This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Globalization is one of the most controversial phenomenons of the modern business world. Today, the world map still includes the national borders; however national borders have just stayed in order to signify the political lines.
Except politics, national borders have eroded between countries. In business life from finance to marketing, from economics to technology, a great degree of globalization is experienced. However, in order to make sound analysis about globalization, first of all, it is crucial to define what globalization is.
There are numerous different definitions in the literature but one of them uses a humorous manner in order to define globalization through an event we all know well. According to this short story, globalization is the situation in the death of Princess Diana. It is so because "an English princess with an Egyptian boyfriend crashes in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky, followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines." (http://www.nowcwc.com/activities/globalization.htm) The story is very effectively pointing out the fact that today's life has become globalized rather than being national.
In literature, many authors from all around the world with diverse backgrounds and diverse disciplines have studied about globalization and tried to define it from different perspectives. Globalization, in its contemporary meaning, has emerged in after 1980's despite the fact that it was used earlier before in different meanings. The famous American sociologist, Saskia Sassen, who has been noted for her studies on globalization, has defined it as "a variety of micro-processes that are denationalizing all that has previously been constructed as national". (Sassen, 2006)
Furthermore, United Nations Economic and Social Commission have asserted that in the context of economics, globalization refers to "the reduction or elimination of the barriers and borders between the nations and countries in order to facilitate the free flow of;
Goods and services
Despite the stronger globalization for the goods & services and the capital, there have still been barriers for the flow of labour because of the imperfect mobility due to its nature. However, it is never possible to have perfect mobility for labour. (UNESC, 2002)
Another author, Thomas Friedman, has defined the situation in today's world as the "flattening of the world". He asserts that the changes in trade, outsourcing, and supply chain and even in politics that we all name as globalization have changed the world permanently and that the pace of globalization is accelerating. (Friedman, 2008)
The emergence of globalization dates back to 80's. In the past 30 years, the changes in science and technology have brought up globalization. Flow of goods, services and capital is the key for globalization and this has been enabled by the virtue of technological advances and their application in both business life and daily life. Advances in the telecommunication have first of all permitted the flow of information across far distances. Advances in computer technologies and the rise of Internet have led to the digitalization of business. It has only, by these advances, been possible to move to a globalized economy all over the world.
As a result of these advances, global companies have emerged. For example Xerox is a global organization with offices and locations in 160 different countries and 54.700 employees. Different offices in 160 different countries are connected to each other and by the virtue of the technological advances 54.000 employees in 160 countries can work in harmony. (www.xerox.com) As another example, Ford Motor Company is a global company with operations in North America, South America, Europe, Asia / Pacific and Africa. Ford manufactures cars and trucks in more than 100 plants throughout the world. (www.ford.com) As an example from financial sector, HSBC bank, the world's largest bank, operates in 86 countries from United States to Hong Kong and Kuwait, from Mexico to France and Brazil. Furthermore, the shares of HSBC Holding are owned by 220.000 shareholders from 119 different countries. (www.hsbc.com)
As it can be seen, the degree of globalization for a company may differ. One company may only have sales and distribution operations in abroad countries. Another may also have production capacities in different countries but is managed by only local executives. (Robert, 2004) Analyzing globalization becomes more meaningful as long as the analysis is conducted within a specific industry because the dynamics of different industries may require different degrees of integration among its international operations. (KPMG Global Auto Executives Survey, 2008)
This report is aimed to analyze the automotive industry from the perspective of globalization. Automotive industry is a very distinct industry with many global players and a cut throat competition. The report, firstly, tries to examine whether the automotive industry and its players operate in a single global market or not. In order to do this, it is crucial to define what is meant by a single global market and what indicators could be used to measure the extent of globalization. Furthermore, these indicators are to be applied to the automotive industry where international data is available. Secondly, the factors that have contributed to the globalization for the automotive industry are to be analyzed. It is important to successfully define these factors and furthermore evaluate their importance. Lastly, the impact of globalization on levels of trade and employment is to be stated in the United States. To do this, national and international statistics on trade and employment are to be utilized.
Before proceeding to the report, it would be useful to depict a current picture of the automotive industry in general, in order to be able to set the frame and background of the analysis.
Automotive is a very broad industry with very different operation areas. The industry covers operations like design, sales, after- sales support, spare parts and marketing. This makes it difficult to differentiate these different operations just by naming the as automotive industry. However, the core operation areas in the automotive industry can be summarized as follows:
Design of the vehicle
Engineering of the designed vehicle
Production and manufacturing of the vehicle
Marketing and communication of the brand
Sales operations through the retailer
After sales and spare parts support
Another important classification emerges between the different product types of the vehicles. This depends on the primary usage aim and the size of the vehicle. So, motor vehicles can be classified in the following categories:
Automobiles or passenger cars
Light Vehicles (without commercial usage)
Commercial Vehicles (McKinsey Quarterly, 2006)
In line with this classification of the product types, total number of manufacturing for motor vehicles in 2007 makes up a total of 73 million units. When compared with 2006, the increase is calculated to be 5,4%. Total production in 2006 was 69,3 million units. But 2008 witnesses a rather sharp decrease in motor vehicle production. After 73 million units of 2007, total production in 2008 emerged to be 70,5 million units. (KPMG Global Auto Executive Survey, 2008) This is mainly caused by the effects of the global financial crisis that affected many parts of the world. Many automakers faced serious financial problems in 2008 and some of them even experienced the risk of bankruptcy. Governments prepared support plans for the local automakers of their countries and some merger and acquisition operations are seen in the industry.
Production by Regions
Source : (OICA.net)
As it can be seen from the table, the biggest share of production is done in Asia and Oceania which can mainly be attributed to the fact that production costs are considerably lower in these regions. Furthermore, the local governments in these regions also support the investment plans of the automakers by some incentives and options.
When production in 2008 is analyzed country by country, it is seen that leading automakers are Japan, China, Germany, USA and S. Korea. (GLG Expert Contributor, 2009) Developed economies of the world have lost production in 2008 compared with 2007. It was also seen in the general production throughout the world. However, it was also striking that emerging countries had increases in their 2008 productions. These countries can be exemplified as Brazil, Russia, China, Turkey, India and Mexico. (www.oica.net)
The following table shows the top-20 countries with respect to their automotive productions for 2008.
PRODUCTION in 2008
It is an interesting fact that despite the start of the automotive industry in America by Ford Motor Company, today most of the production has shifted to the Asian countries. The main reason for this change is that Asian countries offer cost advantages in production. Making production in these countries affect the financial performance of the automakers and produce bottom line results. (Keller, 2003) This way automakers gain financial advantage whereas the Asian governments attract foreign direct investment and they have employment opportunities for their citizens. (Keller, 2003) They also support this situation by tax exemption and tariffs.
The point is that since automotive is a huge industry, there also exists a competition between the governments in order to have production facilities and plants in their countries. It is for sure that the competition between companies is much more fierce compared with the competition between countries. Globalization is a very important aspect in this situation. Companies try to reach for economies of scale in order to gain financial advantages and they increase their production and these forces the companies for mergers and acquisitions. So, an important result of globalization in the industry is consolidation which is forecasted to increase in the future periods. (www.pwc.com automotive industry Analysis)
Utilization rates are also important in the industry. In general, utilization rates are below 80% for the automakers which means idle production facilities. (Sturgeon & Lester, 2004) Companies try to increase their utilization rates but this fact results in excess capacity when they are unable to sell the vehicles and turn it into cash. In order to sell more, companies go for price discounts and lose profitability. So overcapacity in the industry and the competition cause a price war.
Price war is reflected in various forms. It can be either in terms of sales price discount or incentives and promotions to the customer. The total amount of givebacks provided to the customers is guessed to be around USD 45 million for 2007. (Pwc Report) This situation is a reality of the industry regardless of the region.
Without the exceptions like a global financial crisis, the growth rate for the automotive industry is forecasted to be around 10 million units for the next 8-10 years. Even these growth rates will not heal the capacity utilization problem in the industry. The utilization rate is expected to rise to a maximum of 85% which is still low for such an investment - intensive industry. (KPMG Global Auto Executives Report, 2008) This is one of the most serious problems that the future of the industry faces and needs to tackle with.
Another problematic side of the industry is the suppliers. Suppliers are having pressure from the automakers both in order to keep down costs and prices and they are both expected to make innovation. For product differentiation and facing the changing demands of the customers, suppliers are very crucial to make innovations. It is only by this way possible for automakers to address the demands of the customers and the market. (Sturgeon & Florida, 2000)
The automotive industry is also stretched by the rules and regulations they face from both local and international institutions. Many of these regulations are related with financial issues or social issues like environment protection. Some of such regulations are as follows:
Block Exemption Regulation (BER)
End-of-Life Vehicle Regulation (ELV)
CO2 emissions Regulations
These are the key issues regarding the automotive industry and I believe that they are crucial to understand the industry dynamics before proceeding to its relationship with globalization.
Globalization in Automotive Industry
Globalization is not a new concept for the automotive industry. When the history of the industry is studied, it is seen that automotive industry has began globalization by the start of mass production. Total different number of countries that Ford and General Motors were assembling vehicles was already 24, even as early as of 1928. These countries that Ford and GM were operating were spreading around a huge geography from Japan to Brazil and India. By the end of 1930's, both of these American automakers had plant facilities even in Europe. By 1950's, European automakers were financially recovered from the negative effects of the World War 2 and Europeans started to invest in Australia, Latin America and South Africa. By the decline of communism in the Soviet Russia and the end of the Cold War, new markets were opened to the automotive industry like Eastern Europe, India and China. 1990's witnessed the efforts of the automakers to harmonize their operations on a global scale especially in design and manufacturing. The timeline in the history already shows that globalization has always been in the spirit of the automotive industry one way or another. (Sturgeon & Florida, 2000)
When the production in 1975 is compared with the production in 2005, a striking effect of globalization is visible. In 1975, the number of different countries that make up 80% of the total automotive production was 7, however when we came to 2005, the number of countries that make up the 80% of the total automotive production had risen to 11 with the dispersion of geography for the automotive industry. (Sturgeon, 2009)
The entry barriers in the industry are very high. This is the reason of such a consolidation as depicted above. The design and development process for a new vehicle is very costly and it takes 3 to 5 years and billions of dollars to complete a project. In such an environment, the competition is fierce and innovation is a key element that automakers need to possess. By the advances in computer and communication technologies, the need for innovation is crucial. The automotive industry is still in a growth trend. When we look at the overall numbers for vehicle ownership, we see that only 12 % of the total population in the world has automotive products. The industry grows about 20% in each decade except the times of economic crisis.
The total demand in 2010 is forecasted to be around 65 - 70 million units of vehicle and the leading countries in this expansion would be both developed countries and both emerging economies like BRIC countries. (Brazil, Russia, India, China) The rise of BRIC countries is a very important reflection of globalization in the automotive industry. As of today, the share of these countries in the total annual sales is not very high but in one or two decades, the global picture is expected to change. Especially, China is forecasted to account for a very large share in the increasing demand of the emerging economies, this is the reason why companies like General Motors has been aggressively working in Chinese market. (Hsu, 2002)
In order to analyze the globalization in automotive industry by its today's context first of all we need to understand the current changes in the industry and the effects of globalization in these changes and the reflections in the academic literature about the automotive industry. According to Sturgeon and Florida (2000), globalization is shifting the economic geography of the automotive industry. The industry with all its side industries from spare parts and OEM to electronics is affected by a new wave of assembly and plant constructions among different places of the world. According to this new wave, China, India, Thailand, Vietnam, Brazil, Mexico and East Europe are new locations for assembly and supplier plant constructions. The reasons pushing these developments can be listed as follows:
Competition is intense at home markets and as a result of the competition market saturation is reached in many local developed markets.
As a result of the end of the Cold War, new investment opportunities have arisen in the countries that are stated above.
There are host country requirements for local production which squeeze the automakers.
Automakers are trying to benefit from regional trade arrangements. Some familiar examples are NAFTA and EU. These trade agreements provide some opportunities to automakers in order to make cost cuts. (Sturgeon & Florida, 2000)
The effect of trade agreements is rather important in the industry and it is the newer side of globalization that is experienced in the automotive industry. It had started with the Japanese automakers' efforts that resulted in intense competition in the United States and in Europe. Against Japan automakers, Europeans and Americans focused on their cost structure and tried to reduce their operational costs. Through regional strategies of moving production to low cost countries, automakers of Europe and the United States tried to gain cost advantage against the Japanese. Those low cost countries were especially Canada, Mexico and Spain in the 1980's. (Keller, 2003)
Globalization in the automotive industry is also experienced in manufacturing. Vehicles are generally designed with common under-body platforms but then they are modified in specific characteristics according to the local needs and conditions. Also through the inclination to global vehicle body platforms, the assembly capacities and skills can be designed more generic or in other words global. This way assembly and manufacturing become less model-specific.
Another important issue in the automotive industry is that automakers constantly try to decrease the minimum scale of assembly plants because they have a risk in such emerging market investments since these markets are vulnerable and they possess more risk due to a possible uncertainty compared to developed markets. Thus, automakers strive on to decrease the initial risk they incur on such investments. They try to launch relatively smaller but flexible plants and these plants are designed as expandable in case it is needed. Automakers furthermore share large investments with other automakers who would also like to benefit from the assembly plant. (Sturgeon & Florida, 2000)
Globalization is also experienced through its impact on the structure of the automotive industry. As a result of the globalization in the industry, the relationship between the automakers and suppliers is changing. This change is much distinct for the first - tier suppliers who, day by day, play more importance in the industry. This has also led to the fact that anymore global suppliers have emerged in the automotive industry. These global suppliers have a superb capacity of sourcing components on a global level in different parts of the world, simultaneously and in coherence. So, this both means geographic expansion for the global scale suppliers but it also means a consolidation in the industry as these global suppliers start to reach economies of scale and work with maximum efficiency and minimum costs. It is so striking that for the future of the automotive industry, such global suppliers may be more effective in the automotive industry's future investments. Being more effective in the investments also mean that suppliers will be more and more enjoying the benefits of such investments, either social or economical like employment. It can be asserted that as a result of globalization, the power of the suppliers versus automakers is increasing. This is the most important effect of globalization on the automotive industry and it has led to the rise of suppliers like Bosch, TRW, Magna and Valeo. (Sturgeon & Florida, 2000)
Sturgeon, T., Memedovic, O., Biesebroeck, J.V., Gereffi, G. (2009) have also studied on globalization of the automotive industry with its main features and the prevailing trends. The authors also accept the boom in the developing markets and emerging economies but they also emphasize on the fact that developed markets still have importance in the automotive industry. In operational levels, regional integrations play an important role but also global value chain links have been created in the industry.
Another sign of the globalization on the automotive industry is seen in the change in the job market both in terms of quality of the jobs and the necessary characteristics and both in terms of the number of jobs available in the market. According to the analysis of Sturgeon and Florida (2000), automotive industry has added 103.000 jobs to the job market just between 1993 and 1996. However, later as the globalization started to affect the automotive industry, the job structure has shifted from the automakers to suppliers and this has also affected the pay levels since the pay was lower in the supplier side compared to the automakers. (Keller, 2003)
The change in the job market has also been seen through the shift of locations from developed countries to emerging economies like Russia, Mexico, Brazil, India and China. So, it can easily be concluded that job opportunities of the United States and Northwest Europe have gone to other parts of the world. A relaxing factor for this issue could be seen as the fact that still some important parts and components are manufactured in the traditional centers of the automotive industry like the United States and Europe. (Keller, 2003)
As production and assembly facilities have shifted from United States and Europe to low cost countries, these traditional centers that have stayed expensive for production have taken more responsibility in other functions like design, research and development and engineering.
Another important aspect of globalization in automotive industry is the sharing of technology and know-how. As a result of the competition, innovation has been a key issue in order to sustain competitive advantage in the market for all industries. This need of innovation is far more important in the automotive industry because the needs and demands of customer segments are constantly changing and evolving. In order to meet changing customer needs, automakers have to innovate new product features that are in line with customer needs. One aspect of innovation in the context of globalization is seen in the design and manufacturing. Generally main body parts of the vehicles are designed globally and are used in all different models. Besides, manufacturing processes are planned globally and applied in all different plants.
However, another important aspect is valid for recruitment in order to attract talent. In order to meet the need for advanced technology, companies need to attract and recruit most skilled employees wherever he / she reside and whatever nationality he / she are in. For example, General Motors recruits engineers and scientists from a very diverse range of countries and nationalities like from North and South America, Europe, the Middle East, China, Taiwan, India, and Korea. The variety in the backgrounds of the employees makes a leveraging effect in order to create new ideas and perspectives for the company. This is an essential part of the business in order to create competitive advantage through the use of innovation. So, a very important benefit of globalization is the ability to have access to technology and the employees who know and use these technologies.
It is also valuable to compare the automotive industry with other global industries like electronics or consumer goods. One of the most important common features between these industries and automotive is that there has been tremendous increase in global production, cross-border trade between the countries and foreign direct investment. These increases have especially intensified after the 1980's up to today and the pace of increase is accelerating. (Sturgeon, T., Memedovic, O., Biesebroeck, J.V., Gereffi, G, 2009)
Another important common feature between all these globalized industries is that the level of outsourcing is increasing in the industry and more and more operational work is transferred to the supplier firms. The fact that suppliers became global which we have addressed previously is thus valid for many other globalized industries. (Sturgeon & Lester, 2004)
However, automotive industry is different for some of its distinct characteristics. First of all, the automotive industry is very concentrated. Very strong small numbers of firms are very powerful against a huge number of smaller firms. Three countries Japan, Germany and the United States are the leading countries and a total of 11 firms from these 3 countries are the most effective companies of the automotive industry. This was especially shaped by the mergers and acquisitions that took place in 1990's.
Secondly, another important characteristic of the automotive industry is seen in its proximity between the manufacturing and the sales. Production is generally done close to the market and the notion of "build where you sell" is very important. (Sturgeon & Florida, 2000)
Thirdly, regional integration as stated earlier in this report is much more common in the automotive industry compared with other globalized industries. In automotive industry, regional integration is seen side by side with the global integration and this is a differing side of the automotive industry compared with for example electronics where only global integration is seen.
Lastly, it must be noted that in the global automotive industry there is a lack of standardization in the parts and components whereas in electronics for example processors are nearly virtually usable in all kinds of computers but the automotive industry lacks such industry standards.
We have focused heavily on the globalization of the automotive industry from different aspects and identified the indicators of globalization in the industry and the causal links between these indicators and the extent of globalization. However, in order to be able to draw a complete picture of globalization, we also need to study the national and local elements of the automotive industry.
There are many elements of the automotive industry that still retain as national or local. Consumer preferences, the income levels, driving conditions in the highways, regulations regarding the job market in the local countries and public policies like taxation all are subject to differ in different countries. These attributes have thus stayed national despite the fact that they have great effect on the automotive industry. (Sturgeon & Florida, 2000)
As a specific case, I would like analyze the Turkish automotive market as an emerging market. Turkey is one of the top-20 countries that manufacture automobiles and commercial vehicle. The following table shows the automotive production in Turkey for the years 2005 to 2008. As of 2008, the total automotive production in Turkey is 1.147.110 units. (Findikcioglu, Yildirim, Senol, 2008) When the past data for the previous 4 years is analyzed, it is seen that there is a constant increase in Turkish production in the automotive industry.
Source: Findikcioglu, Yildirim, Senol, 2008
The increase from 2007 to 2008 is 4% for the Turkish automotive production. The capacity utilization ratio was 78% and Renault was the largest manufacturer by 286.995 units. (Findikcioglu, Yildirim, Senol, 2008)
Source: Findikcioglu, Yildirim, Senol, 2008
Despite the increase in production, automotive sales decreased in 2008 in the Turkish market. This is affected from the recessionary environment due to the reflections of the global financial crisis and as a result of the two forces of sales decrease and production increase, inventory levels increased in Turkey. 2009 was thus a year with high stock levels, however, the government executed a rescue program and decreased the taxes on automotive until September 2009 and this way, and automakers could close the year 2009 with higher sales and lower inventories. (Findikcioglu, Yildirim, Senol, 2008)
Source: Findikcioglu, Yildirim, Senol, 2008
The most important indicator concerning the effects and extent of globalization in the automotive industry in Turkey is the number of exports. Turkey's automotive exports have been constantly increasing since 2005 and as of the end of 2008, total automotive exports of Turkey is 910.270 units with an 11% growth compared with 2007. Renault and Ford Turkey were the leader auto exporter in 2008. This shows the integration of Turkish automotive industry with the global automakers industry which can be seen as an indicator for the extent of globalization in Turkey. (Findikcioglu, Yildirim, Senol, 2008)
Source: Findikcioglu, Yildirim, Senol, 2008
The table shows the consolidated results for production, retail sales, domestic factory sales, exports and capacity utilization ratios for the previous 4 years. (Findikcioglu, Yildirim, Senol, 2008)
Source: Findikcioglu, Yildirim, Senol, 2008
When we look at the sales in Turkey, more than half of the automotive sales are imports. In 2008, total automotive sales are 526.544 whereas the share of local brands is 41.8% and the share of imports is 58.2%. (Findikcioglu, G., Yildirim, B., Senol, B.G., 2008) This is also another indicator of the effect of globalization. However, Turkish automotive industry is weaker in supplier's side. Turkey does not have a global supplier brand. (Teker & Felekoglu, 2008)
This report has aimed to analyze the globalization in the automotive industry and has tried to provide answers to the questions stated in the Post Module Assignment of the Global Business Environment lecture. To sum up, it can be concluded that automotive is an industry that is highly affected by globalization from various aspects. The degree and extent of globalization is different among different countries, however, when considered as a whole, automotive is a globalized industry. Globalization has affected the automotive industry in various business areas from design to manufacturing and from recruitment to investments. Business professionals need to understand the dynamics of globalization in the industry and need to develop appropriate strategies in order to survive in the competitive market.