THE U.S. AUTOMOBILE MANUFACTURING INDUSTRY

1 MEETING THE INDUSTRY FACES THE 21ST CENTURYTHE AUTOMOBILEMANUFACTURING INDUSTRYP rofessor Charles H. FineDr. Richard St. ClairThe International Motor Vehicle ProgramMassachusetts Institute of TechnologyandDr. John C. LafranceOffice of Technology PolicyTechnology AdministrationDr. Don HillebrandPNGV SecretariatTechnology Department of CommerceOffice of Technology PolicyDecember 19963 The AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYTHE AUTOMOBILE MANUFACTURING OF THE FORCES AND PRODUCTION Market Trends .. 21 The Geography of Production:Global Sourcing and Factory Transplants .. 22 Foreign Transplants in the United States .. 23 Investment in Developing Countries .. 24 COMPETITIVENESS AND PRODUCT Plant Performance .. 25 Product Development Performance .. 31 Big 3 Assessment .. Research and the Partnership for aNew Generation of Vehicles .. 42 Increasing Use of Electronic Components .. 45 ADOPTION AND EVOLUTION OF LEAN PRODUCTION HUMANRESOURCE Resource Management.

2 46 Key Issues in Labor Relations .. 46 Implications of the Key Issues in ManufacturingPlants and Human Resource Practices .. 48 Experimentation Case Studies .. 51 AUTOMOTIVE COMPONENTS SUPPLY Chain Policies .. 57 Key Issues in Supply Chain Relationships .. 58 Supply Chain Management .. 604 The AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYDISTRIBUTION, RETAILING, AND POSTMANUFACTURING Issues in Distribution, Retailing, and Postmanufacturing .. 63 The Major Role of Distribution and Retailing in theAutomotive Value Chain .. 65 Making Distribution Lean .. 66 The Role of Information Technology in Selling Cars .. 67 Independence and Diversification of North AmericanDealerships .. 68 One Example of Retail Innovation: The Saturn Corporation .. 70 Urban Multibrand Retailers .. 71 Conclusions .. 72 REGULATION OF AUTOMOBILES TO MEET SOCIAL , Economic Development, and the AUTOMOBILE .. 73 Safety Concerns and the AUTOMOBILE .. 76 Environmental Concerns and the AUTOMOBILE .

3 77 Diverse Approaches to the Regulation ofAuto Manufacture and Use .. 79 SUMMARY AND A: THE SUPPLIER BASE AND MEXICO:A CASE EXAMPLE OF Resource Management Issues .. 87 Supplier Issues .. 87 APPENDIX B: REGULATORY POLICY AND Systems .. 91 Industrial Relations and Management Systems .. 92 Product Development .. 94 Supplier Performance and Relations .. 96 Globalization and Emerging Economies .. 99 Retailing and Distribution .. 101 Environment and Mobility .. 1015 The AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYFOREWORDFor more than a decade there has been widespread and increasing con-cern that the ability of the United States to achieve sustained economicgrowth and long-term prosperity is adversely affected by declining industrialcompetitiveness. Congress, in a bipartisan response, has introduced a widerange of programs and policies to improve competitiveness. Whetherfocused on building a 21st-century infrastructure, stimulating technologicalinnovation and commercialization, improving the business climate for invest-ment and growth, supporting education and training, or promoting trade,these policies start with assumptions, often implicit, about the competitiveposition of the Challenge: INDUSTRY Faces the 21st Century is a new series ofstudies, produced by the Department of Commerce s Office of TechnologyPolicy, that assesses the competitive position of a number of major and the factors influencing their growth.

4 Drawing principallyfrom the experience and insight of the private sector, some 150 expertsfrom over 30 organizations in INDUSTRY , academia, and government havecontributed to the drafting and review of the studies. Overall, the studiesprovide a framework for public policy that is better informed and thatmore accurately reflects the shifting, and often improving, competitiveposition of report on the AUTOMOBILE MANUFACTURING INDUSTRY concentrates onthe Big 3 firms (Chrysler, Ford, and General Motors) and discusses the con-dition of the INDUSTRY , product and production strategies, the importance ofthe supply chain, distribution and retailing, and conclusions and possiblefuture directions. It suggests that, although the INDUSTRY (and the Big 3in particular) has made tremendous progress in the past 15 years, newchallenges are clear as the global market, technology, and INDUSTRY struc-ture continue to evolve. For example, the fastest growing markets are incountries that are developing an auto INDUSTRY of their own.

5 And as thereport makes clear, best practice is easily transferred to emerging produc-ers. New technologies are also being introduced, often in response to thechallenges posed by environmental and safety regulations. In addition, themajor producers are experiencing structural pressures as suppliers producea larger fraction of the finished product s value, and well-financed and inde-pendent organizations threaten the traditional distribution networks onwhich producers rely to sell their R. MitchellAssistant Secretary of Commerce for Technology Policy7 The AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYACKNOWLEDGMENTSMIT s International Motor Vehicle Program (IMVP) was asked todevelop this study in parallel with INDUSTRY reports in other sectorsto provide strategic assessments of key industries to governmentpolicymakers. Drawing on the experience and expertise of several dozenIMVP-affiliated researchers from around the world and numerous indus-try participants, this study reports on the automotive INDUSTRY in thecontext of the world automotive study represents contributions from Martin Anderson, ErikBrynjolfsson, Joel Clark, Michael Cusumano, John Ehrenfeld, Frank FieldIII, Kaye Husbands, Jacqueline Isaacs, Thomas Kochan, James Maxwell,Jennifer Nash, Kenneth Oye, Daniel Roos, Richard Roth, SandraRothenberg, Brian Schenck, Gregory Scott, and Daniel Whitney (Massa-chusetts Institute of Technology); Kim Clark (Harvard Business School);Takahiro Fujimoto (University of Tokyo); Young-suk Hyun (Han NamUniversity, Korea); John Paul MacDuffie, Jeffrey Dyer, David Ellison, andFrits Pil (Wharton School of Business, University of Pennsylvania); SusanHelper (Case Western Reserve University); and Mari Sako (LondonSchool of Economics and Politics).

6 In addition to the IMVP staff listed above, John Lafrance and DonHillebrand of the Department of Commerce, Technology Administration,contributed to the AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYEXECUTIVE SUMMARYThe Automotive INDUSTRY Today: A Global EndeavorWhile sometimes characterized as mature, the automotiveindustry continues to experience dynamic change change thatsweeps across national borders. To succeed, auto manufacturers mustmanage large and complex supply chains, spanning many geographicregions, and pursue opportunities in diverse national markets. Whilenational policies play an important role in shaping the environment forlocal MANUFACTURING operations and resulting products, cost competitionincreasingly drives the INDUSTRY toward global product report explores several important dimensions of the forces of changefacing the INDUSTRY and reviews the responses of the Big 3 manufacturers(Chrysler, Ford, and General Motors) to those of Change in the MarketImportant changes are under way in the market, both in the type ofvehicles preferred by consumers and in the system that delivers thosevehicles to consumers.

7 Equally important, foreign firms are opening newassembly plants in the United States, and foreign suppliers of parts andcomponents are building a domestic response to shifting consumer preferences, the variety of productssupplied by the automotive INDUSTRY has increased have shifted toward the two-wage-earner family, and as aresult, demand for light utility vehicles has surged. In addition, consum-ers have shown increasing interest in both safety and performance. At thesame time, average new-vehicle transaction prices have continued to riseat a rate far higher than the increase in average household income,posing a serious challenge for the change is also taking place in the downstream activities ofthe automotive INDUSTRY distribution and retailing. These activitiesrepresent 20 to 30 percent of the value of a new vehicle and are an impor-tant potential source of cost savings. The changes in this area reflect ashift from capital-intensive operations (involving inventory investment)to information-intensive operations (providing the right vehicle in theright place at the right time).

8 This shift is leading to the development of10 The AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICY flexible and highly entrepreneurial structures and methods to , new assembly plants operated by Japanese and German automanufacturers have been built in the United States, introducing addi-tional competitive challenges for the Big 3. Because of their location, theyhave also altered the regional distribution of automotive new transplant MANUFACTURING facilities have been accompaniedby the arrival of new suppliers from the home markets of these manufac-turers. The presence of these new suppliers has benefited both the newassemblers and the Big 3 by introducing additional competition into thesupply of automotive Responses of Big 3 ManufacturersThe Big 3 have responded to these forces of change in a variety of important, they have dramatically improved both the quality oftheir products and the productivity of their operations.

9 This study showsthat Big 3 plants improved their productivity from direct labor hours per vehicle between 1989 and 1994 a 17percent improvement. While Japanese-owned plants in Japan improvedmore slowly, they still remain the most efficient producers but by arelatively smaller a broader perspective, the productivity data underline the need forcontinuous improvement in these areas, evidencing the convergence ofaverage performance across the world. European plants improved theirproductivity nearly 30 percent, and new entrant countries (Korea andMexico) showed significant improvement as well. Equally important, thedata show that productivity varied widely within each regional group,suggesting a disparity among regional competitors in the management ofvehicle Big 3 have recognized that the development of new products is ofspecial importance as manufacturers struggle to respond to the demandfor product variety and low prices. Since the 1980s, these companies haveshortened the time required to bring a new product to market and de-creased the engineering effort required for new products.

10 The largedifferences among the three companies in their approach to this chal-lenge in terms of the involvement of suppliers, organizational struc-tures, and the degree of coordination among different product offer-ings are explored in this AUTOMOBILE MANUFACTURING IndustryOFFICE OF TECHNOLOGY POLICYH uman resource practices represent another important determinant ofthe auto INDUSTRY s competitiveness. There appears to be wide varianceamong manufacturers in this area ranging from traditional labor-management practices to new and unique management structures. Therate of diffusion of new practices within the United States is slow, butresearch presented here suggests that several important changes areoccurring: (1) decreases in inventory buffers; (2) increases in the use ofteams, job rotation, and worker suggestion programs; and (3) use ofcontingent compensation, training investment, and other human final area of competitive response in which each of the Big 3 is devel-oping its own unique approach is the management of supply research suggested that management of automotive supply chainswas improved by the development of close relationships among automanufacturers and suppliers who develop and produce components andsubsystems.