AITEG European Network
The Impact of Focused Globalisation in the Italian Automotive Industry: by Giovanni Balcet and Aldo Enrietti1 (University of Turin)
1. Introduction. Multinational strategies in the automotive industry 2. The international and European context 3.
Fiat Group and Fiat Auto
4. Evolving multinational strategies of Fiat Auto 5. Fiat’s focused globalisation: the 178 project 6. Measuring the impact of globalisation: focused globalisation and trade flows among the main production poles 7. Measuring the impact of globalisation: the internationalisation of the supplier system. Outsourcing, modularisation, and vertical partnership 8. The impact on employment: a tentative assessment of the Polish case 9.
1
Concluding remarks
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Whilst this paper is the result of joint research, G. Balcet is responsible for the final version of sections 1, 4, 5 and 6; A. Enrietti for sections 2, 3, 7 and 8. The authors are grateful to Giovanna Ardoino and to the other top managers of the Fiat Group, who kindly cooperated in this research. 1
1. Introduction. Multinational strategies in the automotive industry Globalisation is a multi-dimensional concept, which needs to be defined more precisely, especially as far as the strategies of the firms are concerned (Balcet, 1999). It is generally considered as a new stage of economic integration in international markets, where the main actors, i.e. the big oligopolistic multinational firms, are increasingly internationalising their operations. Their performances are deeply affected by their mutual interdependence and by the strategic behaviour of their competitors (Porter, 1986). Within the same "global" sector, the firm strategies may be very different; firm-specific factors, as well as country-specific factors, should therefore be analysed in order to understand the competitive framework (Bélis-Bergouignan, Bordenave, Lung, 1994). In this paper, attention is focused on the impact of the industrial globalisation in the automotive industry, defined as the process of internationalisation of production, R&D and product development. The approach adopted here is based on a notion of a filière, or vertically integrated industry, which includes not only car makers, but also suppliers of components at different levels. Therefore the co-operative/competitive linkages between these different actors, and the evolving relationship between them will be analyzed. In the first part of the paper, we propose a typology of relevant multinational configurations in the automtive industry, including an operational definition of global strategies. After a look to the international and European context, we introduce the main features and stages of the internationalisation process of Fiat, in the light of the proposed typology. The evolution of the international stucture of Fiat in the second half of the '90s is then considered, as based on two regional networks: a first network of integrated activities in Europe, extending to the East, thanks to the Polish affiliate and to Turkey; and a second network in Latin America, centered on the Mercosur area, based on the affiliates in Brasil and Argentina. Trade and industrial policies, both national and regional, deeply affect the multinational strategies in all these areas. As a first step for assessing the impact of globalisation on the Italian economy, we analyse the creation of trade flows between the main foreign production poles involved and Italy, using both national trade statistics and intra-firm flows data. As a second step, we analyse the internationalisation process of the suppliers of Fiat, in terms of modularisation, outsourcing and vertical partnerships In the conclusions, we focus on the limits, trade-offs and consequences of this case of industrial globalisation.
1.1.
A general framework
If we refer to the localisation of production, marketing and R&D facilities of MNEs within the car industry, four main strategies can be identified. a) Multi-domestic configurations. Following Porter's (1986) definition, foreign affiliates are oriented to serve local national markets, as an alternative to exports and licensing, through local assembling or more value-adding and locally integrated manufacturing. Strategic functions, such as product design and R&D, or finance, tend to remain centralised in the home country, giving rise to technology flows from the centre to the periphery. These configurations are fully consistent with the traditional Product-Life Cycle approach (vernon. 1966). The main motivation, the access to attractive (large and growing) markets, may be strengthened by the need to overcome protectionnist barriers. 2
b) Regional and multi-regional configurations. An intra-group division of labour is developed within a macro-region, through integrated activities and specialised foreign affiliates, which are increasingly export-oriented. Beside the access to markets, cost-saving is a major target, reached through better economies of scale and sourcing in low wage areas. The range of products tends to be unified on a regional basis. R&D and finance may be partly decentralised to the regional headquarters. In the case of multi-domestic configurations, the same kind of intra-firm division of labour, as in the simple regional pattern, is developed within two or three macro-regions of the world economy, possibly identified with the Triad (North America, Western Europe, Japan). Alliances, partnerships and co-operative networks are developed at a regional level. c) Trans-regional, or global, configurations. Intra-group division of labour, rationalisation and integration of corporate activities are delopoped on an enlarged geographical scale, involving two or more macro-regions (Bélis-Bergouignan, Bordenave, Lung, 2000). Every regional network of affiliates tends to specialise in a line of production or in a specific function. For example, in R&D, design and manufacturing of a specific range of models, which is then produced on a world scale. As a consequence, such a configuration implies a degree of interdependence between regions within the multinational organisation. Purchasing strategies tend to create a worldwide component sourcing network. In this paper, we’ll use this operational definition of industrial globalisation. Regional, multi-regional and global strategies may be implemented through intra-firm centralised control, corresponding to the internalisation of markets within the firm, or through more decentralised organisational structures, including networks of alliances and agreements. The definition of global strategy used here does not imply an homogenisation of the product by the global firm, i.e. the production of a world car, nor a unified world auto market. On the contrary, it is consistent with regionally differentiated product strategies, and with different ways of achieving the objectives of scale and of scope economies within MNEs, through the joint use of key components for different models, or through inter-firm cooperation agreements (Chanaron, Lung, 1995). Since the '70s, after the first oil crisis, a process of limited convergence of the patterns of demand has been under way between North America, Europe and Japan. Markets tend to be more homogeneous and demand "global" in the case of the most luxourious and expensive models. However, geographic and socio-cultural factors, as well as government regulations, deeply affect demand and this means that it is necessary to adapt and to diversify car models on a national or on a regional-continental base (e.g., Europe vs North America). Moreover, it must be emphasised that this typology should not be interpreted as a unique path of growth, within a deterministic approach. Evolution is possible in both directions, as in the case of disinvestment and redeployment. The regional dimension seems to be a crucial factor in the spatial development of automobile multinationals. One of the reasons for this is that the strategies of the multinational firms interact with regional integration processes, especially with trade and industrial policies: it is the case of EU, NAFTA, Mercosur, or of the proposed integration of the CEECs with EU.
2. The international and European context 2.1. The globalisation of the automobile industry 3
Since the early 1990s, the automobile industry has been greatly affected by the process of globalisation, yet presenting some limitations (Lung, 2001): both in the way in which many participants who had invested high hopes in the emerging markets (for example, Brazil, Argentina, India) have been disappointed, and also in the repeated failures of global car or global platform strategies (for example, Ford Fiesta project). The globalisation process is also one of the prime sources of the accelerated concentration that has occurred over the past few years and that includes the merger between Daimler and Chrysler (followed by the alliance with Mitsubishi), Volvo's take-over by Ford, Renault's assumption of control over Nissan, and a mutual exchange of capital stakes between Fiat and GM (see table 1)2. Table 1. Strategic transregional alliances in the automobile industry Europe
USA
Japan
Emerging countries
Daimler (Mercedes)
Chrysler
Mitsubishi
Huyndai
Nissan
Samsung, Dacia
Renault Volvo
Ford
Mazda
Fiat
GM
Isuzu, Suzuki, Fuji Heavy
Daewoo?
It is interesting to note that it is in no way certain that such alliances and mergers are going to succeed, given the likelihood of conflicts that will be born either out of situations in which duplicated competencies are being placed in competition with one another (see, for example, the case of Daimler-Chrysler merger), or else out of the adjustments that are going to have to take place if engineers, managers and technicians possessing different backgrounds are to be brought together on joint projects. The trans-regional nature of these alliances undoubtedly constitutes the new and specific trend of the 1990s – a trend that was facilitated by the opening of the Japanese market (for car manufacturers as well as for parts makers) to foreign companies. However one must remember that a process of regionalization of markets tends to include new peripheral spaces (Eastern Europe on the part of European companies, Mexico on the part of the United States and Southeast Asia for the Japanese). 2 Moreover, in terms of mergers and acquisitions, parts makers have been just as active as automobile manufacturers. The effect of the present concentration process is that of selecting a few big world leaders which operated in a global way . They are, in fact, five super-suppliers with more than 8 billion dollars turnover: Delphi and Visteon, which are the component divisions of GM and Ford ( GM however is progressively quoting Delphi on the stock exchange market), Denso and Aisin, which still hold strong ties with the Japanese keiretsu system and the German Bosch, the only really independent supplier. Companies with similar characteristics in turnover and capacity to develop whole systems will possibly emerge between TRW, ITT, Dana, Lear, Valeo, Magneti Marelli, Johnson Controls, Eaton, Magna, Siemens, ZF, Temic, Takata and SKF. Reasonable forecast s indicate, in the medium – short run, a presence of not more than 20 – 25 global suppliers of the first level ( able to operate with more than one car producer at one time and on different markets), with a ratio of nearly one to one between OEM and car producers.
4
The technological/organisational side of the globalisation strategies is portrayed either by the ‘world car’ strategy or the one of ‘common platform’. The world car strategy consists in the attempt to realise a car which can be manufactured and/or sold in different markets: one example other than that of the FIAT Palio – of which we will discuss in another part of the text – is the case of Ford Focus which after being launched in Europe was then launched in the USA. The use of a common platform for more than one car model increases the number of common parts (eg. gears and engines) between cars of a different type,3 thus enabling a more intensive exploitation of scale economies both in the design and production phases. This policy had been already used in the past at both national and regional level, the new aspect is that the platforms are now common between different continents. The use of the same platform is one of the possible effects of the concentration process by merger, buy over or joint ventures that have been discussed above. 2.2 The different trajectories of globalisation of European car makers In Europe, different car manufacturers followed different ways to the globalisation. • Renault has thrown itself headfirst into the globalisation race. It has concluded multiple alliances (buying over of 36,8% of the Nissan share capital, 51% of the Rumanian Dacia one and 70,1% of the Korean Samsung for cars; joint ventures with Volvo AB for trucks) and has been refocusing on a co-ordinator’s function in that it has been withdrawing from components production (externalisation). These operations transformed Renault from being a regional (European) to a global company. • Renault’s French rival, PSA, represents the other side of the coin; it has been seeking to act as a local player, remaining family-controlled, reinforcing its upstream presence in the components making industry (with Faurecia’s takeover of Sommer-Allibert) and demonstrating remarkable economic performance both in terms of product innovation and also in terms of profitability. The internationalisation process was prudent by beginning with the production in the Porto Réal plant in Brazil, with a scheduled yearly volume of 100,000 cars and the target to reach 8% of the local market. • All of the three most important German automobile companies - Volkswagen as well as Daimler-Benz (now Daimler-Chrysler) and BMW - began changing dramatically their internationalisation trajectory since the beginning of the 1990s. The overtake of Rover by BMW, the Daimler-Chrysler merger and the competition between Volkswagen and BMW for buying Rolls Royce are the most visible expressions and the 'top of the iceberg' of these new dynamics of the German Big Three. n Since the end of the Second World War, BMW has been a nationally centred company that made experiences on a world-wide scale only in exports: BMW was the Bavarian premium car exporter. Only the beginning of the 1990s marked the take-off-phase as an internationally producing company with the main emphasis on the Anglo-Saxon countries by taking over ROVER (UK) and establishing a new production plant in Southern USA4. Additionally, BMW has launched what can be called an 'overseas assembly offensive'. In uncertain country markets like Egypt, Indonesia, Malaysia, Philippines, Thailand, Vietnam and Russia BMW assembles cars in cooperation with local partners. Unlike 3
An example of this is the VW Golf platform, which is common with AUDI, SEAT and SKODA cars.
4
With its Spartanburg plant (South Carolina) BMW was the first German carmaker who decided to establish a new production plant in the Southeast of the USA far away from the traditional automotive regions.
5
other company, BMW is acting more cautiously with respect to the SouthAmerican markets. n Up to the Chrysler take over, Mercedes-Benz, have had a long lasting export orientation, as BMW. For a very long time Mercedes functioned mainly as a nationally centred company with a certain amount of more or less passive affiliates or overseas subsidiaries. The end of the German unification boom brought particularly for Mercedes a serious economic crises which at the same time turned out as a driving force towards internationalisation. As Mercedes like all the other big German car makers considers the US-market as the most important automobile market in the world it tried to strengthen its position in that country and in1994 decided to establish a greenfield plant in Tuscaloosa, in the Southeast of the USA. With regard to South America Mercedes has just set up a new production plant for the production of the A-class in Brazil. That model will then be produced parallely in the Brazilian and the German Rastatt plant. n The VW internationalization process during the ’90s was orientated more to the take over of competitors in Europe than creating new plants abroad. In this way they bought the Spanish SEAT, the Czechoslovakian Skoda, Lamborghini, Rolls-Royce up to 2003, Bentley and Bugatti, by gradually increasing dimensions and differentiation of models. 2.3 The re-definition of firm boundaries The current trend towards globalisation reflects an increasingly competitive international business environment with a search for new sources of competitiveness which lead up to the redefinition of firm's specific competencies and of firm's boundaries (Lung, 2001). This process goes through three main strategies. • Outsourcing In the past, the automakers were responsible for almost all of the branch’s manufacturing activities, but, in recent years, they have tended to delegate important parts of automobile production to specialist firms (components makers, parts suppliers, engineering companies, etc.) who assume responsibility for an ever-greater proportion of industrial design and production functions. For example, from mid eighties to mid nineties, Fiat Auto reduced the degree of vertical integration, from 50% to 30% in production, but it should be noted that at the beginning of that period a significant number of components manufactured by suppliers were still wholly designed internally by Fiat (table 2): if we consider the breakdown of the value of the parts designed and developed by Fiat, it can be seen that the degree of vertical integration in design was even higher in the mid eighties (70%), and it fell to 30% in the mid nineties.
Table 2. Level of vertical integration in Fiat Auto (%) MODELS Production
Uno
Tipo
Punto
Bravo Brava
New Punto
50
48
35
30
30
6
Uno
Tipo
Punto
Bravo Brava
New Punto
Production
50
48
35
30
30
Design
70
70
55
41
40
MODELS
Source: Fiat Auto
At the centre of the reorganisation of the suppliers’ network was a drastic reduction in their number. At the end of the 1980s the average number of suppliers to a European car manufacturer fluctuated between 900 and 2500, compared to 160 to 260 for Japanese manufacturers 5 . Thus, a process was begun which led European car manufacturers to reduce the number of suppliers by 40% to 80%6. The result of this selection process was the creation of a pyramid-shaped hierarchical structure, in which there are first, second and third level suppliers and first level suppliers are mostly large firms, often multinationals. Car manufacturers seem to have decided that their involvement should be more upstream, that is, in the overall coordination of the activities and actors that participate in the design of an automobile product. As such, they will mainly tend to become the coordinators of those manufacturing activities that are realised by first tier suppliers, entertaining close relationships with the various distribution channels (and thus the final market) in what becomes an extended enterprise. In general, this process push car makers to refocus on their core business, outsourcing more and more of their activities (selling entire business lines that had once been integrated into their perimeter of operations). One example is the spin-off of GM's (Delphi) and Ford’s (Visteon) component subsidiaries; an other one is the sale of the lights and suspension divisions of Magneti Marelli. It must be underlined that the outsourcing strategy varies for each carmaker, for each geographic region, primarily revolving around firms' history, the competencies and capabilities that they have developed, and their location. One contradictory example of the afore mentioned trend towards outsourcing is provided by Toyota, which would like to avoid getting rid of its Denso subsidiary. • Modular production Components makers, particularly from Europe and North America, have become heavily involved in the march towards modular production7 offering automakers new solutions that will help them to consolidate their commercial and strategic positions. Nevertheless, automakers diverge greatly with respect to the extent to which they have taken these principles on board. Such disparities reflect firms’ regional dimensions as well as their differentiated orientations. Toyota, for example, seems to be very hesitant in this field and this is coherent with the Toyotist model itself which stresses the control of upstream and downstream relationships within the framework of an industrial keiretsu. The American carmakers Ford and GM have had to restrict their ambitions in their domestic market due to their relationships with their parts suppliers, and with their employees.8 However, US carmakers have already widely applied these methods in their overseas plants, in Europe,
5
In 1990 Mercedes had 2500 suppliers, GM Europe 2000, Ford Europe and VW 1700, Audi and PSA 1250, BMW and Renault 1100, and Fiat 720, while Honda had 270, Toyota 260, Mazda 180 and Nissan 162. 6 The aim of many European car manufacturers for the mid 1990s was: 500 suppliers for Mercedes and Fiat, BMW 450, Audi 400, Ford and PSA 600 Renault 700 and VW 1000. In fact as shown in table 1.1. In 1994 Fiat had already reduced the number of its suppliers to 410. 7 It is a big business and a huge opportunity: the modular assembly business is expected to grow from $42,7 billion in 2000, to $73 billion in 2005, and 111 billion in 2010. But it means also a major restructuring of the supply sector: in the last three years there have been over 124 acquisition and 65 joint ventures and strategic alliances as leading suppliers have positioned themselves for this opportunity. 8 For examples, the UAW labour union has been strongly opposed to an ambitious GM plan involving the construction of a plant that would produce small cars according to the principles of modularity.
7
but above all in Brazil, a country that, with GM’s Blue Macaw project9 and Ford’s Amazon project, remains a promised land for wide-scale experimentation with this type of productive organisation. In fact, it is at its Resende truck plant in Brazil that VW first introduced the concept of modular consortium, whereby operators working for components makers assemble their module directly on the assembly line, under the supervision of a VW staff member. In Europe, Ford and GM have been closely tracking the steps that have been taken in this direction by VW (notably in the Czech Republic), DaimlerChrysler (with the Smart car and the Mercedes Class A), and by Fiat, which has sometimes been depicted as the first mover in this field (Volpato, 1999). With their ever-increasing delegation of sub-system design and modules production and even assembly functions to suppliers, carmakers seem to progressively organising their withdrawal from the manufacturing function. They appear to be limiting themselves to a role as an architect and global manager, getting involved in the overall product design and in the production chain’s management. With this upstream disengagement (outsourcing), carmakers appear to have been trying to position themselves increasingly as service providers, and this has had implications on their complementarities, competencies and knowledge bases. • Services The dynamics that have been at work in the world’s automotive systems are not only limited to the constraints that linked to the manufacturing phase. They also encompass all of the activities that are associated with a vehicle's utilisation, particularly its material (maintenance, spare parts) and fundamentally immaterial services. Services are one of the older constituents of the automotive system (finance, insurance, rentals, resale of used vehicles) and automobile firms have long been active in these areas, above all through their financing of new car sales. New car purchases only represent a small portion of total motoring expenditures. As a result, automotive firms (vehicle manufacturers and component makers) and new actors in this branch have renewed their interest in services. But not only in new services: for examples, some manufacturers have entered in the car rental market (acquisition of Hertz by Ford, of Europcar by VW), in the maintenance and rapid repair business (purchase of Kwick Fit by Ford, of Midas by Fiat, Renault's European launch of the Carlife network). In effect, automobile manufacturers are no longer simply seeking to sell a new vehicle, but they are now trying to track the vehicle over the course of its life cycle. 3. Fiat Group and Fiat Auto: trends in employment With revenues of more than 57 billion euros in 2000, Fiat is one of the world’s biggest industrial groups, operating in 61 countries with 1,063 companies, which employ over 220,000 people, more than 110,000 of whom outside Italy. In 1991 the employees outside Italy represented only 24% of total employment. The Group runs 242 production facilities (167 of which are outside Italy) and 131 research centers (61 outside Italy). Some 46% of the value of production is generated outside Italy, against 17% in 1990, showing an important process of internationalisation.
9
A small and low price car based on the Corsa platform and co-designed with suppliers in Brazil, with a planned capacity of 120,000 cars/year, expansible. Production/supply system is based on industrial condominium with 16 modules and systems suppliers based onsite and another one that is outside the condominium, nearby. The modules are: 1. small stamped parts; 2. pre-assembled window glass; 3. module dashboard including pedals; 4. tool kit of the car; 5. screws, mounting elements; 6. brake and fuel lines;7. Fuel tank; 8. front and rear suspensions, including brakes; rear axle; 9. air filters; 10. seats, headliners and door trim; 11. exhaust system; 12. lighting system; 13. assembled wheels & tires; 14. plastic-injected parts like bumpers, internal parts, door “clothes”;15. tapestry, carpeting and insulation, noise absorbers; 16. cooling system.
8
Fiat Group companies are organized into ten operating Sectors: Automobiles, Agricultural and Construction Equipment, Commercial Vehicles, Metallurgical Products, Components, Production Systems, Aviation, Publishing and Communications, Insurance and Services. Despite the diversification process during the nineties, Fiat group remains an automotive dependent firm: the three core automotive activities (Automobiles, Agricultural and Construction Equipment, Commercial Vehicles) account for 78% of sales and Metallurgical Products, Components, Production Systems, mostly specialised in automotive activities, represent 15% of sales. FIAT Auto is the most important activity of the FIAT group, representing 44% of turnover and 33% of employees. The analysis of the employment trend during the ‘90s (table 3) shows that 1997 has been a real turning point: during the previous eight years employees decreased by 10, but in only one year (between 1997 and 1998) employment fell by 18%. This trend was confirmed in the following years, so, in the year 2000, the employees were little more half of those in 1990. Table 3. Fiat Auto: Total employment 1990 Employees 133431
1991 128925
1992 125378
1993 120338
1994 119618
1995 114386
1996 116144
1997 118109
1998 93514
1999 82553
2000 74292
Index
96,62%
93,96%
90,19%
89,65%
85,73%
87,04%
88,52%
70,08%
61,87%
55,68%
100%
Source: Fiat Auto
How can this trend be explained? The relatively slow decrease at the beginning of the nineties is the outcome of two opposite situations: on the one hand, the fall of occupation in Italy following the crisis of the European market, and FIAT Auto specially (important reduction of the market share in Italy); on the other hand the increase of employment in Brazil following the boom of registrations in that Country, plus, from 1993, the acquisition of Polish FSM, which became thereafter FIAT Auto Poland. The fall at the end of the decade was caused by many factors: firstly the crisis of the Brazilian market, as a consequence of the south-east Asian crisis and, mainly, because of the outsourcing process of part of activities previously made inside the FIAT Auto plants. This process involved employees in various activities, the manufacture of moulds, credit card management, personnel management, production control, reporting, energy, ecology, spare part warehouse management, logistics, movement, suspension assembly, production line maintenance, pressing of body parts. Balance sheet data show that, during three years (1997-1999), in all 23,350 employees passed to other companies working for FIAT, which is 70% of the total employment fall between 1997 and 1999 (33,591 employees). Between 1998 and 1st December 1999 the adoption of a policy of outsourcing affected more than 16,000 workers in Italy (table 4); 52% of these workers went to other firms in the Fiat Group, while the remainder went to firms outside the group. What is interesting is that for a large number of these workers it only meant the name on their overalls changed, and they continued to work as before, in Fiat Auto factories. Four cases can be quoted as examples, Magneti Marelli took over the manufacture and assembly of suspensions and dashboards, together with the necessary workers. Comau Service took on the employees responsible for the maintenance of the lines while TNT took on and operated the lines and Stola an ITCA took on the press workers in Rivalta. Table 4: Fiat Auto outsourcing process in Italy 9
TOTAL
White-collars
Blue-collars
%
16.395 100
4.549 100
11.846 100
%
6.677 40.7%
3.069 67,4
3608 30,4
%
9.718 59,3%
1.480 32,6
8.238 69,6
TOTAL
INSIDE FIAT
OUTSIDE FIAT
Source: Fiat Auto
Another interesting point regarding employment concerns the geographical distribution of FIAT Auto employees in Italy between production plants in the North and in the South (including the Centre) of Italy. As shown in table 5, during the nineties there was an important change between the two areas, chiefly as a consequence of the two new plants opened in the South of Italy (Melfi car assembly plant and Pratola Serra engine production plant) with the result that the percentage of employees in the North (mainly in Piedmont) fell from 70% in 1990 to 50% in 1998. Another reason of this change was the fact that two plants in the North, Desio (Milan) and Chivasso (Turin) were closed. Table 5. Fiat Auto: Employment structure in Italy (%)
1990 NORTH 70,4 SOUTH 29,6 Source: Fiat Auto
1991 71,3 28,7
1992 71 29
1993 65,7 34,3
1994 59 41
1995 54,8 45,2
1996 53 47
1997 53,7 46,3
1998 51 49
4. Evolving multinational strategies of Fiat Auto In this and in the following sections, we’ll apply to the evolution of Fiat Auto the light of the categories introduced above, in order to characterize the stages of the internationalisation processes in the automotive industry and to shed light on the important changes that took place in the last decade. A specific feature of the Fiat case is that FDI has been an alternative to domestic relocation in the Southern Italian regions, where regional development policies have reduced labour and investment costs, helping to set up a closely integrated network of vehicles and components factories. 4.1. Multi-domestic strategies: local merket-oriented affiliates and cooperative agreements Since the ‘50s, despite its activities being clearly concentrated in Italy, Fiat followed a policy of market-oriented expansion abroad: it invested in Spain and bought into the Spanish State company SEAT (1953), made an agreement with Zavodi Crvena Zastava, Yugoslavia, (1954), created an affiliate in Argentina (1960) and concluded an important cooperation agreement in the USSR (1966); in 1968, it also bought a 15% interest in 10
Citroen, France, agreeing to develop collaboration on production and sales. This agreement, however, was broken off in 1973 due to differences on policy and organization. In the ‘70s and the ‘80s, the internationalization strategy was strengthened by setting up a Brazilian subsidiary in 1973, but the process was interrupted because of the oil crisis and social conflicts in Italy, so that in the ‘80s a policy of disinvestment abroad took place, by selling those activities which did not appear to be strategic or which did not guarantee a sufficient level of profit. In 1979, Fiat Auto turned down the Spanish government's invitation to take over SEAT (Volkswagen later took over the company) . Few years later, Fiat Auto liquidated most of its investments in Latin America (Argentina, Uruguay, Colombia, and Chile) and withdrew from the US market. In 1985, negotiations with Ford to create what would have been the largest European car group were broken off, because of questions of control and governance. In the early 90s, multi-domestic strategies continued to play a dominant role: in particular, the positive net income of the Brazilian company granted fairly good results at consolidated level. 4.2. Regional stategies: Poland and Mercosur A turning point towards the emergence of new regional configurations occurred in 1987, when a contract was signed with the State-owned company FSM, to manufacture a smallsized car, the Cinquecento, exclusively in Poland. Technologically advanced assembly lines were set up in a new factory at Tychy and production started in June 1991 with a production capacity of 250,000 cars per year. Fiat Auto, as licensor, supplies the design of the car, the technology and the components which were not available in Poland. Fiat provided the help and technical assistance for the construction and implementation of the new factory. It was the first Western manufacturer to concentrate the production of a new car for the whole European market in an East European country. About 80% of the Cinquecento and Seicento production is exported. The process of transition to a market economy in Poland in the early ‘90s created the conditions for the transformation of Fiat's previous involvement as a technical and industrial partner, into a foreign direct investor, controlling huge productive capacities. The acquisition of FSM in 1993 created Fiat Auto Poland, a majority controlled affiliate. It offered opportunities for the systematic integration of the activity in Poland within Fiat's regional productive structure in Europe. The Polish government had an active role, promising a number of specific incentives covering a period from five to eight years. The role played by direct negotiations between Fiat and the Polish government during and after the takeover was important, because the strategy of the Italian investor was affected by the evolving trade policies, by tax legislation, and by antitrust regulations. A second regional pattern emerged after 1993 in the Mercosur area. As well as other multinational groups, Fiat reacted to the Asuncion treaty (1991) and especially the Ouro Preto agreement (1994), that was considered a guarantee of the political credibility of the process of economic integration in that area. In 1995, the decision was taken to set up a new production complex in Argentina, with an investment of $0,6 bn, to produce 180,000 vehicles a year from 1997. The Mercosur regional configuration was also the starting point for the new strategy of focused globalisation, that will be descrbed in the following section. In the mid '90s, the international stucture of Fiat Auto appeared to be based on two regional networks: • a first network of integrated activities in Europe, extending to the East, thanks to the Polish affiliate; • a second network in Latin America, centred on the Mercosur area, based on the affiliates in Brasil and Argentina. 11
Regional trade integration may be considered as a necessary condition to the development of an intra-firm division of labour on a regional level, including specialisation of foreign affiliates, optimising the economies of scale and of the access to the markets and to the relevant externalities, and minimising costs. As a consequence of the implementation of these multinational strategies, the weight of Italy on the total production was gradually reduced from almost 90% in 1986 to 64% in 1999, in favour mostly of Brazil and Poland, underlining how FIAT Auto is gradually loosing the character of a national company. Table 6:Fiat Auto: Production by country (%) 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Italy
89,82
90,06
90,81
90,71
90,12
87,54
84,48
65,20
66,91
68,15
62,86
Brasil
10,18
9,94
9,19
9,29
9,88
12,46
15,52
20,14
21,70
19,46
23,18
Poland
0,00
0,00
0,00
0,00
0,00
0,00
0,00
14,66
11,39
12,38
13,96
Rest of the world Total
100
Cars (000)
100
100
100
100
100
100
100
1695,1 1963,1 2137,1 2242,1 2158,6 1958,9 1826,3 1786,2
100 2098
100
100
1997
1998
1999
61,82
63,14
64,36
22,09
16,83
17,03
12,45
14,41
14,95
3,63
4,99
3,19
100
100
2209,1 2209,2 2537,2 2205,8
100 2215
Source: Fiat Auto
5. Fiat’s focused globalisation: the 178 project The project of a world car, specially oriented to the needs of emerging countries, represents the transition from multi-domestic and multi-regional configurations towards what we can define as a “focused globalisation” strategy. We must stress that this new stage in internationalisation took place in the same years, the early '90s, as a major effort of organisational change was made by Fiat in Italy, towards integrated factory, just-in-time flows and team work. In fact, both strategies may be considered as strategic reactions to the same competitive challenge. The new international growth of Fiat Auto, in the early '90s was due to increasing competitive pressure within the European and the domestic Italian car markets (where Fiat's share fell from 52.8 % in 1990 to 44.0 % in 1996). Given the difficulty of penetrating the slowing and difficult North American (and even more Japanese) markets, the strategic choice of internationalisation has been to concentrate efforts on emerging markets. The innovative idea was to produce a world car especially oriented to the needs of emerging countries, in Eastern Europe, Latin America, Africa ad Asia. Italy was the location of the platform of the 178 project, where the models of this family have been developed, and the source of component exports, while production involved several main integrated poles and a number of assembly units in emerging or developing countries. In a first stage, the project was implemented in the Mercosur area (through the greenfield investment in Cordoba, Argentina, integrated with pre-existent Brasilian facilities), with production starting in 1996. In 1997, Poland became a third pole of this project, able to produce Palio and Siena models and to export. In the mid-Nineties, Fiat decided Turkey to become one of the main production poles of the “178 project”. Turkey was then choosen as a fourth production pole, whose importance was considered equal or superior to that of Poland, and second only to the Brasilian pole (Balcet, Enrietti, 2000). In this country, all the companies of the Fiat group operate through joint ventures with local partners. We can summarize the main features and objectives of the 178 project as it follows. 12
• Production of the same family of car models and standardisation of the components worldwide, through a single platform, located in Turin. • Maximisation of the economies of scale through the goal of producing one million vehicles in 2000, as stated in 1995 by the Fiat top managers. • Frontier technology content of the new product, low prices, adaptability to the local conditions of demand (roads, fuel, regulations). • Product differentiation through a range of versions and motorisations of the models Palio and Siena, in order to respond to the various segments of local markets. • Organisation of a flexible and adaptive network of global sourcing, supported by an information and communication system, centralized in Turin, providing relevant information in order to choose between “make or buy” and to decide material flows worldwide. • Hyerarchy, specialisation and integration of the production units at three levels: a) general direction, finance, R&D and product development are located in Italy, from where strategic components, technology and knowledge flow to the whole system; b) the production poles, located in Brasil, Argentina, Poland and Turkey, are exporting both vehicles and components to the rest of the system; c) assembly plants in Morocco, Egypt, South Africa and India have the traditional role of importing components from levels (a) and (b), selling vehicles on domestic markets. • First steps towards the internationalisation of R&D and product development, via the creation of a global enginnering network integrating the Italian, Brasilian and Turkish R&D units. In particular, the Belo Horizonte plant was responsible for the re-styling of the Palio model in 2000. In general, the results of the process of focused globalisation were much below the objective of one million cars to be produced in 2000. After a maximum of 442000 units produced in 1997, 85 % of which in Brasil, production decreased dramatically because of the impact of the international financial crisis in Brasil, that was not compensated by the penetration in new areas (table 7). In 1999 and in 2000 production levels fell in Argentina following the dramatic impact of the devaluation of the Brasilian Real and of the reduction of the domestic market. After an year of booming domestic demand, during the last months of 2000 the financial instability spread again to Turkey, and Fiat tried to compensate through exports the falling market. In the same year, production fell in Poland, because of the slowing down of demand and of the growing competion from Skoda exports from the Czeh Republic. The share of the Brasilian production on the total of the world car, even if decreasing, is still dominant at 71 per cent in 2000.. Table 7. Production of Palio and Siena models, 1996 - 2000
Brasil Argentina Poland Venezuela * Morocco
1996 157.570
1997 375.169 48.141 9.006 9.766 98
1998 265.865 60.544 28.521 8.858 5.393 13
1999 254.504 26.139 21.957 1.867 8.361
2000 259.681 25.736 10.945 6190
Turkey India Southafrica Egypt World
157.570
442.180
20.095
23.964 3.766 137
389.266
340.696
43.892 2.701 6.822 3.201 359.168
(*) disinvested in 1999
Source: Fiat Auto
Changes in the geographical distribution of the production eventually affected, obviously, the employment distribution: in the year 2000, 66% was in Italy while in 1991 the Italian share was 86%. On March 13, 2000, Fiat and General Motors announced a strategic industrial alliance involving their operations in Europe and Latin America. The agreement was completed on July 24, 2000. The two 50-50 joint ventures established under the agreement in the areas of Purchasing and Powertrain production are now operational, whilst a cooperation agreement has been sealed by Fidis and GMAC, the financial companies of Fiat Auto and General Motors. Fiat Auto Holdings BV (80% Fiat and 20% General Motors) has been established as part of the reorganization resulting from the agreement and controls the light commercial vehicles and automobile sector of the Fiat Group, with the exception of Ferrari and Maserati. Following the agreement, Fiat acquired 6% of GM’s capital stock. The aim of the alliance is the reduction of costs achievable by combining the activities of the two firms (powertrain and purchasing) which are almost 80% of production costs for a car, activities which could be distributed on nearly 5,5 million of cars. The Powertrain joint-venture is located in Torino and has about 26,000 employees in Europe and Latin America: the aim is to develop common families of engines and gearboxes in order to reduce production costs. The Purchasing joint-venture is located in Ruesselshein (Germany) and will run a purchasing volume of about 32 billion euros. Further results could be obtained from a possible common use of platforms of some future car models, with the outcome of exploiting scale economies in production and of reducing the design costs. The peculiarity of the alliance consist in the fact that the two companies are in competition with respect to customers, each of them maintaining its sales network and its product policy. When the two joint-ventures will be operative, a total of 14,000 FIAT employees will be transferred to the two companies.
6. Measuring the impact of globalisation: focused globalisation and trade flows among the main production poles Assessing the impact of the internationalisation strategies on the Italian foreign trade flow can offer helpful elements in understanding the consequences of the globalisation processes on income and on occupation. Ex-ante, one could expect a cycle of trade flows:
14
• strong exports of parts, components, materials and machinery from Italy to foreign affiliates in a first stage; • declining component exports from Italy due to growing local content of foreign productions; • growing imports of components by Italy as foreign units develop. In order to shed light on this issue, we elaborated the Italian ISTAT 8 digit data on foreign trade and re-aggregated them, to evaluate the volume of the flow both of motor vehicles and parts and materials between Italy and the main production poles abroad: Brazil, Argentina, Poland and Turkey. It is then possible a confrontation of ISTAT data with intra firm trade data supplied by FIAT Auto, regarding the more recent years. The first group of graphics, from Fig. 1 to Fig. 9, is made up of the elaboration of ISTAT data on foreign trade, and it shows the trend of the value of cars and parts export and import flow from 1995 to 2000 between Italy and the four countries considered. We then show bilateral trade balances between Italy and the four countries. We can see (Fig. 1 to 3) that since 1995 Italy is net importer of motor vehicles from Poland and Brazil. From Italy there are also export flows of motor vehicles in order to offer the full range of vehicles in the foreign markets, with a peak in 1995 towards Brazil, which are not enough however to compensate the value of imports from those two countries. In the same period, the dynamics of the exports of parts from Italy is very high, in particular towards Poland and Brazil, and this ensures a positive balance for Italy even if imports are growing (Fig. 4 to 7). An important share of those export flows is represented by after market parts, which is spare parts. These results derive from, on one side, trade flow originated from the regional model export – oriented, and on the other side, trade flow originated from the model which we called focused globalisation. The first model explains the car export flow from Poland to Italy (Cinquecento and Seicento models), and the corresponding export flow from Italy to Poland of parts. The 178 project is, on the other hand, the origin of the trade flows with the other three countries, among which Brazil is the most important (Palio model). Less important and more irregular are the import flows from Turkey; in this case the ISTAT data includes also exports of the Renault subsidiary located in that country, as well as the beginning, in 2000, of exportation of a new commercial vehicle (Doblò) which is produced in Turkey by FIAT Auto for the whole of Europe. In the year 2000 there is also a growth in the export of vehicles and parts from Italy towards Turkey following the increase in the domestic demand. Even if Italian imports of parts and components are always lower than exports, nevertheless we must stress that they are clearly growing from Poland, Brasil and to a lesser extent from Turkey (Fig. 5) If we look to the typology of products imported, suspentions and steering have a dominant weight (Fig. 6). This is a new and interesting outcome. Foreign poles within Fiat’s focused globalisation show a growing propensity to specialise in the production of specific parts and components, in order to reach better economies of scale and to become export platforms, both to other poles and to Italy. The exception is Argentina, where the exchange rate policydeeply deteriorated the comparative costs situation, as we have pointed out in previous sections. Taking into account the entire production chain, we estimated that the bilateral balance for the motor car industry is positive for Italy. Fig. 8 and 9 show respectively, the bilateral and total trend. This first result, obviously partial, indicates on the whole a positive impact on Italian income and employment from trade flows generated by foreign direct investments in the countries taken into consideration. We must also consider that these data do not include the export of machines, technologies and intangibles goods (services) linked to the industry’s internationalisation of the production, which, if included, could improve Italian 15
balance. However, growing imports of components from foreign affiliates could change, in the medium and in the long run, the present trade surpluses. Fig. 10, 11 and 12 refer to the FIAT Auto internal foreign trade flow, regarding 1998, 1999 and 2000, disaggregated for ‘vehicles’ and ‘parts and materials’. The graphs show data on export, import and balance for the whole of the five countries that form the multinational system of trade, that is to say Italy, which occupies the central position, and the four main production centres. The data concerns the total flows for each of the five countries. The Italian position is the central one, where the main components and technology flows originate. The high Italian deficit in the vehicles trade confirms the ISTAT data (Fig. 10). Poland during the three years and Brazil after 1998 (that is after the devaluation of the Real) are net intra – FIAT exporters of vehicles. The situation is reversed if we consider internal trade of parts and materials: Italy is a net exporter, while Poland, Brazil and Turkey have a structural deficit (fig. 11). It must be underlined that, despite the devaluation of the Real, between 1998 and 1999 Brazilian export of parts decreased and imports increased, because of decisions on investment previously made by FIAT Auto: for exemple, new machinery in Turkey. In the year 2000 these imports are decreasing mainly because of the domestic market crisis. Taking into account the entire production chain (Fig. 12), the data confirms the Italian intra-firm trade surplus, thanks to the export of parts, with a decreasing deficit for Brazil and a growing one for Turkey in the year 2000, and a situation of substantial equilibrium for Poland and Argentina. The percentage of intra-FIAT Auto flow on Italian exports of parts and on Italian total exports of the entire production chain is near to or higher than 50% for Poland, Brazil and Argentina and slightly lower for Turkey. This share is very high, taking into account that data refers only to the intra-FIAT Auto flows, with the exclusion of the other companies in the group, Magneti Marelli and Teksid, which are strongly involved in the internationalisation process. Our results give some support to the hypothesis of a three-stage cycle in trade flows activated by italian FDIs in this sector, that has been outlined at the beginning of this section.
16
Fig.1. Italy: exports of cars to selected countries (million lira) 1.200.000 1.000.000 800.000 600.000 400.000 200.000 -
Poland 1995
Brazil
1996
1997
Argentina 1998
1999
Turkey 2000
Source: Elaboration from Istat national statistics of trade
Fig.2. Italy: imports of cars from selected countries (million lira) 1.000.000 800.000 600.000 400.000 200.000 -
Poland 1995
Brazil 1996
1997
Argentina 1998
Turkey
1999
2000
Source: Elaboration from Istat national statistics of trade
Fig 3. Italy: bilateral car trade balances (million lira) 1.200.000 1.000.000 800.000 600.000 400.000 200.000 -200.000
Poland
Brazil
Argentina
Turkey
-400.000 -600.000 -800.000 -1.000.000
1995
1996
1997
1998
1999
2000
Source: Elaboration f rom Istat national statistics of trade
17
1.200.000
Fig 4. Italy: exports of car components to selected countries (million lira)
1.000.000 800.000 600.000 400.000 200.000 -
Poland 1995
Brazil 1996
1997
Argentina 1998
1999
Turkey 2000
Source: Elaboration from Istat national statistics of trade
Fig 5. Italy: imports of car components from selected countries (million lira) 420.000 370.000 320.000 270.000 220.000 170.000 120.000 70.000 20.000 -30.000
Poland 1995
Brazil 1996
Argentina
1997
1998
Turkey
1999
2000
Source: Elaboration from Istat national statistics of trade
Fig 6. Italy: imports of car components from selected countries, by product (million lira) 350.000.000 300.000.000 250.000.000 200.000.000 150.000.000 100.000.000 50.000.000 -
Body 1995
1996
Electric systems 1997
Engine 1998
Suspentions and steering 1999
2000
Source: Elaboration from Istat national statistics of trade
18
Fig 7. Italy: bilateral car component trade balances (million lira) 1.200.000 1.000.000 800.000 600.000 400.000 200.000 -
Poland 1995
Brazil 1996
Argentina
1997
1998
Turkey
1999
2000
Source: Elaboration from Istat national statistics of trade
Fig 8. Italy: bilateral trade balances in total car industry (million lira) 1.600.000 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 -200.000
Poland 1995
Brazil 1996
Argentina
1997
1998
Turkey
1999
2000
Source: Elaboration from Istat national statistics of trade
Fig.9. Italy: Evolution of total trade flows in the car industry with selected countries (million lira) 4.000.000 3.000.000 2.000.000 Export 1.000.000 Import
-1.000.000
1995
1996
1997
1998
1999
2000
Balance
-2.000.000 -3.000.000 Source: Elaboration from Istat national statistics of trade
19
Fig. 10. Intra Fiat Auto trade 1998 - 2000: motor vehicles (million lira) 1.000.000
500.000
-
ITALY
POLAND
BRAZIL
ARGENTINA
TURKEY
-500.000
-1.000.000
-1.500.000
Export '98 Import '00
Export '99 Balance '98
Export '00 Balance '99
Import '98 Balance '00
Import '99
Fig. 11. Intra Fiat Auto trade 1998 - 2000: components (million lira) 2.000.000 1.500.000 1.000.000 500.000 -500.000
ITALY
POLAND
BRAZIL
ARGENTINA
TURKEY
Export '98
Export '99
Export '00
Import '98
Import '99
Import '00
Balance '98
Balance '99
Balance '00
-1.000.000 -1.500.000
Fig.12. Intra Fiat Auto trade 1998 - 2000: total car industry (million lira) 2.500.000 2.000.000 1.500.000 1.000.000 500.000 -500.000
ITALY
POLAND
Export '98 Import '00
Export '99 Balance '98
BRAZIL
ARGENTINA
TURKEY
-1.000.000 -1.500.000 -2.000.000
Export '00 Balance '99
20
Import '98 Balance '00
Import '99
7. Measuring the impact of globalisation: the internalisation of the suppliers system. Outsourcing, modularisation, and vertical partnership. As we have seen in part 3, the globalisation process has also affected suppliers through purchasing and mergers which have significantly increased the industry’s concentration level. There is another element which is determinant in the globalisation of these firms. The vertical structure of supply, with a restricted number of first suppliers, together with the geographical dispersion of the production plants from the car producers, has meant that the suppliers must “follow the client” in foreign investments, especially in developing or emergent countries. This because of the fact that products produced in these countries must have the same quality level of those produced in the industrialised countries for two reasons: a) emerging countries consumers ask for medium standard cars; b) products from those countries may be exported to industrialised countries In the case of FIAT Auto plants in Brazil, Poland, Argentina, Turkey and India, previous FIAT suppliers intervened through subsidiaries, acquisitions, joint ventures and agreements of different types, in order to follow their client. This situation derives from the general principle that Fiat Auto adopts in deciding where and whom to buy from: a policy based on two criteria, the supplier know-how and the impact of logistic costs (table 8): Table 8. Fiat Auto global purchasing strategy CODESIGN High
CConcentrate large volumes on few suppliers (1)
Localise suppliers (2)
Supplier Know-how Buy where most economical
Low
Investigate local competitiveness
(3)
(4)
Low
High Impact of logistic costs
Source: Fiat Auto
• when the supplier’s know-how is high and logistic costs low (sector 1), Fiat selects suppliers with strong central production and negotiates a worldwide price based on global volume; • when the supplier’s know-how is high and logistic costs high (sector 2), Fiat pushes suppliers into manufacturing multinationally; • when the supplier’s know-how is low and logistic costs low (sector 3), Fiat compares local prices against worldwide prices and looks for alternative suppliers; • when the supplier’s know-how is low and logistic costs high (sector 4), Fiat selects the best local suppliers and benchmarks the local price against prices abroad. The policy of ensuring that the same quality components are fitted to the same type of car assembled in different countries also leads to extending ISO 9000 certificates to practically 21
all Fiat suppliers. Taking into consideration two countries where FIAT Auto produces the world car, Poland (with FAP subsidiary) and Turkey (with Tofas joint-venture), (Table 9), we can see how Italian presence is significant: in both countries nearly 30% of foreign companies belong to Italian ultimate parent companies. It is however interesting to note (Table 10) that despite the fact that total number of suppliers is nearly the same, between 180 and 190, the share of local companies in some way dependent on foreign parent companies is less important in Poland than in Turkey. A first reason for this is undoubtedly the year of the investment, in Turkey the ‘50’s and 1993 in Poland. Table 9. Origin of foreign Fiat suppliers producing in Turkey and in Poland (1999) C o u n try
U ltim a t e p a r e n t company
U ltim a t e p a r e n t company
Ita ly
19
28,36%
12
29,27%
USA
15
22,39%
15
36,59%
Germany
14
20,90%
3
7,32%
France
6
8,96%
6
14,63%
S w itzerland
3
4,48%
UK
2
2,99%
S p a in
2
2,99%
Sweden
2
2,99%
2
4,88%
Japan
2
2,99%
1
2,44%
Denmark
1
1,49%
B rasil
1
1,49%
Total
67
100,00%
41
100,00%
Source: TOFAS
22
0,00% 2
4,88% 0,00%
Table 10. Number and type of Tofas and Fiat Auto Poland suppliers (1999) TOFAS
FAP
Suppliers
Number
Number (%)
Turnover (%)
Number
Number (%)
Turnover (%)
Independent suppliers
119
65,75%
40,54%
152
78,76%
14,18%
Cooperating suppliers
62 *
34,25%
59,46%
41
21,24%
85,82%
Total
181
100,00%
100,00%
193
100,00%
100,00%
Source: TOFAS and FAP * This value does not correspond with that (67 companies) contained in table 9 in so much in that table we have the number of foreign companies that are in Turkey, while in table 10 we have the number of Turkish suppliers that are cooperating with these 67 foreign companies.
If however we take into consideration the typology of the co-operation relationship between local companies and ultimate parent company (Table 11) there is another element that must be considered: in Poland lighter forms of co-operation (know-how transfer; licenses; commercial agreements) are completely absent, unlike in Turkey where they represent 27%. It is this absence which determines the difference in the total number. Concentrating only on the heavier forms of co-operation (subsidiaries and joint-ventures) another important difference is evident: the importance of the two forms is reversed: 33 join-ventures are present in Turkey, while there are 32 subsidiaries in Poland. Therefore we can deduce that the age of the investment, the structural and legal conditions of the country strongly determine what type of foreign investment is made. Table 11. Type of inter-firm cooperation (1999)
TOFAS
FAP
Kind of cooperation
N°
N°
* Subsidiaries * Joint ventures Subtotal * Know-how; licenses; commercial agreements Total
12 33 45
19,35% 53,23% 72,58%
32 9 41
78,05% 21,95% 100,00%
17 62
27,42% 100,00%
0 41
0,00% 100,00%
Source: TOFAS and FAP
Referring again to Table 10 an element which differentiates in a substantial way the two countries is the different importance that the national independent companies have in terms of turnover; if in Turkey these represent 40% of the turnover, this value decreases to only 14% in Poland indicating an unit value, and a technological content, quite low for the products of these companies compared with the ones of companies linked with foreign suppliers. The importance, in 1999, of the foreign companies in the two chosen countries is however the result of a selection process of suppliers during the whole of the ‘90’s, selection which involved all types of suppliers. In Poland, the number of suppliers has been 23
reduced from 620 in 1992 to 266 in 2000, (table 12), and in Turkey from 481 to 181 (table 13)10 in the same period; that is a reduction of more than 50% for both firms. This selection has been in order to take advantage of economies of scale and do business with the supplier who offers the best, most efficient service at the lowest cost, thus following the same policy adopted in Italy. Table 12. Supplier rationalization by Fiat Auto Poland Number of suppliers Polish Dec '92 Sept '93 Dec '94 Dec '95 Dec '96 Dec '97 Dec '98 Dec '99 Dec '00 (target)
Foreign
405 352 297 248 235 195 195 184 131
Total
215 208 193 188 177 196 170 163 135*
%
620 560 490 436 412 391 365 347 266
100 90,32 79,03 70,32 66,45 63,06 58,87 55,96 42,90
Source: Fiat Auto *This value does not correspond with that (41 companies) contained in Table 9 in so much as companies that supply from abroad are also included.
Table 13. Supplier rationalization by Tofas
Number of suppliers Year
1992 1993 1994 1995 1996 1997 1998 1999 2000
Turkish suppliers
132 124 104 103
Foreign suppliers Subtotal in Turkey 421 350 296 249 207 193 193 181 181
61 69 77 78*
%
100% 83,14% 70,31% 59,14% 49,17% 45,84% 45,84% 42,99% 42,99%
Foreign suppliers
Total
23 32 25 39
216 225 206 220
Source: Tofas * This value does not correspond with that (62 companies) contained in Table 9 in so much as Turkish firms which collaborate with foreign companies have been included, while in Table 6, the number is relative to the foreign companies present in Turkey; due to the fact that some of them have dealings with more than one Turkish company, the total number is less than 78.
10
Turkish data actually comparable with the Polish ones are only those referring to the years 1997 to 2000 (Last line of Table 9) in so much as the Turkish ones referring to the previous years do not include companies situated abroad, while they are included in the total data for Poland.
24
Some common features of the experience of Italian car suppliers with production facilities in Poland and in Turkey can be pointed out as follows (Balcet, Enrietti, 1998). 1. Investment strategies were initially of a "follow-the-client" type, and were actively encouraged by Fiat Auto, that exerted strong pressure on Italian component suppliers. After a few years, however, almost all of them tended to evolve towards active initiatives, aiming at the diversification of local clients and towards export. Among the small and medium-sized Italian independent investors, there are cases of highly specialised "niche" firms, which are leaders in a certain product, technology or system. They are typically very efficient in acquiring, adapting and transferring technologies incorporated in specific components. The initial strong stimulus provided by Fiat Auto set off a second stage of diversification of market outlets, including exports. 2. Great productivity gains have been generally obtained through restructuring plants and introducing new work organisation, including a major shift from indirect to direct jobs. Labour training too is very important, while team organisation and work involvement are still very limited. 3. Local content is generally growing, thanks to the selection and re-organisation of second- and third-level local suppliers. 4. R&D is always still concentrated in Italy. Co-design, joint product development and other partnerships in R&D activity, up to the pre-production stage, involve parent companies and Fiat Auto headquarters in the Turin area, while technology transfer and adaptation to local conditions are assured through technical assistance, training and technical missions. Slightly different is the case of Turkey, where Technical Direction of Tofas, 80 employees in the year 2000, is responsible not only for projects aiming to adapt, test or differentiate vehicles or components to specific domestic market needs and regulations; but also for projects which can generate new knowledge to be exported to Italy or other production poles world-wide. 5. Both the companies of the Fiat group producing car components, Magneti Marelli and Teksid, are operating in Poland and in Turkey through joint ventures and subsidiaries. 8. The impact on employment: a tentative assessment of the Polish case Effects on employment are very difficult to assess in general but in the case of Poland we are able to do so. The fall in the number of suppliers (table 12) has, however, been offset by both a fast increase in local content, and by the increased number of cars produced in Poland by Fiat. Direct foreign investment and joint-ventures between suppliers have, for some firms, enabled employment levels to be maintained or increased, due to growing production, and the creation of new outlets both on the domestic market (e.g., supplying FSO/DAEWOO) and abroad (e.g. Skoda in Czech Republic); for some others they have meant, initially, a loss in employment to improve efficiency and productivity. The prospects of these firms are also linked to the possibility of entering Fiat's international suppliers' network, which would open up new export markets. On the Italian side, an initial analysis would suggest that investment in Poland has not significantly influenced the level of employment. Fiat's purchase of state owned FSM in 1993 did not lead to any loss of employment on the assembly lines in Italy, because the cars manufactured by FSM were already produced in Poland under license (Fiat Cinquecento). Moreover, there has been a significant increase in the number of cars 25
exported to Poland so investment in Poland has not only created an export platform, motivated by cost-saving considerations, but has also been an important local market oriented operation, with beneficial effects on employment in Italy via exports. FDIs by Italian suppliers on the one hand probably led to a limited increase in employment in Italy, because of the creation of export flows of components to Polish subsidiaries, in order to guarantee the necessary quality. On the other hand, the substitution of previous Italian exports was partly compensated by Fiat Auto through new orders. In this respect, Italian FDIs to Poland in this industry seem to fit in a non-zero-sum game situation, where both players are able to take advantage of a growth situation. In order to evaluate accurately the impact on employment in Poland, it is first necessary to remember the characteristics of Fiat's direct investment: • in the first instance, Fiat took over a licensee manufacturing two products, the mature “ 126 ” and the new Cinquecento not produced in Italy: it was not therefore a matter of delocalization from Italy; • FSM was both a highly vertically integrated and a diversified firm, with many plants specializing in manufacturing components; • initially Fiat bought the FSM automobile factories (in four productive locations), and later sold some of the component plants to its own subsidiaries (Magneti Marelli and Teksid) and to other foreign component manufacturer; and • FSM survived as a diversified company, producing bikes, machinery, etc.. The evaluation of the effects on employment in Fiat Auto Poland may be made by following several steps: • 24,427 employees were on the FSM's payroll before Fiat's takeover, including diversified non automobile activities; • at first Fiat Auto bought only the eight plants specialized in car and components productions, with 19,408 employees in 1992: so 4,183 employees remained in the old FSM; • Magneti Marelli Poland bought the bumper and dashboard plant from Fiat Auto with 1,163 employees on the payroll; the same operation was carried out by Teksid Poland that bought the casting plant with 2,206 employees; • therefore, Fiat Auto Poland had 16,039 employees at the end of 1992 (table 4) and the loss of about 8,400 employees from 1991 to 1992 was only due to a different definition of firm borders; • in the following years Fiat Auto Poland continued this de-verticalisation process by selling further plants with 2,256 employees to other foreign suppliers; and • the conclusion is that the real reduction in employment by Fiat Auto Poland between 1992 and 1996 was 3,082 people. In summary, between 1991 and 1996 total employment in FSM-Fiat Auto Poland has been reduced by cut of 12,895 employees (from 24,427 to 11,532, see table 4), that is 52,7%, distributed as follows:
Reductions of employment 4.183 3.369 2.256 3.087
- 17.1% - 13.8% - 9.2% - 12.6%
due to FSM's diversified productions; due to productions transferred to Teksid and Magneti; due to productions transferred to foreigner suppliers due to resignations and retirements from Fiat Auto Poland. 26
-------------12.895
-------------------52.7%
In short, it can be said that there was a limited fall in employment levels as a consequence of the restructuring process carried out by Fiat (12.6% of total), but this was voluntary (resignations and retirements and not dismissals). It has to be pointed out that resignations were mostly connected with the process of externalization of several activities which were previously internalized (for instance, every production unit had its own legal office, and health care was assured by the firm: FSM employed consequently 28 lawyers and 48 company doctors).
9. Concluding remarks. • The Impact of Globalisation During the late ‘80s and early ‘90s Fiat and its suppliers attempted to pursue a regional approach both in Europe and in Mercosur, while since 1996 an original strategy of focused globalisation was implemented in different geographical areas. This contribution provides empirical evidence on trade flows and trade balances between Italy and the countries where Italian multinational firms have located their main production facilities abroad in the last decade. These first results show a positive impact of focused globalisation on income and employment in Italy, via the generation of exports and trade surpluses. However, a specialisation of foreign affiliates in exporting components and parts from Poland, Turkey and Brasil is emerging in the late ‘90s. As a consequence, if such trends consolidate, the present favourable effects for the home country could be reversed in the future. Despite positive macroeconomic effects for Italy, at the company level the strategy of focused globalisation largely failed its quantitative goal because of the impact of financial crisis in the emerging countries involved, mainly in Brasil, in a context of a structural excess of supply, weak demand and declining profitability in the world automotive industry. The strategic answer of Fiat to this structural factor of crisis was the alliance signed in March 2000 with General Motors for the creation of two joint ventures for common manufacturing of powertrain and common purchasing, in order to generate economies of scale for the partner companies.. • Limits to globalisation. The complex nature of industial globalisation emerges from our sectoral case study. In particular, the empirical evidence discussed here seems to provide critical arguments against a popular idea of globalisation as the unification of the world markets of goods and factors, where multinational enterprises make their locational choices by comparing cost conditions, mainly labour costs. In real world, and especially in a global industry such as the automotive sector, costs depend also to a large extent on economies of scale, labour productivity, skills, technology, organisation and logistics. Moreover, product quality, proximity to suppliers and clients, access to human and technological ressources in the area of investment play a crucial role. The case of the Turkish market is a significant exemple. In contrast with the popular wisdom on globalisation, the rapid liberalisation of imports from the European Union originated a fall of the market shares of local carmakers, even if their labour costs were three to four times lower than in Western Europe 27
• Industry and finance may diverge. The devaluation of the Brasilian Real between 1998 and 1999 and its impact on multinational operations in the Mercosur area show deeply diverging timing of industrial investmets and production versus finance and macroeconomic change. In fact, both the fall of the Brasilian domestic demand and the dramatic growth of comparative production costs in Argentina (where the currency board was maintained) affected the international division of labour in the Mercosur area. In the case of Fiat, the new greenfield plant in Cordoba was re-oriented to the domestic market, while it was intended to specialise and export to Brasil within a regional integration strategy. In the late ’90s, multinational strategies in that area regressed to a multi-domestic stage. Moreover, we have shown that Fiat Auto was unable to take advantage from the devaluation of Real by exporting more from Brasil. This was due to decisions on the localisation of production taken in 1998, in a context of increasing complex logistics, just before the impact of the financial crisis. New financial turbulence in Turkey and in Argentina in 2000-2001 negatively affected again multinational production in emerging markets. • Tade-offs. In the international expansion of the Italian automobile industry two trade-offs appear: • between scale economies and product differentiation; • between global sourcing and proximity of main suppliers. The first trade-off characterises almost all the world car projects recorded by the history of this industry. Ambitions of maximising the economies of scale through an homogeneous product have always been contrasted by the need to differenciate the product, to adapt to the specific features of national and regional markets. Production targets contrasted with marketing targets. The same happened with the Palio and Siena models. An answer to this trade-off is given by the modularisation of main components within a single platform, from which a range of car models and versions is produced. The second trade-off derives from the impact of the organisational innovation in this industry, known as lean production, that affects logistics and production. Big multinational suppliers tend to specialise the production of single components with low logistic costs and high technological content on a global or regional base, while assembling large modules, or sub-systems, in proximity to the carmakers. • Redefining boundaries between carmakers and suppliers. The globalisation of Fiat Auto also affected the suppliers network. Its structure tends to correspond to a common pattern world-wide, characterised by: the reduction of the number of suppliers; the evolution towards the supply of modules or sub-systems; the improvement of quality standards through the ISO 9000 certification; the multinational growth of suppliers, able to operate in different countries, thus insuring homogeneous levels of technology and quality for the same model. As a consequence, new multinational firms developed in Italy. Modularisation is extending among carmakers, even if with different paces and intensities. An interesting point is that a peripheral country such as Brasil became the place where the most innovative organisational solutions are experimented. It must be stressed that modular production is reshaping both power relations between carmakers and first tier suppliers, and the nature itself of car produrcers, which tend to reduce manufacturing while expanding the supply of services. • Trade and industrial policies: does the focused globalisation need protectionnism? This case study shows that trade and industrial policies (tariffs, local content requirements, trade compensation rules, incentives) deeply affect multinational strategies. 28
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