Globalisation and Its Impact On Automobile Industry

Satish. S
Institute of Management in Kerala


The word globalization often appears as a description rather than an analytical concept, describing a certain phenomenon in an extremely wide range of fields. Thus, a large list of concepts of globalization includes the globalization of financial markets, corporate strategies, technology, consumption patterns, regulatory capabilities and governance, world politics, and socio-cultural processes. It is easy to perceive the increase in the flow of trade, especially intra-firm transactions by multinational corporations, and the even faster growth of global capital markets that are obvious signs of globalization. The globalization of production is the most visible evidence that can be detected from the growth of manufacturing FDI, and even more significant is the expansion of the international capital market.

The sheer scope of the globalization debate, however, raises the question about the plausibility of a 'universal' understanding of globalization across political, economic and social arenas. Under such circumstances, accumulating stories of globalization in various fields would contribute to a more comprehensive picture of globalization. When focusing on global economy, globalization has two components: finance and production. Globalization of these factors appears in the form of the increased international mobility of capital and the growing incidence of mergers and acquisitions and strategic alliances. And for both finance and production, markets have facilitated the globalization process, while markets themselves also became globalized.

The level of globalization in those various aspects, however, differs significantly depending on industrial sectors; Strange (1997) emphasized that globalization is not a universal phenomenon, but it differs depending on sectors and firms rather than on states. Among various industries, only a few are practicing 'globalism' in all aspects of sales, production, personnel, research and development, and financing. Individual firms often seek for localization of their activities along with their 'global strategies'. Only a handful of multinational corporations specifically target the global market instead of focusing on several local markets, and operate their production globally rather than having local production independent and separate from production in other areas. In this sense, globalization has not permeated as thoroughly as the popularity of the word suggest.

Despite the unevenness of the development, globalization has brought changes in commitment-rules that have caused systemic transition, though not yet complete, of cross-border economic transactions. Globalization was preceded by internationalization, which differs from globalization in that the nation-state system itself was not in question at the time. Internationalization is still based on 'a comparatively stable system of sovereign states, each with an internal hierarchy of more or less subservient local governments', whereas globalization is based on a system 'characterized by emerging and still primitive governance structures...' The current trend aggrandizes a situation that is better described as globalization, 'in which national economies are evolving from a condition in which they are less like billiard balls in holistic interaction than they are permeable entities in various states of amalgamation with one another.'  Therefore, 'The term globalization suggests a quantum leap beyond previous internationalization stage.' 

Globalization in relation to India has been a two way process. Global forces have had a considerable impact on India at all levels of its life. They are penetrating its economy and reshaping its structure and mode of operation. They are forcing India to redefine its place in the world and its relation to its neighbors and the west. India's educational and cultural life, TV and print media, and its perception of itself and the world are also undergoing profound changes. Not surprisingly, India today is quite different from what it was barely ten years ago, and it is not easy to predict how it will progress during the next few years.

India has not been a passive recipient of global impact. Both directly and through its diaspora, it has increasingly become a significant global presence. India's literature, arts, films, religions, food, textiles, fashions and music are now an integral part of life in the west. Its doctors, IT specialists, computer scientists, small and large industrialists, managers and engineers are present in the west in large numbers and have made a very considerable impact. Indeed, they are admired for their skills and hard work and are much sought after.

Consider Globalization and Indian industry. In the seventies, India was just emerging from the first stage. After 30 years from then, it has crossed second stage and going into the third one. Year 2003 was pivotal as it saw manifestation of India's global aspiration. The number as well as size of the foreign targets showed steep rise. Close to 50 overseas acquisitions, amounting $1.8 billion took place last year, which was only $0.21 billion in 2002. The increase in average deal size is from $7.5 million in 2002 to $36.5 million in 2003. India has adopted domestic policies and institutions that have enabled people to take advantage of global markets and have thus sharply increased the share of trade in their GDP. India has been catching up with the rich ones our annual growth rates increased from 1 percent in the 1960s to 5 percent in the 1990s. Now it is above 8%. Indians saw their wages rise, and the number of people in poverty declined.

Industry wise, the software and services sector lead the mergers and acquisitions charge overseas but now this list includes both old and new economy industries like auto ancillaries, pharmaceuticals, telecom, agro-chemicals and steel. There are thus no stereotypes that only new economy companies are invited to the mergers and acquisitions ball or that only the blue chip companies are partaking of the action. It is more democratic as smaller auto ancillary companies are also in the fray.

Globalization and Automobile Industry

Even though the automobile industry is technologically advanced, the increasing integration of low-income countries into the global division of labor has put competitive pressure on traditional automobile producing countries. New end-producers emerged in Asia, Latin America as well as Southern and Central Europe. In addition, the automobile industries of Germany, Japan and the United States engaged in outsourcing of relatively labor intensive segments of the value chain, especially on a regional level. Our analysis of the labor market effects of these developments supports the predictions of trade models: Low-skilled workers and labor intensive sub sectors of the automobile industry in traditional locations suffered deteriorating wage and employment prospects in the process of globalization. The adjustment to fiercer competition from below differed considerably between Germany, Japan and the United States. Economic restructuring was least pronounced in the US automobile industry, largely due to the resistance of trade unions. As a result, the employment record and the world-market performance of US automobile producers turned out to be poor compared to their German and Japanese counterparts.

First let us see the automobile industries of three major traditional producer countries, namely Germany, Japan and the United States. The analysis covers the period 19781998. We will discuss several aspects of globalization in the automobile industry. We focus on new competitors which emerged in countries with relatively low per-capita income. This is because trade models predict that increasing trade between countries at different levels of economic development should have relatively pronounced effects on the intrasectoral distribution of income and employment. In addition to new producers and exporters of finished automobiles, we assess the degree of outsourcing of relatively labor intensive segments of the value chain undertaken by the automobile industry in traditional producer countries.

The question to which extent automobile production has become globalized may be assessed by referring to UNCTAD's transnationality index. This index is calculated as the average of three ratios, namely the share of a company's foreign assets to total assets, its overseas sales to total sales, and its employment abroad to total employment (UNCTAD 1999). It may come as a surprise that, according to the transnationality index, the automobile industry of traditional producer countries is less internationalized than various other industries, including food production, chemicals and electronics (ibid.: 83).

Nevertheless, the automobile industry is typically considered to be at the forefront of globalization. Evidence supporting this view includes:

    * The intricate network of alliances and cross-shareholdings among automobile companies, within nations and regions but also between regions (Vickery 1996)

    * Intensified M&A (mergers and acquisitions) activities in the 1990s, involving both end-producers and automotive input suppliers ((Price water house Coopers 2000; World Trade Agenda 2000)

    * The trend towards technologically motivated cooperation agreements, which was caused, inter alia, by end-producers entering into new forms of partnerships for the design of principal components and subsystems (UNCTAD 1998: 25 f.)

    * The significant role of intra-firm trade, e.g. of US-based automobile multinationals (UNCTAD 1999: 443

All these indicators do not reveal, however, whether new competitors from countries with relatively low per-capita income have become integrated into the international division of labor in the automobile industry. This element of globalization is of utmost importance for analyzing the labor market implications of globalization in traditional producer countries. Labor market effects should be relatively benign as long as international relations remain restricted to intra industry trade between countries that are similarly advanced economically and characterized by comparable factor endowments. By contrast, competition from below, i.e., from considerably less advanced countries with an abundant endowment of less qualified labor is expected to cause  significant adjustment pressure, especially on less qualified automobile workers in high-income countries. At first sight, the automobile industry seems badly suited to study the consequences of fiercer competition from below. The industry as a whole is technologically advanced and relatively human capital intensive. As a consequence, automobile production continues to be dominated by high-income countries, accounting for about 70 percent of world production. However, sub sectors of the automobile industry differ considerably in terms of factor intensities. In Germany, for instance, the ratio of workers to sales was 2.5 times as high in the production of auto parts as in the production of automobiles and engines. Hence, outsourcing, the fragmentation of value chains and the integration of low-income countries into the international division of labor are reasonable options in this industry, too. Put differently, relatively labor intensive segments of this industry and less qualified workers are likely to be negatively affected by the emergence of new competitors, even though the automobile industry of high-income countries as a whole should be among the winners of globalization. New competitors comprise end-producers and input suppliers from countries with relatively low per-capita income; in addition to developing and newly industrializing countries, Eastern and Central European transition countries and the so-called EU-periphery (Greece, Ireland, Portugal and Spain) belong to this income category. Considering the most important producers of automobiles among low-income countries, Figure 1 reveals rising market shares especially for end-producers located in Asia and in Southern and Central Europe. As a corollary, the share of high-income industrial countries declined by almost 10 percentage points since 1980. This shift in worldwide production of automobiles towards low-income countries only partly reflects increased competitive pressure from below. New suppliers such as China expanded the production of automobiles for serving protected local markets, while lacking international competitiveness. However, several new suppliers, including Mexico, South Korea and Spain were quite successful in penetrating world automobile markets. In the second half of the 1990s, the countries listed in Figure 2 accounted for almost a quarter of world exports of automobiles, thereby nearly doubling their export share within a decade.

Figure 1 New Competitors: Share in World Production of Automobiles, 1980 and 1998

aCzech Rep., Hungary, Poland, Spain. b PR China (1983 instead of 1980), India, South Korea. cArgentina, Brazil, Mexico.   Source: VDA (a, var. issues).

Figure 2 Major New Competitors: Share in World Exports of Automobiles, 19851998a

a Period averages; missing values for Mexico: 19851991 and 1993; South Korea: 1985. World exports approximated by the sum of exports of relevant exporters as given in VDA. Source: VDA (b, var. issues); American Automobile Manufacturers Association (1998; for Brazil 19851992); Auto & Truck International (var. issues; for Mexico).

Taking recent developments into account, Figure 2 tends to understate the competitive pressure from new automobile production locations. Automobile production in Brazil was traditionally restricted to serving local (or at best regional) markets, but its world-market orientation is likely to become stronger. Investment projects initiated since the mid-1990s indicate that automobile multinationals are changing strategy as a response to liberalized import policies in Brazil (Inter-American Development Bank and Institute for European-Latin American Relations 1996: 41; The Economist 2000: 66). Furthermore, while comparable data are lacking for exports from Central European locations, some suppliers in this region have clearly emerged as internationally competitive exporters recently. Notably in the Czech Republic, automobile production has become integrated into the value chains of automobile multinationals, as before in Mexico and Spain (Richet and Bourassa 2000).

The emergence of new producers and exporters of automobiles was frequently due to foreign direct investment (FDI) in low-income countries by multinational companies. For example, low-income countries taken together hosted almost half of total FDI stocks held by the German automobile industry prior to the Daimler Chrysler merger in 1998 (Table 1). In the early 1980s, Latin America represented the by far most important host region for German automobile companies. In the process of forming the European Single Market, Spain attracted substantial FDI by the German automobile industry. More recently, this industry grasped new investment opportunities in Central and Eastern Europe. In the late 1990s, FDI stocks held in this region were of a similar magnitude as FDI stocks held in the EU-periphery.

The crucial role of FDI notwithstanding, the automobile industry of new competitors developed under strikingly different conditions. In China, which opened up to FDI in the process of market-related reforms starting in the late 1970s, automobile production continues to be dominated by national companies (VDAa 1999: 68 pp.). Korea set up an indigenous automobile industry (Daewoo/Ssangyong and Hyundai/Kia) which successfully penetrated world markets. In contrast to Mexico and Spain, Korea's exports of automobiles were not focused on neighboring high-income countries, but regionally diversified. As a consequence, traditional producers were affected by competitive pressure from Korea both in their home markets and in third markets, including in the developing world.

On the other hand, the development of an indigenous automobile industry rendered it more difficult for Korea to become integrated into global sourcing networks of automobile multinationals. Apart from assembling automobiles, locations such as Mexico, Spain and Central European countries increasingly supplied traditional producer countries with automotive parts and components. In other words, competition from below goes beyond world-market oriented assembly operations in low-income countries and extends to imports of automotive inputs. Figure 3 shows that low-income countries have become relevant suppliers of automotive inputs for the automobile industries of Germany, Japan and the United States. According to detailed country studies, trade in automotive inputs with low-income countries expanded particularly on the regional level (Diehl 2001):

    * In the case of the US automobile industry, a rising share of imports of engines, electrical equipment and other parts and accessories originated from Mexico.

    * For the Japanese automobile industry, other Asian countries represented the most important (low-income) suppliers of automotive inputs.

    * Apart from high-income European neighbors, the EU-periphery was the most important supplier of electrical equipment to the German automobile industry. Since the mid-1990s, this industry imported a steeply rising share of engines from Central European countries.

All in all, the evidence suggests that traditional automobile producing countries have been subjected to increasing competitive pressure from new locations in low-income countries. Countries such as Mexico, Spain and the Czech Republic emerged as competitive suppliers of both finished automobiles and automotive parts. Other countries, notably Korea, focused on penetrating world markets for finished automobiles. All three traditional producer countries considered here were affected, even though imports of automotive inputs remained less important for Japan than for Germany and the United States. Hence, the stylized facts let us expect adverse labor market implications of fiercer competition from below for low-skilled workers in all traditional automobile producing countries.


Globalization has changed the face of business all over the world. Those countries who opened their doors for liberalization and globalization have recorded a tremendous economic growth. India is one among those countries who enjoyed these benefits. Though India opened its door very lately to these, currently she is in a better position. Globalization has never been a remote experience. It affected industries directly and common man both directly or indirectly. There is lot of industries or sectors, in India, which showed a tremendous growth after the liberalization and globalization struck India. Like wise MNCs over the world showed an exceptional growth as the globalization spread. In days to come it's sure that the face and nature of business will change dramatically and globalization will have a key role to play. Here we have made an attempt to study the Impact of Globalization on MNCs and we have succeeded in a better way.

Satish. S
Institute of Management in Kerala

Source : E-mail April 3, 2005



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