automakers’ global supply chain configuration field study
TRANSCRIPT
Automakers’ Global Supply Chain Configuration
Field Study
Touareg Passat Jetta Beetle Golf
EngineGermany
HungaryGermany
Poland
MexicoMexico Hungary
Transmission Japan JapanArgentina
Japan
Argentina
JapanArgentina
Final Assembly
Slovakia Germany Mexico Mexico Brazil
Country of Origin for VW Models Sold in U.S.:Major Components and Final Assembly
Jetta
Transmissions
Assembly
Engines
Customers
Global Supply Chain for Jetta
U.S.
CustomersPoland
EnginesJapan
Transmissions
Mexico
Assembly
VW International Strategy - Touareg
Germany
Japan
Slovakia
Hungary
Transmission
Final Assembly
Misc.
Steel & Engine
U.S.Marketing
VW International Strategy - Jetta
Germany
Japan
Mexico
Poland
Transmission
Final Assembly
Engine
Misc.
U.S.Marketing
The Context of Global Strategy and SCM
Reasons to “Go Global”Proactive ReasonsProactive Reasonso Exploit factor-cost
differences across countries
o Unique producto Technological advantageo Economies of scaleo Growing foreign marketso Exclusive informationo Attack rivals on home turf
Reactive ReasonsReactive Reasonso Competitive pressureo Overcapacityo Declining domestic
saleso Saturated home marketo Under attack from
foreign rivals
Going Global: Effect on Bottom Line
ROI
% Foreign Sales/Total Sales
Factors/Issues of Globalization
EconomicEconomic
Political Cultural
Technology
Competitive
Legal
The Context of Global Strategy and SCM:The Context of Global Strategy and SCM:Today’s TopicsToday’s Topics
o Globalization and Its Effectso Comparative Advantageo Global Supply Chains for Selected Automakers
The International Political Economy (IPE)o Trade & Investment Policyo Role of Regimes (NGOs and Treaties)o Economic Integrationo Foreign Exchange
What is Globalization?Perspective of Countries
o How are countries connected globally?How are countries connected globally?o How big is globalization?How big is globalization?o Why does it happen? Why does it happen? o Who’s doing it?Who’s doing it?o Is it connected to prosperity? Is it connected to prosperity?
Global Top-20
PoliticaPoliticaGlobalization Index =• Political Engagement +• Technology Contact/Transfer +• Personal Contact +• Trade and FDI
Foreign Policy and A.T. KearneyAnnual Globalization Report
CzechRepublic
U.S.
Singapore
Ireland
Merchandise Exports(US$ billions)
U.S.U.S.
Ger
man
yG
erm
any
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
IreIreMexMexKorKor
Merchandise Imports (US$ billions)
U.S.U.S.
Ger
man
yG
erm
any
Japa
nJa
pan
Fra
nce
Fra
nce
UKUKIreIreMexMexKorKor
Foreign Direct Investment - Out(% of World Total)
U.S.U.S.G
erm
any
Ger
man
y
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
Foreign Direct Investment - In(% of World Total)
U.S.U.S.G
erm
Ger
m
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
Comparative Advantageo Germany:
o 10 units of factor inputs (labor & capital) to produce 1 keg of beer
o 2 units of factor inputs (labor & capital) to produce 1 box of pretzels
o United States: o 15 units of factor inputs to produce 1 keg of beer; o 5 units of factor inputs to produce 1 box of pretzels;
Which country should manufacture
and export only beer? Which country should manufacture and export only pretzels?
Comparative AdvantageGermany:10 labor pretzels = 5 pretzels per beer * beer 2 labor
US:15 labor pretzels = 3 pretzels per beer * beer 5 labor
* Opportunity Costs … price of beer in terms of pretzels, using labor as common denominator
=
=
Comparative AdvantageGermany:10 labor pretzels = 5 pretzels per beer beer 2 labor
US:15 labor pretzels = 3 pretzels per beer beer 5 labor
o Germany has absolute advantage in both beer and pretzels
o U.S. has comparative advantage in beer, and should manufacture and export beer to Germany
o Germany has comparative advantage in pretzels, and should manufacture and export pretzels to the U.S.
Growth in TradeIndexed: 1950 = 100
1950 1960 1970 1980 1990 2000
1600
1200
800
400
100
Trade
GDP
Fair Trade and Outsourcing
…in the media …in politics
Countries don’t trade, companies do.
What is Globalization?Perspective of Multinational Corporations (MNCs)
o Motivations for global operations and reachMotivations for global operations and reacho How are companies engaging in How are companies engaging in
globalization?globalization?o How big is their involvement?How big is their involvement?o What are the effects on managers, customers, What are the effects on managers, customers,
employees, profits, etc.? employees, profits, etc.?
Rank Firm or Country Value (in $bil)
1 United States $8,110.92 Japan 4191.53 Germany 2104.64 France 1394.15 United Kingdom 1288.26 Italy 1145.47 China 902.18 Brazil 802.19 Canada 618.3
10 Spain 531.311 Russia 449.912 South Korea 438.213 Mexico 409.614 Microsoft 407.215 Australia 390.8
16 India 380.817 Netherlands 360.518 General Electric 333.119 Argentina 326.420 Taiwan 283.421 Belgium 242.422 Sweden 227.823 IBM 214.824 Indonesia 214.625 Austria 207.526 Exxon 193.927 Royal Dutch Shell 191.328 Wal-Mart 189.529 Turkey 186.430 AT&T 186.131 Intel 180.232 Cisco Systems 174.1
Extent of Globalization for MNCs
Foreign Sales as
Percent of Total
Foreign Assets as
Percent of Total
Exxon 72% 64%
IBM 57% 44%
Ford 31% 44%
General Electric 32% 48%
Citigroup 35% 41%
Hewlett-Packard 55% 52%
Orange = Percentage of exports to the U.S. by intra-firm trade (via FDI) to total exports (This is NOT volume of total exports)
Green = Globalization Index
Growth in Trade and FDIIndexed: 1950 = 100
1950 1960 1970 1980 1990 2000
1600
1200
800
400
100
Trade
GDP
FDI
Trade and Investment Policy
Free Trade?
Free Trade?
Global Linkages Model
CountryA
CountryB
Management Linkages
Policy Linkages
Trade and Investment Linkages
CountryA
CountryB
Managers choose to…Attack new marketsEntry modesShift manufacturingAlliances, Mergers, etc.
Governments try …Tariffs, quotas
FDI Regulations
Effects are …Persistent Trade DeficitLoss of JobsHigher Domestic Prices
How Nations Influence Trade and Investment Activity Through Policy
o Overt/Visible Policieso Supporting/Strategic Policies
o Follow-up Questions:oHow well to these policies work?oWhat are the side effects?o Retaliation?oHow might managers of MNCs respond?
USTR Definition of Trade Barriers
o Government laws, policies, or practices that either:o Protect domestic products from
competitiono Artificially stimulate exports of particular
domestic products
Overt Policy Alternatives
o Restrict Imports (tariffs, quotas, VERs)
o Restrict FDI o Incoming (F/X controls, local content)oOutgoing (tax code, expatriation disincentives)
o Restrict Exports (DoD restrictive munitions)
o Export Promotion (subsidies, tax credits)
o Import Promotion (tax credits, favors)
o FDI Incentives (subsidies for infrastructure, training & development, market access)
o Preferential Govt. Procurement
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
DomesticQuantityProduced
DomesticQuantity
Consumed
World Price
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff Price
Tariff
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff PriceExtra Revenue
DeadweightLoss
Tariff
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff PriceExtra Revenue
DeadweightLoss
# Jobs saved?At what price?
Cost to Domestic Consumers per Job Saved
Extra Revenue for FirmTariff Revenue to GovernmentDeadweight Loss
$800 million+
$800 million10,000 jobs
$80,000/job
=
What is Globalization?Perspective of Consumers vs. “Regular Joes”
o OutsourcingOutsourcingo Cheaper Products vs. Job LossCheaper Products vs. Job Losso Fair Trade -- Product and Production Fair Trade -- Product and Production
StandardsStandardso Working standardsWorking standardso Living wageLiving wageo Environmental standardsEnvironmental standards
“Voluntary” Export Restraints
TMM-K Georgetown
1971 Honda 2008 Acura MDX
Managerial Responses to VERs
Shift Production to U.S.
Sell pricier, more profitable cars
Global Linkages Model
CountryA
CountryB
Management Linkages
Policy Linkages
Trade and Investment Linkages
FDI: Host Country PerspectivePrimary Impact Favorable
Aspects Unfavorable
Aspects Policy
Response Capital Capital
inflow Loss of control
Ownership restriction
Employment Creates new jobs
Career limits/ low wages
Employment regulations
Entrepreneurship Creates new industries
Displaces local ideas
Restrict market acess
Technology Access to new
technol.
Appropriate techology??
??
Government Revenues
Increase tax base
Foreign dependency
??
FDI: Home Country PerspectivePrimary Impact Favorable
Aspects Unfavorable
Aspects
Capital Profitable opportunities
Capital flight
Employment Access to lower wages
Export jobs
Technology Expand usage into new markets
Lose control over
sensitive technol
Government Revenues
Tax income on profits
Loss of domestic wage tax
base
Globalization-related “Regimes”
Who “governs” or has extraterritorial policy reach for the following:
o Cross-border Internet commerce
o Ocean floor magnesium nodes
o Sea of Tranquilityo Microsoft’s copyright
Windows XP in Chinao Mineral deposits in
Antarctica
o Greenhouse gases emissionso Geo-synchronous satelliteso International airline routeso Dolphins killed in tuna nets
CountryA
CountryB
No PolicyNo Policy
Trade/Investment Linkages
Management Linkages
Regimes as International “Soft Law”
NGOs and TreatiesNGOs and Treaties
Law of the Sea Treaty
o Outside territorial waters, anything goeso Early provisions:
o Anti-piracy effortso Access to and protection of shipping routes o Fishing rights
o Recent:o Pollutiono Over-fishingo Exploration and extraction of resources
o (Oil, manganese, etc.)
Global/Comprehensive Regimes
o United Nations
Functional Regimes: Military - Security
o Nuclear Nonproliferation Treatyo NATOo Geneva Conventiono Warsaw Pact (defunct)
Regional/Associative Regimeso European Uniono NAFTAo ASEANo OECD
Functional Regimes: Environmental
o Montreal Protocol for Greenhouse Gaseso Law of the Sea Treatyo Moon Treatyo Antarctica Treatyo UN-based Consumer Protection Guidelines
Functional Regimes: Economic
o Air transporto Ocean shippingo Telecommunicationso GATT / WTOo IMFo Gold standard (defunct)
Future Regimes
o Internet commerce?o Animal rights?o Human rights?o Fair trade?
Non-Governmental Organizations
Common NGOs that influence trade/FDI:o International Olympic Committeeo Greenpeaceo United Auto Workers Uniono World Council of Churcheso Save the Dolphins Organizationo National Rifle Associationo Amnesty International
Economic Integration
Global Linkages
CountryA
CountryB
Management Linkages
Policy Linkages
Trade and Investment Linkages
Global Linkages
CountryA
CountryB
Management Linkages
IntegrationIntegration
Trade and Investment Linkages
Regionalization of Economic Activityo Levels of Economic Integration
o Free Trade Areao Customs Uniono Common Marketo Economic Union
o Effects on trade and FDI patternso Evolution toward worldwide integrationo Impact on management of MNCs
Trade in Isolation
20%
100%
33%
15%
40%
10%PrevailingTariff Rateson Imports
Free Trade Area
20%
100%
33%
o No tariffs among members
o Tariffs with non-members unchanged
Consequences External Tariffs?External Tariffs? Trade Creation?Trade Creation? Trade Diversion?Trade Diversion? Regional content? Regional content? Export jobs?Export jobs?
Trade and Investment in Isolation
40%
33%
CheapestProducer
Imports
Trade Creation from FTA Formation
33%
CheapestProducer
Impo
rts
Trade and Investment in Isolation
40%
33%
CheapestProducer
Imports
Trade Diversion from FTA Formation
33%
CheapestProducer
Impo
rts
Customs Union
33%
o FTA plus...o Common tariff
policy for non-members
33%
33%
Common Market
o Customs Union plus...
o Reduction of non-tariff barriers among members
No Non-Tariff Barriers
Shift in International Strategy
Common Market
£
DM
FF DkK
ÖS
National Currencies
ConsequencesConsequences• Strain on F/X ratesStrain on F/X rates• … …tax rates?tax rates?• … …growth?growth?• … …trade?trade?
Economic Union
o Common Market plus...
o Single currencyo Harmonization of
Monetary and Fiscal Policies
Multilateralism in Trade and Investment Regimes: WTO
Europe
PacificRim
NorthAmerica
Regionalization/Triad: Building Block or Stumbling Block?
EuropeanEuropeanUnionUnion
PacificPacificRimRim
NAFTANAFTA
F/X
Trade, FDI, and the Economy
o Increase demand for Japanese computers – trade deficittrade deficito Increase demand for computer inputs (components, labor, etc.) –
inflationaryinflationaryo Increase demand for Yen – appreciatesappreciateso Stronger Yen increases U.S. prices – decreases demand for Japanese decreases demand for Japanese
computerscomputers
Computers
Cash $$
Foreign Exchange
o What is it?o Why does it change?o Risk for international managerso How to manage risk
A Medium of Exchange:The Linkage Between Currencies
World Market for Euros
World Market for DollarsPrice = $ /
€Price = € /
$S
D
S
D
$1.30 / € € .77 / $
Same “market”…different perspective.Same “market”…different perspective.
Foreign Exchange Fluctuations and VolatilityIndex of Swiss Franc vs. Dollar
1990 = 100
19901980 2000
Sharply Depreciating Peso vs. Dollar
Medium of Exchange for Foreign GoodsGerman Market for BMWs
Price of a BWMin Euros
€ 100,000
S of BMWs
D for BMWs
Global Market for BMWs:Americans want to import BMWs from Germany
Price of a BMW in Euros
€ 100,000
S
DD’
€ 110,000
World Market for Euros
Price of a Euro in Dollars
$1.30 / €
S of Euros
D for Euros
World Market for Euros:Americans need to convert Dollars to Euros
Price = $ / €
$1.30 / €
S
DD’
$1.35 / €
Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price =$ / €
Price =
€ / $S
D
S
D
$0.77/ € € 1.30/$
Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price =$ / €
Price =
€ / $S
D
S
D
€ .77/$
D’
S’
$1.30/ €$1.35/ €
€ .74/$
Other Forces Causing Changeo Foreign Direct Investmento Foreign Portfolio Investment
o MNCso Government Debt Instruments
o Currency Arbitrage and Speculationo Governmental Intervention
o Official and Unofficial “pegs”o International Agreements (e.g., G-7, the Euro)o Posturing (e.g., “talking” the dollar down)
The Big Mac Index
Big Mac: Local F/X
Actual
F/X Rate
Big Mac: in
US$
Implied
PPP Rate
% Under/ Over Value
U.S. $2.55 – $2.55 – –
EU ℮ 2.44 ℮ 1.08/$ $ 2.26 ℮ .96/$ - 11%
Japan Y 253 Y 118.2/$ $ 2.14 Y 99.2/$ - 16%
England ₤ 2.99 ₤ .69/$ $ 4.33 ₤ 1.17/$ + 70%
Poland Z 1.34 Z 4.12/$ $ .32 Z .52/$ - 87%
www.economist.com
Short-term F/X Management o Currency Hedges
o Forward Contractso Optionso Negotiation of Ratcheted Pricing Schedule
o Adjustment of Prices and Target Profitso Lower foreign prices to keep market share when
home currency appreciates … lowers profit margino Raise foreign prices to keep profit margins when
home currency depreciates … less price competitive
Today: US Dealer to Import BMWs
o Sales Contract:o Quantity: 100 BMW 750so Price: € 100,000 eacho Payment: Due in 3 months
o Value of Sales Contract = o € 10.0 milliono Spot Rate = $1.30 / €o $13.0 million$13.0 million
In Three Months: Payment is DueUncovered Transaction
o Euro appreciateso New spot rate = $1.35 / €o € 10.0 million
o Adjusted Value of Sales Contracto “Risk penalty” = $0.05 per € tradedo $13.5 million$13.5 million
o US Dealer’s Loss = $500,000
Today: US Dealer to Import BMWsHedged Transaction
o Sales Contract:o Quantity: 100 BMW 535so Price: € 100,000 eacho Payment: Due in 3 months
o Value of Sales Contract = o € 10 milliono at 90-day Forward Rate = $1.305 / €o “Insurance premium” = $0.005 per € traded o $13.05 million$13.05 million
In Three Months: Payment is Due Hedged Transaction
o Euro appreciateso New spot rate = $ 1.35 / € (Doesn’t matter!!!) o € 10 million
o Adjusted Value of Sales Contracto Locked-in Forward Rate = $ 1.305 / €o $13.05 million$13.05 million
o Cost of Hedge (insurance premium) = $50,000
In Three Months: Payment is Due Hedged Transaction
o Euro Depreciateso New spot rate = $ 1.25 / € o € 10 million
o Adjusted Value of Sales Contracto Locked-in Forward Rate = $ 1.305 / € (Spot better!!) o $12.5 million$12.5 million
o Currency Windfall Currency Windfall -- Cost of Hedge = $450,000 Cost of Hedge = $450,000
Medium-Term F/X Managemento Balance sheet hedge
o Match foreign assets with same level of foreign liabilities in same currency
o Cash flow hedgeo Match foreign A/P with A/R in same currency
Long-Term F/X Management
o Shift sourcing and procuremento Shift production o Cut costs / improve productivity
Volkswagen’s Global Supply Chain Revisited
Key Strategic ChoicesLocation of Value-creating Activities and
Linkages (flow) between VW Units
U.S.
Mexico
Germany ??
??
??
Shift in IPE
o How does a change in the IPE faced by VW force it to reconfigure its global/North American supply network?
o NAFTAo F/X o Other factors?
Key Strategic Issues Facing VW
o Regional contento Over-reliance on German importso Lack of US or Mexico supply networko Increased competition in Mexico and USo Instability of Pesoo Labor instability
Changes in Currency
DM per $
1991 2000
Peso per $
1991 2000
Peso per DM
1991 2000
Location and Flow:What do YOU recommend?What do YOU recommend?
U.S.
Mexico
Germany ??
??
??
What other strategies should VW try?
o New modelso Consolidate components & platformso Marketingo HR policieso Other stuff?
New Products
Product Evolution
Missed Opportunities?
Design and Production Convergence
BeetleGolf Jetta
Standard Componentsand/or
Single Platform
VW Changeso VW Mexico makes $1.0 bil investment: 1990-95o Cut supply costs
o Reducing VW suppliers from 1,000 to under 100oVW suppliers shifting production to low wage
countries (including Mexico)
o Considering US plant if 10-15% growth achieved
VW’s U.S. Marketing Effortso Cross-promotion of Irish folk/new age band
“Clannad” (1993; music in commercials)o $45 million U.S. advertising campaign focuses on
popularity of Golf /Jetta in Europe (1993)o J.D. Power ranks Golf as “best in class” (1995)o Pushes “test drive outings” vs. rivals’ cars (1995)o Major focus group effort vs. rivals’ cars (1995)o “Drivers Wanted” campaign signals VW’s focus
on 17-30 age group; $45 million (1995)o “Duh, Duh Duh” … $70 mil ad campaign (1997)
The VW Familyo Audio Bentleyo Bugattio Rolls-Royceo Seato Skodao Volkswagen
VW’s North American SalesNumber of Units