Int. J. Technological Learning, Innovation and Development, Vol. 4, Nos. 1/2/3, 2011 181
Copyright © 2011 Inderscience Enterprises Ltd.
Global value chains in the automotive industry:
an enhanced role for developing countries?
Timothy J. Sturgeon*
Industrial Performance Centre (IPC),
Massachusetts Institute of Technology (MIT),
292 Main Street, E38-104, Cambridge, MA 02139, USA
E-mail: sturgeon@mit.edu
*Corresponding author
Johannes Van Biesebroeck
Centre for Economic Studies, K.U. Leuven,
Naamsestraat 69, 3000 Leuven, Belgium
E-mail: Johannes.VanBiesebroeck@econ.kuleuven.be
Abstract: In this paper, we apply global value chain (GVC) analysis to recent
trends in the global automotive industry. We focus on how the recent economic
crisis has accelerated pre-crisis trends towards greater importance of the
industry in the developing world. The regional structure of production in the
industry has largely confined the impact of the crisis within each major
producing country/region. Opportunities to move up in the value chain for
suppliers in emerging economies have proliferated and are likely to become
even stronger now that an increasing number of new models are developed
specifically for local markets. While it appears that some large developing
countries, especially China and India, are gradually gaining more independence
and autonomy as their industries and markets gain size and importance,
supplier countries such as Mexico and countries in East Europe remain as
dependent appendages of adjacent regional production systems.
Keywords: outsourcing; automotive parts and assembly; global suppliers;
China; India.
Reference to this paper should be made as follows: Sturgeon, T.J. and
Van Biesebroeck, J. (2011) ‘Global value chains in the automotive industry:
an enhanced role for developing countries?’, Int. J. Technological Learning,
Innovation and Development, Vol. 4, Nos. 1/2/3, pp.181–205.
Biographical notes: Timothy J. Sturgeon is a Senior Research Affiliate at
the Industrial Performance Centre (IPC) at the Massachusetts Institute of
Technology (MIT) and Coorganiser of the Global Value Chains Initiative
(http://www.globalvaluechains.org). His research focuses on the process of
global integration, with an emphasis on offshoring and outsourcing practices
in the electronics and automotive industries. He is interested in both
the distinctive and common aspects of industries and places, and the
implications of these for economic performance, employment, technological
learning, and industrial upgrading. He is a Co-editor (with Momoko
Kawakami) of Local Learning in Global Value Chains: Experiences from East
Asia, from Palgrave Macmillan, and has published his research in international
peer-reviewed journals including Studies in Comparative International
Development, Industrial and Corporate Change, Review of International
182 T.J. Sturgeon and J. Van Biesebroeck
Political Economy, Journal of East Asian Studies and Journal of Economic
Geography.
Johannes Van Biesebroeck is a Professor of Economics at the K.U. Leuven,
Belgium and a Research Affiliate of the CEPR. He received his PhD in
Economics from Stanford University in 2001 and worked previously at the
University of Toronto. He specialises in the areas of industrial organisation,
international trade, and development economics, with a particular focus on the
automotive industry and the Chinese economy. He has advised the Canadian
and Flemish governments on trade and industrial policy issues and in 2009, he
was awarded a European ERC grant.
1 Introduction
This paper provides an overview of global value chains (GVCs) in the automotive
industry, analyses the role of developing countries in global production and consumption,
examines changes associated with the recent economic crisis and government responses,
and provides a picture of where the industry is headed, particularly in light of the
increasing importance of both production and consumption in large developing countries
such as China and India.
Section 1 highlights three important ways in which the organisation of GVCs in the
automotive industry differs from other industries. First, the export of finished vehicles to
large mature markets is effectively limited by political considerations. Second, the
product architecture is of integral nature, leading to thick ‘relational’ linkages between
lead firms and Tier 1 suppliers, whose role in the industry is more important than in the
past. Third, because of these first two features, the organisation of production has
remained more regional than global.
Section 2 briefly summarises industry-specific government responses to the recent
economic crisis, focusing on mature markets, especially North America and Europe. We
mention these interventions because they lay bare the influence politics has on the
industry, and vice versa. These policies will continue to affect the industry as market
growth (and hence production) shift to developing countries and local firms begin to
compete more directly with multinational firms in developing countries and in world
markets.
In Sections 3 and 4, we focus our analysis on the position and role of developing
countries in the industry. We provide an overview of the different roles that
developing countries play in automotive GVCs, and compare the development
paths and role of domestic firms in China, India, and Mexico. These three countries have
relied – to varying degrees – on foreign direct investment by lead firms from mature
economies to jump-start their industries. Two features of the Chinese industry,
1 the leveraging of a well-developed supply base both locally, in Shanghai, and abroad
2 a domestic market that is sufficiently large to spur the development of vehicles
tailored to local tastes, position that country best for future development.
In Section 5, we summarise our insights and provide some policy recommendations for
the industry in developing countries.
Global value chains in the automotive industry 183
2 GVCs in the automotive industry
1
We begin with an overview how GVCs in the automotive industry are structured. We
highlight the strong regional organisation of production, the growing importance of
globally engaged suppliers, and the persistence of ‘relational’ linkages between lead
firms (i.e., the automakers) and first tier suppliers.
2.1 The evolution of GVCs in the automotive industry
In other writing, we have argued that the automotive industry is neither fully
global, consisting of a set of linked, specialised clusters, nor tied to the narrow geography
of nation states or specific localities, as is the case for some cultural and service
industries (Sturgeon et al., 2008). Global integration has advanced as firms have sought
to leverage engineering effort across products sold in multiple end markets. And, as
suppliers have taken on a larger role in design, they have established their own design
centres close to those of their major customers to facilitate collaboration. On the
production side, the dominant trend is regional integration, a pattern that has been
intensifying since the mid-1980s for both political and technical reasons. In
North America, South America, Europe, Southern Africa, and Asia, regional
parts production tends to feed final assembly plants producing largely for regional
markets. Political pressure for local production has driven automakers to set up final
assembly plants in many of the major established market areas and in the largest
emerging market countries, such as Brazil, India, and China. Increasingly, lead firms
demand that their largest suppliers have a global presence as a precondition to be
considered for a new part (Sturgeon and Florida, 2004). Because centrally designed
vehicles are manufactured in multiple regions, buyer-supplier relationships typically span
multiple production regions.
Within regions, there is a gradual investment shift toward locations with
lower operating costs: the Southern America and Mexico in North America; Spain and
Eastern Europe in Europe; and South East Asia and China in Asia. Ironically, perhaps, it
is primarily local firms that take advantage of such cost-cutting investments within
regions (for example, the investments of Ford, GM, and Chrysler in Mexico; and
Volkswagen and Peugeot in Eastern Europe), since the political pressure that
drives inward investment is only relieved when jobs are created within the largest
foreign markets (for example, Japanese automaker investments in North America and
Europe have been concentrated in the USA, Canada, and Western Europe). Automotive
parts, of course, 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. In some cases these clusters specialise in specific aspects of the
business, such as vehicle design, final assembly, or the manufacture of parts that share a
common characteristic, such as electronic content or labour intensity. Because of deep
investments in capital equipment and skills, regional automotive clusters tend to be very
long-lived.
To sum up the complex economic geography of the automotive industry, we can say
that global integration has proceeded the farthest at the level of buyer-supplier
relationships, especially between automakers and their largest suppliers. Production
tends to be organised regionally or nationally, with bulky, heavy, and model-specific
184 T.J. Sturgeon and J. Van Biesebroeck
parts-production concentrated close to final assembly plants to assure timely delivery
(for example, engines, transmission, seats and other interior parts), and lighter, more
generic parts produced at a distance to take advantage of scale economies and low labour
costs (for example, tyres, batteries, wire harnesses). Vehicle development is concentrated
in a few design centres. As a result, local, national, and regional value chains in the
automotive industry are ‘nested’ within the global organisational structures and business
relationships of the largest firms.
2.2 The increasing role of large suppliers
One of the main drivers of global integration has been the consolidation and
globalisation of the supply base. In the past, multinational firms either exported parts to
offshore affiliates or relied on local suppliers in each location, but today global
suppliers have emerged in a range of industries, including motor vehicles (Sturgeon
and Lester, 2004). Since the mid-1980s and through the 1990s, suppliers took on a
much larger role in the industry, often making radical leaps in competence and
spatial coverage through the acquisition of firms with complementary assets and
geographies. Supplier consolidation at the worldwide level has not progressed as far
as in North America, but it has picked up speed in recent years as the formation of
new global lead firms and groups, such as DaimlerChrysler in 1999 (a deal that was
undone in 2007), Nissan-Renault in 1998, and Hyundai-Kia in 1999 lead to some slow
and partial consolidation and integration of formerly distinct supply bases. With the
recent economic crisis, some of these acquired companies are now being sold off, Saab
and Volvo are two examples, partially reversing this trend. On the other hand, some of
the industry’s largest mergers, such as the alliance between Renault and Nissan, appear to
be quite stable.
As automakers set up final assembly plants in new locations and tried to leverage
common platforms over multiple products, and in multiple markets, they pressured their
existing suppliers to move abroad with them. Increasingly, the ability to produce in all
major production regions has become a precondition to be considered for a project.
However, what is emerging in the automotive industry is more complex than a seamless
and unified global supply base, given the competing pressures of centralised sourcing
(for cost-reduction and scale) and regional production (for just-in-time and local content).
The need for full co-location of parts with final assembly varies by type of component, or
even in stages of production for a single complex component or sub-system. Suppliers
with a global presence can try to concentrate their volume production of specific
components in one or two locations and ship them to plants close to their customers’ final
assembly plants where modules and sub-systems are built up and sent to nearby final
assembly plants as needed.
What should be clear from this discussion is that the economic geography of the
automotive industry cannot be reduced to a set of national industries or a simple network
of clusters. Business relationships now span the globe at several levels of the value chain.
Automakers and first-tier suppliers have certainly forged such relationships, and as the
fewer, larger suppliers that have survived have come to serve a wider range of customers,
these relationships have become very diverse. With consolidation and crisis, we must
question the staying power of smaller, lower-tier, local suppliers, however well supported
they are by local institutions and inter-firm networks, especially since many upstream
Global value chains in the automotive industry 185
materials suppliers, such as the automotive paint supplier PPG, are also huge companies
with global operations.
2.3 Why regional production?
Since the late 1980s, trade and foreign direct investment have accelerated dramatically in
many industries. Specifically, a combination of real and potential market growth with a
huge surplus of low-cost, adequately skilled labour in the largest countries in the
developing world, such as China, India, and Brazil, has attracted waves of investment,
both to supply burgeoning local markets and for export back to developed economies.
The latter has been enabled and encouraged by the liberalisation of trade and investment
rules under an ascendant World Trade Organization (WTO). Yet regional production has
remained very durable in the automotive industry. Because lead firms in the automotive
industry are few in number and very powerful, they have the strength to drive supplier
co-location at the regional, national, and local levels for operational reasons, such as
just-in-time production, design collaboration, and the support of globally produced
vehicle platforms. But politics also motivates lead firms to locate production close to end
markets, and this creates additional pressure for supplier co-location within regional-scale
production systems.
While consumer tastes and purchasing power, driving conditions, and the nature of
personal transportation can vary widely by country, local idiosyncrasies in markets and
distribution systems are common in many industries, and it is possible to feed
fragmented and variegated distribution systems from centralised production platforms, as
long as product variations are relatively superficial. The continued strength of
regional production in the automotive industry, then, is one of its most striking features
(Lung et al., 2004)
2
. The regional organisation of vehicle production stands in stark
contrast to other important high-volume, consumer-oriented manufacturing industries,
especially apparel and electronics, which have developed global-scale patterns of
integration that concentrate production for world markets in fewer locations (see the
papers of Frederick and Gereffi on the apparel GVC and of Sturgeon and Kawakami on
the electronics GVC in this special issue).
Why is political pressure for local production felt so acutely in the automotive
industry? The high cost and visibility of automotive products, especially passenger
vehicles, among the general population can create risks of a political backlash if
imported vehicles become too large a share of total vehicles sold. This situation
is heightened when local lead firms are threatened by imports. In our view, the
willingness of governments to prop up or otherwise protect local automotive firms
is comparable to industries such as agriculture, energy, steel, utilities, military
equipment, and commercial aircraft. As a result, lead firms in these industries
have adjusted their sourcing and production strategies to include a large measure of
local and regional production that firms in other industries have not. This explains
why Japanese, German, and Korean automakers in North America have not concentrated
their production in Mexico, despite lower operating costs and a free trade agreement
with the USA (Sturgeon et al., 2008)
3
. Japanese automakers have also shifted
European production to Eastern Europe later and less aggressively than US and
European lead firms, and have even moved to China later than their European and
American competitors have
4
.
