CHAPTER 2 Literature Review
2.8 Consolidation and Collaboration Within the Automobile Industry
under the banner of the car manufacturers and this also goes to include parts produced and branded by any manufacturer that match a car manufacturer's specifications. This new scenario will attract more competition for the after market sector due to the lucrative profit margins that becomes available. Moreover, the previously traditional high flying OEM parts manufacturers would face stronger competition from new entrants to the market.
According to Humphrey (2003:121-141), the changes in the governance of the auto
As automotive manufacturers seek to cut costs, they outsource more and more to the supply industry. It's argued that this externalises a proportion of fixed (overheads) and variable (materials) costs, and shares the risk for new developments (European Foundation for the Improvement of Living and Working Conditions, 2004:7-8). Outsourcing is believed to allow greater economies of specialisation and scale, since suppliers are more experienced in certain functions and can supply several carmakers. The claims are also that manufacturers have sold off their in-house component companies in order to concentrate resources and raise funds e.g. General Motors and Ford's two component arms became Delphi and Visteon, respectively (European Foundation for the Improvement of Living and Working Conditions, 2004:7).
Suppliers that have specialized in a certain process do not carry out product development as their innovation is focused on improving the production process. They will be expected to have the capacity to· maintain constant price cuts and to fulfil quality and delivery requirements. Thus, the proper size is closely related to economies of scale at plant (Ahiez, et al., 1999:4).
Helper (1993: 141-60) provides a good discussion of 'exit' and 'voice' strategies in supplier relations. When a customer firm has problems with a supplier, it can choose another supplier (exit) or it can work with the supplier until the problem is solved (voice) (Vale, 2004:127). Helper (1993:141-60) shows that for a carmaker an exit strategy requires many potential suppliers who have the ability to compete for each part. The selected supplier has only a short-term contract, and if there are problems the carmaker has the flexibility of quickly changing to another supplier. The exit strategy demands complex in-house engineering and R&D activity for the carmaker. But on the other hand, the voice strategy requires a good communication system with suppliers in order to resolve all the problems that may arise.
Many analysts believe that under cost pressure from the automakers, the trend of supplier consolidation is likely to go further. Knowledge is a key strategic resource and learning is the most important process for innovation. Vale (2004:126) states that the interaction between firms can be seen both in small flexible firms and in large corporations that combine scale and scope economies. It is added that a new model of firms' learning is emerging, evidenced in different forms of interaction which range from outsourcing to
strategic alliances and joint ventures. The relations between companies and institutions are said to be based on trust, cooperation and the sharing of knowledge for mutual benefit (Hudson, 1999:59-72). This is the case in the supply chains of major Japanese carmakers as well as other major international automobile manufacturers.
The counter arguments are that in the case of the automotive industry, collaboration between firms does not mean symmetrical power relations, as collaboration in the suppliers network is quite often not based on trust but on a cost-reducing coercive strategy (Vale, 2004:4).
In their attempts to reduce costs, car makers have begun to build a larger model variety on to fewer vehicle platforms (Lorentzen and Bames, 2004:7). They also add that outsourcing and long-term co-operation for components that require relationship-specific investments have increasingly replaced the high degree of vertical integration and arm's length contracts that traditionally characterised the industry.
In spite of the number of mergers and collaborative agreements within this industry in recent years, it is too soon to predict them as a success or a failure.
Many industry experts believe that over the next decade the challenge is to remove inventory and move to customer order driven stockless supply. The consensus seems to be that the mass customization has long been the strength of the automotive industry, but build to order makes possible a supply chain more responsive to the day-to-day behaviour of the market place and mass customisation. Quite analogous to this would be the Compaq computer group in North America where they build computers to order and deliver within days. The push system takes full benefit from economies of scale in production and input acquisition by producing optimal output size and then distributing to wholesalers and retailers, and, intelligent versions of the traditional push system are employed, for instance, by Compaq, IBM, and Hewlett-Packard (Papadakis, 2003:1-4).
The internationalisation of the market means that the manufacturers have to guard against lack of market growth since the bad effect transcends from one market place to another quite rapidly. As all manufacturers are jockeying for market share, even the slightest signs of market share losses spells imminent catastrophe for the firm concerned. General Motors
Corp., which is planning big job cuts and plant closures as it fights to avoid bankruptcy, showed it had lost $4.8 billion in the fourth quarter and $8.6 billion in all of 2005, dragged down by losses in its North American division. It was the fifth-straight quarterly loss for the world's largest automaker and the worst annual loss since 1992 (Internet 6). GM's results came shortly after Ford announced a profit of $2 billion for 2005. But Ford also struggled in its home market, losing $1.6 billion in North America, and announced a plan to cut 30,000 jobs and close 14 facilities by 2012 (Internet 6).