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A Primer on Global Auto Markets Paul D. Ballew and Robert H. Schnorbus Working Papers Series Regional Economic Issues Research Department Federal Reserve B a n k of Chicago January 1993 (WP-93-1) FEDERAL RESERVE B A N K OF CHICAGO A Primer on Global Auto Markets Paul D. Ballew and Robert H. Schnorbus Much literature in the last twenty years has focused on the trials and tribulations of the auto industry in the U.S. This literature has extensively examined the struggles and restructuring of the domestic industry in response to strong foreign competition and a changing domestic marketplace. The studies have portrayed the degree of pressure (substantial) and the degree of change in the U.S. (correspondingly also substantial). Yet, although this analysis is important, one area which has received only a fleeting review has been the subject of the U.S. market within the global environment or marketplace. Certainly an analysis of import and transplant developments in the U.S. does incorporate a strong international component, but it does so exclusively within the U.S. market. Upon reflection, as the industry has evolved ithas become important to take a broader look. For instance, the U.S. market only constitutes 25% of new vehicle sales in the world and it is a market that is slowing relative to the remainder of the world. Furthermore, the trends that are driving the world product markets forward are, in part, external to the U.S.; and when one discusses future growth and other economic developments, an increasing portion emanates from abroad and not in the vacuum of the continental U.S. Specifically, in the emerging global environment of the 90s, attempting to grasp current developments and, more importantly, future developments for any industry requires a movement beyond a parochial vision. Any analysis requires a global vision that examines sales, production and other factors within an integrated world economy. In an attempt to achieve such an integrated analysis for the auto industry, this paper seeks to analyze each major and emerging market for vehicles first in somewhat of a segmented environment and then integrate these markets through a systematic approach. This systematic approach will also attempt to draw some conclusions and insights for the U.S. nameplates in a marketplace where they must not only compete in their own backyard, but also in increasingly competitive markets throughout the world. Particular emphasis will be placed on developments in the Midwest.1 The domestic industry is still highly concentrated in this region, and future changes willbe of great significance to thisarea. FRB CHICAGO Working Paper January 1993, WP-1993-1 1 Current Global Activities of Domestic Producers A current assessment of the domestic industry within this global marketplace indicates that the Big 3 arc almost exclusively concentrated in the North American and western European markets. A sales dependency ratio for each of the Big 3 ofNorth American sales to worldwide salesispresented in Figure 1. As indicated, Chrysler has the highestconcentration in North America with a ratio of .96, a ratio which has been increasing throughout the latter half of the 1980s. Although the recent expansion of Chrysler in Europe should partially offset this concentration. Ford's North American ratio is .63, while GNfs is slightly higher at approximately .67. Both of these levels are significant improvements over Chrysler. However, calculating a North American/ European ratio provides evidence of the degree of concentration and the dependency of Ford and G M in these markets collectively. For instance, GNTs combined ratio of sales is over .90 and Ford's combined ratio isalmost .95.7 5 Figure 1 Dependence Ratio-Big 3 Sales p ercent (sales in region/totai sales) 100 75 50 25 0 North A m erica North A m erica + w es tern E u ro p e Source: U.S. Department of Commerce and Federal Reserve Bank of Chicago. FRB CHICAGO Working Paper January 1993, WP-1993-1 2 A major contributor in these dependency ratios is the limited presence of the Big 3 in developing markets, with the exception of Latin America. Of particular concern is the Big 3's absence in Asian markets where their combined sales are stillless than 500,000 units annually. And even this level is concentrated in certain markets, such as Ford's dependence on the Taiwanese market Eastern and Central Europe are emerging markets with significantpotential for the Big 3. However, competition from VW, Fiat and eventually Japanese manufacturers will be intense. Additionally, few of these markets will achieve rapid growth in auto purchases until later in the decade or early in the next century. The implications for the domestic industry of high concentration levels in North America and Europe and limited activities in other markets is significant in light of the ongoing changes in the global marketplace. Given the level of competition in traditional markets and the promise in developing markets, the difficulties for domestic nameplates may be substantial. In order to understand the potential difficulties an assessment of the global market must provide a differentiationbetween traditionaland non-traditional markets. W o r l d Market For Vehicles The total world market for vehicles today is a market with sales and production of nearly 50 million units annually. In the last few years sales have been below trend (approximately 4-5 million units annually), with sales in the U.S. accounting forroughly halfthisdeficiency. The trend level iswell above the ten-year average of 41.5 million units; and in fact, growth in the overall vehicle market has been significant in the last ten years, up almost 25 percent during the 1980s. Furthermore, market forecasts are for vehicle sales in excess of 60 million by the turn of the century. For the sake of this analysis, the market in terms of sales and production can be segmented into three mature markets and threeemerging markets (seeFigures 2 and 3.)2 The mature markets consist of production and sales in the industrial world. These markets collectively account for over three quarters of the world's production and sales of vehicles. Of these markets the U.S., Japan and Germany are the most important However, because of the degree of integration between the U.S.-Canada, and among the seventeen major nations of Western Europe, these markets have been sub-divided into the U.S.Canada, Japan and Western European markets. All three major markets are large producers with similar market shares. One major difference is FRB CHICAGO Working Paper January 1993, WP-1993-1 3 Figure 2 Total Vehicle Sales (m illio n s) S4 M Westara: Europe US,«xJ CaM&* <»*»&#Bwisp*..... *0 ■I m m19 ARia<excttttfe® Japan)- Japan m Im LatiftAmarea 01991 sags10year ws average Japan's export orientation, while the U.S.-Canada and Western Europe are domestically oriented. Western Europe and U.S.-Canada represent over 60 percent of all vehicle sales in the world. Japanese domestic sales are significantly less atapproximately 15 percent Besides the established markets there are numerous emerging markets both in terms of production and in terms of sales throughout the world. These markets generally comprise a rapidly expanding production base with a growing export orientation and a domestic sales environment which has more potential then actualactivity atpresent (see Figure 2.)Of greatest significance are the emerging markets in the Pacific basin, Eastern-Central Europe, and Mexico and Latin America. Production activity in these areas is generally expanding robustly and currently accounts for 1 of every 4 vehicles produced, and a correspondingly high ratio in terms of parts. Over a longer time-ffame, the emerging markets also represent phenomenal domestic sales potential, which may be vital for producers in established markets where export sales may offset stagnant or slowly domestic markets. (See Figure 4 which indicates the current leveland trendofexport activityofassembled vehicles.) FRB CHICAGO Working Paper January 1993, WP-1993-1 4 Figure 3 Vehicle Production by region of the world A. North America millions FRB CHICAGO Working Paper January 1993, WP-1993-1 Figure 3 (cont’d) C. Asia millions 20 r 1980 ’81 '82 ’8 3 ’84 *85 *86 '87 ’88 *89 ’9 0 ’91 D. Latin America millions 1.6 r 1980 FRB CHICAGO Working Paper January 1993, WP-1993-1 *81 '82 ‘83 *84 *85 *86 *87 *88 *89 *90 *91 6 Figure 3 (cont'd) E. Eastern and Central Europe millions Source: OECD. Figure 4 Vehicle Net Exports-1991 millions of units Source: U.S. Department of Commerce. FRB CHICAGO Working Paper January 1993, WP-1993-1 In terms of producers, the global marketplace is comprised of 12 manufacturers with annual production capacity above 1 million units. A second-tier group comprised of manufacturers with production capacity below 1 million units many of these second tier producers specialize in specific segments of the market (See Table 1.)The top six manufacturers account for over SO percent of global production and the top 12 account for over threequarters of allproduction. However, in comparison to the 1960s and 70s, the level of concentration is less and has become more geographically diverse. For example, G M is stillthe number one automaker but its market share has fallenbelow 20 percent Ford issecond with a shareofroughly 13 percent and Toyota is currently third with a share of approximately 11 percent Not surprisingly, with a group of over IS major manufacturers competitive pressures have increased in the last20 years, especially in mature markets like North America with the decline ofthe hegemony of the Big 3.3 Table 1 Top vehicle producers-1991 Units produced (in thousands) GM Ford Toyota Volkswagen Nissan Fiat PSA Honda Mitsubishi Renault SA Mazda Chrysler 7,015 5,359 4,719 3,128 3,083 2,461 2,058 1,975 1,908 1,791 1,551 1,481 Most manufacturers still have a core base in their traditional markets. Although one would not classify this core as being completely stable, itstill provides a degree of support and is a major consideration in most decisions affecting company operations. The major question for firms in the future may be whether or not they can maintain their position in their traditional market while atthe same time permeating new markets. FRB CHICAGO Working Paper January 1993, WP-1993-1 8 Mature Markets U.S.-Canada: North America, the birthplace of the mass production of vehicles is still the largest market in the world, especially for U.S. nameplates. This market in the early 90s has been depressed due to the economic stagnation in the U.S and Canada. Consequently, the importance of the market in terms of sales and production has been overshadowed by activities in other mature markets. Still, analyzing changing conditions over the last ten years provides an accurate assessment of the level of activity and highlights once again why North America continues to be a place where many of today’s competitive battlesare being waged. Production during the lastdecade has averaged approximately 12 million units annually with significant growth occurring in two primary segments (see Figure 3). First, light truck production has doubled on an annual basis since the late-70s and early 80s. This development reflects the proliferation of light trucks as a partial passenger-vehicle alternative to cars and the relative strength of U.S. nameplates versus foreign nameplates in this market segment.4 An indication of this strength is illustratedby the fact that in 1992 over 1 in every 3 vehicles sold was a light-truck.5 Secondly, transplant production in the U.S., and to a lesserextent Canada, has soared.6 Transplant production in 1982 was only a token level from Honda; by 1991 transplant production exceeded 1.6 million units annually and new capacity continues to be added, especially in light-trucks.7 Within thisexpansion of production there has been a change in mix, led by the continued down-sizing of GM, Ford and Chrysler, especially in the U.S. By the mid-1990s Big 3 employment in the U.S. will be down by over 400,000 jobs from its level in 1980. Production by the Big 3 did exceed 11 million units in the mid-1980s, when sales were running at +16 million units; however, since that time, production has consistently headed downward toward 8 million units. GM, in particular, is planning the closure of at least four assembly plants with over 1 million units of capacity. Gains by foreigners in terms of market share have prompted some closings, however, the general competitive pressures to do more with less continues to shape the production decisions of the Big 3 as well. Future developments in production of units in North America should reflect the continued development of FRB CHICAGO Working Paper January 1993, WP-1993-1 9 transplants, downsizing of domestic nameplate operations in the U.S. and Canada and, as examined later,thecontinued growth of Mexican production. Sales trends in the U.S.-Canada market over the pastdecade have reflected the cyclical sales trends of the U.S. economy (Figure 2). Sales dropped significantly in 1981-82 and rebounded to record levels in the 1984 to 1987 period. Since 1989, sales have declined as the U.S. and Canadian economies have slowed significandy, with sales bottoming out in 1991. In these two years, North American vehicle sales declined to 16 million and 14.5 million units respectively. Furthermore, the decline since 1989 had been preceded by a slow decline from thepeak of 18 million units in 1986.8 The U.S.-Canadian market has experienced significant competition over the last 20 years as foreign nameplates have eroded the stranglehold the Big 3 once held on the market The market share for the Big 3 has steadily declined to a level for combined vehicles of approximately 70 percent and a market share in passenger cars of approximately 65 percent. G M has been the most significant loser in this market with a loss in market share in excess of 10 percent over the last decade. This erosion has been the result of market penetration of foreign nameplates, of which the Japanese nameplates have been the most successful, with a market share of approximately 25 percent in the North American vehicle market. This share has been constant in the last few years as trade restrictions have combined with higher import prices and a resurgence ofdomestic nameplates toprevent furtherin-roads by import. Initially a large portion of this erosion was through foreign import sales, which by 1986 in the U.S. alone had reached almost 4 million units. With the rise of transplants and trade pressure (quotas) continuing to build, import levels today have dipped below 2 million units. However, offsetting much of this drop has been the rise of transplant production. Additionally, it should not be assumed that competition between domestic nameplates is not intense. An examination of the mid-size passenger car market indicates how competitive the market is between all manufacturers. G M s traditional strength isnot only challenged by Toyota in terms of the Camry, but the Ford Taurus, the Chrysler L-H series and a list of numerous other products. Virtually every segment of the market reflects similar intense competition between allmanufacturers. One segment where domestic nameplates have done reasonably well is the growing lighttruck segment. During the past decade the number of units sold annually has doubled to almost five million by 1992. This growing market, FRB CHICAGO Working Paper January 1993, WP-1993-1 10 along with product strength, traditional know-how of the segment and trade restrictions, has allowed the Big 3 to maintain a market share in 1992 in excess of 85 percent Current vehicle introductions and re-designed versions have provided further stimulation to their sales volumes, at the expense of Japanese producers in particular. However, Japanese and domestic producers are both responding to thisgrowing market by increased product development which isresultingin greaterand not lessercompetition. Therefore, thecurrent dominance of even this segment by domestic producers isnot guaranteed, and once again thechallenges in the segment fordomestic producers will continue to be intense. Future expansion of foreign nameplates in luxury and sport cars as well as mini-vans and light trucks will continue to put pressure on domestic nameplates to retain market share.9 Production schedules are decreasing in length, price containment pressures are intense, and quality and safety improvements continue to accelerate. The necessity to restructure is not only an immediate concern but an ongoing operating procedure. The prospects for a North American Free Trade Area or customs union may dampen some external competition due to domestic content procedures, however, it should foster intra-region competition including transplant operations. Therefore, the U.S.-Canadian market will likely continue to be one of the most competitive markets in the world. Western Europe: The west European market continues to be a significant region both in terms of production and sales of vehicles. In combination with central and eastern Europe, this market also is rapidly becoming one of the most important areas of growth in the industrialized world. Due to the current and future prospects in the region, the presence of numerous firms- both local and foreigncontinues to be a dominant theme of the market With prospects foreconomic unification stillstrong in the region, one of the continuing questions concerns the consequences of economic integrationformajor auto manufacturers. From the stand-point of production facilities,west European production in the last five years has exceeded 13 million units (Figure 3). Capacity is currently estimated at above 14 million units, with new facilities coming on-line. Current production is concentrated in four principal countries; Germany, France, Italy and the United Kingdom. Germany easily outstrips all other production areas, with production in excess of 5 million in 1991, a level which corresponds to domestic sales in excess of 4.7 million units. French and FRB CHICAGO Working Paper January 1993, WP-1993-1 11 Italian producers generally comprise a secondary tier of companies and are concentrated heavily in their domestic markets. British production increasingly involves U.S. and Japanese transplants or wholly owned subsidiaries, and production is mixed between domestic units and products exported to the continent. In toms of nameplates, Western Europe isdominated by six large firms and a second tiercomprised of specialized and/or market specific firms, transplants and imports. Volkswagen, PSA, GM, Ford, Fiat and Renault are the dominant producers in the market representing 85 percent of production. The second tier is dominated by luxury car makers like B M W and Mercedes and one market firms like Volvo. As the market has evolved recently mergers and consolidations have reduced the number of independent companies. Furthermore, competition has also re-shaped the market between the largest firms with G M and V W on the ascendancy and Fiat, and, to a lesser extent. Ford struggling somewhat. Non-U.S. transplant production is increasingly important in the region. This production initially involve Nissan's entry into Britain. However, Toyota and Honda have also recently established facilities. A primary concern in these transplantlocation isthe continuing threatof trade retaliation and a stated European Community (EC) policy to limit Japanese nameplates to a market share of 16 percent or less. Current sales levels are stillbelow this target. Capacity in this region isalso currently being augmented by new facilities in central Europe and transplant operational expansions. BMW, Volkswagen and G M all have major expansion efforts in ex-communist countries and production from these facilitiesshould maintain or at leastpartially offset the decline in state companies which are being liquidated and/or down-sized.10 The Big 3 has also added capacity due to stronger sales or, in the case of Chrysler, tore-establishinga position in the market11 Sales in the market, due primarily to a one-time boost from Germany unification, were robust in 1990 and 1991 (Figure 2). Sales in 1991 reached 15 million units, and although sales in 1992-93 are being depressed by the economic difficulties in Germany, the outlook isfor a continuation of the 15+ million units into the late 1990s. Factors supporting these sales levels include continued growth in certain EC countries notably Spain and Portugal, and the economic stimulus from further integration in the Community. Some of the mature market factors that exist in the U.S. are also present in Germany, FRB CHICAGO Working Paper January 1993. WP-1993-1 12 the U.K., and France. However, they should be offset by other developments and stronger economic growth, especially in segments of Germany, relative to the 1970s and 1980s. Additionally, Eastern and Central Europe should provide two long-term stimuli to the European market. First, as examined later, an under-served consumer market is ready and overly willing to purchase quality durable goods. With economic stabilization occurring in Hungary, Czech Lands, Poland and perhaps certain ex-Soviet Republics, consumption isbeginning to revive. Secondly, the economic stimulus from successful reform efforts in thisregion should not be discounted in terms of itsbenefits to the west Gains through trade, labor movement and other factors should offset many of the other structural difficulties in west European economies. As noted, current sales in Western Europe are dominated by six producers, limited Japanese imports (approximately 12 percent), and a second tier of product or market specific manufacturers. Unlike other major markets no producer has even marginal dominance of the overall market, balance prevailing for the most part. Volkswagen, the market leader, comes closest with a strong-hold in Germany (+25 percent market share) and a balance in every other major market (although limited in the U.K.) V W s current overall market share of almost 17 percent is extremely high relatively to developments in the 1980s. However, even atthislevel itpales incomparison to the dominance of the number #1 company in the U.S., Japan, and many of the emerging markets. Fiat and PSA are next with market shares of approximately 13 to 14 percent. Both producers are heavily concentrated in theirdomestic markets, in fact they are the market leaders in Italy and France by wide margins. PSA has greater balance, however, and Fiat has increased its efforts in central Europe in recognition of this fact. A large portion of Fiat's dependency is due to the Italian government's past decisions to limited foreign imports.12 Ford and G M both have significant sales presences in Germany and the United Kingdom and therefore have a market share above 12 percent. Both companies have been rapidly expanding in other markets; Ford in Italy and Germany, G M in Spain and Ford's long-time stronghold in the United Kingdom. As low-cost producers, relative to European manufacturers, the Big 2 expanded aggressively in the late 1980s and itpaid off handsomely. G M has posted annual operating profits of upwards of $2 billion in Europe in recent years.13 Furthermore efforts to stream-line costs and product development should continue to support growth in the region. State-owned Renault rounds out the major manufacturers with a market share of approximately 10 percent. The company almost exclusively focuses on the FRB CHICAGO Working Paper January 1993, WP-1993-1 13 French market with only limited sales in other European markets. The company has attempted recently to expand its reach with joint operating agreements, especially in Scandinavia. Other companies do have significant market presences in specific markets. Once again many of these firms have been acquired wholly or in-part by larger firms recently and the market appears to be continuing this trend. Japanese manufacturers are also continuing their restructuring in terms of permeating the market Current targeted limits on market share, 16 percent in the EC, appear to be unwavering. Therefore, transplants have increased in terms of numbers. It's likely that Japanese transplants will continue to increase theirpresence in the market, although therapid in-roads they made in the U.S. and Canada are unlikely. Additional limits on these developments, labor costs and other concerns may dampen this movement somewhat. Overall, the western European market continues tobe a dynamic and evolving market From the stand-point of sales and production growth its likely that the market will avoid some of the stagnation of the U.S.-Canadian and Japanese markets. Japan: Separating the Japanese market from the remainder of Asia appears, upon initial inspection, to be inconsistent. Especially, given the degree of integration in Asia between Japanese producers, sales trends, and other developments in Japan and the rest of the region. However, the domestic market is vastly different than the other parts of the region, and is more accurately associated with industrialized markets. From an industry perspective, standards and activity of the Japanese economy are at an industrialized level, and similarly income levels, consumption patterns and other socio-economic developments are firstworld by any standard. In terms of production, Japan is the largest country in the world in combined car and lighttruck vehicleproduction (Figure 3). Annual production levels by 1991 exceeded 13 million units annually. Almost 45 percent of this production isexported (over $65 billiona year) and consequently, Japan isthe world's largest exporter of vehicles. In terms of production, Toyota, Nissan, Honda, Mazda and Mitsubishi are the primary, but not necessarily the dominant producers. Altogether the domestic market actually comprises 10 manufacturers with production above 500,000 units annually. Of greater significance isthe factthatcertainmanufacturers, likeFuji and Daihatsu, have FRB CHICAGO Working Paper January 1993, WP-1993-1 14 important market niches and their influence in this segment is significant. This trend continues in spite of the intense competition that exists in the marketplace. In terms of extended outlook, Japanese production is being influenced by three primary trends. First, domestic production of parts and some finished assembly is becoming more mobile in terms of moving toward offshore sites in Asia and other developing markets. Due tolabor shortages and rising costs in Japan this trends seems inevitable as an alternative to domestic production. Additionally, there remains some incentive to move to offshore facilities as a means of achieving entry to developing consumer market. Production can then include exports back to Japan, as well as some production for the local market. The potential growth of these non- Japanese Asian markets may be significant in the years ahead, and companies like Toyota and Nissan have attempted to anticipate the development. Secondly, transplant operations in the U.S.-Canada and Western Europe continue to increase capacity and plans for furtherexpansion are in the works. Concern over political pressure, trade barriers and economic considerations continue to push Japanese producers toward local production. As this trend continues, production levels in Japan will be reduced by falling exports which are being replaced by Japanese nameplate production in the States and/or in Western Europe. Unless these exports are offsetby new market openings, the impact on domestic production may be severe. With the prospects of further imports into the EC unlikely and the outlook forthe ever more stringent terms of selling in North America probable, transplants in the U.S., Britain, Mexico and other countries look likean ongoing trend. Finally, domestic production is evolving alongside of the industry and Japanese society. This evolution means an increasing move toward luxury, mid-size and sports models to fitthe new technological edge of the firms and the changing preferences of the consumer. In an economically mature and aging domestic market, Japanese producers not only must grapple with sales stagnation but a changing product mix. Their technological gains in these areas also influence theirproduct mix in terms of exports and will continue to do so into the foreseeable future. In terms of sales, annual vehicle sales in Japan currently represent the second largest vehicle market (by country) in the world. Sales in the late 1980s and in 1990 approached almost 8 million units a year (Figure 2). The continued growth of the market throughout the post- war era has resulted in a vehicle FRB CHICAGO Working Paper January 1993, WP-1993-1 15 registration level in relation to its population comparable to the U.S.. However, although salesgrowth in previous decades was substantial, a variety of factors are currently influencing sales growth and will likely hinder a continuation of the growth surge experienced in the lastfew decades. In fact, the Japanese market has declined recently and isnot projected to grow rapidly in the decade ahead. Besides the current economic slow-down, an aging population, low population growth, parking and regulatory difficulties, and a mature market will likely not provide substantial growth in this market.14 And with the number of producers currently vying for market share the level of competition will likely intensify, especially with the potential of foreign nameplates entering themarket. As noted, the Japanese market in terms of sales is dominated by Toyota (35 percent), Nissan (20 percent), Honda (10 percent), Mazda (7-8 percent) and Mitsubishi (+5 percent). Other Japanese producers are active, especially in certainareas of the market. The bulk of the remaining market iscomprised of foreign nameplates, although they continue to struggle toreach any significant market penetration. Annual sales volumes are still below 250,000 units (approximately 3 percent), and most of the activity is currently European nameplates. U.S. nameplates have recently accelerated efforts to establish a presence in the market, although thelevelof success isstillmarginal. Overall the market is currently in flux and the two dominant producers, Toyota and Nissan, have recently experienced significant sales set-backs in the domestic market. A mature and potentially stagnant market will continue to pose problems for these producers, although it is probably erroneous to conclude that the dominance of the major manufacturers will wane significantly. Smaller Japanese manufacturers have experienced greater difficulty in the marketplace and their outlook is at times precarious, especially in financial terms where many do not have the financial wherewithal to wage a competitive battle in multiple segments. In terms of foreign nameplates, some future gains are likely,although once again the lack ofa vibrant market will limitgrowth. Emerging Markets Besides the three mature markets, the world marketplace for vehicles includes a number of emerging and/or developing areas. In general, these emerging markets possess similar characteristics-- low current sales volumes, strong optimism for future sales growth, and emerging production facilities which FRB CHICAGO Working Paper January 1993, WP-1993-1 16 seemingly become export oriented after infancy. The impact these markets have on existing producers, sales trends, and production activity in the decades ahead may be substantial. Asian-Pacific Region (excluding Japan): The Asian-Pacific region including Japan is the largest region for production of vehicles in the world and isalso increasingly an important area in terms of sales. Overall, production in this region currently exceeds 17 million units annually and estimates of additions to current capacity indicate that by the mid-1990s production will be well in excess of 18 million units.15 An increasing portion of this production originates in more diverse areas, including Japanese transplant facilities in Asia. Non-Japanese Asian production in 1991 was almost 4 million units,a level which has increased 10fold in the lastdecade (Figure 3). The fast growing production area has been South Korean facilities, which produce almost 1.5 million vehicles annually. The birth of the Korean industry has been a relative recent one. The industry did not begin in earnest until almost 1980. However, production in the 1980s has gone from 100,000 annually to a projected level of over 1.6 million in 1992. Production in Taiwan has also grown and now approaches halfa million units annually. The Taiwanese market isalso one of the most competitive in the world. Assembly and parts facilities are also well established in Malaysia, Indonesia and Thailand. Additionally, major facilities have been and are being added in India and China. Currently, production in these two markets exceeds 1 million units. Recent expansion in China, in particular, bodes well for production capacity in the region. Overall production in Asia has traditionally had an export flavor, with onethird of the production in this region destined for exportation. The trend is still strong in-spite of the establishment of Japanese nameplate production facilities in Europe and North America. Non-Japanese markets are not as export-oriented as Japan, although the trend is potentially pervasive (see Figure 4). South Korea may be a reflection of the future; net exports of vehicles for the country are almost 400,000 annually and this level comprises almost 30 percent of total production. Other nations in the region have not experienced such a share or export orientation. However, there does seem to be a learning curve, and once facilities are established, some export potential will likely exist^ FRB CHICAGO Working Paper January 1993, WP-1993-1 17 In terms of sales, combined vehicles sales in Asia (including Japan) currently exceed 11.5 million units annually. Overall sales in 1991 in non-Japanese markets were slightly less than 4 million units. This is not to diminish the market in terms of sales, 4 million units is substantial and more importantly the potential isphenomenal. Sales in South Korea, for instance, are currently in excess of 1 million units and have more than doubled in last 15 years. Overall in the 1980s non- Japanese sales grew in excess of 8 percent annually and areprojected to continue thistrend through the 1990s (Figure 2). Sales in Taiwan have also experienced strong growth in the 1980s, total vehicle sales annually are almost 500,000 units. More importantly, parts of theregion representan under-saved market thatis just emerging. With strong income growth along with population growth these markets look very vibrant.17 Additionally, economic reforms in the two most populous countries of the world, China and India, provide a large degree of optimism for consumer product sales. In the early stages of development, consumer expenditures may not be for vehicle purchases. However, gains in income should eventually produce significant gains in vehicle purchases in these under-served markets. An estimate of what these potential sales gains may be is indicated by Figures 5 and 6. The first figure compares income levels with vehicle sales in South Korea during its phenomenal economic acceleration in the 1970s and 1980s. As indicated, vehicle sales,and probably allconsumer durables, explode interms of salesonce income reaches a certain level. In fact, by examining the lesson of Korea, there does appear to be a "flash" point for sales atan income level above $3500 per year. At this level vehicle sales begin an upward swing which accelerates as income continues to gain. IfChina mirrors this trend the gains in vehicle sales in the next twenty years may be surprisingly strong. For instance, adjusting forpopulation ifthe vehicle concentration in relation to income is consistent with Korean development, totalvehicle registrations early in the next century willapproach 40 million units. Current vehicle registrations are only 5 million, therefore assuming some replacement, sales will approximate 35-37 million units in the next 10-15 years-- or four times theircurrent salesrate. Ifthis growth seems outlandish, itshould be noted thatmean income levels in the Guangdong Province in Southern China are currently estimated at above $2,000 a year. And income growth is currently projected at +7 percent annually, with southern regions experiencing much more rapid growth. Even with this growth in sales the market will continue to be underserved, given a population of 1.3 billionpeople by 2010. In fact the current ratio of vehicles (cars,trucks and buses) isone of the lowest in the world. Consequently, future FRB CHICAGO Working Paper January 1993, WP-1993-1 18 Figure 5 Income Growth vs. Vehicle Sales in South Korea Source: U.S. Department of Commerce. Figure 6 Projected Income and Vehicle Registration Growth: China Source: U.S. Department of Commerce. FRB CHICAGO Working Paper January 1993, WP-1993-1 sales growth may be more rapid, although otherconstraints, such as space and regulations, may eventually setlimitson the maiket (similartoJapan.)18 Similarly other nations in the region may achieve substantial growth in vehicle sales in the next few decades. For instance, registrations in India are listedas being even lower than China, thus making the market one of the most under-saved in the developing world. Economic reforms are still in their infancy in thiscountry, however, and remain a concern. Other Asian markets, principally Thailand, Indonesia and Malaysia, appear well on their way to stable economic expansion and this growth should boost sales of vehicles significantly in the years ahead. The key to future sales growth in any of these regions is,of course, making demand "effective," something economic growth and income gains should produce in the years ahead.^ One final area of importance is the presence of producers within Asian markets. To date, production and sales trends reflect similar domination by local firms as seen in established markets, with a higher degree of concentration. The Korean market, for instance, is dominated by the three largest Korean producers, Hyundai Motors (+50 percent), Kia Motors (+20 percent) and Daewoo Motors (+20 percent)20 Others markets are more diverse with foreign nameplates active in Taiwan, where Ford and Toyota have a strong market presence, and Thailand, where Toyota and other Japanese automakers are active. One sub-trend in terms of market share isthe continued activities of governments in the marketplace. Besides trade barriers, many Asian markets have government sponsored companies or joint partnership programs that dissuade market penetration. In this environment Japanese manufacturers continue to be the most successful at entering into a market through unconventional means. Eastern-Central Europe: In the medium term, perhaps the most important emerging market is in Eastem/Central Europe. This market currently is going through a massive restructuring phase with existing state owned firms failing and/or being disassembled and western firms rapidly entering the market. (Nature and markets both abhor vacuums.) From a production stand-point, almost all current production involves inefficient state producers who are and/or will likely be disbanded. Current annual production has fallen to approximately 2.5 million units, with the Commonwelath of Independence States (CIS) responsible for over 70 percent FRB CHICAGO Working Paper January 1993, WP-1993-1 20 of combined vehicle production. The severe economic slump, combined with the break-up of the centralized manufacturing system, has produced a contraction in production in the lasttwo years that is likely to continue in the near term (Figure 3). The civilwar in Yugoslavia and decline of the Yugo has also adversely affected the Yugoslavian economy, which was the second largestproducer in the region prior to 1992.21 Over an extended time-frame, production will continue its trend away from state-owned production to the private sector. Increasingly, however, a larger and larger portion of private sector production has become western firms that have established bases in the region. Volkswagen’s presence in Czech Lands is instructive of what the future may bring. The company is using facilities to expand production to perhaps +200,000 units annually; of this total a portion will be exported back to the West. A trend that will likely continue as the "cheap” skilled labor and the opening of new markets provides a magnet to U.S., European, and Japanese firms. In terms of sales in the region, from an overall market stand-point the near term outlook is somewhat bleak, with incomes falling and unemployment rising (Figure 2). However, in the extended term the economic transformation is beginning to take shape and, as the recovery begins, income levels will support the desires of the under-served consumer market Consequently, sales in Hungary, the Czech Lands, and Poland, and the Baltics should accelerate throughout the mid- and late 90s. Furthermore, the 250 million consumers in the CIS will likely experience significant income gains by the turn of the century and, therefore, provide an added boost. These developments should significantly enhance the overall European market. A conservative estimate of vehicle sales of 6 million units annually seems likely by the next century, excluding a rapid economic transformation in the CIS. Itisimportant to keep in mind that such a sales level would exceed annual sales in Germany. Furthermore, even given this sales levels, the market will continue to be underserved. Mexico-Latin America: Latin America is another emerging market that is experiencing a significant economic transformation. Reform efforts have solidified growth in Mexico, Argentina, Chile, and Venezuela, and will eventually stimulate demand for consumer durable goods in a market of 125 million consumers. Successful reform in Brazil and the Andean nations, which appears possible if not FRB CHICAGO Working Paper January 1993, WP-1993-1 21 probable, would further stimulate the market. Once again, however, the outlook for the auto market will be tempered by growth in income and development ofa domestic industry. Currently, &om a production stand-point Latin America is an important location, both for domestic consumption as well as some exportation (Figure 2). Domestic contentrestrictionsand other trade barriers have produced some distortions in toms of some domestic production. However, current production in excess of 2 million units annually generally reflects the comparative advantage of these areas as a low-cost production base. Evidence of thiscomparative advantage isin Mexico where a million units are assembled annually and over 500,000 units are exported annually.22 The other major production market isBrazil, where a combination of vehicle sales and exports are responsible for almost 1 million units annually. Brazilian production isnot quite as export oriented as Mexico; primarily due to a larger domestic market as well as the economic problems of the nation in the last twenty years. Besides these two production zones, limited assembly occurs in Argentina, Chile, Venezuela and Colombia. Current production activity is being increased by the rapid expansion of facilities. In fact, capacity estimates indicate that future expansion plans are accelerating, and production should continue to grow, especially in Mexico where a trade agreement with the U.S. should provide an stimulus to the market. Mexican capacity has doubled in the last ten years and, as noted, production in 1992 exceeded 1 million units. This expansion reflects the economic reforms in the country as well as the development of Mexico as an export center of certain models to the U.S. market. The competitive position of the Mexican production environment bodes well for expansion of production facilities in North America, especially due to the continued importance of the market in terms of sales. This expansion will also augment the general trend of the last twenty years which has seen U.S. and European firms increasingly setting up facilities in the region. These efforts have once again been an attempt to breach the local market as well as provide exports to established markets. The potential for future growth also includes Japanese nameplates, who to date, with the exception of Nissan, have had only a minimal presence. The domestic content provisions of the North American Free Trade Agreement may provide a strong impetus for location in Latin markets, principally Mexico. Current sales levels of almost 2 million units annually reflect the potential of sales in the region (Figure 2). Given the economic hardship of debt FRB CHICAGO Working Paper January 1993, WP-1993-1 22 restructuring and economic austerity, the current sales levels reflectpositively on the demand for vehicles in the region. Estimates from the IMF and World Bank indicate, thatgiven the pace of currentreforms, economic growth of the region should continue to accelerate throughout the decade, with economic growth averaging 4.5-5.0 percentannually. Given the strength of such growth the recent sales recovery of +20 percent may not be replicated, however, the pace should continue forward. In terms of manufacturers, this growth should boost Big 3 sales as well as European manufacturers sales (especially Volkswagen). These producers have significantly presences in Mexico and Brazil and, therefore, have an established market presence. Japanese nameplates have most recently begun to penetrate the market. However, the effortshave been limited. One continuing wild card are the various trade talks ongoing in the region. Modifications in domestic content restrictions and other trade barriers could significantly alter production and sales activity for various producers. The general effort to liberalize existing trade policies will likelyaccelerate investment, export activities,and domestic sales.23 Global Markets & T h e Future of T h e Big 3 Sales data for 1991 indicate the diversity of activities throughout the world and highlight the environment U.S. nameplates face as the decade continues. In 1991 the percentage of total vehicle sales in the world broke down as follows: 33 percent of all sales occurred in Europe, 30 percent in North America, 15 percent in Japan, 8 percent in Asia, 7 percent in East/Central Europe, 3 percent in Latin America and the remaining 3 percent in the rest of the world. Prima facie, itwould seem that the Big 3 would be well positioned in the world given that almost two-thirds of allsales occur in North America and Western Europe, theirtwo traditional strongholds. Unfortunately, such a conclusion ignores developments discussed in thisarticle. The most important concern is the fact that sales growth in the market is accelerating in Asia (excluding Japan), Latin America and Eastern and Central Europe where the Big 3 are not active and decelerating in traditional Big 3 strengths, the U.S. and Western Europe. At the same time the current market standing for firms in traditional markets is under stress from foreign competitors, and with the integration of the EC and maybe North America, competition should accelerate further. The proposition of a shrinking domestic market with intensifying competition at the same time developing markets are expanding abroad, poses many questions for the Big 3 and its traditional center of operations- the Midwest. FRB CHICAGO Working Paper January 1993, WP-1993-1 23 Continued restructuring and down-sizing of domestic operations is,of course, at the forefront of these questions. Especially, if the Big 3 fail to penetrate new markets through expansion programs. Moreover, even the basic question of market penetration may be insufficient to supplement U.S. domestic development and employment, unless this penetration involves exports of product Of greatest concern is the further employment and income erosion in the Midwest as Big 3 facilitiesare stream-lined. G M s plan to cutitsworkforce in halfby 1995 has an immediate impact on the region where most of thosejobs are located. In fact, current employment in terms of manufacturing jobs in autos isestimated atslightlyover 800,000jobs infinishedand parts assembly. Projections of white collar support staff and retail distribution employees include an additional 500,000 workers. A large portion of these workers are in the Midwest, which isstillresponsible forover 60 percentof the assembled U.S. vehicles and ishome to the headquarters ofthe Big 3. There is a strong probability of further economic restructuring in addition to the overwhelming adjustment which has occurred already. Since 1979 the domestic industry has closed numerous plant facilities,pared production costs throughout the entire manufacturing process and will eliminate more than 400,000 jobs by 1995. The impact of this restructuring has been especially severe in the Midwest. In Michigan alone, the Big 3 reduced their workforce by over 150,00 between 1979 and 1991. GM's planned job cuts through 1995 willreduce the workforce in the stateby perhaps an additional 50,000 jobs. A weak sales environment intensifies the need to restructure and will likely prompt further efforts to speed up the adjustment This factor will also likely encourage all producers, domestic and foreign, to explore new opportunities, many of which will be external to the U.S. market Whether or not these opportunities are or will be available islikely to become a major issue which each manufacturer will have toaddress. As an example of potential production trends, consider finished assembly trade activity. In 1991 the U.S. imported twice the amount of auto products its exported. Over two-thirds of its exports were to Canada and Mexico, where integrated manufacturing processes are the principal determinant of trade, and a large number of vehicle parts are shipped for final assembly and re-shipped back to the U.S. Exports of assembled cars in the U.S. stillamount to less than 175,000 units annually versus vehicle imports in excess of 2 million units. Although there have been expanded efforts to export certain FRB CHICAGO Working Paper January 1993. WP-1993-1 24 models like the Saturn and Probe units. Exports of parts have been on the rise,approximately $13 billion a year, however the U.S. is stillin a net deficit position in terms of parts. Over the long run, the success of manufacturers and the location of manufacturing facilitiesin the Midwest for domestic and/or export production depends on the costs of production, including shipping and locational concerns, versus the costs in other markets. In a competitive marketplace these pressures are felt much faster and to a greater degree. Consequently, when evaluating further global integration and its impact on the Big 3 and Midwest considerations should also include issues of taxation, education and training, regulatory costs and costs in the production process. These elements will impact the competitiveness of the firm and will in the long-run play an important role in determining location, production activity and export growth for any industry. Overall, the issues of external growth and domestic restructuring will continue to bring forth many questions for the domestic industry and the Midwest. Further restructuring and down-sizing of the industry pose many important questions, and itis imperative to try to assess the direction of the industry and is role in supplementing growth in the Midwest. The future for the motor vehicle industry is increasingly a global one, both in terms of production and sales, and hopefully U.S. industry can benefit and get in the game. Otherwise the degree of change and the resulting economic pain may be severe. Footnotes ^The M idwest is defined as the East-North Central census region which includes Illinois, Indiana, Michigan, Ohio and Wisconsin. 2 Among other estimates the University of Michigan, Euromotor, and the Commerce Department all conservatively estimate sales growth at this level. Estimates provided in this analysis have come from these sources. “'Recent acquisitions have reduced the number o f independent automakers, especially in Europe, where intense restructuring appears to be occurring. These acquisitions have not dampened the degree o f competition in the marketplace. If anything, competition has become more aggressive recently. 4 The expression "foreign nameplate” refers to vehicles produced by a company whose headquarters is external to the U.S. Production activity may well, and in fact does, occur in the U.S. and other nondomestic markets, but the firm is headquartered. ~*Note that U.S. nameplates have been relatively aggressive in developing light vehicles that combine the strengths o f trucks with the ride and comfort o f cars. Mini-vans and many sports utility vehicles possess these characteristics. Domestic nameplates' market share have also been helped by import quotas and the 25 percent tariff levied on imported light trucks. FRB CHICAGO Working Paper January 1993, WP-1993-1 25 ^Foreign transplants refer to U.S. facilities o f foreign nameplates. The initial development o f transplant facilities began in 1982 when Honda established U.S. assembly facilities in Ohio. ^The expansion o f light-truck production is being influenced by trade concerns (friction) and the existing tariff levels. ®The recent sales declines may be a reflection o f the general downward adjustment in the trend in auto sales. Demographical shifts, minimal income growth and price increases may mean that further expansion in the market is unlikely. These factors may cause multiple problems for many producers, especially given the level o f competition that already exists in the market. ^Light trucks in this discussion exclude vehicles classified as Class 5 and greater. 10The expansion by VW and GM has recently added capacity in excess o f 500,000 units annually. ^ C h rysler has built a facility in Austria and is targeting production o f at least 150,000 units annually. ^ R e c e n t EC rulings have encouraged the removal of auto trade restrictions within the Community. These revisions are forcing significant changes within the Italian m arket ^ F o r d ’s financial performance has slumped in European due to competition and weakness in its principal market the United Kingdom. ^R egulatory procedures, specifically emission requirements, do encourage a higher replacement rate for autos than otherwise expected in a mature economy. However, reduced prices for slightly used vehicles are beginning to put pressure on new car sales. Along with other adverse trends, one would expect only m odest sales gains in the future. ^ A d d itional capacity in mainland China, Thailand and Indonesia may increase Asian capacity above 18 m illion units by the mid 1990s. Given the difficulties in measuring existing capacity and additions to capacity, a reasonable forecast would place the level at more than 18 m illion units by 1995. As illustrated by Korea, emerging producers may have difficulties in exporting to mature markets due to quality problems, trade restrictions, and other factors. However, low labor and other production-related costs are an offsetting factor in export growth to other emerging markets. 17 1 'Conservative estimates o f GDP growth in the dynamic Asian economies places growth at approximately 7 to 8 percent per year throughout the decade. Southeastern China, with a population equal to the U.S., has an economy growing at a 12-14 percent annual rate with industrial production growing in excess o f 20 percent per year. 1ft AOYet, even given Japan's space limitations, vehicle registrations and concentration levels are one o f the highest in the world. l^O ther elements are also important to support an expanding consumer market for vehicles. Infrastructure, especially roads and parking facilities, is an important factor. Additionally, there may be constraints on specific markets which will hamper growth. Hong Kong, for instance, because o f space difficulties has a very small vehicle market in spite o f its relatively high incom e levels. ^ O n e qualification to the claim o f apparent market dominance by domestic producers to the exclusion o f other manufacturers is that cross ownership stakes are significant and therefore other manufacturers successfully permeated markets through equity stakes. For instance, GM has a 50% equity stake in Daewoo, while Ford has a 10% equity stake in Kia Motors. FRB CHICAGO Working Paper January 1993, WP-1993-1 26 ^P rod u ction o f the Yugo and the Trabant has been disrupted by current events. Production o f the Lada is still occurring at the Nizhny Novgorod facility, an industrial behemoth employing 160,000 workers. *y\ ^ S o m e Mexican exports are the result of 2-for-l import requirements. However, in general the exports reflect the cost effectiveness o f Mexican labor. ^ S e e Ballew and Schnorbus (1992). FRB CHICAGO Working Paper January 1993, WP-1993-1 27
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