Reports confirm today that VW will be building a new plant in Changsa, Hunan province, China. The factory will have a 300,000 annual car capacity and cost around 1.6 billion dollars. With sales of 2,812,825 vehicles last year China is now VW largest global market. This factory, when it opens in 2016 will be the twelfth VW factory in the country.
Questions for the group: How does globalization affect the car industry? Should other automakers follow VW lead? Will VW’s investment pay off?
Source: http://www.autonews.com/apps/pbcs.dll/article?AID=/20130513/COPY01/305139881/vw-confirms-report-it-will-build-factory-in-changsa-china#axzz2TCy8PKLF
I think that the effect globalization has on the car industry has become evident over the past three decades (the big three realized their business model wouldn’t cut it). I also think that the question of whether other western automakers should follow suit by expanding to Asia is self-evident. For VW, opening shop in China is not an investment, it is a necessity. China is largest untapped potential market out there– see my previous post vis-à-vis emerging markets and the necessity to keep up technologically. Automakers who do not keep up will feel the pain of obsolescence.
I agree that building a factory in China is, prima facie, a good idea, but there have to be a whole lot of complicated decisions to go along with whether to build, such as: future cost of labor in China, the safety of workers in Chinese factories, etc. My point is just that things might be a bit more complicated than they seem.
We all know that China has become the largest auto industry in the world. This means that all global automakers are now going to attack the Chinese market. In one of my posts (“Automotive Industry in China”), I mentioned that VW dominated the Chinese market in March 2013. In fact, out of top 10 models of best sellers, 6 were VW’s. VW knew that in order to stay as a dominant leader in the market, they needed to supply more and faster as the demand went up for their cars. Ford, Nissan, and other car companies are also building factories in China to follow VW, hoping that they can also lead the market.
To start from the last comment from “G”, all major global players have already set up substantial operations in China – they dominate the market. It’s not that they only now are “going to attack” the market! (OK, a few lag … Chrysler, Fiat, Peugeot-Citroen.)
Blake notes that setting up a new plant is a major decision, when it involves $1 billion or more. However, labor costs may not be something that firms worry about, since product is aimed at the domestic market. Yes, wages vary in different regions. Car companies are not however low-end bottom-feeders in the labor market; particularly when it comes to engineers and skilled machinists, they face a national market. So as long as they match the market, they won’t be at a disadvantage (or an advantage). And skimping on safety saves little money, global firms such as VW just don’t do that.
Asher points to the past 3 decades, but globalization in the industry is far older. In the 1800s French firms exported most of their product. The current Ford Motor Company dates to 1903, but had a subsidiary in Canada by 1904, and operated on 6 continents by 1925 (OK, I’ve not checked when they started up in Australia…South Africa was 1923, Japan 1925). How firms approached or managed their global reach is another issue. As we heard at Ford HQ and from Mr. Cosgrove, One Ford built on earlier initiatives, but today the company tries to operate on a global basis, whereas at least until the 1980s most markets outside NAFTA had a high degree of autonomy. That was not true of Toyota or Honda. I don’t know about VW, I’ve never read a company history. Now firms don’t have to be in China, but the industry does benefit from economies of scale and also exports/imports are small relative to domestic production in most markets. To date, at least for GM and VW, China has been highly profitable.
Finally, Andrew asks about globalization. A lot of this will come down to whether J Mays is correct in seeing a convergence of tastes so that vehicles that sell well in one place have a good chance of selling well everywhere, at least in terms of styling and vehicle characteristics. [Some product categories are local: large pickup trucks are a US thing, and the lack of subcompacts is another US thing, while due to low taxes and easy licensing “kei” (mini) cars are domestic Japanese. That makes “global” easy.
The other component is that over the long haul the industry makes where it sells. Yes, the US imports lots of cars, but Honda and Toyota and Nissan make most of what they sell here. Ditto for Ford and GM (= Opel and Vauxhall) in Europe, and (on average) everyone in Brazil and China and Southeast Asia and India and Russia and…you get the picture. Tariffs are one reason, but so is exchange rate risk, and political risk, and (at least until recently) the fact that most markets were idiosyncratic so required adapting vehicles.
But there’s still variation, especially at the luxury end: BMW which has only one full-scale factory outside Germany, in Spartanburg SC (though I assume they’re doing something inside China).