AO ' ~21 DISCUSSION PAPER Radical Reform in the Automotive Industry Policies in Emerging Markets Peter O'Brien Yannis Karmokolias INTERNATIONAL FINANCE CORPORATION Recent IFC Discussion Papers No. 1 Private Business in Developing Countries: Improved Prospects. Guy P. Pfeffermann No. 2 Debt-Equity Sivaps and Foreign Direct Imnestmnent in Latin America. Joel Bergsman and Wayne Edisis No. 3 Prospectsfor the Business Sector in Developing Countries. Economics Department, IFC No. 4 Strengthening Healthl Services in Developing Countries through the Private Sector. Charles C. Griffin No. 5 The Development Contribution of IFC Operations. Economics Department, IFC No. 6 Trends in Private Investment in Thlirty Developing Countries. Guy P. Pfeffermann and Andrea Madarassy No. 7 Automotive Industry Trends and Prospectsfor Investmnent in Developing Countries. Yannis Karmokolias No. 8 Exporting to Industrial Countries: Prospectsfor Businesses in Developing Countries. Economics Department, IFC No. 9 African Entrepreneurs-Pioneers of Dezvelopment. Keith Marsden No. 10 Privatizing Telecommunications Systems: Business Opportunities in Developing Countries. Wifliam W. Ambrose, Paul R. Hennemeyer, and Jean-Paul Chapon No. 11 Trends in Private Investment in Developing Countries, 1990-91 edition. Guy P. Pfeffermann and Andrea Madarassy No. 12 Financing Corporate Growth in the Developing World. Economics Department, IFC No. 13 Venture Capital: Lessonsfrom the Developed Worldfor the Developing Markets. Silvia B. Sagari with Gabriela Guidotti No. 14 Trends in Private Investment in Developing Countries, 1992 edition. Guy P. Pfeffermann and Andrea Madarassy No. 15 Private Sector Ekltricity in Developing Countries: Supply and Demand. Jack D. Glen No. 16 Trends in Private Investment in Developing Countries 1993: Statisticsfor 1970-91. Guy P. Pfeffermainn and Andrea Madarassy No. 17 How Firms in Developing Countries Manage Risk Jack D. Glen No. 18 Coping with Capitalism: The New Polish Entrepreneurs. Bohdan Wyznikiewicz, Brian Pinto, and Maciej Grabowski No. 19 Intellectual Property Protection. Foreign Direct Investment, and Technology Transfer. Edwin Mantsfield No. 20 Trends in Private Investment in Developing Countries 1994: Statisticsfor 1970-92. Robert Miller and Mariusz Sumlinski 1INTERNATIONAL FINANCE CORPORATION DISCUSSION PAPER NUMBER 21 Radical Reform in the Automotive Industry Policies in Emerging Markets Peter O'Brien Yannis Karmokolias The World Bank Wasbington, D.C. Copyright O 1994 The World Bank and International Finance Corporation 1818 H Street, N.W. Washington, D.C. 20433, USA AM rights reserved Manufactured in the United States of America First printing April 1994 The International Fmance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its member countries through investment in the private sector. 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The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, Deparanent F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.SA, or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. ISSN: 1012-8069 Library of Congress Cataloging n-Publication Data O'Brien, Peter, 1947- Radical reform in the automotive industry: policies in emerging markets / Peter O'Brien, Yannis Kannokolias. p. cm. - (Discussion paper / International Finance Corporation, ISSN 1012-8069 ; no. 21) Includes bibliographical references. ISBN 0-8213-2806.9 1. Automobile industry and trade-Developing countries. 2. Automobile industry and trade-Govermment policy-Developing countries. I. Karmokolias, Yannis, 1946- . II. Title. III. Series: Discussion paper (International Finance Corporation) no. 21. HD9710.D452028 1994 338.4'76292'091724-dc2O 94-8112 C:IP Contents Foreword ....................................................... v Abstract ........................................................ vii I. Content and Purpose of the IFC-Sponsored Workshops .......................... I II. Dominant Trends in the World Automotive Industry ........................... 5 The Vehicle Picture in the 1990s ..................................... 5 Automotive Components .......................................... 9 Organizational Inperatives ........................................ 10 m. Structure of the Automotive Industry in Selected Countries ..................... 15 The Assembly Industry .......................................... 15 The Component Industry ......................................... 15 Domestic Demand ............................................. 18 Automotive Trade ............................................. 20 Measuring Rods of Investment and Production for Developing Countries .... ....... 20 TV. Policy Performance and Policy Prospects ................................ 23 The Policy Process and Its Participants ................................ 23 Policies on Automotive Production .................................. 25 Macroeconomic Policies and Automotive Development ...................... 28 Trade Policies . ............................................... 29 V. Strategic Policy Perspectives for Major Developing Countries .................... 34 South America . ............................................... 34 Indian Subcontinent and China ..................................... 38 Indonesia and the ASEAN Countries ................................. 43 Central Europe . ............................................... 45 Bibliography ..................................................... 47 List of Tables 1. World Vehicle Sales and Distribution by Region, 1991 and 1995 .... ........ 5 2. Vehicle Production and New Registrations in Selected Countries 1991, and Comparisons with 1985. 7 3. Foreign Trade Orientation in Vehicle Sector, Selected Countries, Early 1990s. 8 4. Structure of Assembly Industry in Selected Countries, Early 1990s, Compared with mid 1980s .16 iii S. Chanacteristics of the Component Sector in Selected Counties, Mid 1990s ..... 17 6. Share of Passenger Cars in Total Vehicle Sales, Selected Countries, 1991 (%) . . 19 7. Local Content Regulations in Selected Countries, 19 ................. 27 8. Barriers to Automotive Imports in Selected Countries, Early to Mid 1990s . 31 List of Charts 1. Vehicle Maf Alliances, 12 ........................... 12 2. Main Corporate ang/A ssembly Acdivity of MNC in -New Growth Countries, Early 1990s .14 3. Major Economic Characeistics by Stage (Automotive) .21 4. Passenger Car Assembly Economics: Developing Vras Developed countries . 21 S. Components of Car Cost .22 iv Foreword This study was inspired by IFC-sponsored ound-tables which brought together industy executives and policymakers in South America, South and East Asia, and Cent Europe. It offers insights as well as speculation about the future of the fastest-growing aumomotive markets, txose of the developing countries. The industry is important; in several developing countries it has come to play a major role in output, employment and exports. The kiCoOv is globalization and what this means for the industry. The study offers far-reaching suggestions. For example, component industries, a much- neglected segment, can thrive and help to generate foreign exchange where car assembly may not succeed. The development of fitre automotive industries does not need to start with assembly, a has ben the case in many counties, but could be based on component ma ring that might lead later to assembly. Afe sketching out major trends, the study outlines the industry's structure and te assesses policies. The concluding chapter speculates about strategic policy perspectives for major developing country markets. Peter O'Bden is an international industry consultant and Yannis Karmokolias a staff member of IFC's Economics Department who has done extensive work on the automotive industry of developing countries. Guy Pfeffrnmann Director, Economics Department and Economic Advisor of the Corporation v Abstract The automotive industry has been the subject of considerable research over the years. Practically all such research has dealt with the automotive industry in developed countries that formerly accounted for nearly all production and the bulk of sales. Litde attention has been given to the industry in developing countries. Yet, in 1993 the Emerging Markets of Central/Eastern Europe, Asia/Pacific, and Latin America accounted for approximately 19 percent of global vehicle output, twice greater than the share had been in 1985, despite major disruptions in the former USSR and Yugoslavia. Vehicle sales in these countries have recently been growing at least 30 percent annually, much faster than in OECD countries, while exports of both vehicles and components have been substantial. This paper focusses on the automotive industry in developing countries. It builds on the round- table discussions organized by the International Finance Corporation (IFC) in Brazil, India, idonesia, and Hungary involving automotive industry executives from the respective regions and from multinational companies, Goverznent policymakers, industry experts and IFC staff. The discussions covered business aspects of the industry, such as technological changes, characteristics of the market place, the changing relationship between suppliers and assemblers, and between multinational and developing country companies; and policy aspects such as macroeconomics, competition, trade regime, local content regulations, and the environment. This paper reviews the main points of the round-table discussions, the major changes that have taken place since then and the implications for developing countries. The core part of the paper reviews the impact of macroeconomic changes on business decisions; regulations governing market structure and production conditions; policy constraints on the growth of domestic demand; trade policy and measures to enhance investment. vii I. Content and Purpose of tie *FC-Sponsored Workshops The automotive industry can play a dominant role in a country's economic development. In the United States the automotive industry accounts for 5 percent of GNP and 17 percent of imiiastia employment. In the European Community, 10 percent of industrial employment is tied to vehicle output - in Germany, one job in every six depends on the industry. Mexico now has 9 percent of ma cIng output and 10 percent of manufacturing employment related to vehicle manufacture. In Brazil, where the automotive industry participates only modestly in manufacturing output, 6 percent of the total, and industrial employment, 3 percent of the total, it has a vital role in the country's development because of the substntial linkages to other economic activities. For example, it absorbs 76 percent of alumi_n alloys produced in the country, 43 percent of zinc alloys, 36 percent of cast iron, and 18 percent of uncoated flat-rolled iron and steel products. Forward linkages to marketing, repair and manmance, fuel and lubricants, insurance, shipping, and accessories, are equally extensive. Because of the industry's potentially major contributions to development, direcdy and through linkages, many countries that aim to grow through industrialization have regarded the automotive sector as a suitable way to achieve this objective. Since 1956 when IFC was established to promote economic development through support to the private sector, it has financed a variety of investn for boti vehicle and component production in many developing countries around the world. The frequency of applications for funding of automotive investment projects accelerated during the eighties as more and more developing country governments supported the development of their automotive industries and private firms, local and multinational, decided to invest in developing countries. Given the very fast pace of change occurring in the industry, its complexity, and the knowledge that protection in many forms often masked the economic realities faced by a project, IFC carried out a study of the industry focussing on developing countriesY1' The study generated requests from the Brazilian automotive industry for IFC to organize a discussion forum in South America so that those directy concerned, that is, vehicle producers and raw materials and component suppliers in that region, would have the opportuiy to discuss the study and its findings. At that time the Government of Brazil was contemplating changes in the country's policies dealing with this industry and an event such as the one suggested could be considered appropriate for an exchange of views on the issues facing the industry and how they might be effectively addressed. IFC responded positively to this request. In May 1990, a two-day round-table discussion was organized in Sao Paulo by IFC and ANFAVEA (Brazil's Automotive Manufacturers Association) attended by most auto assemblers and large component mufactrers in Brazil, some assemblers and suppliers from Argentina and Venezuela, several U.S. and European multinationals, representatives of the Brazilian govenment, IFC staff and antomotive industry experts. The discussions were far reaching, frank and lively. It was an opportunty for many points of view to be expressed and to be understood, if not shared, by those with a different perspective. And there were many perspectives: assemblerslsuppliers; South American companiesl multinationals; private sector/Govermuent; investment officers/economistslengineers. The practical aim was for participants to meet outside the more usual, and often adversarial, setting of specific business negotiations. Subsequentto the Sao Paulo event, a number of countries requested IFC to organize similar events. It was decided to cover those regions where the automotive industry was strongest and growing 1/ Karmokolias, Yannis Aaonotive Industry Trends and ProsWds for in_sme in Deioping Couwries, IFC Disussion Paper No. 7. 1990. among developing countries. Accordingly, regional round-table-discussionsz1 took place in December 1990 in New Delhi (covering South Asia), May 1991 in Jakarta (covering Southeast Asia), and November 1991 in Budapest (covering Central and Eastern Europe). In each workshop attendance included representatives from: * Assembly and component producers in the region. * Government officials directly concerned with the sector. * International automotive companies, normally those with interests in the countries under review. * International automotive consultants closely involved with developments in the area. * IFC staff, primarily those in the engineering and economics departments who have for some time worked on projects and programs in the automotive industry, but also drawing on others engaged in relevant activities for example, privatization programs in CentrallEastern Europe. The initiative to hold the workshops and the objectives set responded to the concerns both of IFC and of the countries. For IFC the aimrs were: - Policy Oriented Dialogue. The automotive industry is an industry where strong conflicts, usually over the degree and type of protection but also stemming from the divergent interests of different entities within the industry, have marked much of the evolution in developing countries. 3 Policy Assessment. The automotive industry has for several years been in a state of turmoil, and there is no sign that the near future will differ from the recent past. On the production side the trends to regionalization/globalization have swept the concept of Global Best Practice to center stage. But does the notion of global best practice also apply to policy, in the sense that attainment of specified goals for the automotive industry necessarily requires design and implementation of a particular set of policies? rf so, where do the selected countries stand on the policy spectrum? What are the directions of change which should be followed? What obstacles are likely to complicate matters? * Automotive !ndustry Trend Assessment and its Policy Applications. The speed of change in the automotive industry compels those who would be successful to analyze continuously the shifts in economic conditions, business strategies and policies elsewhere which condition the likelihood of achieving the policy objectives. The wide range of automotive industry actors present at the workshops offered a splendid opportunity to examine the forces at work and gauge their likely impacts in the countries selected. * Project Opportunities and Risks. IFC has as its raison d'etre the support of commercialy profitable and economically beneficial private sector projects in developing countries. The information 2/ Part of the expenses for the round table discussions were covered by the IFC-Swedish Govenment (BITS) trust fund. 3/ Represetatives of China's automotive industry aueded both the New Delhi and Jakarta event. 2 generated during and after the workshops provides a frame of reference for project work, some mechanics for monitoring change, and channels of communication which can assist both IFC and potential partners to keep each other informed regarding opportunities and risks. * Promotion in Maor Countries/Regions. The two workshops in Asia and that in Latin America were in countries which together account for 60 percent of world population, while the Budapest encounter was in the emerging East European market. From the automotive industry angle there is no doubt that the coverage so obtained permitted focus on all the areas of significant production potential for the 1990s. The breadth of the policy and project challenges in the countries considered, can safely be taken as representative of anything likely to come up in the automotive industry for the foreseeable future. The developing countries shared these objectives since they recognized that their automotive industry sectors are in delicate periods of transition. They also had the following aims: * Industry as the Development Motor. In all Emerging Markets covered by the workshops, the development effort has been predicated on industrial expansion playing a lead role. Within the industrial sector the automotive industry, because of its potential for forward and backward linkages, occupies a central place. Although other industries might also merit detailed examination, few of them attain the stategic importance of the automotive industry. Hence tho success of industrial strategy hinges importantly on its aevelopment. In the past some countries tried either a 'go-it-;done-path' or one confined to limited regional markets. Political and economic conditions of the 1990s do not allow a continuation of this direction given that development now depends on adequate integration with the international automotive industry economy. In this regard, the workshops facilitated exploration of alternative routes while at the same time, through the diverse composition of the participants, gave a clear signal of a change in attitudes (often at least as important as the policy alterations). - Encouragement of New Patterns of Trade. The integration with eternal markets, for technologies and equipment as well as for completely built up (CBU) or completely knocked down (CKD) units and components, puts a fresh tint on the automotive balance of payments. Given that al countries recognize the need to set up new ways of handling the foreign exchange impact of automotive trade, detaued discussions with those influential in the markets represent a logical step in the process. * The Irpetus to Domestic Sales. The automotive industry, while an important supplier to the middle classes of Emerging Markets, has not been able to expand in any sustained way through reliance on home market sales. But, for socio-political as well as economic reasons, future policy must seek to promote both exports and domestic consumption. To encourage domestic sales yet avoid being swamped by imports requires a careful mix of policies related not only to domestic production but also to trade, pricing, and credit. The workshops gave a chance for these matters to be examined in a comparative setting. * Competition Among Locations. Governments as well as producers are now aware that investors scan a wide spectrum of projects before reaching decisions. So it matters for a country to be visible as a place where economic opporunities are considerable and the commercial/political risks manageable. The structure of deals that can be concluded in any location must be seen to be flexible and open to innovation in their trade, financial and production aspects. International workshops afford a good means to promote this image (upolicy trade fairs'). 3 This paper is based on the experience gained and information obtained in the workshops, and on mateiri developed since. Its purposes are: * To assess tie automotive industry situation of the emerging markets in the 1990s. * To assess the changes made in automotive industry policies in the selected countries and set out possible next steps in the process of transformation. The structure of the report is as follows: Section H summarize dominant trends in the world automotive industry economy as of the early/mid 1990s, and situates the seleed countries within th context. Section m looks in more detail at what is happening to assembly, component manacture and demand in the emerging markets. The quantdtative and qulitative matea used in these two secons give the setting for analysis of policy behavior in Section IV. That material, which is a core part of the study, highlights five dimensions of policy, viz. the impact of macroeconomic changes on business decisions; regulations governing market strucre and production conditions; policy constrints on the growti of domestic demand; trade policy; and measures to enhance invest. Section V concludes with a comparative assessment of policy perspectives . the various emerging markets. 4 H. Dominant Tends in the World Automothve Industry The Vehicle Picture In the 1990s Table 1 underlines the continued dominance of OECD as the world sales hub - in 1993 it constimed 77 percent of the world car market (reckoned by volume) and even with current slow gowth the share by mid decade will still be close to three-quarters. On a value basis the predonnce would appear greater. The geographical areas at the core of this study (viz. South America, ASEAN, India, China and Central Europe) absorbed about 8.5 percent of global sales in the early part of the decade ad are expected to account for one-tenth by 1995. The critical shift occurring in the early 1990s and likely to become more and more noticeable in the rest of the decade concerns the geographical disriution of the increment to global sales. Even in the late 1980s, the regions classified here as Emerging Markes did not account for as much as one fifth of the increment in any pair of consecutive years. Recent forecasts, however, suggest that these countries ww absorb at least 30 perct of year-on-year increas and that this share could approach 35 percent or more by the year 2000. TABLE 1 WORLD VEHICLE SALES AMD DIS-RIUON BY REGION, 11 AND 15 1991 12s Sales Volume (wn. units) 47.2 54.0 Shares by Region (percut) U.S.A. and Cnad 29.3 32.0 Westem Europe 32.7 30.3 Japa 1S.9 15.2 Mexico 1.4 1.6 South America 2.9 3.3 Republic of Korea 2.3 2.S Taiwan, Cbina 1.0 1.1 ASEAN 1.8 2.0 1n 0.7 1.0 China 1.4 2.0 Eatrn Euope (excluding Rusia) 1.7 1.6 Other 8.9 7.4 Source: -World Automotive Suppliers", Funndal 71he. June 28, 1993. 5 'he emerging pattern is in sharp contrast to the second half of the 1980s, as Table 2 emphasizes. The sales half of the table highlights: * The huge surge in leading Asian countries, where registrations more than tripled. * Sales rises of close to 50 percent or more in the other Asian countries and Hungary (the latter is mostly due to imports in 1990 and 1991). * The clear difference between Mexico, where registrations doubled, and the stagnation or even major collapse (Venezuela) in the main South American countries. * The strong performance in Spain and Turkey, also often cited as 'yardstickw locations. Production trends were a fairly good image of changes in sales, though South America did not lag so far behind Asia, while Poland's position slipped back by 50 percent (chiefly due to poor manufacturing performance in 1990/9 1). Juxtaposition of information given in Tables 1 and 2 points to the following key features of the countries under scrutiny in this report: * Ranked by current and forecast market size, the order of importance of the selected countres and regions is South America, India and China, ASEAN and Eastern Europe. The trends highlight rapid growth of the world's two mega-countries along with significant expansion in South Ameica. ASEAN and Eastern Europe both appear much less promising in the medium term. - None of the regions quite matches up to Republic of Korea and Taiwan, China (taken together) as a market, South America is about double Mexico reckoned by sales volume, and Brazil alone somewhat larger. * Current rank order is virtually the same as regards production. ASEAN manufacturing is currently about double that of India, and 30 percent greater than China. l If India/China are to sustain the expected rise in domestic sales, both the utilization and scope of production capacity will have to expand fast (unless China decides to permit a sudden import boom, as it did in the late 1980s). A similar conclusion, albeit somewhat scaled-down, holds for the South American leaders (crucially, Brazil). * While the medium-term outlook set against the world automotive industry map may not suggest dramatic changes are under way, the fact is that the large countries targeted in this study must make very sizeable alterations to their manufacturing bases within a few years. The oft-repeated story of the automotive industry as a world where all the dynamism is concentrated in a handful of OECD locations plus Republic of Korea and Mexico will certainly not be an accurate description of events in the middle and late 1990s. Vehicle trade, excluding intra EC movements, approximates 11 million units or close to one-third of global sales - of this, the Emerging Markets as a whole export roughly one-tenth. The predominant sources are Republic of Korea, Mexico, Brazil, Czech Republic and Poland. Table 3 summarizes the trade orientation for the selected countries; the figures shown there, in conjunction with other available information, suggest the subsequent observations. 6 TABLE 2 VEHIC l?PRODUCTION AND NEW REGISTRATIONS IN SELECTED COUNTRIES 99L, AND COMPARISONS W IT REGION/COUNTRY PRODUCTION (urn. wunts) NEW REGISTRATIONS (mnn.uits 1991 1991/1985 ratio 1991 1991/1985 ratio I. AMERICAS Mexico 0.99 2.5 0.64 2.00 Brazil 0.96 1.0 0.77 1.02 Argetina 0.14 1.0 0.14 0.98 Colombia 0.05 1.2 0.05 1.10 Venezaula 0.04 0.3 0.04 0.30 I. PACIFIC RIM Republic of Korea 1.50 3.9 1.05 4.3 Taiwan, China 0.21 1.5 0.55 3.2 Indonesia 0.25 1.8 0.24 1.7 Malaysia 0.17 1.5 0.17 1.5 Thailand 0.21 2.6 0.30 3.5 IIL. CENTRAL EUROPE AND MEDITERRANEAN Spain 2.08 1.3 1.13 1.6 Turkey 0.17 2.8 0.23 3.8 Czech Republic 0.25 1.1 0.24 1.2 Humgry 0.02 1.0 0.16 1.6 Poland 0.18 0.5 0.21 1.1 IV. INDIVIDUAL COUNTRIES India 0.34 1.5 .34 1.5 China 0.51 1.2 0.62 1.4 Autm News, 1992 Market Data Boat New York. 7 TABLE 3 FORE:IGN TRADE ORE NTATION IN VEHICLE SECTOt, SELECTED CO ARLY REGIQIIONICOUNTRY SHARE OF OUTPUT GOING SHARE OF SUPPLY M TO EXPORTS (ue ten) EBQFRM dERTS aRt L AMERICAS Mexico 35 S (20 pcut cei1mg fixed for 1993 by law) Brazl 20 ne_ligbo Argentina <1 20 Colombia <1 4 Venezuela <1 4 IL PACIFIC RID Reublic of Koren 25 <1 Taiwan, Chins < 1 30 Indonesi negligible negigile malaysia 10 13 Thailad 7 3 IIL CENTRAL EUROPE Cich Republic 30 20 Hqngry 70 90 (cv only) Polnd 22 12 IV. INDIVIDUAL COUNTRIES India s China neogligble 6 Note: Fiues ae aveages of the respective sares in the yeas 1990-93. Sou United Na_os, ntratina Commodity Trade Dab Base; and Autmtiv M' A of Aretn Brnz, Idoes, Idia, Malay, Thaland. 8 * Given both the shifts in production location of the late 1980s and the prevailing determination in Europe and Japan to continue management of trade in vehicles, the ratio of global trade to sales is likely to decline. * The United States reriains the major market for emerging country exports but access to it will continue to alter markedly over the next few years, due to fierce competition from the Japanese- owned plants in the United States, the progressive introduction of NAF:A rules and possibly an eventual free trade regime embracing all the Americas. The United States 'Big 3U have also started to regain market share: in 1993 GM, Ford and Chrysler together sold thee-quarters of cars and light trucks as against two-thirds at the beginning of the decade. * Latin American countries which adopt aggressive, market oriented policies will be relatively favored by these trends. In the short run, the opportunities will fall to Brazil and Argentina. * Markets in developing countries remain relativciy closed to imports, though they are less hermetic than is often suggested (see Table 3). Gradual opening is occurring in South America, under the impetus of wider-ranging policies of trade compensation and recent drives to promote sub- regional trade. Eastern European import behavior will probably alter substantially in the medium-run, as market liberalization increases in Hungary and Czech Republic. India and China hover around a self-sufficiency level, but the standards of manufacture remain low while dependence on imported components persists. Automotive Components In contrast to the ample data on vehicles (especially passenger cars), the component business singularly lacks adequate statistical and qualitative information. The problem is particularly severe for production and for smaller components, whereas trade in larger items is fairly well recorded. Yet the figures and findings which are available point to a number of important policy possibilities in the selected countries. * Global sales of original equipment manufacture components were estimated at around $500 billion in the early 1990s. Trends towards greater sophistication of pars, and greater outsourcing by assemblers, indicate a growth rate in the middle and late 1990s substantially in excess of that for any other part of the automotive business. * Replacement market sales are also likely to grow significandy, particularly in a period where new vehicle sales expand at only a moderate rate (see Table 1). * Several characteristics indicate that a number of components may be attractive production propositions to developing countries. The simpler items permit companies at relatively lower technological levels to compete; fixed investment costs are frequently lower than for vehicle manufacture; labor content for many components is a significant cost factor, thereby enhancing prospects in lower wage locations; transport costs relative to value in simpler components for example, wire harnesses are lower than for CBU; and barriers to entry and to product distribution tend to be fewer, above all in replacement markets. * Intenational trade in components is substantial. U.S. imports for the mid 1990s are in the range of $25-30 billion, of which about 20 percent come from developing countries. Though the 9 dominance of Brazil, Mexico and Republic of Korea is again marked, some of the other selected countries have a significant presence (Thailand, Indonesia, India and Philippines). EC imports of components from developing countries overwhelm purchases of vehicles, and are estimated at about $4 billion for the mid 1990s. Sources are quite diversified; indeed, it is the region in closest proximity (Eastern Europe) which is lagging though exports should grow as some of the engine plants enter larger scale production. * Trade in components among developing countries exceeds $1 billion. It is regionally focussed and suggests that cost savings for vehicle assembly could be achieved if, for example, 'regional content' were accepted instead of local content in domestic manufacturing policies of the larger developing countries. * Restructuring of the component sector receives less publicity than that of assembly but is every bit as urgent (and necessary!) on an international scale. Standards of quality, cost and just-in- time (uT) delivery, coupled with moves by assemblers towards global out-ourcing and single- sourcing, are altering the structure of the component industry, accentuating its stratification into top tier firns (design capabilities) and others functioning at less sophisticated levels. Some of the top component firms are now comning to rival the assemblers in capabilities, outstrip them in profitability, and be better placed as regards vulnerability. If the VW drive towards 'logistical suppliers," already practiced to an extent by some assemblers, is broadly replicated by other vehicle producers, then the leading component companies are likely to assemble whole segments of vehicles and deliver the resulting modules to the vehicle producers. * The upper echelons among the component companies are now global, which implies a strong interest in foreign direct investment opportunities. Appropriatepolicies by developing countries, including encouragement of joint ventures and alliances, can give these countries a good position to attract investment, for export as well as domestic markets. Organizational Imperatives Automotive companies, assemblers as well as suppliers, are faced with new challenges relating to quality standards regardless of location. They need to respond to these challenges by adopting strategies based on the optimization of assets they have access to, relative to the markets they will serve in the future. Stndards Wich Companies Must Meet Since the mid 1980s the automotive industry has been characterized not so much by globalization reckoned in terms of trade and investment but by the globalization of corporate atitudes. Those attitudes arysllize around a set of standards, for products and processes, which all firns hoping to survive and prosper in the automotive industry must strive to attain and enhance. The standards put the accent on quality in three dimensions. In relation to the vehicle user the key characteristics are safety, comfort and adaptability, and environmental soundness. Vis-a-vis the distributor, the maintenance of brief delivery times and full service are essential. Within the production system, major changes are in-plant, with the accent on individual worker polyvalence, team solutions to problems, the weakening of hierarchies and, above all, the detection and elimination of difficulties before they affect production - quality is built in and zero defect becomes the norm. But the impact on component producers is likewise enormous. In day-to-day production they must maintain product standards and quick schedules (mventory 10 minimization), while their participation in design (at least for first tier component companies) becomes a crucial aspect of gaining and retaining business. It would be a fundamental error in policy thinking and company planning for developing countries to suppose that the standards just described do not apply to them. While these markets are still pardy separated from the OECD, the forces impelling them towards global best practice are powerful: * Vehicle exports, even if they are of lower priced models, must compete against products manufactured in the OECD. Where the standards referred to here have been translated into legislation (which is the case for safety and environment), the quality factor is a necessary condition for exports. Where they have not, the awareness of buyers is sufficient to ensure that quality will be crucial in their purchase decisions. * To the extent that emerging markets gradually permit more CBU imports, these will set higher quality standards in domestic markets and thereby force local producers to meet the international norms. * In every one of the selected countries, multinational corporations hold total or partial control over the assembly firms. It would follow, therefore, that foreign direct investment, whether in new plant or renovationtrestructuring of old, will be aimed at meeting the multinational corporations overall standards (image mters in all markets) while plant reorganization also moves in the same direction. Mexican companies where U.S. multinational corporations hold strong interests have recently been at the top of the global benchmarking exercises conducted by the parent firms. In such instances the real labor cost advantage of developing countries exceeds their wage differential advantage, due to the additional productivity edge. * Component manufacture, especially original equipment manufacture, is driven by the assembly requirements. Once again, the wave of component foreign direct investment in several of the selected countries conforms to the international norms. Furthermore, to the extent that the countries want to raise local content, export vehicles, and encourage foreign direct investment, they will have to upgrade quality in components. The automotive industry world of the next few years will not be one for half measures. Optinization of Assets The spread of global best practice, the increase of design and investment cost for products whose life cycles (measured across many markets as well as within individual ones) have become shorter, the severe reduction in growth in major markets, and the persistence of the "management of markets mentality", have forced even the world's largest automotive industry firms to opmize on the assets they possess and use them to obtain usufruct of assets they do not own and/or control. Negotiations to create new, profitable asset combinations has been and will remain an organizational imperative - its inmpact on automotive operations in United StateslEuropelAsia is summarized in Chart 1. Corporate assets which enter such deals depend mainly (though not solely) on genuine capabilities for example, command over a given technology. Sometimes "positional' factors that is, directly related to a particular market, can also be influenced by a firm - an obvious instance is where an indiidual company can affect protectionist policy of the govenment. A country's assets are almost entirely of the positional type - straight geographic location, availability of low wage labor, control over government 11 policy. Whedher the asset be of the capability or the position type, however, its value is always subject to ersion. Both automotive industry companies and emerging market governments are frequently caught off balance in face of shifting asset values. For example, it appears that VW's quality image cannot sustain its cost structure, nor its proximity to Central Europe is necessarily a guarantee of success in major new investment programs; Ford's network strength in Western Europe has not been enough to protect market shares with the advent of the single market (even though that market is far from unified); Brazil cannot CHART 1 Vehicle Manufacturer Alliances, 1992 90 70- * ~~so * ~~40- 20- In LIS In Asia UStEurope I n ELaps USAa AsiaEopAI Shading by type of alllance Ej3 EquIty 3 JoInt Ventu re Tochinology E IManufacturino = Marketino Z GCoa,onent Supply Note: Asia = Japan and KoraL Some:. Wards Asomtive Hadooi 1992. rely solely on its size to atract foreign direct investment or its labor costs to promote exports, as its long runnmg export promotion program, BEFIEX, has competitors in several countries which are also attractive as production locations. Thailand has been in the investment limelight since at least the start 12 of the 1990s and highly optimistic forecasts of its automotive industry future are regularly offered. As long as rapid economic growth persists, the country should remain favored. However, policy changes towards modernization of market structure, particularly to permit larger scale output by individual firms, would reinforce its status. The central challenge govermnents in the emerging countries must confront is: how can they maximize use of positional assets they possess to encourage companies to locate top capability production there? Only since the late 1980s have some of the governments stopped thinking in terms of their control space that is, the areas of automotive industry activity over which they can exercise policy command. Yet the idea that the decision space which they can influence is ample has still not taken hold. One of the purposes of the many-sided policy dialogue IFC is promoting is precisely to raise awareness of this possibility. Strategic Posirioning Policy for the automotive industry must be framed against the market positioning choices which the leading vehicle assemblers have made andlor might be persuaded to make. Chart 2 shows the assembly position in the early/mid 1990s and suggests the following observations: e The matrix shows some regional concentration, although this is weakening over time. The Japanese companies are in Asia, while US and European companies are in South America. Only in Central Europe is there some mix, with VW, Fiat, Suzuki and GM. * By major company some geographic separation is evident. Toyota focusses on ASEAN as a production site, GM and Ford on the principal Latin American countries, VW or Latin America and Czech Republic. Most producers, however, have become active in China. * Suzuki is the one firm using developing country locations distant from each other. * Since competition in these markets is now quite strong, and the financial state of most of the leading firms is difficult, it seems improbable that there will be much change in the form of the matrix over the next few years. 'Te message is clear: govermnents should concentrate in the short run on improving the environment for those multinational corporations (and their local partners) already nating domestically. Only in the medium term are efforts aimed at potential new entrants likely to yield much return. Clarity of the message, unfortunately, does not mean that its implementation is simple. Policies designed to raise efficiency through modifying market structure can affect the survival of existing producers; policies relaxing local content requirements in return for greater exports can offer larger potential advantages to some rather than others; all assembly firms migbt be suffering from weaknesses m domestic component production which could be tackled through greater foreign direct imvestment but in components. The implication is that only with access to considerable technical and communication skills, a good deal of market specific information, and substantial dialogue, can the policies work. The transition of the 1990s requires a qualitatively superior policy effort. 13 CHART 2 MAIN CORPORATE MANUFACTURING/ASSEMBLY ACTIVITY OF MNC IN "NEW" GROWrH COUNTRIES, EARLY 190s COUtNTRYICOMPANY TOY= NISSAN HIONDA MDA MlTStUISHI SMUZKI GIM EDFl YW FOA RENIAULT CHRYSLER PEW190T CHINA INDONESIA * U U * U MALAYSIA * U THALAND i i i REPUBLIC OF KOREA U U * U TAIWAN, CHINA U H MEXICO U U U U BRAZI * * U U VENEZUELA U U U CZECH & SLOVAK U FEDRAL REPUBLIC HUNGARY POLAND U U TURKEY U * U U ARENTlINA * * * Sounc: 'A Report on the Automotive Industry Seminar Held in Jakart, Indonesia'. IFC, May 1991. II. Structure of the Automotive Industy in Selected Countnes The Assembly Industry In the preceding section, Table 2 showed the extent of production in the selected countries while Chart 2 complemented this with a map of multinational corporation presence. The purpose of this sub- section is to examine further the size, structure and content of output; a crucial dimension of the policy debate is the way in which those elements can be improved, especially in passenger cars. Table 4 synthesizes the information on market structure by firm. Read in conjunction with Table 2 data on output, the figures suggest that the two Andean and three ASEAN countries are the ones suffering from diseconomies of scale that is, even the leading firms cannot generate sufficient volume to keep down unit costs. The conclusion is reinforced by the plethora of models sold, many of which do not have interchangeable parts. Consumer prices are thus higher than larger scale manufacture would allow while those components made at home likewise cannot reap scale benefits unless export markets can be gained. In comparison with the mid 1980s there has been greater concentration in Brazil/Argentina (due to the fusion of Ford and VW into Autolatina) but some weakening in the Asean countries. Unfortunately domestic demand has been volatle with no overall tendency to grow in South America so at firms there cannot readily count on larger scale production. Economic inefficiency, however, does not necessarily imply lack of profitability for individual firms. The data on this key point are not particularly reliable nor easy to interpret. Certainly financial results have varied sharply from year to year in Latin Ameica, have been on the whole good in the Pacific Rim, and poor in Central Europe (where the very concepts of corporate financial management have only recently begun to be used). Companies have been able to stay in business, or even prosper, for a variety of reasons extenal to the economics of the automotive industry in the country where they operate. Those reasons include the high prices (particularly of passenger cars) which the markets have borne; transfer pricing operations avaiable to firms where multinational corporations have a significant stake and the volume of intra-trade is large; in some cases, the availability of credit at low or negative real rates of interest; and dealings by the firms in activities bearing little or no relation to the automotive industry. All of this may be a valuable cushion in conditions of virtually permanent and pronounced unceraUinty. But the fact is that companies will only strengthen their real performance if they are able to focus management energy on the competitiveness problems. Policy, not just to the automotive industry itself but for the economy as a whole, must maximize that space (see Section IV below). The Component Industry Production and trade characteristics of components are summarized in Table 5 (data for Central Europe are not included due to unreliability). In this disparate picture the main features are: * Firm size varies enormously within and across countries, with BrazillArgentina appearmg relatively the strongest of the selected countries. * Foreign ties are important to the bigger companies, especially through licensing agreements. 15 TABLE 4 SIFRUC~ OF ASSEMBLY INDUSTRY IN SELECtED COUNTRIES, EARLY 1990s, COMPARED WITH MID 1980k REGTONICOUNTRY MID l11 12 No. af finn OA Shoo No. f fin uu Shen OfrTO 3 6>esm Of TOD 3(DOn I. AMERICAS Mexico 5 68 S 66 Brazil 7 82 5 95 Argentina 4 82 3 100 Colombia 3 100 3 100 Venezuela 6 76 7 70 II. PACIFIC RIM Republic of Korea 3 100 6 95 Taiwan, China 10 40 10 48 Indonesia 12 64 12 54 Malaysia 7 75 7 62 Thailand 8 70 8 66 m. CENTRAL EUROPE Czech Republic 1 100 1 100 Hungary - - 2 100 Poland 2 100 2 100 IV. INDIVIDUAL COUNTRIES India 5 75 5 88 China 13 46 18 48 Source: Authors' calculons. 16 TABLE 5 CHARACTERISTICS OF THE COMPONENT SECTOR IN SELECTED COUNTRM, MID 1990s REGIONCOUNTRY PRODUCTION CHARACTERISTICS FOEQBEN T| N. of Firms ,Sze Disrilution Tumover OEMIRM Eaquitv/Contrml Exp 1. AMERICAS Mexico S00 About 25 percent of 6 40160 Many joint ventue 20-25 percent of firms employ a turnover 1000 Brazil 550 About 14 percent of 15 50/50 20 percent of all firms are 15-20 pecent of firms employ 2 foreign affiliates, minly turnover 1000 the largest companies. Many licensing agreements Argentina 600 About 20 percent 2 2s/7s 15 percent of firms are 10-1S perent of employ > 400 affiliates; many licensing turnover - agreenments Colombia 200 9 percent of firms 0.25 N/A Minimal equity: many 3 percent of turnover account for 60 licenses percent ules Venzuela 200 30 percent of firms 0.8 20/80 Equity now permitted: 12 percent of turnover employ > 100 licensing ss. PACIFIC RIM Republic of Kome 1100 5 perct employ 12 80/20 Many licensing agreements 10 pecent of turnove > 1e00 Taiwan, China 250/300 N/A 5 50/50 60 percent of firms have 20 percent of turover Japanese links Indonesia 200 N/A 4 N/A Many liceasing agreements 5-10 percont of turnover Malaysia 200 N/A 1 40/60 Limited Negligible Thailand 350 N/A 4 40/60 N/A 5-10 percent of turnover Source: Authors' calculations. * Total tumover across countries shows a much larger spread than for the assembly business. * Original equipment manufacture share of output is bigger, the larger is vehicle output. * All countries export some of their output, with shares up to 20 percent. The product mix is wide and influenced powerfully by technology levels and local content legislation, which frequently provides full or partial protection to domestic manufacturers of specified major items. Though the barriers to entry are fairly low, and domestic competition can be quite strong, the involvement of foreign firms is not too widespread but seems to be necessary if constant improvements in cost and quality are to be made. Neither in components nor assembly do the selected countries possess technology of their own, even if considerable learning by doing has taken place. To meet international standards, technology imports will be needed and this will lead to rationalization of the component sector (even more so if local content is to be raised without sacrificing quality). The task here will be still greater than assembly and require more wide-ranging policies. Domestic Demand The composition of vehicle sales varies widely across countries, as Table 6 demonstrates. In Asia particularly (Indonesia, China, Thailand) the passenger car share is one-quarter or less while in Central Europe along with Brazil and Argentina it reaches three-quarters or more. While there is obviously demand for heavy commercial vehicles in all countries, the pivot on which the passenger car share swings is the behavior of demand for light commercial vehicles. Indonesia and Thailand especially use them as multi-purpose transport; in Indonesia there is even a further development, in that the bodies and seating of light commercial vehicles are frequently converted to render them more suitable for passenger transort. Conversion is done by so-called 'carroserie' builders of whom there are about 215 in the country. This fact alone strongly suggests the existence of a substantial latent demand for straight passenger cars. If price structures, which are the outcome of government production licensing and tax policies, were allowed to change directly through the market instead of indirectly, there could be an appreciable rise in the passenger car share. There are, all the same, good reasons why future policymaking in South American and Asian countries should examine carefully the possibilities in the light/medium commercial vehicles branch of the automotive industry. First, though urbanization is increasing in all countries, the need for vehicles which can withstand long journeys over tough terrain and poor roads is indeed great. Second, low incomes plus the necessity of maximizing household/business use of a vehicle, indicate that light commercial vehicles will retain their appeal. Third, multinational corporations are devoting much greater attention in new model design to the light commercial vehicle sector. There might be opportunities to bring these items very quicldy onto developing country markets, where known demand is available, rather than incur the heavy promotional cost of creating/encouraging demand in OECD locations. The first section of the study underlined how development of the automotive industry in developing countries has responded to a perverse philosophy, in that countries have wanted domestic production yet constnly kept control over domestic demand. Why? Because the automotive industry has in essence been regarded, and in many instances still is regarded, as a producer good rather tha a consumer good. In other words, countries have stimulated output because of linkage effects with the rest 18 of the industrial production system. Certainly the foreign exchange angle has always matted usually through import substitution and occasionally through exports. But the encouragement of domestic demand has been thought of as inimical to these aims rather than as supportive of them. It would be interesting to see whether this central bias of policy will alter in the next few years. Proponents of this change argue that impetus to output expansion is far more likely to come from internal rather than external sales, and that the introduction of new products and processes, as well as restructuring in the industrial sector, can be managed much better in a growth scenario than in one of stagnation. In this light, production increases should be promoted by greater home demand instead of being negated by restrained demand. TABLE 6 SAARE OF PASSENGER CARS IN TOTAL VEHCLE SALES, SELECTED COUNTRIES, 1991 t ent) REGIONIC5OUNTRY PASSENGER CAR SHARE (nent) I. AMERICAS Mexico 61 Brazil 75 Argentina 82 Colombia 62 Venezuela 48 H. PACIFIC RIM Republic of Korea 68 Taiwan, China 72 Indonesia 16 Malysia 63 Thailand 25 m. CENTRAL EUROPE Czech Republic 87 Hungary 73 Poland 93 IV. INDIVIDUAL COUNTRIES India 60 China 15 Sot.ce: 1992 Mairet Data Book, New York, 1992. 19 How has internal demand been restrained? Besides import taxes and duties, the principal policy instrument has been direct taxation of sales, mainly through excise duties and purchase taxes. In most of the selected countries the percentage rates have reached 50 percent and in some substantially more of ex-factory costs, these costs themselves being high relative to OECD levels. The official prices, however, are not an accurate guide to the real demand position since physical shortage of vehicles (cars) has been the norm in many places. Black markets have flourished, with side payments to jump the queue a common feature. The chronic absence of credit facilities has contributed to narrowing of the potential customer base and thereby consolidated an image of the car as an item affordable only for a small elite - not the image that many developing countries wanted to project. Running costs, especially petroleum prices, are not a handicap (several of the selected developing countries are significant petroleum producers) but in some instances insurance charges are exceptionally large Citself a reflection of high replacement cost of damaged vehicles). Automotive Trade The leading developing countries were, until the present decade, concerned with two issues in trade: control over vehicle imports, and export promotion of CBU vehicles and engines. Table 3 indicates how policies for the former have fared. In value terms, Brazil manages CBU external sales of around $1 billion which, while still much below the yardstick locations of Mexico (> $2 billion) and Republic of Korea (around $5 billion), does give a strong boost to the balance of trade. Engine exports have begun to reach significant levels in Brazil ($0.2 billion) and are starting in Thailand and Hungary. Nevertheless, it appears that the critical trade changes in this decade will stem from components. Modernization requires major improvement to product and this can only be achieved when components and subsystems of requisite quality are used. The numerical translation of this is vivid in the yardstick countries. Since the late 1980s, when modernization gathered pace, Mexico's balance of trade in components has registered a growing deficit which alone has turned the automotive industry balance negative. Given that Mexico exports a sizeable volume of smaller components (witness the burgeoning of maquiladora trade), besides engine sales of about $1.5 billion per annum, the surge of component imports has indeed been strong. Republic of Korea, for its parl, has about 30 percent Japanese content in its vehicles, again the consequence of component inports. The selected countries already have appreciable deficits in the component trade balance. Although some exports could be made in the next years, these countries will need to import most of the major components necessary for restructuring. Those components must either be imported directly, or the technology necessary for their production locally must be imported. Foreign exchange outflow will show up either in the automotive trade balance or in royalty/license payments. Policy must start from the premise at a significant and lasting improvement of automotive industry performance, and in particular an effort at reaching international standards, is certain to worsen the component balance for quite some years. The objective of policy should be to ensure that the deterioration is a worthwhile investment, in the sense that local production capabilities are genuinely strengthened and, if possible, that subsequent export opportunities are created. In this perspective trade issues might best be dealt with through policies aimed at investment and technology rather than at trade as such. Measuring Rods of Investment and Production for Developing Countries The information presented above and the analysis of policy which is the substance of Section IV can be linked together via the core facts governing automotive industry investment and output. Figures 20 refer to passenger car economics; some minor modifications are in order for commercial vehicles. Chart 3 synthesizes the investment costs, optimum scale range and labor content for the four main stages of production. CEHART 3 MAJOR ECONOMIC CHARACTERSICS BY STAGE (AUTOMOTIVE) STAGE INVESTMENI SCALE LABOR CONTENT LOGISTICS1 LEVEL COSTS Assembly $400-500 100 to More than 50 pert 10 percet million 200,000 Major $400-500 500,000 10-20 percent 5-15 prcent component million Moderate S50-200 million 500,000 to 10-20 percent 5-15 pen:ent processed 1,000,000 rough process S20100 million 200,000 to 10-20 percent 5-15 percent parts/ystems 1,000,000 Except wming haness, Highser for some plastc. trim, adio asembly 30 Lower for electrmics percet or more Source: IFC Data. Assembly has relatively the lowest scale, the highest labor content, and (provided a 100,000 volume is attained) offers a cost edge of at least 30 percent compared with OECD assembly. But assembly is quite a small share of total car cost and the penalides for sub-optimal scale are severe - so the advantages from local assembly are relatively much less significant than is usually implied (Chart 4). CHLART 4 PASSENGER CAR ASSEMBLY ECONOMlCS: DEVELOPING VERSUS DEVELOPED COUNTRY DEVELOPING DEVELOPED (E.G. BRAZEL) Volume per year 100,000 200,000 Per unit labor hours (total) 48 22-30 Wage rae (with frige) 3-5 20-30 Per unit labor costs 144-240 440-900 Per unit other costs (depreciation, taxes, utilities, overhead) 450 500-600 TOTAL ASSEMBLY COST 594-690 940-1500 Source: IFC Data. 21 Component manufacture (the bottom two rows of Chart 3) covers a range of products some of which do lend themselves to very large scale operations with fairly high labor content and low labor costs that is, are prime candidates for global/ regional sourcing from developing countries. Opportunities for such items have been taken up in regional centers for example, Mexico. The ability to translate the assembly cost edge into a genuine market advantage is dependent upon the quality of components used and the quality of assembly itself. The latter is a function of plant organization and labor skill, whereas the former reverts back to the points made earlier regarding the role of components. Unless components are fully competitive, the assembly advantage will be nullified. CHART 5 COMPONENTS OF CAR COST * Assembly 15 perent * Body and body parts 25 parcent * Enginelbansmission 25 parent * Final drivelsuspensionlsteering/brakes 15 percent * Other 20 percent Source: IFC Data. Many original-equipment-manufacture components do not have a particularly favorable economic structure for developing countries production and they do absorb a large share of total vehicle cost (see Chart 5). The selected countries all have big internal markets supplied almost entirely from domestic bases - if policy could encourage improved efficiency of manufacture of these components (for example, through free trade areas to reap economies of scale), the economic and commercial profitability would almost certainly be substantial. 22 IV. Policy Perfomance and Policy Prospects lie Polcy Process and Its Partidpants A realistic assessment of policy behavior towards the automotive industry needs some understanding of who becomes involved, what kinds of policies and/or decisions are taken, and the degree to which they are implemented. Transparency, stability and applicability are criteria that ideally might be employed, yet nowhere in the world would the policy process score high marks on those indicators. More relevant is the extent to which the process gives producers, in particular, enough confidence to carry out investment/modernization programs. Two preliminary points have to be made clear. First, this subsection considers only policies directly aimed at the automotive industry - the impacts of macroeconomic management are dealt with in the next subsection. Second, Central European countries are in a radically different situation than other regions. The January 1993 division of Czech Republic into two separate states, added to the breakup of previous regimes elsewhere in Central and Easten Europe, means that a totally new policymaking process is under creation. One of the risks of the new situation is to suppose that nothing should be done. This report argues that, on the contrary, specific actions are required and that experiences in other countries can provide a guide. The key participants in polic,ymaking in the selected countries are certain government offices and ministries; business associations and on occasion individual businessmen; and foreign groups, including (depending on the policy) automotive firms, trade lobbies and financial entities. In specifics, the ministries most frequendy concerned, that is, those dealing with industry and with trade, are at the center of the debate over market structure regulations and local content. Typically the Industry Ministry is often heavily immersed in issues of ownership and foreign investment legislation/implementation. But the strategic significance of the automotive industry virtualy guarantees imvolvement of the Ministry of Economics and/or Finance, in some cases a Planning Board, and on sensitive matters the President's (or Prime Minister's) office. Generalizations about the attitudes of these entities and the influence each of them exercises are tricky, especially in the mid 1990s phase of transition. Subject to that caveat, industy mnistries tend to be the most ardent supporters of greater local content and tougher restrictions on foreign ownership/control. On market structure policies they have frequently been ambivalent, especially when conflicting interests among domestic producers have been at stake. Significant shifts in structures have tended to occur under the initiative of groups other than the Industry Ministry. Trade ministries see their role in essence as that of securing the best possible foreign exchange position - their bias is towards import control but they often show a readiness to innovate with regard to export promotion (ncluding compensating trade arrangements). In the South American countries they are active in support of sub-regional accords in the automotive industry. To an increasing extent in all selected countries, the promotional dimensions of policy need support functions for example, trade fWrs for components, exploratory missions abroad to seek out joint venture partners and training of export promotion specialists. There are some signs for example, in Argentina and Thailand, of programs joily conceived and operated by trade ministries and business associations. The Economics/Finance ministry has the single most powerful impact on demand, through fiscal and credit policies. Early 1990s trends have been towards some relaxation of fiscal pressures (for example, the February 1993 tax cuts on smaller-engine vehicles in Brazil) on the argument that demand for automobiles has a high price elasticity so that total fiscal revenues rise if percentage charges per unit are reduced. In the case of latent demand, income elasticity is high so that even with high sales taxes 23 demand remains strong, as was the situation in Brazil in the early sixties and in Central and Eastern Europe with the liberalization of imports. Moves to assist the creation of more efficient and broader credit markets have also begun to offer some stimuli to would-be vehicle buyers, especially in the ASEAN countries. Automotive industry business associations in the selected countries share a number of characteristics: * In nearly all cases assemblers are more effectively organized than component manufacturers. If associations of the latter do exist, their political influence is minimal. * Membership indudes strong participation of multinational corporations through their local affiliates. * They have tended to function more as spokesmen for assemblers vis-a-vis government ministries (sometimes perceived as adversaries) rather than as entities oriented towards provision of industrial services to their members. Given the way the automotive industry has developed in most developing countries those features are not surprising; their policy implications nevertheless merit enumeration. First, the associations tend to behave as one in discussions on policy changes affecting overall demand and mandatory local content requirements - in both instances the pressure is on the relevant ministries to relax restrictions. Second, on all policies which are liable to alter appreciably the structure of the assembly market, the internal strains are usually severe. Multinational corporation attitudes are increasingly influenced by strategic requirements at headquarters while local managers do not want to risk market share. Third, the same considerations tend to mean ambivalence towards regional trade promotion agreements - the cripplingly slow progress among ASEAN countries is a telling example. At one time or another, Ford, Mitsubishi and Toyota have each proposed their own schemes for integration, yet have reportedy thwarted any ventures that would bring about widespread rationalization. Fourth, the effect of assembly-side policies on local component production does not receive sufficient attention from business interests since parts manufacturers themselves rarely have a strong voice in the proceedings. The kinds of decisions made, or the styles of automotive industry policymaking in Asia and South America, can be characterized as follows: * In South America, the promulgation (very frequent in the early 1990s) of wide-ranging decrees which set out the 'automotive industry policy". This approach tends to push aside smoother, more gradual adjustments which might ultimately have greater impact. * Protracted negotiations prior to decree publication, often giving the impression of continuous argument but little useful dialogue. * In Asia the acrimonious exchanges are just as prevalent but they do not often result in much policy change at all. * The atmosphere in both regions is thus of ever-present possibilities of legislative change, requiring significant expenditure of lobbying resources by firms. 24 * The occurrence from time to time of major decisions, normally involving a new entrant to the assembly market, which tend to come through the President/Prime Minister's office and provide "shocks to the system". These decisions escape the policy fames just mentioned (the 1993 import liberalization in Brazil is a case in point). In none of the selected countries is the pol icymaking process smooth. It is marked by a constant tug-of-war not only between government ministries and business associations but also within each group; the resultant movement is usually disproportionately small compared to the effort expended. For many of the participants, maintenance of the legislative status quo is probably the real objective. This frustrating state of affairs is compounded by severe difficulties of policy implementation. Governments tend to overestimate their control space in two crucial dimensions. Relative to the details of policy, they give excessive weight to administrative capabilities and not enough to possibilities firms possess to elude the requirements. Relative to the speed and type of change dictated by the market, they set policy too rigidly - changes of gear are then made in jerky fashion. The outcome is a weakening of confidence in the whole process, and possibly less investment than might otherwise be made. Policies on Automotive Production These policies relate to ownership, licensing of production and local content regulations. In all three areas the trend is for increased liberalization although local content presents a mixed picture as some Asian countries have opted for rather tight controls. Ownership of F-irms Two dimensions of ownership policies/decisions are important: the publiclprivate split, and the domestic/foreign division. On the former, state participation in equity now exists only in a few assembly companies viz. Maruti in India, Proton in Malaysia, the joint ventures with VW, Peugeot, Chrysler and GM in China, joint ventures with Fiat and GM in Poland, and small shareholdings of governments in some other companies in various places. South American governments have removed themselves entirely from the production sphere. In no instance, apart from China, is any share capital of component firms held by public authorities. By and large the mid 1990s situation corresponds well to the conditions of each country - multinational corporations would be unlikely to have significant involvement in China unless the government were also seen to be present, while similar implicit guarantees have a value in Poland. Conditions will alter, however, and State equity holdings will most likely continue to decline. Driven by the need to encourage foreign exchange inflows and the recognition that the automotive industry required modernization and restructuring, a number of the selected countries have liberalized policies in recent years. The main policy trends and their impacts are: * In South America the assemblers are wholly or majority owned by multinational corporations. There are no restrictions on entry to component production either and this is reflected in the stakes taken in leading firms, which are usually foreign affiliates. * Central Europe has yet to attract notable component foreign direct investment but the assembly sector (cars) is now undergoing major transformation thanks to VW in the Czech Republic, Suzuki in Hungary, and Fiat and GM in Poland. Engine plants to supply W. Europe are, however, on the increase. 25 * The Asian countries remain those where foreign equity holdings, though present in nearly all assembly firms and in the larger component enterprises, rarely reach a majority stake (though control is often assured via other well-known mechanisms). In several countries formal legislative instruments limit share-holding (the three giants of China, India, and Indonesia are the outstanding cases) and in others, implicit government policies (for example, statements of intentions, preferences) encourage corporate prudence and thus restrain foreign equity. But it is precisely in Asia where technology licensing (often tied to minority foreign equity) occurs most frequently. From these observations a quite clearly defined picture of ownership policies and trends in the automotive industry appears. South America and Central Europe are the regions where macroeconomic policy changes have been most striking, and where the desire to promote capital inflows and modernize has been greatest. This will in all probability persist, especially as in South America more countries try to link together via sub-regional arrangements. Success, as measured by the results these external ties bring, will be shaped by the quality of the investments and the degree of upgrading they can bring. United States and European firms, both in South America and Central Europe, should likely be the prime movers. Asian countries, contrary to the impression often given because of their extensive involvement in the trading system, retain much more protectionist policies. Domestic groups keep majority holdings in assembly and component plants, in most instances with Japanese partners who also supply technology. With everyone determined to keep out vehicle imports, and each Japanese partner not wishing to lose ground against others from Japan, the assembly operations continue to be high cost. The sustainability of this structure is doubtful. Its persistence depends on sustained expansion of domestic vehicle demand (CBU exports from the selected Asian countries are not a likely short-term prospect) and/or the maintenance of relatively high profit margins per unit. Paradoxical though it may seem, South American countries might be better placed in the modernization drive. Licensing of Producaion In this policy dimension also, the South American and Central European countries now operate open policies in assembly whereas the Asian countries retain constraints. Controls over entry of new companies are severe in all Asian selected countries. Production allocation is still frequently practiced through devices such as limiting the firms permitted to manufacture certain categories of vehicle and juggling fiscal systems to encourage sales of those categories in preference to others. This kind of market management can work if economic growth shelters too many producers from harsh suffering - but any slowdowns in Asia will place existing policies under scrutiny. Local Content Practices No set of policies has been so contentious in the automotive industry as that relating to local content. It is here that the objectives of encouraging domestic industrialization, controlling imports, and controlling cost and quality, join together and come into conflict. Table 7 synthesizes the mid 1990s position in Latin America and Asia, with the "yardstick" countries included and information given for both cars and commercial vehicles. Several key policy trends are highlighted by the table: * The tendency since the beginning of the 1990s has been for South American producers to reduce mandatory minimum local content levels and to permit more flexibility in meeting the levels set. 26 In every case the mid 1990s legislation provides much wider import opportunities th was previously the case. 0 The Asian countries have not tollowed the same pattern. In part this is because the rates in some countries were below those in South America, and in part because they wanted to avoid too heavy an outflow of foreign exchange. TABLE 7 LOCAL CONTENT REGULATIONS IN SELECTED COUNTRIES, 1993 REGION/COUNTRY MINIMU LOCAL CONTENT OTHIER DETAILS REQUIRED (9er_cnt) Passenger Cars Light CV Hev CV L AMERICAS Mexico 36 36 36 Policy since December 1989; rate computed as aveage across a manufactuer's entire product rag. Brazil 70/75 70175 707 Since 1991; complianceneeded to be eligible for subidized financing from National Development Banlk Argentina 40 42 42 Until 31112/94; from 1995 until 31 December 1999 levels will be decided by Mercosur ageements.. Vehicle exports which wish to qualify for import nghts must contam 25 paerent local content stemming from the nationally owned parts producers Colombia - - - Positive lists exist for items to be produced domestically: debate an switching to a percent rate formula in which labor costs would be excluded. Venezuela - - - Decree 1335 of 11 December 1990 replaced LC rules with a mii forex enigs equieme which includes allowane for incorporation of local parts as well as exports. Source: 'A Report on the Automotive Industry Seminas Held in Jakata, bndneua'. IFC, May 1991. * Brazil continues (despite reducing mandatory requirements) to have a far more 'national based" automotive industry than any other country. The breadth and depth of its component sector were 27 illusaed earlier in the report; if it can amplify some of its automotive industry policies stil further, then (macroeconomic conditions permitting) it can modernize from an industrial system which many would argue is qualitatively and quantitatively stronger than that in any other of the selected countries. * No one is likely to make dramatic shifts in local content policy in the medium term. Greater foreign direct investment in the component sector can bring about upgrading and reduce the cost penalty for local manufacture. The data in Table 7, when analyzed alongside some of the other policy trends already surveyed, reinforce the conclusion that the South American countries are moving quite far in the direction of greater efficiency and that, whatever else the Asian producers may have accomplished, they are still some way both from the existing automotive industry capabilities in Brazil and Argentina and from putting together coherent sets of policies which would give a strong push along the road. Macroeconomic Polices and Automotive Development The differential performance of the selected countries in recent years has owed more to macroeconomic policy differences than to any other single factor. The ASEAN countries, especially Thailand, enjoyed fast growth under stable macroeconomic policies; China, a period of enormous expansion; South American countries had to survive failing per capita incomes as well as violent swings in economic activity; the Central European countries stagnated prior to complete system collapse; and xndia experienced a dramatic deterioration in its debt situation, followed by liberalization. The cost to the countries of past macroeconomic policy failures have been so great and so visible that a much sounder economic framework in the next few years is now recognized as a necessary condition of improved performance. The changes completed (or in progress) and which should yield most for the automotive industry are: e Exchange rates that reflect the underlying production conditions and move more or less in accordance with spreads in inflation rates across countries. * Rates of inflation in many countries are far lower than in previous years and which permit business plans to be formulated with a reasonable chance that estimates for main parameters are accurate. * Liberalization of price structures, again permitting production and purchase decisions to be made freely and the underlying profitability of various activities and locations to be properly compared. * Much greater flexiibility in labor markets, allowing productivity improvements based on better plant organizaion and enhanced techniques (physical equipment). * Privatization of companies with strong input/output links to the automotive industry firms, and increased competition in the markets for those products. This change is a key move towards system efficiency in the automotive industry. * Reductions in overall levels of protection (and not just in the automotive industry) allowing cheaper production and some further export possibilities. 28 * A pronounced liberalization of foreign direct investment regimes, technology licensing regulations and other legislation influencing the import of assets critical to programs of industrial modernization. The extent and pace of the changes, as well as their actual/probable impacts, obviously differ widely among the selected countries. But by far their most important feature is the message they convey. Just as corporate management is seized with the recognition that global best practice sets the tone for performance, so the macroeconomic policy revolution makes it clear under which kind of market conditions the business will have to operate. In fact, attainment of global best practice at plant and company level would be impossible without greater efficiency in market operations. The relaxation of restrictions has started to occur, although at an uneven pace amongst the selected countries, at precisely the time when the quantity of information along with the electronic capacity to process it has expanded enormously. As a result it would appear that the conditions for efficiency improvement in the automotive industry of the selected countries are now beginning to come into place. Provided the macroeconomic changes continue to be pursued, the accent can switch to the central features of automotive industry policy as such. Trade Policies The core information on policy is given in Table 8; though the title refers to imports alone, the material presented includes the compensating trade arrangements devised in Mexico, Brazil, and Argentina (similar schemes are not in use anywhere else). Principal findings are: - The Asian countries either totally prohibit CBU imports or impose extremely high tariffs. In Latin America the pattern is to permit imports in volumes constrained by ceilings (reckoned as a percentage of domestic production) and/or by foreign exchange generated through automotive industry exports. Tariff rates on the imports that do come in have been sharply cut in the early 1990s. a Various countries unport CKD kits at rates below those used (explicitly or implicitly) on CBU. * Parts imports generally come in at still lower rates but there are a number of restrictions covering items which are made locally. * Brazil is the only country which explicitly exempts machinery and equipment imports from tariff charges. * Argentina makes explicit allowance for sub-regional trade and discriminates (at least unti end 1994) in favor of CBU imports from Brazil. * Mexico has an import price monitoring program to protect against overcharging. Once again the message is repeated; it is South America which exhibits policy dynamism through taking appreciable steps towards much freer trade. Without doubt restrictions remain (of which Mexico's ban on car imports is perhaps the most serious). Yet if compared with the substantial quanitative barriers imposed by the EC on CBU trade from non-member countries, the VER practiced by the United States, the NTB employed in Japan, and the total or nearly-total ban imposed by most Asian countries the South 29 American countries today are putting together a policy package which, in relative terms, is substantially more progressive. An important feature of Table 8 is the incentive to sub-regional trade alluded to above. Analyses which stress regionalization forces in the automotive industry economy, pointing to three mega-regions and their respective developing country hinterlands, often pay little attention to whether and how developing countries organize themselves in and around the triad. Available evidence suggests that some Latin American countries, especially Mexico, have made a start toward regional integration but Asian countries generally remain noticeably divided. The hopeful signs in the Americas include: Mercosur, especially the automotive protocols signed by Brazil and Argentina; the February 1993 G3 accord of Colombia, Venezuela and Mexico; the quick schedule for creation of a free trade zone among four Andean countries that came into operation in October 1992; and the automotive agreement between Mexico and Chile of 1992. All of these keep the future progress, and possible extension, of NAFTA in view. In comparison with Latin America, most Asian countries show a poor record and a less than promising perspective. Perhaps India and China can proceed on their own paths, their size and potential providing enough to interest others (despite the success of Maruti, the case of India is less convincing). But the ASEAN countries have certainly not been successful with their schemes, there is little sign they will be refurbished, at least not in the automotive industry, and the countries do not seem to exert that much pull on Japanese firms. There remains much scope for creative trade policy to keep abreast of changes in the power balances in the international automotive industry economy. 30 TABLE 8 BARRIERS TO AUTOMOTIVE IMPORTS IN SELECTED COUNTRIES, EARLY TO MID 1990s 1. AMERICAS Mexico rrEM POLICY * CBU Imports - limited to mnximum of 20 percent of domestic production as of model year 1993 - imports require permission, which depends on a manufacturer having a favorable trade balance; relevant balance is 2:1 for model year 1993, 1.75:1 for model year 1994 * Parts Imports - subject to irnport du;ies which average approximately 10 percent * Import Prices - closely monitored; if listed price exceeds international public prices for equivalent vehicles, manuficturer may lose import exclusivity rights * Trade Surplus Rights - transferable among manufacturs Brazil ITEM POLICY * Import Duties 1991 1992 1993 1994 (percent of fob price) CBLT vehicles 60 50 40 35 (cxcqpt emculaWtd tiucks) Articulated trucks 40 35 30 20 CKD kits 55 45 35 30 Ports (avg. taiff) 30 25 20 20 - Parts Imports - greater range of imports permitted - Lei de informatica weakened making import of electronic components easier * Machinery and Equipment - since March 1991, import permitted duty free Imports 1TEM POLICY * CBU Imports by - must be compensated on 1:1 basis by exports (of any automotive ManUfiactUrers product-CBU vehicle exports are calculated at a 20 percent premium), and/or by new fixed investment (30 perent of its value can be reckoned as exports) -. subject to a ceiling, calculated as peccent of pervious year's domestic output. In 1993194 share is 6 percent 31 Table 8 (continued) _ duties on such imports are 2 peont until 31 December 1994; from then until 31 Decemnber 1999 will follow MERCOSUR rates; therfter GATT mates * CBU Imports by Non- - models produced or imported by the mufacturmr can be brought in manufacturers without limit on payment of 22 percent taiff - other models way be imported, asbdect to qootu and on payment of duties * Pas Imports - as long as compensated on 1:1 basis, impwortble on payment of 2 percent tariff * Nature of Compesting - must include 2 25 perce val from independent pas supplers Exports located in Argentina _ vehicle manufacures not located in Argentina can bring in their vehicles at 18 percent taiff provided they export puts for us in their vehicle manftes abroad Colombia im =U:X * CBU Imports - permitted at tariff of 50 percent as of January 1993 (down from 100 percent in Jsnury 1991) * CKD Imports of Passenger - tariff rates from 15 to 30 percent depending On engine size Cars 3 Other CKD Imports - tariffs from 45 pecent for LCV to 8 pent for HCV * Parts Imports - designated components canot be importe; others pay aveage 30 percent duty Venezuela imm~~~~~~~~~ 2OUCY * Import Duties (perent) on 19 9 j993 CBU Passenger cas and LCV 40 30 30 (Engines 5 3000 cc) Engines > 3000 cc 74 68 68 HCV 30 20 20 * Pemitted CBU mports - only models identical to those aeady au bled il *enezela * CKD IMport Duties - psser cars and LCV: 10 percent HCV: 1 percet * Parts Imports - stbject to duties aveaging 30 percent 32 Table 8 (continued) U. PACIFIC RIM RepubL;c of Korea nTEM POLICY - triff 25 percent * CBU Tandffs acquisition duty of 2-15 percent of sales price, depending on that - excise duty of 10-25 percet depending on engine size * Parts Tariffs - 15 percent Taiwan, China tlMm P2OLICY * CBU Taniff - 30 percent * Pats Tariffs - 25 percent Indonesia ITEM POLTCY * CBU Imports - prohibited * CKD Tariffs - 100 pcent * Parts Taiffs (items not -5 percent locally produced) * Parts Tariffs (items localy - 50 percent (calculaed with reference to rplacement par price) alaysma EM POCY * CBU Tariffs - zero (but excise duties fiom 140-300 percent of seling price) * CKD for Taiffs 40 percent * CKD CVTariffs - Spercent Thailand ITEM POQLCY * CBU Cars with Engines < - prohibited 2.3 liters * Other CBU Vehicles - iscimiatory intemnal taxes militate stomgly agaist imports Source: Authors' calculations. 33 V. Strategic Policy Perspectives for Major Developing Countries The experiences in the selected countries are sufficiently diverse to suggest that strategic policy approaches should be 'custom-made' within the overall drive towards international standards. The following sub-sections therefore deal with each country/region in turn. They are predicated on the idea that govemrnent and business together can produce results. South America The Transition to a Free Market System in the Auromotive Industy The history of automotive activity in South America has been marked by the persistent and occasionally negative involvement of government. In terms of equity participation governments have now withdrawn from the sector but their role in shaping trade policies, local content regulations, pricing of outputs and inputs, access to credit, and even the handling of the labor force remains extensive. Thus in Brazil more than 40 percent of the price paid by the consumer represents government revenue through taxes, a figure which is more than seven times the comparable number in the United States. Specific input problems with steel and informatics are a direct result of badly judged government interference in those sectors. Given the importance of the automotive industry in industrial activity in the region, there cannot be a transition to an open market system overnight. But it is imperative that the process begin at once and that it take place through a constant interaction and creation of mutual confidence between governments and firms. Recent experiences in South America as well as in Mexico suggest a few guides to the key issues. First, price structures must be liberalized very quicldy. Second, and partly as a consequence of the improvement in macroeconomic stability, credit conditions should be liberalized rapidly. Third, the maintenance of high local content levels is irrelevant if the industry is filling further behind with relation to world standards. Already the local contenttargets established in legislation are impossibleto maintain; the new legal frameworks in Venezuela and Argentina embody much lower local content percentages as well as permit exports to compensate for local content (the 1989 automotive decree in Mexico includes provisions of this type). Fourth, trade policy changes may take longer to initiate but again the Mexican experience points the way with the emphasis on increasing competition through freer trade, thus encouraging efficient specialization within the Mexican market. The dialogue necessary between the automotive firms and the government requires that the companies themselves clarify their position. In Venezuela the government effectively invited the industry to submit its own proposals, yet this has proved hard for tht ;--mpanies to do since there are strong conflicts of interest between different types of enterprise. Experience in other developing countries, including Republic of Korea, shows that automotive associations are defining their objectives more sharply and much more targeted work by them is fundamental to keeping pace with change. In South America the near future may well wimess a number of adjustments of this kind. The present period therefore needs to be one of rapid transition. The new paradigm focusses on world market standards, cooperation rather than confl ict between governments and companies, a dramatic reduction in government intervention and a willingness to live from both exports and domestic sales. In the past many countries followed the same route of inward looking production whereas the outlook for the 1990s is that the accent will be on outward oriented activity. 34 The Diversiiy of Product Markets Three types of automotive markets need to be distinguished, namely vehicle sales, original equipment manufacture and replacement markets. The first of these is totally controlled by multinational corporations. Exports will take place only if the international furms operating within South Amerian countries choose to treat them as export sites. There were substantial vehicle exports from the region and within it during the 1980s, but also several instances where export models were withdrawn and sales were highly volatile. In the early 1990s Brazil's vehicle exports were below levels achieved early in the 1980s while Argentina has more or less ceased to be an export location. Prospects for a recovery of South American exports in the near future are not good. The North American market is growing slowly in volume terms and switching to sophisticated iaodels that are not manufactured in South America. At the lower end of the market, competition from Asian countries and Mexico is currently too strong for South America. Sales to Europe are not likely to be restarted since Volkswagen and Fiat are fully using their European networks to supply that market. Moreover, any transatlantic movements will come mainly from Japanese firms (primarily Honda) located in the United States. Although Africa is a small market compared to the OECD countries it could be a useful outlet for South American exports particularly since the two areas are geographically near. Both Brazil and Argentina have exported commercial vehicles there in the past and in spite of weak wansport and communication difficulties between the two continents the effort should be maintained. In the Asian market South American countries are very badly placed due to the virht nonexistence of Japanese producers within the region - in other words, intra company trade is not available. Those transpacific shipments which do go in a West to East direction originate from North America (mcluding Mexico). Thus the implication is that intra regional trade will have to play a key part in export expansion. 7These comments do not mean that vehicle sales have ceased to make key contributions to the automotive balance of trade. Indeed, export performance in commercial vehicles has been quite strong (though with fluctuations). The point is that the sustainability of the export push is particularly dependent on the major improvement ili government policies and a corresponding response by companies. As with vehicles, OEM component export sales are difficldt to achieve unless there is a close tie- up with multinational corporations, whether the latter be vehicle or component manufcturers. At the moment, in-house production by vehicle firms is mostly located either in their home countries or in major affiliates. Where these firms contract production to outside companies, dealings are now centered on a much smaller number of first-tier suppliers than used to be the case. The big three producers in the United States are reported to be aiming for a 30 percent reduction in the number of outside suppliers between the early and late 1990s; WI has started a global purchasing organization with dealings in South America handled from Barcelona; and Nissan has begun to buy a few components from a firm in the Toyota family. Long-term contracts, meaning life of the model, are becoming the norm while design increasingly attempts to secure commonality of paris between mode!s. Thus the benefits from obtaining these markets are substantial but in practice only top rank suppliers can meet the tough criteria applied for selection. Arrangements tend to be with OECD firms, and South American producers are likely to come in mostly through subcontracting to them as second der producers. Brazil's experience in OEM exports shows that upwards of 80 percent are made by foreign- owned companies with international reputations in the field. The shiftng balance between component and vehicle producers requires constant investments in R and D by the former as well as per_ma contact between the two. Furthermore the imperative of just-in-time delivery, though it does not exclude 35 long disance deliveries, tends to create a preference for close proximity of suppliers and vehicle manufacturers. In short, OEM is not a market in which South American firms have many advantages. Thus far relatively little attention has been paid to export opportunities for replacement markets. Estimates put the global retail value of that market at more than $400 billion a year, which translates to about $220 million at ex-factory prices. While some 40 to 45 percent of vehicle production is internationally traded, the proportion is much lower in the case of replacement parts. Yet several considerations suggest that South American countries might have advantages in export supply for these products. One argument is that production of many replacement and spare parts is not tied to vehicle manufacture, can be arrange( ,n a bulk supply basis to distributors in major markets, and the quantities needed can be estimated frow. available statistics on breakdown rates for parts. A secona point is that this market is much more open to medium and smaller size companies which do not require close links with multinational corporations. Neither of these points means that replacement markets export is easy or that quality levels can afford to be anything but the best. Rather, the argument is that the morphology of the market corresponds much more closely to the economic advantages which South American companies possess or can generate. The behavior of parts imports in the United States suggests some of the opportunities. In the early 1990s purchases from the 11 leading supplier countries reached about $3 billion, a 60 percent increase as compared with the mid 1980s. Mexico, Brazil, Republic of Korea, and Taiwan, China together provided about 20 percent of the imports in the later period, a share rise of 2 percentage points. The key product groups from these emerging markets were ignition wiring, gas engines, brakes and parts, and parts of gas engines - in sum, these four items amounted to almost one third of all sales from the countries listed. Individual products of importance to Brazil include diesel engines (13 percent of Brazil's parts exports to the United States) as well as the items mentioned above. Thus despite the explosion in joint venture arrangements by Japanese component producers in the United States, there is still scope for exports to that market. While it may be impossible to devise a general strategy, plenty of specific opportunities seem to exist. Ease of Cross Border Movement Effective exports depend on good transport facilities, first rate communications (for example, telephone, fax), and minimal administrative and bureaucratic obstacles to trade. South American countries are not well placed in any of these dimensions. They are dependent on air services which have worsened rather than improved in recent years and maritime transport is also less frequent and for some routes more expensive than before. Throughout the region major investments to improve electronic communication facilities are only just being made and privatization of those sectors is still not widespread. This means that automotive companies cannot yet rely on world class linkages with potential clients. The bureaucratic hurdles are manifold, ranging from numerous tariff and non-tariff barriers through to substantial paperwork required to process foreign transactions. These conditions are the product of the inward oriented attitudes which have prevailed in South America, attitudes which in their turn have led to a relative isolation of the region from international developments. The vicious circle of the past now has to be turned into a positive sequence of change and the first step must come from within the region. A firm commitment by govermments and enterprises to encourage trade will make infastructure investments worthwhile, and the presence of that infrastucture will in tr make exports relatively more profitable to undertake. 36 The Place of Exports in Corporaie Policy Vehicle exports of companies located in South America have varied widely in volume and destination. In some years exports have been negligible but in others they have been quite large. Exports have gone to countries across South America, North America, Western Europe and Africa yet with quantities altering substantially from year to year. A commitment to export requires explicit emphasis or consistent supply such that distributors and consumers abroad can rely on regular supplies and after- sales service. Otherwise, it is impossible to retain strong export competitiveness. Multinational corporations located in South America wil only do this as long as this is part of their overall strategies and if they are confident that the region will provide a good environment for exports over a long period. In the components field the volatility of sales between domestic and foreign destinations has been much less of a problem yet exports have not, for most companies, figured prominently in sales strategy. This situation must alter. The longer term survival of independent component producers is a function of their ability to meet and keep pace with international standards and that cannot be done unless firms are permanently involved in competition with high quality producers. For these companies also the development of exports becomes critical. Moreover, access to export markets permits realization of economies of scale. Since the rate of unit cost reduction consequent on bigger volumes is steep for many components, the advantages embrace price as well as quality. The only circumstances in which some firms may remain without external projection is if they are content to operate as second or third tier producers only. Although this position may be suitable for some firms it has the disadvantage that it restricts a firm to the lowest value added segments of production and leaves it highly vulnerable to sharp technological shifts. Development of Export Markets In every branch of automotive production the toughness of competition compels South American firms to explore and/or create opportunities in as many markets as possible. For vehicles and components there may be prospects on a wide geographical basis including within South America itself Regional trade complementation has been a constant theme of South American policy discussions but frequently has not proceeded much beyond the most limited arrangements. Protocol 21 of the Brazil/Argentina accords of 1986 started out with listings of more than 350 automotive components for trade between the two countries yet the numbers have been progressively reduced to only a fiaction of the original figure. This reluctance to develop trade is not confined to South America as the persistent failures to expand automotive commerce among the ASEAN member countries testify. At the moment the most promising route seems to be for companies to make their own arrangements within the existing trade frameworks while pressuring their respective govermnents to liberalize the trade regime. Most automotive companies in South America, except for the largest among them, do not devote sufficient resources to export market development in any region. The lack of information aboutvolumes, prices, competitors, consumer preferences, marketing and distribution systems, and many other features of trade is extremely serious. The gap cannot be filled from one day to the next nor can immediate success be expected even when information is collected and analyzed. It follows that efforts must begin straightaway if results are to be seen by the second half of the decade. There is scope for joint action through business associations and through goverment/business cooperation. In Canada, for example, both approaches have been used over several years and have 37 yielded excellent results. The devices employed are familiar ones including regular appearances at industrial fairs, participation of component producers in trade missions, elaboration of data bases on targeted markets, and joint development of marketing arrangements. It appears that several Asian countries are using similar strategies; South America can do the same both in individual countries for a wide product range and across countries for closely defined items. Unless South American firms put themselves on the map for components, exports will be lost through default. Private Sector Opporruninies in Automotive Development in South America In South America (as elsewhere) consumer choice will be given much greater scope than in earlier years. Automotive companies can respond to market signals, and incidentally improve their own profit performance, only if they supply the required products at the best quality and prices. The relative absence of competition in the past has not imposed sufficiendy stringent requirements in this respect. From now on the companies must meet top standards. In essence a first rate supply behavior represents the way in which the private sector can meet its obligations under a free market system. The advantages from cutting out government interference can only be passed on to the consumer if supply alters to match itemational standards. Forunately international automotive industry conditions are such that this consequence is likely to follow quite quickly if South American countries switch their policies. The example of a multinational corporation plant in Mexico is eloquent: in 80 percent of recent company performance audits, this plant has been evaluated as the most efficient of the firm's units. Thus in the space of some 3-4 years the image of Mexico as merely an average quality production location has been altered -the investment and trade advantages of this transformation will accumulate in the future. Speed of change requires firms to improve constantly not only their organization but also the standards of their staff. A consequence of the new environment discussed in this report is that South American companies will be compelled to invest heavily in on-the-job human resource improvement. The changes will go much beyond engineering and financial management. They encompass fresh attitudes towards consumers, new methods of marketing and distribution, and a readiness to explore new markets. Contrary to what is frequently supposed, the effect of a successfil investment in human resources is likely to be an expansion of automotive employment and an increase in the positive impacts of the automotive industry on other economic sectors. In the late 1990s the wheel may come full circle as far as the role of the automotive industry in South American economies is concerned. The initial justification for investing in the industry was its beneficial impacts on employment, foreign exchange balances and the output of related sectors. However, govemment policies which -at first fostered automotive industry growth remained rigid. With time, the attempt to achieve automotive industry aims within a protective environment and unstable macro economic conditions has been shown up as counoductive. The about-rn to a stable economy with an open automotive sector can fulfill those original objectives. Indian Subcontinent and China Government Policy Two forces have slowly started to push government policy concerns in the region, and ways for dealing with those concerns, in a direction consistent with recent moves elsewhere in the world. The first is the acceptance that standards of enterprise treatment and product quality should be compared at least on regional and preferably on international bases. Consequently, policies for reorganizing and upgrading 38 the automotive industry within a region must be formulated with an eye to what happens outside. The second is the spread of information about alternatives. The presence of foreign firms and their representatives in the automotive industry associations in the region is one source of such information, but so is the wealth of material now coming from a variety of data banks and printed sources. The new 'conventional wisdom' regarding automotive industry policy puts the accent on measures to encourage high quality standards, to balance foreign exchange through a mix of export promotion and import substitution, to orient the component branch to external operations, and to protect the environment from the nefarious effects of the automotive industry. The following paragraphs summarize the key points under each of these headings: * Quality Standards Although protection against CBU imports is maintained, the new philosophy stresses that this cannot be used to permit poor quality in production. The fact that Japanese collaboration is dominat in the region, and that Japanese companies remain the pacesetters in all aspects of plant and system organization, helps to ensure that there is a drive for quality even if external competition does not exis This stance does not weaken the traditional aim of high local content but often supports the establishment of realistic timetables, with the factor determining them being the rate of quality improvement. System organization, in particular the stress on JIT, has started to show up even in the regional distribution of component operations - in India today the new original equipment manufacture plants tend to be established in the vicinity of the Maruti assembly plant. Staff training is performed with international standards in mind, while the necessity of matching parts to foreign designs which incorporate many of the latest technical developments itself adds to the pressure. * Foreign Exchange There cannot, as yet, be the same reliance on balancing of export sales against imports for each company which has characterized government policies in Latin America. But the need to encourage exports is gradually being recognized. One consequence is that governments must examine their tariffs on capital equipment imports, tariffs which raise production costs and therefore hinder exports. Another is that the component sector has to be improved, pardy by government support for external fact-finding through education and promotional trips (including trade exhibitions). Persistence in such policies is essential lest manufacturers lose confidence in the seriousness with which the government takes the export drive. Once more treatment of local content is important. The critical observati. n is that whereas in the past there was held to be a tradeoff between a country's desire to raise local content and a freign collaborator's interest in reducing it, the new circumstances of the world industry transform the picture. Companies will localize provided not only that they can maintain quality but, even more, develop export prospects. Hence local content policy, properly formulated, can now be seen in terms of symbiosis rather than conflict between governments and frmns. By the same token, governments must encourage the spread of external networks, perhaps through their foreign collaborators, which can help to market automotive industry products. Finally, tax policy to support exports has to come in the early stages (when the export to output ratio is low) and not after the tough initial effort has already been made. Too often in the region tax breaks are given as a reward for export success rather than as a way of encouraging it. 39 * Components The component industry internationally is also in the throes of a drive for rationalization, global reach, a heavy R and D effort, and the spread of subcontracting by the top layer producers. This means both risks and opportunities for Asian producers. The risks exist because of the possibility that transplants of these companies will move into developing country markets and thereby badly squeeze local companies unable to achieve the same standards. But the opportunities at present outweigh the risks. Like the assembly companies, component firms are looking for phased entry into markets where their knowledge is relatively limited and their practical experience minimal. Local goverment policy needs to be supportive of this by focusing on two points of importance to companies, namely, the recognition that genuine technology transfer can be encouraged, and that larger exports are possible. At present, the under-developed stage of policy towards components creates real openings for initiatives by the countries of the region. All of them have strong internal demand for replacement markets and original equipment manufacture, cost conditions are generally very competitive, and there is a rich experience of technology transfer. A move in this direction could be an excellent way to take advantage of current developments in the automotive industry. Indian component manufacturers have made remarkable progress in recent years and the recent liberalization provided additional impetus to exports. Between 1986-87 and 1992-93 output rose from Rs 12 billion to Rs 40 billion, 22 percent average annual growth, while exports rose from Rs 0.7 billion to Rs 5.3 billion, or 39 percent average annual growth. Most exports are for the replacement market but within the last three years or so several Indian companies are exporting original- equipment-manufacture to assemblers in Japan, Europe and the U.S. Exports have been boosted by the increasing number of alliances or technical collaboration agreements, well over two hundred at present, between Indian and foreign companies, many entailing off-take agreements. This growth is attributable to several factors, for example, rising disposable incomes, improved road infrastructure, greater experience by Indian companies and more focus on exports, but one of the necessary prerequisites has been the significant change in Government policies toward greater market orientation. Since international trade in components already exceeds trade in CBU and is much less protected, governments should be receptive to fresh ideas, especially in the aftermath of the successful Indian experience. * Environment In the OECD countries, the automotive industry has become, alongside the chemical industry, the principal target for government policy seeking to control and/or prevent environmental damage. Legislation and its enforcement are growing quicldy and start to embrace a range of approaches which include both mandatory provisions and market oriented measures. At center stage is the total vehicle life cycle, that is, from design to disposal the vehicle will be affected by environmental policies. This concept raises the questions of who will bear the environment related costs at each stage and how those costs might affect both supply and demand. The key measures, and the responses to which they are giving rise in the production system, are: * Fuel economy legislation, based around the CAFE schemes in force since the late 1960s in the United States, imposes significant financial penalties on companies which fail to provide a model mix that sufficiently limits fuel consumption. The legislation is becoming progressively tougher and is also sometimes employed as a protectionist device. * Design of vehicles which can run on alternative fuels (methane, for example) or are powered by non-liquid means, for example, electric cars. Several exanples of intra-urban use of the latter 40 vehicles can be found in Europe, while early 1990s policies in California effectively guarantee these vehicles a significant share of sales by the turn of the century. * A carbon tax, which would hit both the automotive inaustry and other sectors. This proposal, which was totally out of favor even a short time ago, now appears to be gaining support very fast (mcluding from the automotive industry producers in OECD countries). Its imposition would, depending on the tax rate set, curtail the use of vehicles by a greater or lesser degree and therefore influence both vehicle design and purchase. * Further imcreases in other automotive industry taxes so as to reduce environmental effects. * Rigorous enforcement of regulations. These matters acquired a global dimension thmugh acceptance, in the second world dlimate conference held in late 1990, that vehicle use was an important factor contributing to the puncturing of the ozone layer and, therefore, to global warming. Moreover, the insistence that vehicles possess c; alysators is just one illustration of how environment related laws can affect trade. It appears that environmental policies are now starting to come under serious consideration in the developing Asian counties, driven still more by local than by intnational preoccupations. AU of them are detrmed to promote fuel economy (though here the motives are lso strongly influenced by the balance of payments) and would like to see atmospheric pollution reduced. Those policies wi have to be fishioned with automotive industry associations taling an active and imaginave part in the diberations. Maruti, for example, has already exported a few units to Europe where electric is can be fitted to the light passenger car bodies, and it is known that some OECD firms might be interested in the production of newly designed bodies for alternative fuel vehicles in some of the Asian countries. Such mass market models might also be suitable for local consumption in the region. Hence it would be a mistake for enviroment policy to be tackled either in a narrow, intemally focused way or limited to control measures without looking for ways that the region's automotive industry can be promoted through its awareness of the environment issue. Regional Coopration This oft mooted, fiequently frstrated theme might at last be an idea whose time has come as many multinational companies opt for a local presence in each region. Asian markets now have sufficient internal purchasing power to sustain sizeable regional consumption of vehicles. Governments in the region want to maintain a combination of protection and outward orientation, thereby offering credence to the idea of efficiency within a regional setting. The experience of some regional groupings (ASEAN), and the trends towards collaboration (strategic alliances) among companies, suggest more groups are now inclined to perceive the advantages rather than the risks of collaboration. Ihis represents a radical change of attitude from earlier years. Furthermore, of the world's major automotive industry regions, Asia remains the one where most is to be done regarding cooperation. In the early 1990s, DAF obtained approval within the ASEAN counties for a complementation scheme designed to produce 6,000 commercal vehicles. Its main fures may serve as an example of what can be achieved: 41 * Equity, to the value of $-JO million, would be provided by DAF, the European Community and the ASEAN member within each country. * DAF guaranteed product buy-back, thereby giving the countries a safety net and encouraging each of them to participate. * The allocation of activities among countries was guided by the technical level of partners, utilization of under-exploited capacity, and by the ability to convince governments of a win-win situation for everyone. This approach started from the recognition by the European firm that Asia is a growth region, that some degree of market unification is desirable, and that little could be achieved unless local producers felt that risks are minimized in the early stages. The perception is important since it indicates that Asian countries have some assets around which good deals involving third parties can be constucted. The obvious areas where cooperation initiatives might be taken are in commercial vehicles, a less densely populated field than passenger cars, and in components. Given the sophisticated technology of the automotive industry, the involvement of an OECD partner wishing to improve global market share through locating in the region is an essential component of such a scheme. (The DAF deal in Asia was not implemented because of DAF's grave difficulties in its home, that is, European market). Futre Possibifies Developing Asian countries have considerable prospects in the automotive industry. It remains a key manufacturing sector, the reductions in labor and material intensitv of production have not diminished its relative importance, and even the thrust for global localization works to the advantage of the region. While various kinds of commercial vehicles are critical in overall sales, passenger cars are being taken up everywhere and all signs are that there is not only plenty of pent-up demand but that sustainable levels of consumption are also quite large. Policies are gradually becoming more flexible, oriented to taking advantage of options rather than imposing further controls, while the scale diseconomies which tended to discourage production in the past no longer appear to set such heavy unit cost penalties as they once did. There is, moreover, a better atmosphere of dialogue between producing firms (ncluding component manufacturers) and governments than has existed at aay time before. In brief: the conditions are ripe to undertake fresh ventures. The areas which could be explored include: * Export markets for components. The issues include linkages with already established international distribution networks, exports via assembly firns already collaborating in the region, promotion of trade fiirs, and changes in government policies to facilitate equipment and other imports needed to help production for export. * Trade development through contacts with companies from the exporting country already established abroad. The largest Asian countries have large numbers of citizens abroad, many of whom could help in export promotion and distribution. * Arrangement of foreign collaborations such that brand name use also takes cognisance of the Asian producer. 42 * Steps to encourage domestic demand still more, such that it drives the industry forward. This, in turn, will attract more foreign collaboration and thus increase the chances that quality and scale of output increase export opportunities. The automotive industry in Asia now has a real chance to create the dynamism which corresponds to the region's place in the world economy. If the world is splitting into fast and slow growing regions, at the same time that it is becoming more interlinked, then Asia is very much in the vanguard. The essence of the image must be an openness of attitude (often confused with the openness of markets, though the two are not synonymous) sustained by a commitnent to strong performance. The examples of Mexico and Republic of Korea show how quicldy the automotive industry can be turned into a dynamic sector once the attitudinal openness is there for all to see. The history of the automotive industry repeatedly demonstrates that the growth possibilities for those committed to quality output are highly attractive. Developing Asia is now in an excellent position to provide another demonstratinn. Indonesia and the ASEAN Countries The Constraints on Growth There is no doubt that the automotive industry labors under some severe handicaps of 'context in Indonesia. The geography of the islands allied with the difficulties in constructing adequate road arteries certainy limits vehicle use. Even if additional substantial investments in roads were to be made, much would still be required with regard to service and maintenance networks. Private investments in the automotive industry have in recent years been rendered more risky by the high and volatile interest rates along with a number of administrative regulations which fiuther increase the cost of capital. The accent on developing a few branches of heavy industry has meant that firms can obtain some key materials locally yet are burdened through the prices they must pay for them and/or by inferior quality. While these difficulties are real and significant, the primary obstacles to growth of an efficient automotive industry are those coming through government policy. At the core of the debate is the belief that Indonesia can adopt a path which is markedly different from that followed by others. In certain industi sectors a pronounced degree of individuality in product, and perhaps even process, may be consistent with economical manufacture - but the automotive industry is not one of those sectors. It needs constant dialogue among all interested groups. It requires acceptance of the prevailing standards of sectoral efficiency if it is to make its contnbution to development and it cannot do without the impetus provided by domestic, and not just export, demand. It can operate efficiently only when relations among joint venture partners are stable and based on a common commitment to reach world standards and not just juggle local forms of protection to yield profits to the few while raising costs for the many. Indonesia has every chance to develop the automotive industry successfbily provided it works with the requirements just sketched rather than against them. lhe 1)ends 7har Mater The perception of the automotive industry most likely to nurture sound policies centers around the following trends: * Constant relocation and internationalization of the automotive industry, both in CBU and components, creates numerous opportunities for successfl new collaboration. One of the great mistakes is to imagine that the sector's structure is rigid and amenable only to slow change. 43 * Competition among fims in all branches of the industry (passenger cars, commercial vehicles of various kinds, original equipment manufacture and replacement market parts) throughout the world is so intense that the "regions of influence' pattern currendy dominating world automotive industry can be altered rapidly. * It is incorrect to believe that a strong automotive industry (and even a fully integrated automotive industry) can only be built by working backwards from vehicle assembly. That paradigm has governed all policies in most developing countries over the past 40 years. But strong efforts in well chosen areas of component manufacture can just as well serve as the core from which everything else is made. * No policy towards the automotive industry will permit a wide range of objectives to be satisfied simultaneously. Priorities have to be set and maintained - if production is efficient, a virtuous circle can be set in motion. Guiding Principles for Policy Formulion Given the perception just defined, the way in which policies are created and operated becomes critical. Key points to consider would be: * Automotive industry policy is neither a series of decrees handed down from government nor a mere result of inernal debates among a few assemblers and one or twc Ministries. It is a process which compels the participation of all branches of the industry on the production side, of consumer groups of diverse kinds, and (today more than ever) of persons with knowledge of environmental and related issues. The initiatives for changes in policy may come from any of these sources. - While the policy agreement must be adhered to, and frequent manipulation of measures does not improve confidence, the speed of change today is such dtat policies have to be designed with change factors built in. Under no circmstances should any interest group be able to appeal to a policy as if it were sacrosanct or to change it for its own narrow interests. * Prior ncement of draft policies followed by adequate time for public debate has much to commend it. Though conflict is a normal part of the process, and in this sense to be encouraged rather than disguised, the aim must be to create consensus around the directions of change and the instruments for promoting it. Once policies are announced, reasonable time for adjustment must be allowed to interested firms. However, it must be made clear that this in fact is a period to adjust and not for furither lobbying. * The relationships between what is done in the automotive industry and the development prospects of other branches suggest that the automotive industry should not implicitly be assigned a priority at the expense of other parts of the industial sector. Among the many ideas which will likely appear as the automotive industry policy debate gathers force in Indonesia, the following points certainly will be on the action list: * Analysis of market opportunities, at home and abroad. One of the major weaknesses as of now is the absence of information collected, analyzed and used as a basis for action by Indonesian 44 groups in the automotive industry. Without that the only stimuli for dhange will be the internal crises of industry branches (which is no basis from which to launch fresh endeavors) or proposals advanced by external groups. Though the latter may well illustrate advantages for Indonesia, it is extremely unlikely they will cover the spectrum of new opportunities for the country. * Analysis of policy trends elsewhere. Since one of the features of the automotive industry today is the application of global best practice to policy as well as production, it is vital that policy monitoring be used. The groups who do this should be composed of a range of interests and not confined to goverment officials. * Utilization of technical services, and perhaps ultimately the capital involvement, of international bodies such as IFC. Their Inowledge of developments elsewhere gives them a good position from which to advise while their operating tenets that all projects should be technically feasible, economically viable, financially profitable and environmally sound, provide criteria against which assessments within Indonesia can be tested. Indonesia is by no means alone in being confronted with an automotive industry policy challenge. But it does have its own industry history, resource set and development horizons. They lead to greater opportnities on some fronts along with larger risks on others. The ideal response to Indonesia's own opportunity/risk cluster is to stimulate domestic demand and encourage much greater competition in all branches of manufacture. Ihe size and variety of Indonesia's market are a powerful guarantee dtis approach will yield returns. Central Europe The Government Vacuum Given the failures of the past, it is scarcely surprising that government is trying to withdraw from many areas where previously it determined events. Unfortunately, the pullback comes fastest in those areas where prudent government presence is necessary, and slowest in the issues where it should be removed. There is little capability to support retraining of staff, no fresh investment to support infrastructure, and no clear reorganization of trade flows. The hope appears to be that, just as in the area of macro economic affairs, technical and to some extent financial assistance from abroad will take care of things. This has created a void which in fact complicates the tasks in those realms where the State should be withdrawing its presence rapidly, viz. direct involvement in production, foreign trade and intelnal distribution. Partly as a result of the sudden withdrawal by governments from areas where the private sector cannot possibly ffll the vacuum, at least in the near to medium term, individual company prospects vary a great deal. Some Czech and Slovak firms are optimistc, either because foreign commitments are secured (Skoda, BAZ) or because past activities had allowed them to specialize in manufacture where markets abroad were still achievable (Tatra). The Hungarian bus producer, Ikarus, nevertheless faces serious problems since its marketing was closely tied to the former CMEA structure; the inability to cope with the virtual elimination of those outlets has left the firm in a difficult position. In Poland the situation likewise is mixed in that the Fiat commitment to FSM (and in particular the decision to make it the source for the Cinquecento) seems to suggest a reasonable future, as does the GM investment in FSO. But so far there are few signs of major commitments to the component business (Ford's manufacture of ignition coils and fuel pumps in Hungary is an exception) while the promotion of foreign trade for smaller firms 45 is likely to take some reorganization. In all of this the behavior of governments has been hesitant and, on the whole, not encouraging for the parties to negotiations. Creating an Auomotive Industry Business Contea Opportunities seem to outpace realities in Central Europe. To try and narrow the gap a number of points should be kept in mind: * Amidst all the hectic activity from day to day, a new automotive industry cannot be built in anything other than a fairly long time horizon. The persistence and determination required must come from three key economic agents, viz. the automotive industry firms themselves, the government and the financial institutions. Thus far there are some signs (through foreign direct investnent) that this kind of perspective may begin to take root in the sector itself. Similar indicators from the other two agents are far less visible. * The creation of dense networks for dialogue is essential. Nowhere in Central Europe are there the industry and trade associations which play such a vital role elsewhere. Recent efforts in Indonesia, for instance, have begun to show the value of bringing together firms, particularly in the component field, so that they can share knowledge of markets and customers, develop grorp taining programs, and be in a position to engage in dialogue with the govermment. Yet another of the consequences of the government pullback is that firms must take the initiative in dialogue with the ministries, persuading them of the value in promotional actions. At the moment the ministries seem most worried about appearing satisfactory to foreign assistance groups while the automotive industry firms are most concerned about the image they give to foreign automotive industry enterprises. While this may be understandable it is not acceptable as a permanent state of affairs. 3 VW noted how its vendor conferences have helped to create confidence and strength among component producers. This approach could well be fbllowed more extensively in the region. * The emphasis on managing companies effectively entails, among other things, creation of a work ethic which puts quality, continuous improvement, and performance at the top of the list. Hard though this is, Central Europe is not the only region facing the problem and may have some chances to proceed more quicldy than elsewhere. Incentive structures must be managed consistently with this activity. * Technical cooperation with foreign firms takes on a new perspective given the changed conditions within Central Europe and in the automotive industry as a whole. Licensing, for example, will in future involve patents but the likelihood that know-how will be available is not great. Some foreign firms, such as GKN, now insist on some equity holdings where there are licenses at stake. Effective linkages with external developments require the automotive industry firms to stay abreast of such shifts of technology supplier behavior. * There must be a domestic commitment to training and learning. The short run hope is clearly that in-plant efforts will take care of problems and indeed perhaps that is so. But the need for broader investment in taining is crucial. In this respect Central Europe may again reap some benefit from the Europe-wide changes in education/training and stricter work attitudes. 46 Bibliography Asociaci6n de Fabricantes de Automotores, "La Industria Automotriz Argentina: Motor de la Recuperaci6n Econ6mica' , Buenos Aires, October 1992. "Industria Automotriz Argentina", Buenos Aires, December 1991. ANFAVEA, "Te Brazilian Automotive Industry 1991", Sao Paulo, 1992. Automotive Component Manufacturers Association of India, "Recent Developments in the Indian Auto Component Sector", New Delhi, December 1992. Berry, S., V. Grilli and F. L6pez de Silenes, The Automobile Indutry ad *ae Mexio-US Free lhde Agreement, NBER Working Paper 1452, August 1992. Booz-Allen and Hamilton, Inc., Final Report: Automotive Industary Sn*, June 1992. Economist Intelligence Unit. 'The Motor Industries of the European Region: Western Europe, Eastrn Europe and Mediterranean Countries", May 1992. .The Motor Industries of Japan, South Korea and the Pacific Rim Countries", May 1992. -. "The Motor Industry of South America", May 1992. -. "The Motor Industries of India and China', May 1992. IFC, Economics Department. "A Report on the Automotive Industry Semin So Paulo, Bra", May 1990. -. A Report on the Automotive Industry Seminar New Delhi, India", December 1990. -. "A Report on the Automotive Industry Seminar Jakarta, Indonesia", May 1991. -. A Report on the Automotive Industry Seminar for Central and Eaen Eurmpe, Budapest. Hungary", November 1991. -. Active Investment Report, June 1992. Karlin, A., "Automotive Industry Review", IFC Memorandum, December 1992. Karmooloias, Y. Automotiv Industry aends and Prospects for Inwvnt In Deveaoi Counra, IFC Discussion Paper 7, 1990. Maruti Udyog Ltd., "Recent Government Policies and Regulations Affecting the Automotdve Industry in India", Communication to IFC, December 1992. O'Brien, Peter, The Automotive Industy in the Developing Countrlis: Risk and Xn on 1590s, London, 1989. . The Prospects for Collaboration in Trade and Production Between DewLoped and Dewloping Cowntries in the Automotive Industry, Geneva, 1989. ' "New Perspectives on the Automotive Industry in South America", Washington, May 1990. " MThe Automotive Industry in Developing Asian Countries: Issues and Prospects', Washington, January 1991. "Automotive Policy at the Crossroads", Geneva, May 1991. ' "Automotive Industry and Automotive Policy: Directions of Change", Jakarta, May 1991. " "Tackling the Transition: The Problems and Prospects for the Automodve Industry in Central and Eastern Europe", Geneva, December 1991. ' "The Government's Role in a Market Economy", Budapest, November 1991. "Automotive Industry: The Permanent Revolution", in Industry on the Move, JLO, Geneva, November 1992. Repdblica de Argentina, Decreto 2677de 20 de dkembre de 1991, Buemos Aires, December 1991. Snowdon, M., 'Development Opportunities for the Eastern European Automotive Industry", Budapest, November 1991. UNCTC, Foreign Direct Invesmnent and Indutral Restructung in Mexio, New York, 1992. Distributors of World Bank Publications ARCENllNA TIddlelmOb_vr ITALY PORTUGAL Cada. Hlnh.SRL 41. Shw Sg Lico naCmmlulmusra 1S...o SPA Uvirla Poimp adAGunme CA Via Duc DI CalibWiB 1/1 llu DoCaru=70.74 Flbd. 14, 41 hFpOfc. 4l/465e CeMIl.PI z 11200 Usbn U3J boun Abu RNLA?D 5025 Fkeaea AU%emIaIu p p SAUDI ARAUBA. QATAR AUSTRALI,PAPUA NEW CUINMA. PAX rr- JAPAN arIlcokStore FIJI SOLOMON ISLANDS, SF-OOIM Heidnki 10 Em_rn Bak P.O. Box 3196 VANUATU, AND WETMN SAMOA HOp 34C0oau w Buukyo. 113 Ryadh 11471 DA. 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