close to final assembly plants to assure timely delivery
Lighter, more generic parts produced at distance to take
advantage of scale economy and low labor costs
§  Vehicle development is concentrated in a few design
centers
§  Local, national and regional value chains in the
automotive industry are “NESTED” within the global
organizational structures and business relationships of
the largest firms
Outsourcingboomandriseofglobalsuppliers
306
.
Sturgeon et al.
Figure 2. Outsourcing in the U.S. automotive industry, assembly and parts employment,
1958–2002.
GVCGovernanceintheautomo;veindustry
§  USautomo$veGVCgovernance:hierarchy
§  Japanautomo$veGVCgovernance:mixofrela$onalandcap$ve
governance
§  Europeautomo$veGVCgovernance:modular
§  Ineachna$onalautomarkettheautoindustrywasanOLIGOPOLY
withafewmoreorlessver$callyintegratedautoproduc$on
systemsandonlyEuropesawthedevelopmentofrather
independentinterna$onalautosuppliers.
§  Difficultyinriseoftruevaluechainmodularity:duetoapaucityof
robust,industry-widestandardsandcodifica$onschemes
q 
q 
Technicalreasons:deepinterrela$onamongvehicleperformance
characteris$cssuchasnoise,vibra$onandhandlinganditisdifficultto
quan$fytheirinterrela$onshipsinadvance
Structuralreasons:11producershavehugeamountofpowerover
suppliers
§  Therela$onallinkagesinautoGVClimitstheeconomyofscalein
produc$onandeconomyofscopeinvehicledesign
Newtrendsandstructuresforautomo;veGVC
1.  Thevehicleassemblers’shareofthetotalvehiclevalue
decreasedfrom75%in1955and50%in1975downto25%
in1995,withsuppliersmaking25%,50%and75%
respec$vely.
2.  Theautosuppliersystemisdominatedbyfirst$ersuppliers
genera$ng38%ofvalueadded,second$ersuppliersmaking
26%andthird$ersuppliershaving11%in1995.
3.  Thestra$fica$onoftheautosupplychainischangingfurther
withnewspecializa$onamongfirst$ersuppliers,comprising
q 
q 
q 
q 
Systemintegrators(includingmodulesuppliers),
Globalstandardized-systemsmanufacturers(forcomponentsor
systems),
Componentspecialists(includingsubassemblies)and
Rawmaterialsuppliers
Newtrendsandstructuresforautomo;veGVC
4.  Theinterna$onaliza$onofautoMNCvehiclemakershas
beenaccompaniedbyaninterna$onaliza$onofespecially
first$ersuppliers(forexample,throughfollowdesignand
followsourcing),buttheautomakersaswellasauto
suppliersares$llfairlyregionalizedintheirmarket
orienta$on
5.  NorthAmericancomponentsupplierssellprimarilyinNorth
AmericaandfarlessinEuropeandAsia,Europeanfirms
delivermorepartsinEuropethaninNorthAmericaandfar
moreinNorthAmericathaninAsia,whileAsiansuppliers
primarilysupplyAsiaanddelivermoreitemsinNorth
AmericathaninEurope.
6.  AmongEuropeansuppliersGermanfirmsdominatewith
morethantwicethesalesofFrenchfirms,whichagainsell
three$mesasmuchastheBri$shsuppliers.
GVCconclusioninautomo;veindustry
§  Automo$veindustryissimilartoapparelandelectronicsinthatthe
geographicalscopeofbothleadfirmsandtheirlargestsuppliers
expandedinawaveofoffshoreinvestment,mergers,acquisi$ons,
andequity-basedalliancesinthe1990s.
§  Automo$veindustryembracedoutsourcingwithoutarobustsetof
industrystandardsinplaceforspecifyingthetechnical
characteris$csofproductsandprocesses.
§  Technicalnecessity,poli$calsensi$vityandmarketvaria$onhave
keptfinalvehicleassembly,andbyextensionmuchofparts
produc$on,closetoendmarket.
§  Economicgeographyofautomo$veindustryisplayingout
differentlyindifferentsegmentsofvaluechain.
q 
q 
q 
q 
Concentra$onofdesignengineeringinexis$ngclusters,
Dispersalofsomeconceptualdesigntogainaccessto“leadusers”,
Regionalintegra$onofproduc$on,and
forsomecategoriesofparts,globalsourcing.
Sec$on2
AUTOMOTIVEGVCAND
DEVELOPINGCOUNTRIES
Developingcountriesandposi;oninginauto
GVC
§  GVCapproachisdeficienttoanalysisemergenceofglobal
autosuppliersandtheirposi$onindomes$cautoindustries
indevelopingcountries.
q 
q 
Hiddenassump$onthatautomakersarecharacterizedbyhigh
capability(rela$vetosuppliers)
TheGVCapproachsuffersfromins$tu$onalamnesiaoratleast
downgradingofins$tu$onalexplana$ons.
§  Overallquasihierarchyandcap$vevaluechainsinauto
industryindevelopingcountries
q 
q 
Encourageproductandprocessupgrading
hinderfunc$onalupgrading
TypesofgovernanceofGVCbycapabilityofproducer
Capabilityof
producer
Complexityof
transac;on
Codifica;onof
transac;on
Capabilityof
supplier
Governance
type
Upgradingof
suppliers
High
Low
High
High
Market
Independentof
chain
High
High
High
High
Modular
Open-ended
High
High
Low
High
Rela$onal
Open-ended
High
High
High
Low
Cap$ve
Product,Process
High
High
Low
Low
Hierarchy
n/a
High
Low
High
Low
Vendor
Product,Process
Low
Low
Low
Low
Producer
Deficient
Stalledatlow
level
Low
Low
Low
High
Supplier
efficient
Upgrading
producerand
sub-suppliers
Low
High
Low
High
Supplierdriven
Upgrading
producerand
sub-suppliers
Ins$tu$onalcontextandcondi$ons
MalaysiaandKorea
§  Sheersizeandconsolida$onoftheKoreanautomobile
marketandindustrymadeKoreainteres$ngforglobal
supplierswhilethesamecouldnotbesaidaboutMalaysia.
§  Bothcountriesfollowedapolicyofde-linkingwithforeign
autofirmsaimingforadomes$candlaterna$onalowned
autoindustry
§  Na$onalprojectsbeganasJVsandtheysetupaspecial
vendorprogramtosupportindigenousautosupplier
development
§  Interna$onalperformance:successinexpor$ngfollowedby
outwardFDIinKoreaduring1990swhilena$onalautopolicy
inMalaysiadidn’tgenerateexportsuccessandna$onal
protec$onismhasremainedun$lnow
MalaysiaandKorea
§  IndigenousautosuppliersinKoreaandMalaysiaarerelegatedto
lower$erposi$onswhileaimingforupgradingbywayofshiking
fromvendorandcapturedgovernanceintomodulargovernance.
§  Maindifference:lackofcapabilityofMalaysian’sna$onalauto
manufacturerstoundertakemarketupgradingintoexpor$ngand
upgradingitsna$onalsupplierbase.
§  AweakMNCpartnerforMalaysiawithverylessassistanceto
developindigenoussupplierfirms
§  Malaysia:astateownedcompanywascreatedtocatchupwith
verysameJapaneseautomakerandsuppliertechnology
§  Korea:na$onalautomakerswereestablishedbyprivateowned
chaebols,largeconglomerateswithexperiencedmanagementand
alargerdomes$cmarketasasteppingstoneforaggressiveexport
promo$on
MalaysiaandKorea
§  Korea:largeautocompaniesfailed,buttheKoreanautoindustry
survivedandsodidthedominantplayer,HyundaiMotorwithits
subsidiaryKiaMotorsanditsaffiliatedcoresupplier,Hyundai
Mobis
§  HyundaiMotorrespondedtothecrisisbywayofrestructuringfor
modularmanufacturing–HyundaiMobisplayedacrucialrolein
this.
§  HyundaiMobisseemstohavecapacityandcapabilitytobeontop
layerofglobalautosuppliers.
§  InaGVCperspec$ve,localautosuppliersinbothKoreaand
Malaysiawereeitherintegratedintothena$onalauto
manufacturingcorpora$onsorgovernedas“vendor”or“captured”
companies.(beingwhollydependentonthesamena$onalauto
assemblersandthecustomer’stechnologicalandfinancialsupport)
Czech
§  SecondlargestautoproducerakerRussiaincentralEurope
§  Tier1suppliersareforeignTNCsanddomes$csupplierstend
tobein$er3and2withlesspoten$alforfunc$onal
upgradinginperipheralregionsofautomo$vemanufacturing
§  In1990s,Czechiaautoindustrywasdominatedbyasingle
assembler(SkodaAuto)andcomponentindustrywasthus
overwhelminglydependentonsupplyingSkoda
§  Insecondhalfof1990sand2000stheCzechautomo$ve
industrydiversifiedandlowereditsdependenceonSkoda
§  Posi$onofCzech-basedautomo$vefirmshasimprovedin
GVCs
Turkey
§  Ascomponentsuppliersintheperipheryofautomo$ve
produc$on,suchasthoseinBursa,Turkey,havegainedthe
competenciesnotonlytomanufacturetothecost,quality
andflexibilityspecifica$onsrequiredbytheircustomersbut
alsoofdesignandproductdevelopment,
§  LeadfirmsintheTurkeyautomo$veindustryhaveturnedto
modularvaluechains,wherecompetentsuppliersprovidea
rangeofserviceswithlessdependenceontheircustomers,as
awayofsourcingfromthesesuppliers.
§  GVCgovernanceisdynamicandsuppliersintheperiphery
havesomeroomforbreakingpowerasymmetriesassociated
withspecificmodesofgovernanceinGVCs
Sec$on3
FUTUREOFAUTOMOTIVE
INDUSTRYANDITSIMPACTONGVC
Outlookofglobalautomo;veindustryin2020
Outlook of the Global Automotive Industry in 2020
Urbanisation and Growth in New Markets to Bring Paradigm Shift in the Automotive Industry
Vehicle
Production and
Sales
Car of the
Future
New Business
Opportunity
• Over 110 million vehicles are expected to be sold in 2020, with Asia accounting for about
44 per cent of global sales.
• Small, subcompact and compact segments are expected to account for 55 per cent of
total sales.
• About one-fourth the sales are likely from vehicles priced between $10k and $15k, and
with a length of 3,500 mm to 4,500 mm.
• As 50 per cent of the vehicles are to be produced in Asia, OEMs are looking to increase
their production capacity, due to the low-cost manufacturing capabilities in the region.
• By 2020, 12 key OEM groups, accounting for nearly 75 per cent of global production
share, are expected to reduce their total platforms by over 30 per cent.
• Green vehicles such as hybrids, EV and vehicles driven on alternate fuel are predicted to
account for about 30 per cent of global sales.
• About 6-8 per cent of global light vehicles sold in 2020 will be electric vehicles.
• The niche microcar segment in Europe is projecting a positive trend, with an expected
market size of approximately 800,000 vehicles by 2020.
• The market for small cars is expected to grow in North America, with about 60 new
models launched in 2010.
• There are expected to be about 1.2 billion vehicles on road by 2020, offering a huge
opportunity for aftermarket companies.
• Europe and North America are forecasted to have a car-sharing member base of over
15 million.
• Multi-modality is predicted to give rise to the formation of mobility integrators as one-stop
transport providers.
Source: Frost & Sullivan analysis.
M6A0-18
5
Outlookofglobalautomo;veindustryin2020
Future-Orientedautomo;veGVC
§  HowpowerregimeinGVCisgoingtobeaffectedbyallthese
trendsinautomo$veindustry?
§  Whatkindofins$tu$onswouldberequiredtofacilitatethe
industrialupgradingindevelopingcountriesforaddressing
thefuturetrendsofautomo$veindustry?
§  WhatwouldbetheimpactofGVCgovernancemode
consideringthenewtrendsinautomo$veindustry?
q 
q 
q 
Impactontransac$oncomplexity
Impactontacitknowledgetransferability
Impactonsuppliercapability