Mexican Automotive Industry at a Belgian crossroad
MEXICAN AUTOMOTIVE INDUSTRY SITUATION
By the end of last August it was publicly announced a preliminary agreement reached between Mexico and USA regarding the revision of the NAFTA (North American Free Trade Agreement) which renegotiation took more than a year, after 24 of uninterrupted enforced operation as the largest world’s free trade region.
Curiously, such preliminary agreement was made by both countries while Canada decided, by the end of September, to join as third partner, in the very last minute. It was USA’s initiative to split negotiations bilaterally, with its partners.
This Free Trade Agreement (FTA) has been announced as a totally brand new so that it can be presented as a Trump’s presidential campaign promise fully covered; it was timely done since there is a critical mid-term elections process approaching in USA. Looking to get rid of any reminiscence of NAFTA, they also gave a new name to such FTA: USMCA, which imaginatively stands for US, Mexico and Canada Agreement. It has still to be ratified by all three countries.
Anyway, it appears that Mexico has approached the new FTA conditions with a damage-control perspective. At least, this is true from the Mexican Automotive Industry’s standpoint.
This agreement raises regional original content in the Auto Sector shipments crossing borders under tariff-free conditions to 75% from the previous 62.5%. Additionally, 40% of vehicles content has to be manufactured with labor earning at least $16.00 USD per worked hour.
According to an analysis by David Welch and Dave Merrill, published by Bloomberg (1) in January 2017 (“Why Trump Tariffs on Mexican Cars Probably Won’t Stop Job Flight”) taking as example a $25,000 USD mid-size sedan built in Mexico, would represent net savings of $4,300 USD as compared to an equivalent assembled in USA. Savings derived from labor would contribute with only $600 USD, given the high automation level that car manufacturing plants have reached today.
The composition of the savings is shown in the following table:
NOTES - 1. Mexican Car Sector Hourly Wage as per 2013 official data
2- Mexican infrastructure lags behind USA’s highways and railroad network, thus increasing transportation costs
3- Cheaper Mexican parts are because lower wages but also from imported parts at lower costs
4- Mexican FTAs facilitate access to more than double those countries with which USA has current free trade
5- Table figures are expressed in USD
As it can be appreciated in these figures, there is a larger part of the savings arising from the open trade borders policy followed by Mexico since the late 1980s, than those coming from cheaper local labor costs.
Mexico counts with 12 free trade agreements (FTAs) signed with about 50 countries (over 60% of World’s GDP), which favorably compares with the set of 20 countries with which USA has signed FTAs. (2)
The last FTA signed by Mexico is one of the most interesting ones. It is named Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Integrated by 11 nations from America (Canada, Chile, Peru and Mexico), plus the Pacific Rim (Japan, Malaysia, Australia, New Zealand, Brunei, Singapore and Viet Nam) is, incidentally, the basis for the provisions of USMCA’s dealing with online commerce and intellectual property protections.
This CPTPP enables Mexico to access to half the global automotive market under tariffs-free conditions (9% of global car sales, in the case of USA). In fact, as of today, Mexico is the only car manufacturing country that has a trade agreement with the MERCOSUR block (Acuerdo de Complementación Económica with Argentina, Brazil, Paraguay and Uruguay). However, the EU is now negotiating and about to sign a free trade deal with the four founding MERCOSUR states but, rather than competing with the corresponding Mexican FTA, could complement it.
According to ProMéxico’s paper “THE MEXICAN AUTOMOTIVE INDUSTRY: CURRENT SITUATION, CHALLENGES AND OPPORTUNITIES“, (2016), Mexico is the 7th light vehicle producer and 4th global exporter (3). In such document, prepared in collaboration with the Mexican Association of the Automotive Industry (AMIA), it is established that in 2009 the challenge was to get out of the “grave global financial crisis”, while in the moment the paper was published they perceived a “totally different situation in front of us, in which the challenges have nothing to do with a crisis, but with the way to consolidate the growth of our sector and strengthen the areas that currently present an incipient development level”.
Given the conditions set up in the USMCA, the Mexican automotive industry will face the need of a major restructuring. Such sector redefinition wasn’t in the roadmap, not even as a minor possibility, a couple of years ago when the mentioned paper was published, previously to the highly protectionist policy adopted by the White House.
This need for restructuring will not be alien to the USA’s car economic sector, either; in an April-2018 article published by the Financial Times (“Nafta: Why the US car industry is trapped in Trump’s trade crossfire”) it is highlighted that, as an example, the Toyota Tundra pick-up truck, which is assembled in a Texas plant has a regional content of 65%, safely above of the NAFTA’s current minimum of 62.5% but clearly falls short of the 75% threshold considered in the USMCA, as is described above (4).
As per Mexican Economy Ministry’s (Secretaría de Economía) 2016 figures on the matter, NAFTA car manufacturing industry is the 3rd global vehicles manufacturer (just behind China and the EU) with almost a 20% share of motor vehicles global production and, at the same time, a 22% quota on motor vehicles global exports. Mexican car industry alone contributes with over 21% of NAFTA vehicles production and almost 4% of the global corresponding figure (5). See graph below:
SOURCE: Mexican Economy Ministry with data from IMF, WTO and OICA
As complementary Info, for perspective, in the period 2009-2016, world’s vehicles production grew from 61.7M units to 94.9M (net increase of 54%); NAFTA block reflects a growth that goes from 8.7M to 18.1M (108%). By this way, NAFTA block car sector accounted almost a third of the world’s production increase in such period (6).
It is important to mention that close to 80% of Mexico’s vehicle production had foreign markets as its final destination. A key problem is the fact that about 90% of those exports go to North America, taking not enough advantage of those treaties that Mexico has formalized with 46 countries (7). See graph below:
SOURCE: Mexican Economy Ministry with data from AMIA (figures shown in thousands of units)
It is evident that Mexico’s automotive industry has indeed benefited from NAFTA. To begin with, it has tripled its vehicles production in these 24 years (from about 1.0M units in 1993 to 2.9M in 2016); the commercial treaty has given virtually to all global car manufacturers access to one of the world’s largest auto markets. Because of this, Mexico has become one of the key players in the car and auto parts global sectors.
As of today, the automotive sector has become one of the most dynamic and competitive industries in Mexico. It generates more than 3% of the national gross domestic product and, at the same time, 18% of the manufacturing GDP. It is responsible for around 900,000 direct jobs while accounts for the generation of above $52,000M USD / year (8).
Regarding the heavy vehicles segment, there are up to 11 plants in the country belonging to those manufacturing companies that have integrated the National Association of Manufacturers of Buses, Trucks and Tractors (ANPACT). They are responsible for 25,000 direct jobs, generating 5% of the manufacturing gross domestic product in Mexico (9).
For perspective, in the 2012 – 2018 period only, foreign investments in the car industry in Mexico amounted about $13,700M USD. Five new plants have been built or initiated, including a KIA’s plant in Nuevo León state and a Japan’s Nissan (Infinity brand premium cars) joint operation with Germany’s Daimler (named COMPAS which stands for Cooperation Manufacturing Plant Aguascalientes) while BMW continued building its own new plant, which will be inaugurated by 2019 at San Luis Potosí state.
In summary, this is the Mexican economic sector which is at stake after the agreement reached as USMCA. That’s why is so important to reinvent itself appealing to a more flexible approach, looking beyond NAFTA-USMCA (in case such new pact is ratified by the three countries) and to more innovation than ever.
LEARNING FROM THE BELGIAN EXPERIENCE
Belgium is one of the pioneer countries in the development of automotive technology. In 1677 it was described the first steam-powered vehicle (some people claim to be the world's first automobile) by the Belgian Father Ferdinand Verbiest (10). Given its wit, flexibility, suffering capacity and incredible resilience, Belgian car sector has been able to adapt to the strong convulsions that automotive industry experience from time to time, with every downturn.
In a similar way to the Mexican case (with USA and Canada as robust car manufacturers), Belgium has immediate powerful neighbors such as Germany, France and England.
Because of its small internal market (11M of inhabitants and a total inland area of almost 30,300 km2), exporting has always been a matter of survival. Belgium’s exports rate per capita in 2014 reached $28,870 USD, which compares with Germany’s $18,316 USD and $5.516 in the case of Japan.
From 1810 to 1880, Belgium was the world’s 2nd industrial powerhouse, just behind England (the cradle of the industrial revolution) while in the first decade of the XX Century, it was the 3rd, following England and the USA. Belgium was acknowledged in those days because of its coal extraction techniques, steel manufacturing competences and fine mechanics. It used to be praised by its quality of firearms factories. It was a very favorable environment to develop an automotive industry.
The first public railroad line entered into operation by May 5th, 1835 between the cities of Brussels and Mechelen. Engineering developments in this field led to patented inventions. As examples, we can mention the invention of the dynamo, by Zénobe Gramme; Égide Walschaerts, best known as the inventor of the Walschaerts valve gear for use in steam locomotives and Alfred Belpaire who first developed a firebox to burn poor quality coals and then later improved his invention into a robust thermally efficient design.
All these ingredients combined perfectly to develop the Belgian industry into one of the car sector’s global pioneers. One of the first horseless carriages had Belgian origin; Camille Jenatzy, a Belgian engineer, designed an electric car (“La Jamais Contente”) built with basis on an alloy of materials and aerodynamics principles which was able to overcome the 100 Km/hr barrier in 1899.
SOURCE: Brussels Times (“When Belgium was the world’s greatest car producer”, April 2017)
The Belgian racing driver and event organizer, Baron Pierre de Crawhez, created the Circuit des Ardennes race, held from 1902 to 1907 (precedent of the modern Spa Francorchamps F1 GP); it was an early attempt at a circuit race as opposed to the city-to-city events that were prevalence at the turn of the XX Century, but quickly became very dangerous.
By 1902, Belgium was the 2nd manufacturing car country in terms of volume, just behind France but ahead of Germany and the USA. The global car industry scene changed drastically the following year when an America businessman, Henry Ford, developed the concept of chain production, looking for dramatically lower manufacturing costs in a project aiming to allow access everyone (every worker) to own a car.
When the WWI sparked in Sarajevo, Belgium was a premium cars manufacturer; those luxury vehicles were envied by their competitors. From 1910 to 1927, Antwerp’s Minerva cars used to be even more prestigious than Rolls Royce. It was the preferred luxury limousine in the USA; a real best-seller.
By 1910, Belgium’s automotive industry was integrated by 21 car building plants, 327 auto bodies’ specialists and over 100 car brands. Belgian engineering skills, creativity and car developments and inventions used to be genuine rivals to those in the powerful neighbor countries.
SOURCE: Brussels Times (“When Belgium was the world’s greatest car producer”, April 2017)
Among the WWI consequences, the Belgian auto industry lost the path for modernity and was practically annihilated by German’s car manufacturers.
Technology and operating developments such as car assembly lines, Ford’s mass production techniques, specialized manufacturing tasks, one-site integrated operations, plant optimization methodologies… etc., were fatal factors to Belgian’s craft assembly focus to build unique, top-quality models sold at premium prices.
By the time of the great depression, as derived from the stock market crack of 1929, the western world entered in a high protectionism era. Belgian car manufacturers were strongly penalized by their difficulties to access exports markets and having to make business only in a very small domestic one.
Once the long and protracted WWII ended, a new protectionism era surged in the western world trade, in spite of the important trade liberalizing efforts that also took place at the same time (for instance, GATT born then, as one of their key outcomes)
For a car builder at that time, selling on a local market meant either opening a factory assembly in the country (which would represent a large investment), or reach a pact with a domestic assembler to make a vehicle from parts sent by the parent company or another subsidiary. There were important entry barriers to any automotive market.
While the motorization rate was already very high in the USA in 1950 (260 vehicles for 1000 inhabitants), it was still low in European countries. Belgium registered a rate of 87 vehicles for 1000 inhabitants in 1960.
Belgian automotive companies leveraged on Ford techniques to achieve high manufacturing rates. In 1960, with a production of 840,000 vehicles, Belgium was a world leader in assembled vehicles per capita.
The Treaty of Rome, signed in 1957 by Germany, Belgium, France, Italy, Luxembourg and the Netherlands, provided that in 1967 would take the abolition of internal customs barriers and the establishment of a single tariff towards those countries outside such a treaty.
The result of this was a real massacre for the Belgian automotive industry; while in 1970, there were still 13 auto constructors, with a total production of 841,695 vehicles in Belgium, this figure went down to five in 1985 (1,000,000 vehicles) and to just two manufacturers in 2015 (414,000 vehicles). In response to the 1973 oil crisis, production grew at a much slower pace.
At the beginning of the 1980s, the unification of the European market was still far away. The price for the same car was very different from one country to another. In the vast majority of cases, particularly in large countries, one or two builders dominated the European market: Volkswagen in Germany, Peugeot and Renault in France, FIAT in Italy and Ford in England. They set a rate per model that guaranteed them a sufficient return, the competitors agreeing to supply their vehicles at slightly lower prices.
In this framework, the Belgian factories went to play a specific role: they were each assigned the manufacture of two models. Depending on the sales of the models in Europe, due to their flexibility, those Belgian plants had to adapt their production, which was mostly exported to neighboring countries: 87% in 1970, 95% in 1980 and 90/95% since then.
However, this relative equilibrium in which national builders dominated their respective national market quickly oscillated under the impulse of Ford and GM that set up regional decision-making bodies in Europe with the mission of competing with local leaders, starting with Italy, where FIAT market share went from 60.5% 1988 to 46.7% in 1992.
In 1991, European Automobile Manufacturers' Association (ACEA) was created with the mission of defending the interests of the sector. With its headquarters in Brussels, it is close to the European Commission and the European Parliament. Now it represents the 15 major Europe-based car, van, truck and bus makers.
The year 1992 enshrined the total freedom of movement for people, services, goods and capital in the EU. Within this context, any plant could supply any country of the European Union with any motor vehicle. For an automotive company, the most interesting thing was to specialize by product or platform and send their models (and components) throughout Europe: they assured the same level of production without having to change the tools and therefore enjoying economies of scale.
The adjustment of production to European sales from the Belgian manufacturing units no longer made sense. The hunting season to the competitiveness and to costs reduction, then, was open: it was implacable for the Belgian plants when new countries entered into the EU from Eastern Europe offering costs advantages.
By 2006, Toyota had become the leader in most of the international markets, while in 1990 it was half the size of General Motors; in such year was published the book “The Machine That Changed the World“ (by P. Womack, Daniel T. Jones, and Daniel Roos), where it is clearly described Toyota’s production system, christened by these authors as lean manufacturing (11). It consisted in reversing the logic of the Ford method: instead of manufacturing a product and afterwards trying to sell it, only what was strictly necessary at the right time has to be produced, according to the demand of the market. In other words, it was no longer the production that pushed the demand, but exactly the opposite (market pulling approach).
The Toyota Production System (TPS) was established based on two concepts: "Jidoka" (loosely translated as "automation with a human touch") which means that when a problem occurs, the equipment stops immediately, preventing defective products from being produced; The second is the concept of "Just-in-Time" (JIT); (12) Toyota also operated with other techniques such as: Quality Circles approach (Kaizen), Supply in line sequence (SILS), production segmentation in modules (Kanban)… etc., were introduced in Toyota’s manufacturing operations. Toyota has been successful too, in effectively managing subcontractors; those suppliers are key in establishing optimized JIT and Kanban operations, as well.
With the increasing integration of the EU coupled with a stagnation of sales, the transition to lean production was part of a broader set of restructuring measures. Between 2000 and 2013, the EU motorization rate went from 533 to 591.
It is enough to compare this progression to the one registered between 1950 and 1970, when the motorization rate was multiplied by a factor of five or six, (including 19 in Italy) to realize that the era of automobile growth had ended in Western Europe. Nor were the perspectives in Eastern Europe looking excellent with a rate already close to a vehicle for two people.
In short, all manufacturers were going to face both a surplus and a fierce increase in competition. These trends inevitably had an impact on the structures of the auto builders. The image of the traditional "mammoth plant operations" faded to make way for the lean enterprise in which the role of the builder evolved from a manufacturer to a real systems integrator, solely responsible for the final assembly of the vehicles. Non-strategic industrial processes were entrusted to third parties, in this case subcontractors.
The builders were forced to take drastic saving measures. One of the most resounding initiatives was the closure of the so-called brownfield plants, that is to say, the oldest factories that, due to their location near the residential areas and their limited surface, could hardly undergo a radical reconversion. The closure of Renault production premises in Vilvoorde (Flemish Brabant) in 1997 -a true national drama- can be explained by this factor.
This relentless hunt for unnecessary costs significantly increased the productivity of the assembly plants. Where 7,000 employees were still needed to assemble 200,000 cars in 1990, 5,000 were needed in 1990 and less than 3,000 by 2005.
At that time, the workers, involved wage-earners, the car unions and the Belgian government feared, like the plague, any subtle indication of plants’ relocation, any result less beneficiary, any reduction in productivity or decrease in the quality of work. They knew that it would be a pretext to justify measures taken far from the country: in Detroit, Tokyo, Wolfsburg, Goteborg or elsewhere.
The ultraliberal position of the European Commission was clear, complete, without a concession, in one implacable word: to promote the sliding of the assembly of vehicles towards the East in order to strengthen the competitiveness of the automobile companies.
It would benefit those countries with the most recent adhesion to the EU. In fact, this decision favored above all Germany and France or possibly northern Italy, which had activities with high added value such as the development and design of cars. However, for Belgium and the countries which were only assembly or production centers for less strategic components, there was everything to fear from such a policy.
Western multinationals took advantage of this opportunity to acquire the most interesting pieces of the industrial apparatus of the former communist bloc. Volkswagen seized Skoda (Czech Republic) and the Mösel factory (Zwickau, in East Germany) that manufactured the famous Trabant (1990). FIAT took control of the Polish company FSM (1991), GM of Wartburg (1990) and of FSO in Poland, Renault of Revoz (Slovenia) and then of Dacia in Romania (1999). These subsidiaries were immediately integrated into the European strategy of the group to which they belonged.
Those "late arrivals" built greenfield plants: Suzuki in Hungary (1992), Peugeot in the Czech Republic in a joint venture with Toyota (2005) and in Slovakia (2006) Hyundai and its subsidiary KIA Motors in Slovakia (2007) and in the Czech Republic (2008).
The effect was, once again, dramatic for Belgium. Spain, Portugal and southern Italy were negatively impacted, as well.
The recession that erupted in 2007-2008 in the USA had disastrous repercussions in the EU. In order to counteract the brutal declines in sales, responsible authorities adopted the policy of "scrapping bonus", i.e. a subsidy provided for the purchase of a new vehicle, if an old car (often more than 10 years old) was discarded at the same time. The outcome of this policy was expensive (2.200M € for France and 5.000M € for Germany) with not enough results.
The European Commission intervened with the publication of a note indicating that the builders needed to prepare themselves to take advantage of the opportunities that will be offered as soon as the crisis is over. Clearly, they should focus even more on competitiveness.
VW was clearly the best to this game. In fact, its management had followed an aggressive policy of lowering costs before the start of the recession with, by ambition, being the first world constructor in 2018 with a production of 10M vehicles per year. Its low-end brand, Skoda, conquered popular markets and even allowed customers to upgrade with a series of superior models. Its luxury subsidiary Audi, hit hard BMW and Mercedes in the luxury car market and even invaded the upper middle class segment, such as the Ford Mondeo.
This strategy was denounced in 2012 by the president of FIAT, the late Sergio Marchionne, who also was then President of the ACEA, as devastating because it was going to cause a "blood bath". Immediately, VW demanded the resignation of the Italian businessman from his position at the head of the automobile federation, forcing him to retract and apologize.
Similarly, when FIAT, Peugeot, Renault and Ford pointed to over capacity as the biggest problem in the industry calling for a European plan to execute their reduction in an organized manner, VW's position remained unchanged; at that time, VW's arrogance was that of an undisputed and undisputed leader.
As of today, with the scandal of the "engines" counterfeit with diesel exhaust and emissions readings (currently, venturing in the courts), VW has softer its tone.
The mistakes of GM Europe were of such magnitude, that it considered selling its operations in Europe to one of its suppliers, Magna (associated with the Russian bank Sberbank), but had to back down at the last minute under the double pressure of the European Commission which stated that the Magna's decision had been determined based on the public guarantees granted by Berlin and the USA –then a large GM shareholder- who pointed out the risks of technology transfer to Sberbank that it intended to produce the brand in Russia.
In 2010, the GM plant in Antwerp was liquidated. In 2014, Ford closed its plant in Genk.
TOWARDS A NEW COMPETITIVENESS IN THE AUTOMOBILE SUBCONTRACTING INDUSTRY
Taking into account this new mode of the automotive sector organization, a more specific definition of the concept of subcontractor is imposed. Thus, we distinguish the following:
Original Equipment Manufacturer (OEM) or constructor (for example, Ford).
First-Tier supplier (FTS), that is, a supplier that produces components, modules and / or systems and supplies them directly to the OEM. In the new organization of production, this type of supplier assumes an important responsibility in terms of project and integration.
Second-Tier Supplier (STS), that is, a supplier that produces simple components or modules and delivers them to the First-Tier Supplier. This type of supplier is often a product specialist who puts his expertise on projects at the service of the First-Tier Supplier.
Third-tier supplier (TTS) or "undifferentiated provider", i.e. a supplier that produces simple components, semi-finished products or materials and delivers them to a Second-Tier Supplier. Most of the time, it does not offer significant development support except in cases of innovation in the field of basic materials. Regarding this last point, we mention the production of laser pre-formed parts in steel mills.
The automotive industry has gradually evolved into a co-manufacturing ecosystem in which the whole process, including R&D, is managed and integrated by the OEM, operating with a limited number of FTSs. Since it is the FTS that determines the technologies to apply within the framework of this cooperation (and often is also the owner), its responsibility also extends to the production process and the final product.
Evidently, the OEM selects its partners with great care, imposing its strict requirements in terms of flexibility, quality, delivery and price. The FTSs are subject to world-class benefits in terms of quality, costs and logistical support. Its close association with the development of new models requires imperatively an excellent capacity for product development. Ideally, they have their own unique technology and know how to apply it perfectly.
Examining the impact of these demands on the outsourcing industry and its competitiveness, a distinction must be made between the consequences in terms of internal structure and the consequences in terms of local service.
Internal organizational structure - A fine and thin structure, combined with a short chain of command is the central pillar of the FTSs. The principle of lean production considers flexibility and multi-functionality a priority. A large number of FTSs is of multinational nature.
Flexible production planning, inspired by new outsourcing techniques, is supported and sustained by a multi-skilled staff. The fast increase in the number of models, their relatively short life cycle, as well as the principle of life-time contracts have the consequence of confronting the subcontractor with a volume of production in constant fluctuation. The adaptations that this requires in terms of management and personnel, is a flexible application of multi-functional collaborators. Intensive training programs, whether organized by the contractor or by the client, guarantee a fast and flexible conversion process.
Through their quality systems, the FTSs guarantee OEMs a constant quality of the services or products offered. Possessing or obtaining the necessary quality certificates, essentially based on third party certification, has become the sine qua non condition for entering as a full-fledged car subcontractor near the OEM's.
Certified quality systems make obsolete and superfluous those long and systematic controls at the OEM's entrance. A standard digital interaction is the basis for a solid, efficient and fast way of reaction to fluctuant demands of different OEMs serviced by the same FTS.
Subcontracting pyramids – In today’s world, it is becoming increasingly difficult for the subcontracting industry, with the exception of some world-class players, to operate in stand-alone mode.
Because OEMs want to limit the number of FTSs to deal with, many small subcontractors are forced to turn into supplies to the latter. The vast relations of cooperation that can be created between subcontractors, by this way, give rise to the phenomenon of subcontracting pyramids.
The creation of these pyramids has a quadruple positive effect: (1) it guarantees the access of smaller subcontractors to the automotive industry (although some corporate consolidations seem inevitable in the long term); (2) it offers the opportunity to the FTSs to evolve from the status of "simple supplier", to supplier of subsystems (panels, bumpers); (3) STSs and TTSs improve significantly their operations by having access to technology and quality certifications, thus generating additional qualified jobs and (4) the OEM can reduce traditional assembly line to pre-assembled modules, thus releasing own resources to focus on its genuine core business: design, distribution, marketing, innovation... etc.
Implementation policy – Typically, OEMs ask their FTS to establish themselves in the area or near their assembly plants. Considered in the context of this new philosophy, this requirement seems very logical. In fact, investing in a production unit near the OEM is economically viable only for companies that are part of an international group or that are supported by it.
Currently, we see among subcontractors a tendency to build more storage spaces with limited possibilities of assembly. In these spaces, some stockpiles are strategically kept to guarantee punctual deliveries and to allow the subcontractor to provide their finishing touch, too.
Global sourcing means that OEMs deal exclusively with subcontractors capable of supplying components at a fixed price anywhere in the world. The contractor is in fact obliged to follow his clients around the world by opening related warehouses or establishing joint-ventures when necessary. Therefore, the contractor must have sufficient financial resources. In the long term, they will have no choice but to join international groups of contractors if they want to maintain their place in the global automotive industry.
External influences on the competitiveness of subcontractors - Given the multiplicity and diversity of products and services, the truth is that no company will face exactly these trends in the same way. External influences will also determine the competitiveness of a subcontractor.
There is public aid in the form of training programs and the provision of JIT industrial estates near the builder. For instance, the Welsh Development Agency (WDA) succeeded as an official body that was created, based on these incentives, an automobile subcontracting industry, and this without the presence of the main OEMs in the region.
All the concepts and ideas discussed in the present section are generally applicable to any automotive industry. Both cases that are subject of this work, Mexican’s and Belgian’s car sectors are no exceptions, of course. On the contrary, we’re convinced that both share common basis in which leverage grasping of new opportunities.
WHAT’S IN THE FUTURE OF THE CAR INDUSTRY OF BOTH COUNTRIES?
As of today, Belgian automotive industry is mainly established in Flanders, where it has been one of the key economic sectors of the region.
Production premises are deployed as follows: car assembly plants in Ghent (Volvo) and Brussels (Audi); additionally, there are bus and truck manufacturers in Lier (Van Hool); Roeselare (VDL Bus & Coach); Temse (DAF Trucks) and Ghent (Volvo Trucks) (13).
Actually, the car sector is the 3rd largest industry in Flanders; ranks as the 6th EU’s largest vehicle producer per capita; exports over 84% of the assembled vehicles in Belgium; The Port of Zeebrugge is the world’s largest car transit port since it handles about 2.77M vehicles per year and productivity rate of this sector is very high (Flander’s car workers assemble twice as many cars per year as the EU average) (14).
SOURCE: be AUTOMOTIVE (Car Assembly Plant in Flanders)
If the automotive industry is considered as an important branch of the Belgian industrial sector, it is not only due to the direct jobs generated; it is also a vector of innovation and generates jobs in many other related fields. It is estimated that having one job in the automotive assembly creates another in the direct subcontracting (First-Tier Suppliers). Indirect employment could even reach a ratio of 1-to-4 considering the subcontracting industry as a whole.
Looking closely we see that, alongside the First-Tier Suppliers based in Belgium, there are a large number of Second and Third-Tier Suppliers whose potential lies at the level of the development of permanent cooperation agreements within a pyramid of outsourcing.
A pretty similar jobs generation behavior and pyramid effect are shown in the case of the Mexican car industry. According to ProMéxico, by the end of 2015, about 875,382 people were directly employed in the automotive industry, where 81,927 registered in the manufacture of automobiles and trucks and 793,456 in the auto parts sector (15).
Belgian Authorities set up the appropriate scenario to guarantee the correct execution of this "precarious transition process" through a series of direct and indirect measures allowing the creation of a network of subcontractors for:
Preserve the future competitiveness of the country’s subcontractors.
Convincing subcontractors to establish themselves in Belgium.
They also took into account the fact that the anchoring of the subcontracting industry in Belgium (the ultimate goal of a healthy competition policy) was strongly influenced by the competitiveness of OEMs present in the country. A more effective aid to the export of cars produced in Belgium offered them the necessary tools to guarantee their long-term competitiveness.
Government authorities realized then that the maintenance of a viable and competitive automotive industry could not be based on individual actions, but should be integrated into a common central strategic plan. In this way, a deep agreement between all interested parties was necessary if the Belgian automotive subcontracting industry wanted to optimally take advantage of the opportunities associated with this new reality.
In the Mexican case, federal government responsible authorities promote specifically the development of small and medium companies via the National Entrepreneurship Institute (Instituto Nacional del Emprendedor - INADEM).
For perspective, in the same 2015, INA and INADEM announced a financing program, consisting in the delivery of 50%, corresponding to the cost of providing First-Tier, Second-Tier and Third-Tier Suppliers that want to become OEM suppliers with the basic quality tools required by the industry (i.e. Core Tools, Quality Management Systems (QMS), ISO/TS-16949 certification and/or advanced management systems) (16).
In a similar way as the Mexican Car Industry is subject to the conditions of the FTA with Canada and USA, the Belgian Automotive Sector is now under uncertainty because of the unknown conditions of the eventual Brexit that presumably will take place in 2019.
One of the economic sectors that will suffer the greatest impact in carrying out such separation between the EU and the UK is precisely the Automotive Industry. EU27 exports to UK in 2017 recorded a total of 2.3M vehicles, which are worth about €38,400M (which represent up to 28% of the EU global vehicle export value and, at the same time, reflect 88% of the UK global vehicle import value) (17).
On the other hand, from the UK standpoint, we can mention that in 2017, such country exported to EU27 a net figure of 804,332 vehicles worth about €14,500M (it represents 40% of the UK global vehicle export value and, at the same time, 30% of the EU global vehicle import value) (18).
Analyzing such figures is easy to reach the conclusion that a non-agreed Brexit conditions would lead to severe damage to both parties in this economic sector. Belgian Automotive Industry is highly exposed, just after the German Car Sector (see graph below):
SOURCE: ACEA (“BREXIT AND THE AUTO INDUSTRY: FACTS AND FIGURES”, April 2017)
CHALLENGES TO FACE
Technology developments are significantly changing the face of the automotive industry. Research on fields such as digitization, robotics, big data, IoT, new energy sources… etc., aim to deliver safer, more reliable, more comfortable, with more efficient energy consumption rates and better equipped vehicles.
These are technologies capable of adapting automatically and modifying behavior to adapt to the environment. Perceive things with technological sensors, providing data to analyze and infer, draw conclusions from the rules.
They are also able to learn from the cumulated experience to improve performance, anticipate, think and reason about what to do next, with the ability to self-generate and self-sustain.
Putting such technologies in a common operating platform is known as Industry 4.0. When data exchange, robotics automation and digitization are central drivers for efficient manufacturing, combining automated processes with physical ones, we are speaking about the 4th industrial revolution.
The automobile of the future will be electric. Beyond collective efforts - such as car sharing - and initiatives to reduce the size of vehicles, the abandonment of the internal combustion engine in favor of the electric motor is a matter of time.
Volkswagen wants to launch an offensive in the electrification of its entire model range in 2020 to become a leader in the field of electric vehicles. "We are not going to produce niche vehicles but mainstream models" has been declared by official speakers of a brand whose goal is to sell 1.0M electric cars a year starting in 2025.
Tomorrow's car will be connected. It is a vehicle capable of calling itself relief in case of accident, locating cars and traffic jams, in short, receiving and transmitting information, also in order to make life easier for drivers.
The concept finally begins to take off. For instance, the Automatic Pro initiative provides various vehicles services for review, diagnosis, emergency care and even remote repairs (if applicable), managed via cell phone or mobile device, by the user himself / herself.
The only restriction, often recurrent in this type of innovation: security. Connecting a car must not compromise the behavior of the driver, and the modification of data must be subject to strict control and traceability. According to a study published some months ago by the Machina Research Institute, in 2020, 90% of the new cars will be connected and this market will generate over $600,000M USD.
All these technologies converge in the concept of driverless cars. They are under intensive tests in these days. Uber’s fatal crash of March-2018 is a tragic milestone that reflects the road that still has to be traveled on such a field.
When failures of reliability occur, the consequences can be fatal. Unfortunately, the search for fault-tolerant solutions has a limit since the reliability rate has an asymptotic behavior when reaching high levels and in reality it is never achieved by 100%.
There are other changes whose origin is not technological but rather sociological. The millennial generation is much less likely to own cars than, say, baby boomers. Smart cities increasingly migrate to (smart) public transportation, less harmful to the environment.
To remain as an important economic sector for both countries, the Belgian and Mexican automotive industries must turn both to high technologies, digitalization as well as hybrid technologies or new materials.
To compete (and even survive) in the digital economy, organizations must develop new competencies and consolidate an organizational culture in line with digital demands. This includes the adoption of new behaviors at all levels of the entity.
The main characteristic of the automotive industry in Belgium and Mexico is the following: both are equipped for the future.
The focus has changed from the pure assembly of vehicles (however efficient it might be), to the production of components with a high added value. Today, both, Belgium and Mexico have the know-how, expertise, assets and logistics infrastructure to play an active role in the development of the car industry of the future.
However, they will have to be very creative and fight to protect jobs with high added value, since they have no control over the design, development of vehicles or destination (final market).
Both countries must attract and also create companies with leading edge technology in their production processes and in the complexity of their products, generated from research, development and innovation activities (R&D+I).
There is ample field to join efforts to capitalize the opportunities that these convulsionary changes will bring. In the short term, both industrial sectors need to take advantage of their respective strengths (and know their weaknesses, so that they can be reduced):
One of the best examples of these synergies is the East Flemish company, DS Fibres, which is about to reach its 35th anniversary. A very innovative organization, it introduced 30 years ago, the dope dyed polyester fibre, which since then became a common material in the car industry, particularly in European automotive brands (21).
Recently, this important car subcontractor established a production facility in Mexico. For such a purpose, this firm chose an active and economically dynamic region: the Mexican State of Aguascalientes.
An April-2018 article of the Spanish newspaper El País, defined this State as “That Mexico which grows at an Asian rate” (“El México que crece a ritmo asiático”); in such a note, it is established that fiscal incentives, skilled labor at competitive costs and low union strikes occurrence are the keys for region’s economic success (22).
The Belgian and Mexican automotive industries have complementary characteristics. Given the turbulent panorama that opens up in international markets, both must seek to join forces. The question is to do it creatively and looking for mutual benefits, as well as a much stronger industry on both sides of the ocean.
OEM decide on production sites and exports destinations with basis on corporate reasons but subcontractors have the possibility of take advantage of opportunities such as the ones here described.
Following this path will certainly be an exciting journey with attractive rewards.