THE AUTO INDUSTRY: FROM UNFETTERED EXPANSION TO SUSTAINABLE DEVELOPMENT. CHALLENGES AND OPPORTUNITIES

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1 THE AUTO INDUSTRY: FROM UNFETTERED EXPANSION TO SUSTAINABLE DEVELOPMENT. CHALLENGES AND OPPORTUNITIES Giuseppe Volpato *, Francesco Zirpoli ** Abstract This article provides an overview of the main consequences of the recent economic crisis on the auto industry and examines its implications for firms strategies in the light of the recent turn of public policies. We show that the industry of industries is still a potential source of organizational, strategic and managerial innovation. We also submit that firms strategies and industrial policies would greatly benefit from a more focused and analytical approach combining both micro and macro perspectives. Keywords: automotive industry, corporate strategy, sustainable development, electric car Parole chiave: industria automobilistica, strategia d impresa, sviluppo sostenibile, auto elettrica Jel classification: L22, L62, L53, L52 Received: Final revision received: This paper is the result of the joint work of the authors. However, Giuseppe Volpato wrote section one and Francesco Zirpoli section four. Introduction, conclusion, sections two and three were written jointly. * Università Ca Foscari Venezia, Dipartimento di management; volpato@unive.it. ** Università Ca Foscari Venezia, Dipartimento di management; fzirpoli@unive.it. Economia e Politica Industriale - Journal of Industrial and Business Economics 2011 vol. 38 (2): 5-24 e/o la messa a disposizione al pubblico su rete pubblica o privata,

2 Introduction In 1946, Peter Drucker labeled the international automotive industry the industry of industries, it being a cradle for technological, manufacturing, commercial and organizational innovations that shaped also the structure of many other industries. Today, this industry is undergoing a highly delicate transition due to the overlapping of many competitive, geographical and environmental factors. In Western countries, where the motorization process has reached hard-tobeat levels, the past twenty years (at least) have seen automotive demand take the almost exclusive form of replacement car purchases. Conversely, other countries, including BRIC (Brazil, Russia, India and China) and Eastern Europe, have entered a phase of high-speed motorization that is offsetting the industry s potential decline. 1 The financial crisis that hit the world economy in 2008 has further widened the gap between Western and BRIC countries in the development of the automotive industry. The crisis has turned the West s long-term concern of losing jobs and manufacturing facilities to the developing countries into a pressing need to save its automotive industry (and the economy as a whole), leading governments to start an exceptional phase of state aid to support auto demand and supply. This has been the case in the U.S., where the administration has played a major role in saving two of the big three American automakers, but also in Europe. At the same time, the need for ecologically sustainable development prompted by the need to dramatically reduce both polluting and greenhouse-gas emissions is spurring a robust increase in investments in product and process innovations able to provide more effective solutions, such as natural gas-powered vehicles, new-generation electric vehicles, fuel cell vehicles, and the like. The combination of the crisis, the complex interdependences between industrial trajectories in developing and Western countries, and the need to develop and market new technologies in favor of more sustainable mobility opens up corporate policy and public policy to a wide range of possible alternative routes, all marked by high degrees of uncertainty. Nevertheless, the disparities in managerial visions across the different industrial groups and public policy in the countries where the automotive industry plays a key role in economic development have led to fierce debate over the possible strategic options. 1. The global automotive industry has gone through a long and complex process of growth and reorganization during which automakers have pursued different profit strategies. For a comprehensive overview of this process see Freyssenet et al. (1998); Freyssenet, Shimizu and Volpato (2003a, 2003b). 6 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

3 For example, given the dependence of the automotive industry on hefty infrastructural investments to drive automobile development, many of the most innovative green technological solutions will only deliver benefits to the companies through state interventions centered on territorial planning and industrial policy. However, the complexity and timeframe of such interventions are so great as to raise doubts over the willingness and capacity of the individual governments to complete them. The article provides an overview of the main consequences of the recent crisis on the auto industry and offers a set of implications for corporate policy in light of the recent changes in public policy. We claim that the industry of industries is still a potential source of organizational, strategic and managerial innovation and believe that corporate and industrial policy would greatly benefit from an analytical approach that combines the micro and the macro perspectives. Section one outlines the recent market development of the auto industry and how the crisis has helped to accelerate existing trends and create new ones. Section two describes how public policy has attempted to counter the impact of the international economic downturn. Section three presents the strategic options left to automakers given the current scenario. Ultimately, section four sketches the possible evolution of the industry from the viewpoint of the automakers and introduces this Special Issue. 1. Market trends and the impact of the crisis on the automotive industry In order to understand where the market is going and the implications for the automakers strategy, we must first provide data on the number of vehicles per one thousand inhabitants and its evolution over time. This data not only gives a simple and clear indication of whether the market has the potential to grow or not, but also offers a straightforward indication to automakers about the kind of vehicles customers are likely to buy. Table 1 shows the number of vehicles per one thousand inhabitants in ten countries, from which we can see that the distribution of cars per inhabitant is extremely heterogeneous. Moreover, many commentators assume that the developing countries will soon close the gap with the Western economies. 2 For example, while India s 2008 data looks very much like Germany s for 1950, India s GDP forecast of similar or higher growth rates to Europe in the 1950s and 1960s implies that we can reasonably expect also the country s auto market to spur rapid growth. On the other hand, the data for the U.S., Italy and other Western 2. See Global Insight (2010). Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 7

4 countries underscore the significant slowdown in market expansion. That is because when the number of vehicles per one thousand inhabitants surpasses three hundred, the market then becomes a replacement market, i.e. the need for individual mobility is fulfilled and customers buy a new car only to replace their old car (Volpato, 1983). Such a situation reduces the number of new vehicle registrations and customers change their attitude to buying a new car. The proliferation of automobile segments and the acceleration of new product development cycles are some of the strategies implemented by the automakers to induce buyers to upgrade their vehicles and combat the shrinking in the Western markets. Table 1 Number of vehicles every one thousand inhabitants Country U.S Japan n.d Germany France UK Italy Brazil n.d. n.d Russia n.d. n.d. n.d. n.d. n.d China n.d. n.d. n.d India n.d. n.d including cars, light commercial vehicles and trucks. Source: ANFIA (Associazione Nazionale Filiera Industria Automobilistica), UNRAE (Unione Nazionale Rappresentanti Autoveicoli Esteri), CCFA (Comité des Constructeurs Français d Automobiles). In the 1990s, the same reason led the Western automakers to start looking at BRIC as a possible new market. Most industry players interpreted the GDP growth of these countries as the prelude to the growth of vehicle sales in the respective markets. An expectation that has been fully confirmed by the facts, given that China has become the number one vehicle market. However, the globalization of the auto industry has been a costly business. First, the automakers often have been forced to set up production plants in the developing countries to gain access to those markets, which has led to an increase in global production capacity and, as a consequence, the overall structural rigidity of the industry. Production overcapacity has been the main reason for the low profitability of all the automakers since the end of the 1990s, with overcapacity peaks of up to 30%. 3 Similarly, production overcapacity is the main reason why the growth 3. See PriceWaterHouse&Coopers (2010). 8 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

5 in sales from forty-eight million light commercial vehicles in 1995 to fiftyeight million in 2003 was not accompanied by a higher profitability of the automakers. 4 The impact of the recent crisis has exacerbated the overcapacity problem. Table 2 shows that the global utilization of plants was just 63.7% in 2009 and that the outlook is unlikely to improve. Table 2 Global utilization of plants (%) Region E 2012E Asia-Pacific EU East Europe North America South America Middle East & Africa Total global assembly Global utilization Source: PriceWaterHouse&Coopers (2009). Overcapacity is not only leading to a further profit squeeze at the automakers, but also is raising their operational risks, although the problem has not affected all automakers to the same extent. Indeed, our computations on the impact of such a situation on the automakers financial performance indicate that while the European and Japanese automakers managed to stay profitable, at least until 2008, the U.S. automakers were already experiencing a decline in both sales and margins (table 3). So it is not surprising that, when the crisis hit in 2008, the big three were the most exposed to the risk of bankruptcy. Table 4 provides a picture of the winners and losers by comparing the production levels and ranking of the major industry players in 2006 and 2009, i.e. just before and after the crisis. The reason the crisis had such a heterogeneous impact on the automakers production volumes and relative ranking is due to the fact that the automakers have very limited possibilities to react to a crisis in the short term. As a result, regardless of their actual ranking, the 2008 crisis found some automakers well positioned (financially but also in terms of product portfolio) to contain the loss of sales, while others took advantage of the market s crisis-driven changes and yet others found themselves in a much weaker position. 4. See Global Insight (2010). Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 9

6 Table 3 Automakers financial results European a OEMs * (million euros) Sales 304, , , ,813 Operating income 10,478 16,162 8,054-1,452 Net incom 11,638 14,308 6,367-6,557 Capex 18,162 18,297 19,661 16,996 R&D costs 14,365 16,143 15,933 14,707 Number of employees 361, , , ,516 Units sold 15,875,673 16,937,552 16,465,956 15,995,646 Operating income on sales (%) Japanese b OEMs (million euros) Sales 289, , , ,776 Operating income 23,212 22,722 23, ,000 Net incom 18,105 17,789 18,450-4,541 Capex 18,391 17,118 17,236 19,311 R&D costs 13,367 12,727 13,439 15,192 Number of employees 653, , , ,795 Units sold 18,373,000 19,184,000 20,339,000 17,935,000 Operating income on sales (%) 8, U.S. c OEMs (million euros) Sales 291, , , ,725 Operating income - 18,929-5,906-16,395-7,753 Net incom - 11,621-28,114-28,807-77,721 Capex 11,389 9,209 n.d. n.d. R&D costs 11,389 9,209 n.d. n.d. Number of employees 550, , , ,000 Units sold 15,690,000 15,923,000 13,894,000 12,295 Operating income on sales (%) fiscal year for Japanese companies ends on March 31. For diversified groups (Daimler, Fiat, Honda, Nissan, PSA, Renault, Toyota) data refer to the automotive research. a European groups: BMW, Daimler, Fiat, Peugeot, Renault, Volkswagen; b Japanese groups: Honda, Mazda, Nissan, Suzuki, Toyota; c U.S. groups: Ford, GM. * original equipment manufacturer. Source: our elaboration on annual reports. 10 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

7 Table 4 Automotive groups: production of light vehicles and leadership ranking Group 2006 Ranking 2009 Ranking Group 2006 Ranking 2009 Ranking Toyota a 8, ,139 1 BMW k 1, , Volkswagen b 6, ,266 2 Daimler l 1, , GM c 8, ,460 3 Saic m , Hyundai d 4, ,335 4 Changan n , Renault-Nissan e 5, ,242 5 Mazda o 1, , Ford f 6, ,335 6 Chrisler p 2, PSA g 3, ,173 7 Mitsubishi q 1, Honda h 3, ,014 8 Faw r Fiat i 2, ,386 9 Tata s Suzuk j 2, , Chery t a Toyota brands in 2009: Daihatsu, Hino, Lexus, Scion, Toyota; b Volkswagen brands in 2009: Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat, Skoda, Volkswagen; c GM brands in 2009: Buick, Cadillac, Chevrolet, Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saturn; d Hyundai brands in 2009: Hyundai, Kia; e Renault-Nissan brands in 2009: Dacia, Infiniti, Mahindra Renault, Nissan, Renault, Sansung; f Ford brands in 2009: Ford, Lincoln, Mercury, Volvo; g PSA brands in 2009: Citroën, Peugeot; h Honda brands in 2009: Acura, Honda; i Fiat brands in 2009: Abarth, Alfa Romeo, Ferrari, Fiat, lancia, Maserati, Tofas; j Suzuki brands in 2009: Maruti, Suzuki; k BMW brands in 2009: BMW, Mini, Rolls Royce; l Daimler brands in 2009: Maybach, Mercedes, Smart; m Saic brands in 2009: Nanjing-MG, Roewe, Ssangyong, Wuling, Shangai Huizhong; n Changan brands in 2009: Changan, Harbin Hafei, Landwind; o Mazda brands in 2009: Mazda; p Chrisler brands in 2009: Chrisler, Dodge, Jeep. Ram; q Mitsubishi brands in 2009: Mitsubishi; r Faw brands in 2009: Faw; s Tata brands in 2009: Jaguar, Land Rover, Tata; t Chery brands in 2009: Chery, Vortex. Source: our elaboration on data from ANFIA, UNRAE, CCFA. Table 5 shows the possible reasons why some automakers suffered from the crisis more than others; it also shows how the crisis has triggered a marked shift towards the basic and small-size car segments. Table 6 reconciles the data from tables 4 and 5 and indicates how the market trends have indeed favored some automakers (at least in Europe), in particular, those with a product portfolio of small cars (e.g. Renault, PSA, Nissan, Fiat) and/or those which offer low-cost vehicles (e.g. Kia and Dacia). Similar trends are reported in the U.S. (see the paper by Helper in this Special Issue), where the market shift towards compact cars and hybrid and bi-fuel cars has favored the Japanese and Korean manufacturers Hybrids cars combine an internal combustion engine with an electric engine. Bi-fuel cars use engines that can work with different fuels, such as compressed natural gas and gasoline. Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 11

8 Table 5 Car segment trends Model 2009 Share (%) 2008 Share (%) Change(%) Basic 1,886, ,420, Small 4,074, ,674, Lower medium 3,867, ,254, Upper medium 851, , Near executive 767, , Executive 280, , Luxury 35, , Sports car/coupe 185, , People carriers 179, , SUVs 1,129, ,104, Mini-buses 105, , Utility 246, , Unidentified 19, , Source: AID (Automotive Industry Data) (2010). Table 6 Most successful brands in Europe in 2009 vs (% change) Brand Brand Volkswagen Lancia Audi Alfa Romeo Seat BMW Skoda Mini Peugeot Toyota Citroën Mercedes Ford Smart Volvo Nissan Renault Hyundai Dacia Suzuki Opel-Vauxhall Honda Chevrolet Kia Fiat Chrysler Source: ACEA (European Automobile Manufacturers Association) and ANFIA. 2. The role of public policy in Europe and the U.S. The main aim of the post-crisis public policy has been to save as many jobs as possible and avoid a snowball effect. In fact, a collapse of the automotive industry might have had a huge propagation cost across the whole economy, along with the relevant social consequences. Table 7 shows the job loss trend 12 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

9 in the U.S. automotive industry in the last ten years, highlighting the crisis-driven acceleration of the reduction in the workforce of both the automakers and their suppliers after The data is similar for Europe, where around one hundred and thirty thousand jobs were lost between 2008 and 2009 (Volpato and Zirpoli, 2011). Table 7 U.S. employment trends Motor vehicles (NAICS code 3361) Motor vehicle parts (NAICS code 3363) Year Annual Year Annual % % % % % % % % % % % % % % % % % % % % data type: all employees, thousands. Source: Bureau of Labour Statistics. Following, we outline the main measures taken by the EU and the U.S. to counter the effects of the crisis. In Europe, no comprehensive and coordinated industrial policy for the automotive industry has been formulated by the European Commission and the European Parliament, mainly because the interests of the EU members diverge all too often, making it impossible to develop a unitary approach. As a consequence, current European policy centers on two goals: to push the automakers towards a cleaner product portfolio and to deter the member states from introducing policies that create competitive imbalances within the EU. To achieve the first goal, the key European Directive 441/1991 introduced a maximum noxious vehicle emissions level and a continuous increase in the limit from the Euro 1 emission standard (the first limit) to the Euro 6 standard in The relative EU directives also call for the levying of fines on those automakers that fail to comply with the standards, i.e., by selling cars whose noxious emissions surpass the established threshold. Nevertheless, these restrictions are a double-edged sword for the European automakers. On the one hand, the restrictions reduce the attraction of the European market to foreign automakers (such as the Koreans). On the other, European products are more expensive and, consequently, pose a problem in the export markets. Pro- Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 13

10 vided that mostly small cars are imported to Europe (which can more easily comply with the stringent European emissions regulations), the combined effects of the severe EU regulations and sanctions seem to be negative for European automakers. That is not to say that the directives that combat noxious emissions have a negative effect on the automakers, but suggest the need for a more comprehensive EU policy on the matter. Currently, European policy is unfolding along the three main lines below: 1. support green technology research and development (R&D); 2. promote the introduction of incentives to buy green cars; 3. propose a common approach to encourage the adoption of electric cars through the development and standardization of a recharging infrastructure, the development of electric smart grids, and the updating of the rules on battery recycling. Quite surprisingly, there is no policy initiative to support methane or GPL as a short-term solution for environmental problems, despite the many advantages of such solutions (for a discussion see Stocchetti and Volpato, 2010). The crisis has hit the U.S. in a more dramatic way than Europe. As shown in table 3, above, U.S. automakers were already reporting negative results before the crisis reached its peak. While in Europe many jobs were at risk but no automaker risked bankruptcy (with the exception of Opel, owned by GM), in the U.S. the whole auto industry and, with it, the industrial future of the country seemed to be seriously threatened by the crisis. That led the Obama Administration to push Ford, GM and Chrysler into submitting a reorganization plan to obtain government support. And while Ford, thanks to its wise financial strategy, was prepared for the crisis and would have been able to overcome it with its own resources, the recovery plans presented by GM and Chrysler were considered inadequate. The Obama Administration wanted GM to replace its CEO and formulate a much more radical rescue plan but believed that Chrysler s chances of a turnaround were slim. In fact, GM had the right size (especially in terms of sales volume) to recover and presented positive results in some key geographical markets (such as Asia and South America). But Chrysler s situation seemed desperate. First, Chrysler s sales were insufficient to cover its costs, even if it had implemented a major cost-cutting plan. The company presented very limited R&D resources (R&D talents had left the company after its acquisition by Daimler and the subsequent takeover by the Cerberus investment fund). Second, its product offering had no cars in the small, compact and green segments that in 2008 were considered essential to survival, even in the U.S. (while the strength of GM in this market both in Asia and in Europe meant it could easily import fuel-efficient cars to the U.S.). Finally, Chrysler, with no access to the international markets, showed an overreliance on the U.S. market. 14 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

11 Unlike GM, which obtained financial support from the U.S. Administration, Chrysler risked being left to its fate, i.e. to fail. After a highly contested decision, the task force mandated by the Obama Administration to deal with the automotive crisis decided to give Chrysler a chance if it could find an industrial partner capable of counterbalancing Chrysler s structural weaknesses. At which point the option to involve Fiat in Chrysler s bailout took momentum. In March 2009, Chrysler and Fiat were given an extra month to present a credible rescue plan to the task force. The plan was eventually accepted and Chrysler obtained funding. Fiat was, in fact, considered in a position to offer complementary resources to Chrysler, including access to the European, Asian and South American markets, small-size engine technology, and the managerial expertise needed to get through the bailout. In this latter respect, the fact that Fiat had just succeeded in turning itself around provided an assurance that Fiat s top management had the right skills and enough experience to deal with Chrysler s problems. 6 In both the GM and the Chrysler case, the workers played a relevant role in the bailout by agreeing to accept much less favorable salaries. However, there is no dispute over the fact that the state s intervention played a major role, the depth and financial extent of which were unprecedented in U.S. history. This marked a relevant difference between the EU and the U.S. approach to the crisis. The EU with the exception of France which offered direct funding to OEMs and suppliers in exchange for the rationalization of their activities and to keep investments in France approached the crisis through short-term policies, such as the car-scrapping incentive. In the U.S., the whole system, from the blue-collar cost per hour to the rationalization of the distribution channels, was revolutionized and suffered hefty structural cost-cutting. This approach seems to be paying off at present: both GM and Chrysler seem to be out of risk and have presented positive operational and financial indicators. On the other hand, in Europe, the end of the car-scrapping incentives is threatening the profitability of the generalist automakers with negative peaks in the Italian market and for Fiat. 3. Automakers reaction to the crisis Overall, the crisis has produced some clear effects: 1. a dramatic fall in car sales, especially in the U.S. and the EU compared with the growth of the Chinese market; 2. a reduction in the global utilization of plants; 6. For an overview on how Fiat managed to turnaround see Volpato (2008); Volpato and Zirpoli (2006); Zirpoli (2010). Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 15

12 3. a shift in customer preferences to low-end and small cars; and 4. a new form of competition among governments to seize investments in the auto industry, marked by the highly heterogeneous approach of the U.S. and EU governments to support the industry. Automakers, on their side, have adopted different measures to stem falling sales and shrinking profit margins. Below, we identify the four main options open to the automakers: 1. Consolidation through mergers and acquisitions (M&A) and joint ventures. Consolidation is a typical outcome of crisis and can bring fruitful results on both the industrial and the commercial fronts. First, from an industrial viewpoint, an M&A can provide the opportunity to rationalize global plant utilization. Only the most efficient plants of the merged companies are maintained, which can generate significant productivity gains on a global scale. Second, product development costs can be rationalized through the sharing of common platforms and components across more models and brands. The leverage of common components across models can lead to a 10% cost saving on the development of a new model. This cost saving derives from both the rationalization of engineering activities and the economies of scale that can benefit the suppliers in the development, the industrialization and then the production of fewer components in higher quantities. 7 In terms of the commercial implications of an M&A, the advantages and opportunities regard the possibility of offering a larger product portfolio, the concentration and higher efficiency of distribution channels and the broadening of the markets served. These are precisely the rewards being reaped by, for example, Fiat and Chrysler after their merger. Fiat has expanded its product portfolio to encompass SUVs and D and E segment cars, while Chrysler has finally got an offering of compact and small car segment options. Fiat is using Chrysler s distribution channels to sell its vehicles in the U.S., while Chrysler is using Fiat s distribution network in Europe, Asia and South America. Consolidation via joint ventures is the strategy chosen by some low-volume manufacturers, i.e. companies that sell less than two-three million cars per year, including premium manufacturers like Mercedes and BMW and generalist manufacturers like PSA and Fiat. These companies are trying to set up joint ventures to overcome the limits of their small volumes using commercial and technological agreements to share platforms, engines, and distribution channels. 2. Major investments in product and process technologies to gain technological leadership. This second option hinges on the development of R&D and 7. The benefits of such rationalization are mainly gained by suppliers but are usually shared with automakers that usually hold a higher bargaining power within the value chain. 16 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

13 manufacturing expertise to outperform competitors by raising the pace of new product launches and the technological contents of products. In this respect, the need for a greening of the industry has given some automakers a window of opportunity to seize technological leadership. Two strategies seem to be the most promising: the first is to offer a full line of hybrid vehicles; the other is to focus on pure electric vehicles. Toyota, for instance, is a pioneer of the former, with Honda hot on its heels. In fact, Toyota is the sole producer to offer a complete line of hybrid products through its two brands (Toyota and Lexus). Today, after Toyota, most automakers offer hybrid variants of some models. This seems the only viable short-term option to comply with the strict regulation of noxious emissions in Europe and some U.S. states, such as California. The second option, i.e. the pure electric strategy, is more controversial. The well-to-wheel cost is still higher for pure electric cars than for some combination of traditional fuels and hybrid technologies. Moreover, the well-to-wheel cost varies depending on the cost of electricity in each national state (see the paper by Freyssenet in this Special Issue). In this respect, automakers R&D investments and strategies must deal with a long series of variables, among which: public and private research funding; the R&D efforts of the suppliers to develop efficient batteries (often non-automotive); consumer preferences and market trends that are not homogeneous and clear-cut in global markets; national policies and regulations that are still not totally geared to the support of pure electric vehicles; the need for cross national standard-setting institutions for the recharging structures and interfaces; trends in the demand and supply of oil and other (alternative) sources of energy; and the political uncertainty related to access to new raw materials, often located in countries characterized by high political turbulence. Despite these open questions and in stark contrast to Toyota s more gradual approach, the Nissan-Renault group is betting on the pure electric car backed and supported by the French state, where public demand is high enough and which has introduced an incentive-based policy that will probably help Nissan-Renault to recover their initial investments. 3. Geographical expansion of markets served. This strategy leverages the high growth potential of the BRIC countries, leading both established automakers, such as Volkswagen, which started investing in markets such as China long before its major competitors, and new local players offering low-cost cars to benefit from the resulting growth in BRIC car sales. Another typical example is the Hyundai-Kia group. Hyundai is betting on the fact that traditional power train technology will still be the dominant paradigm for many years yet and is focusing on the BRIC markets through high quality/price ratio products. That strategy enabled Hyundai-Kia to become the fourth biggest manufacturer in Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 17

14 4. Internal growth and expansion. All top ten automakers are pursuing a mix of the three preceding options, leveraging the opportunities provided by forms of consolidation, investing in green technologies, and seeking to tap into the BRIC markets. However, the case of the local players in China and India (as well as in Russia) is different. These companies are not only enjoying the effects of the two-digit expansion rates in their own countries, but are also using this growth as a springboard to expand abroad. Indeed, this strategy has led, for example, to the acquisition of some historical European brands: Volvo, formerly owned by Ford, was acquired by Geely, a Chinese carmaker; Nanjing Auto, the oldest Chinese car manufacturer, established in 1947, acquired the MG-Rover marque in 2005; similarly, Tata, a major Indian industrial group, acquired Jaguar and Land Rover from Ford in This acquisition is worth mentioning because of the symbolic impact of an Indian company buying out two premium British brands and the fact that the two brands are significantly improving their performance under Tata s management leadership. The combined impact of this complex set of strategies is difficult to envision at the moment. For example, the different approach towards the green technologies of Toyota and Renault-Nissan has the potential of benefiting one group or the other in relation to where the pendulum will swing. Similarly, the growth of Chinese and Indian manufacturers might impact the expansion strategy of some established automakers. Table 4, above, shows the considerable change in the top automakers ranking between 2006 and The outcome of the technological bet made by some automakers, the merger of others, and the expansion of Chinese and Indian markets and companies might result in a new equilibrium. 4. The post-crisis auto industry: introduction to the Special Issue As shown above, the recent crisis has accelerated existing trends and pushed the automotive industry towards higher concentration, a two-speed global market with the BRIC markets taking off and the Western countries markets shrinking, and the expansion of newcomers. All of which has happened in a scenario that sees many Western governments trying to reduce both their dependency on the foreign oil supply and the negative environmental impact of vehicle emissions. And, in pursuing these goals, pushing towards the development of new power train technologies. What will the auto industry of the coming years look like? What will be the key competitive driver for the companies? These are complex questions whose answers call for an analysis that takes into account the complex interdepen- 18 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

15 dences between the technological, market and political aspects mentioned earlier. Despite the crisis, the current technological and competitive scenarios offer the automakers new and unprecedented opportunities, some of which based on a fundamental reconfiguration of the vehicle manufacturing business. We believe the battle will be played on three fields: 1. the capability of automakers to take full advantage of the new technological opportunities to develop, manufacture and market new vehicles; 2. the pace and direction taken by the market for hybrid and electric cars; and 3. the competitive role played by the BRIC markets and companies in the international arena Taking full advantage of technology becomes an organizational competence The first issue at stake is the role that will be played by what so far has been a key competitive factor, i.e., economies of scale, in the future auto industry. There is much evidence that the key challenge for the automakers will be to handle complexity rather than exploiting scale efficiencies (see also the paper by Fujimoto in this Special Issue). In fact, the auto industry of this century differs profoundly from that of the late 20 th century because the manufacturing, design and engineering of cars are no longer performed in vertically integrated companies but in highly fragmented vertical networks (MacDuffie, 2008; Zirpoli and Becker, 2011). This change has dramatically increased the flexibility of the automakers cost structure and has made the need for standardization within each single model design, engineering and production much less pressing. However, it has also led to an increase in competitive tensions within the value chain (not least, the growth of supplier bargaining power), while the higher number of actors (automakers, first and second-tier suppliers, and research centers, etc.) has increased the complexity of the coordination effort. So it will come as no surprise that only a few producers notably Toyota have taken full advantage of a more distributed mode of production in the industry with some, like Fiat, forced to back source design and engineering activities after having experienced the complexity of managing a distributed product development process (Becker and Zirpoli, 2003; Zirpoli, 2010). Other technology driven opportunities include the reduction of the minimum optimal dimension of plants thanks to the adoption of flexible manufacturing systems and lower product development costs. For example, new production technologies have eased joint production in the same plant with the same tools and equipment used for the different models lowering the breakeven points. Indeed, the new Fiat Bravo compact car breaks even at one hundred and twenty thousand units per year (far less than the previous compact Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 19

16 car made by Fiat), while the flexibility of production technology has enabled Fiat and Ford to produce the Fiat Panda, the Fiat 500 and the Ford KA in the same plant. Lower break-even volumes and higher flexibility are also the result of the lower costs of new product development processes. In this regard, along with the use of competent suppliers, as mentioned earlier, the new tools for designing and prototyping new cars play a key role. In fact, the growing use and accuracy of virtual development and simulation tools has been a major driver of cost reductions in new product development projects (Becker, Salvatore and Zirpoli, 2005; Thomke and Fujimoto, 2000), enabling the automakers to enlarge and differentiate their product portfolios without efficiency losses. The sustainability of an aggressive marketing strategy based on the proliferation of niche models and model variants depends on the sharing of components and platforms across these models and is the only way to keep the industrial costs at a sustainable level. To achieve this, the challenge is to leverage economies of scope in both competences and components, which is no easy task from the organizational standpoint. In order to develop models that share components and systems of components without sacrificing their differentiation for customers, a company must introduce several constraints to the design, engineering, and manufacturing activities and ensure close organizational integration between internal functions, product development platforms, and external suppliers. So far, few automakers have fully succeeded in this endeavor (e.g. Toyota and Volkswagen) hindered mainly by the ensuing organizational complexity. Overall, considering the new methods of designing, producing and marketing cars, consensus acknowledges that the major challenge has switched from managing manufacturing efficiency by leveraging economies of scale to governing complex value chain relationships and integrating new product development efforts. The papers by Takahiro Fujimoto and Susan Helper in this Special Issue both address this point in light of the recent crisis. Fujimoto observes that the crisis can be explained as a long-term consequence of the gap between division-of-labor type capability and integral vs. modular type architecture of cars in different countries. Accordingly, the competitiveness of the small Japanese cars of the late 20 th century is shown as the fit between the path-dependent accumulation of coordination-type organizational capability and the stricter safety-energy-environmental vehicle regulations enforced by the advanced nations. Toyota s recent recall is seen as a problem of product complexity overwhelming the company s organizational design capability. Taking the current U.S. auto crisis as her starting point, Susan Helper reaches a similar conclusion on the U.S. front. Collaboration with suppliers is crucially important in the auto industry. Without close collaboration with sup- 20 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

17 pliers, it is difficult to achieve the tight coordination needed to build a car, since cars have a fundamentally integral design. Helper observes that, despite the massive recourse to outsourcing, U.S. automakers substantially squeezed their suppliers for short-term gain and underinvested in long-term design, quality assurance, delivery methods, and innovation. The lack of awareness of the need to develop effective inter-company coordination practices and a lack of a consistent organizational strategy among the U.S. manufacturers are considered the main reasons for the growing competitive gap between U.S. and Japanese manufacturers Is the future electric? As shown above, the crisis has accelerated the electrification process of the auto industry. 8 To reduce the dependency on oil, the auto companies and national governments alike have implemented plans to accelerate the development of new forms of power train. The reason is twofold: first, swayed by the increasing focus of public opinion, governments are putting pollution and Co 2 emissions at the top of their agendas; 9 and, second, the growth of vehicle sales in the emerging markets, such as China and India 10 coupled with the Western countries fear of being oil-dependent are spurring both the demand for and the cost of oil, 11 making it necessary to develop a portfolio of alternative energy sources and to push R&D funding. What conditions will foster the development of the electric car? The paper by Freyssenet in this Special Issue compares the current situation with the historical conditions that enabled the internal combustion engine to become the dominant power train technology. Freyssenet suggests that today s commercial, geopolitical and economic factors will lead to a Second Automobile Revolution driven by the widespread adoption of the electric car and that this will trigger a sea change in the architecture, industry, geography, economy, geopolitics and sociology of the automobile. Such a scenario makes it tough to fully assess the strategic threats and opportunities the greening of the industry poses to automakers. In fact, we still need to better understand the issues at stake, the many opportunities and challenges that automotive industry companies will face, and the implications for their strategic action and the evolution of the automotive value chain as a 8. See Deutsche Bank (2009). 9. See ETC/ACC (European Topic Centre on Air and Climate Change) (2009). 10. See Deloitte Touche Tohmatsu (2009). 11. See Hazeldine et al. (2009). Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 21

18 whole. This issue is tackled by Enrietti and Patrucco whose paper provides an overview on the consequences of the development of hybrid and electric power train technologies in the division of labor between automakers, component manufacturers, and infrastructure providers, and how the industry actors are likely to interpret the changes deriving from electrification. Overall, considering both the current market trends and the actual evolution of the technology, newcomers, including the providers of complementary assets, are unlikely to upset the industry s fundamental status quo, also due to the persistence of high entry barriers. Moreover, the industry and its major players, i.e. the automakers, are not new to the need to incorporate technologies based on knowledge domains exogenous to the auto industry (i.e., electronics, new materials, nanotechnology, etc.) and to the need to modify their system integration competences accordingly. In this respect, corporate strategies most likely will be influenced by exogenous factors, such as public policies, on both the demand side (e.g. incentives to buy green cars, anti-pollution regulations, etc.) and the supply side (e.g. network infrastructure development, selective R&D investments in specific technologies, etc.) and, as argued by Fujimoto in this Special Issue, by the architectural differences between pure electric vehicles and hybrid vehicles The role of the Asian markets Many commentators have noted that Russia is failing to keep its promise of high growth, while Brazil s competitive arena is stabilizing as Volkswagen, Fiat and GM maintain their lead positions. A number of reasons therefore underpin the expectation that China and India will become the key BRIC markets in the years ahead. The high pace of GDP growth in these countries and a relatively low level of motorization means we can expect even faster growth in vehicle sales than in recent years. The winners in these markets will become the world leaders. Indeed, the case of Volkswagen shows that scaling-up to become the first producer in the world might actually start with being the first automaker in China. However, the German producer s case is also linked to the long-term policy of the German government, which started to invest in commercial relationships with China at the end of the 1980s. 12 Western latecomers will find it hard to emulate Volkswagen s success, also because of the advances made by the local producers in the meantime. Moreover, as Fujimoto explains in his paper, the characteristics of the market must match the competence of the automakers. The modular nature of the locally designed Chinese vehicles, as well as the integral 12. Schmidt s (2010). 22 e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale

19 nature of an Indian low-cost vehicle, is indicated by Fujimoto as a source of competitiveness for Chinese and Indian manufacturers in their respective countries. Conclusion This Special Issue focuses on the impact of the recent economic crisis on the automotive industry and proposes a set of implications for corporate policy in light of the recent shift in public policy. The papers published in the Special Issue confirm that the industry of industries is still a potential source of organizational, strategic, and managerial innovation and, moreover, underscore how corporate and industrial policy could greatly benefit from an analytical approach that combines micro and macro perspectives. This approach is a kind of common thread that links the four papers despite the very different backgrounds of the researchers: even the most visionary macro approaches to the future of the industry, which envision the end of the current way of satisfying individual mobility and an inevitable shift towards a more sustainable mobility based on a new system populated by new actors, must face the important issue of how this transition will be managed. A better understanding of the micro issues inherent in such a transition, i.e. the evolution of the architecture of future cars, the capabilities of the automakers, and the organization and governance of vertical and horizontal networks, is essential if we want to identify meaningful implications for the corporate and public policymakers. References AID (Automotive Industry Data) Industry Report 1013, published online. Becker M.C., Zirpoli F Organizing new product development knowledge hollowing-out and knowledge integration. The Fiat auto case. International Journal of Operations and Production Management, 23 (9): Becker M.C., Salvatore P., Zirpoli F The impact of virtual simulation tools on problem-solving and new product development organization. Research Policy, 34 (9): Deloitte Touche Tohmatsu A New Era Accelerating toward An Automotive Industry Transformed, published online. Deutsche Bank New Era Unfolding for the Automobile Industry, published online. ETC/ACC (European Topic Centre on Air and Climate Change) Environmental impacts and impact on the electricity market of a large scale introduction of electric cars in Europe. Critical review of literature. Technical Paper 2009/4. Freyssenet M., Mair A., Shimizu K., Volpato G One Best Way? Trajectories and Industrial Models of the World s Automobiles Producers. Oxford University Press: New York. Journal of Industrial e/o la messa and Business a disposizione Economics al pubblico su rete pubblica o privata, 23

20 Freyssenet M., Shimizu K., Volpato G. 2003a. Globalization or Regionalization of the European Car Industry. Palgrave-Macmillan: Houndmills. Freyssenet M., Shimizu K., Volpato G. 2003b. Globalization or Regionalization of the American and Asian Car Industry. Palgrave-Macmillan: Houndmills. Global Insight World Car Industry Forecast Report, published online. Hazeldine T., Kollamthodi S., Brannigan C., Morris M., Deller L Market Outlook to 2022 for Battery Electric and Plug-in Hybrid Electric Vehicles. AEA Report to the Committee on Climate Change. MacDuffie J.P Technological and organizational barriers to modularity: persistent integrality in the global automotive industry, mimeo. PriceWaterHouse&Coopers Quarterly 1, Forecast Update, published online. PriceWaterHouse&Coopers Autofacts. Quarterly Forecast Update, published online. Schmidt s BRIC Study, Sales & Production to 2015, published online. Stocchetti A., Volpato G In quest for a sustainable motorisation: the CNG opportunity. International Journal of Automotive Technology and Management, 10 (1): Thomke S.H., Fujimoto T The effect of front-loading problem-solving on product development performance. Journal of Product Innovation Management, 17 (2): Volpato G L industria automobilistica internazionale. Cedam: Padova. Volpato G Regulatory reform for the better functioning of markets: the case of the automobile industry, in Galli G., Pelkmans J. (eds.) Regulatory Reform and Competitiveness in Europe. Edward Elgar Publishing: Cheltenham-Northampton. Volpato G Fiat group automobiles. Un araba fenice nell industria automobilistica internazionale. il Mulino: Bologna. Volpato G., Zirpoli F Fiat auto: crisis and resurrection? A critical analysis. Finanza, Marketing e Produzione, 24 (4): Volpato G., Zirpoli F L auto dopo la crisi. Chi vince chi perde. Francesco Brioschi Editore: Milano. Zirpoli F Organizzare l innovazione. Strategie di esternalizzazione e processi di apprendimento in Fiat auto. il Mulino: Bologna. Zirpoli F., Becker M What happens when you outsource too much. MIT Sloan Management Review, 52 (2): e/o la messa a disposizione al pubblico su rete Economia pubblica o e privata, Politica Industriale