Term Paper

on
Global Automobile Trade
Submitted to:
 ACKNOWLEDGEMENT

Would like to take this opportunity to convey my special thanks

to our Professor Sureswari Prasad Das and the entire staff of XIM
Bhubaneswar who made sure that we have understood the topics
well and created an environment of learning during our stay in
the campus.
Abstract
The paper opens by mapping the changes in the global auto industry in the 1990s, showing how the rapid growth in
sales and production between 1990 and 1997 came largely from the emerging markets rather than the Triad regions
(North America, the European Union and Japan). However, for some of these markets the downturn that followed
was substantial and prolonged. The emergence of regional production systems resulted in regional integration. This
created opportunities for industrial upgrading in developing countries with links to one of the Triad regions, where
a major part of production still takes place.
The paper then describes how the relationship between assemblers and suppliers has changed. There is a growing
preference for using the same suppliers in different locations (follow sourcing), which limits the possibilities for
component supplying by local producers in developing countries. However, opportunities in second-tier sourcing,
where a global reach is not required, do exist. The paper shows that developing countries can increase the
possibility of integration into the global value chains of transnational automotive companies by opening up their
domestic markets. It concludes with emphasizing the importance of fostering networks of small firms in developing
countries as a means of entering new markets.

Introduction
This paper discusses industrial development issues for the global auto industry from the perspective of a global
value chain analysis. It highlights the way in which the impact of globalization processes on the auto industry of
developing countries in the 1990s was influenced not only by changes in trade and investment policies and the
globalization strategies of leading companies, but also by changes within auto industry value chains themselves. It
is particularly concerned with the following selected countries and regions including China, India, Mexico, four
countries of the Association of Southeast Asian Nations (ASEAN) (viz. Indonesia, Malaysia, Thailand and the
Philippines), Argentina, Brazil, and countries in Central Europe (Czech Republic, Hungary and Poland).
From the 1950s onwards, various developing countries used import-substitution industrialization policies to
promote the development of their domestic auto industries. By the early 1990s, there were substantial self-
contained vehicle industries in Latin America, the ASEAN region, India and China, with limited imports of
vehicles and components and with few exceptions (most notably Brazil and Mexico), limited exports. Trade
liberalization began to change this situation in the 1990s. Quantitative restrictions were phased out and tariffs
reduced, while Trade-Related Investment Measures (TRIMs) like local content requirements and foreign exchange
balancing were under increasing attack. At the same time, the global production and sales strategies of leading
multinational auto companies were also shifting and developing countries were becoming more integral to their
plans. This paper argues that while these changes were most evident in the assembly sector, even more significant
changes were taking place in components production, driven as much by the alterations in the nature of value chain
relationships between assemblers and suppliers as by the industry’s globalization.
These changes have had a profound effect on the structure and characteristics of the auto industry in developing
countries. This paper analyses the position of the emerging markets in the global auto industry in the 1990s, their
rapid expansion in the period of 1997 and stagnation following the East Asian crisis. It considers how the industry
changed in this period, what implications are for the policy options open to the governments of developing
countries, and what kinds of policies will be adequate to create viable auto industries in the new environment of
lower levels of protection and increasingly globalized production systems.

Mapping the global auto industry

The auto industry is often thought of as one of the most global of all industries. Its products have spread around the
world, and it is dominated by a small number of companies with worldwide recognition. However, in certain
respects the industry is more regional than global, in spite of the globalizing trends evident in the 1990s. This
section considers the global spread of vehicle sales and production, ownership in the assembly sector and the
transformation of the component sector.
The spread of vehicle production in developing countries increased markedly in the boom years of rapid expansion
in the emerging markets in the 1990s. Global vehicle production rose by nearly 7 million units between 1990 and
1997, although the increase in sales over the same period lagged considerably behind this, at just under 4 million
units. Much of this growth was concentrated in developing countries. In the Triad regions (the United States of
America and Canada, i.e. North America, Japan and Western Europe), the vehicles industry is mature and has been
plagued by overcapacity, cost pressures and low profitability. Of the three Triad economies, only North America
was buoyant at the end of the 1990s. This resulted from the long boom of the United States’ economy, the
substitution of imported Japanese cars by cars built in transplant factories, and the remarkable and profitable shift
of consumer demand from passenger cars towards light trucks. In contrast, vehicle sales in both Western Europe
and Japan were less in 1997 than they had been in 1990. Overall, vehicle sales in the three Triad regions rose by
only 0.6 per cent between 1990 and 1997, and production rose by 4.2 per cent.
The stagnation of production and sales in the Triad regions was in marked contrast with the growth of the industry
in the rest of the world. While both production and sales of vehicles remained concentrated in the Triad economies,
which still accounted for more than 70 per cent of global vehicle sales in 1997, a remarkable feature of the period
1990-1997 was that in absolute terms the increases in production and sales of vehicles in the rest of the world far
outstripped the increases in the Triad regions. In the Triad regions, vehicle sales rose by 230,000 units in this
period. In the rest of the world (World total minus Triad countries), sales increased by 3.8 million units. For vehicle
production, the respective figures were 1.7 million units and 5.1 million units.
A considerable part of this rapid growth was concentrated in a small number of developing countries. The Republic
of Korea continued its rapid growth in vehicle production and exports, but perhaps the most noteworthy feature of
the 1990s was the growth of what became known as the emerging markets.
These included Latin America (mainly Brazil and Mexico), which emerged from the stagnation of the 1980s, the
ASEAN countries, Eastern Europe, China and India. The fast-growing emerging markets, taken together, increased
vehicle sales by 80 per cent and production by 93 per cent. In other words, while vehicle sales in the fast-growing
emerging markets grew at a rate of almost 9 per cent per year in the seven years up to 1997, sales in the Triad
economies increased at less than 0.1 per cent per year. It is hardly surprising that the attention of the auto industry
was focused on the potential of the emerging markets to offset the industry’s maturity and stagnation in the Triad
economies and, in this way, to achieve increased economies of scale and spread the costs of developing new
models.
Following the crisis in East Asia, optimism about the prospects for emerging markets dampened considerably.
Rising interest rates, recession and collapsing consumer confidence led to a 69 per cent decline in vehicle sales
across the ASEAN region between 1997 and 1998. The East Asian crisis also had a direct impact on Brazil, where
interest rates were doubled to defend the currency and vehicle sales fell by one-third. Not all emerging markets
were affected directly by this international financial instability, but even those markets insulated by exchange and
investment controls showed lackluster performance in 1998 and 1999.
The extent of the downward trend can be seen in Table 2. In 1996, the Economist Intelligence Unit forecast strong
sales growth in all of the significant emerging markets. However, actual sales fell in the ASEAN region, Brazil,
and India, while in the Central Europe, the actual growth of the sales was only 5 per cent less than the one
predicted. The rate of growth of vehicle sales in China was less than half that predicted, while in Argentina and
Mexico actual sales were above those predicted. Furthermore, in both
Argentina and Mexico, rising vehicle sales were merely recouping losses suffered in 1994-1995. Argentine vehicle
sales in 1998 were still below the level recorded in 1994, and in Mexico, domestic sales for 1998 were only 9 per
cent above the 1994 level.
For a number of the emerging markets, the downturn in the domestic market was substantial and prolonged. A
comparison of sales in the domestic market in 2001 with sales in the peak years of the 1990s for a small number of
the emerging markets for which data are available is presented in Table 3. In the cases of Argentina and Brazil,
sales in 2001 were substantially below those in 1997, and in the case of Thailand, they were substantially below
those in 1996. In India, sales increased only slightly between 1996-97 and 2001-2002. Mexico is the sole country
where 2001 sales were substantially higher than the peak year in the 1990s.

Market Trends
Production Scenario

The global automobile industry, witnessing robust growth in the face of increased global demand, produced around
63 million motor vehicles in 2004. The Asian countries, mainly by Japan, China and India, registered a 9% increase
in production over last year, constituting 35.9% of the global production (Figure 3). In fact China and India posted
positive growth rate over 2003. With the opening up of EU markets, the share of EU countries in global automobile
production was expected to increase in the coming years.
World Automobile Production in 2004
USA continued to drive the demand, accounting for the sales of around 16.9 million light vehicles. As the share of
Big Three fell from 61.8% in 2003 to 60.1% in 2004, Asian brands increased their share from 32.7% to 34.7% in
the same period (Table 3). Japan and Korea posted the maximum gains with increased sales of 7% and 8%,
respectively. The Mercosur area consisting of Brazil and Argentina also showed buoyant production owing to
stabilized economic conditions.

Sales of Light Vehicles in the US in 2004

In the European sector, Germany’s domestic production stood at 5.6 million vehicles and another 4.8 million
vehicles of German brands were manufactured abroad in 2004 (Table 4). With the new wave of globalization,
VDA members employed nearly 1.5 million people in their international operations16 (Appendix 1). This trend
was in tune with the growing recognition of low priced production sites in abroad locations.

Key Figures of European Motor Vehicle Industry

UK’s foray into the global automobile industry could be traced back to 1911 when Ford set up its first
manufacturing plant. This was soon followed by GM, BMW, Honda, Nissan, Peugeot and Toyota. By 2005, the
automotive manufacturing sector was contributing around £8.4bn to the economy, accounting for 1.1% of GDP and
9.5% of total UK exports of goods. The industry employed 237,000 people in the design and manufacture of
vehicles and components. There also existed a niche market for sports and luxury cars.
Most of the leading design engineering companies were also based out of UK. It was estimated that these
companies had a 20% stake in the global market. Many of the high-tech innovations were initially tried out in race
tracks before being incorporated into the general production system. The industry had effected significant cost
reductions to the tune of 30% from quality improvement programs run under the egis of the Society of Motor
Manufacturers and Traders Industry Forum17. The initiative was spearheaded by all major automotive component
manufacturers such as Delphi, Bosch, Visteon, Federal-Mogul, and TRW Automotive, GKNplc, Unipart and
Pilkington.
UK Production (in '000s)

With production touching 320000 units, Nissan continued to be the top manufacturer, a position it had retained
since 1999 (Table 6 and Figure 4).
Top UK Auto-manufacturers (production figures in '000s)

Individual Share of Top UK Auto-manufacturers

The Asian countries were also registering growth in the demand for new vehicles. Indonesia and India showed
significant growth in the registration of new vehicles.

Registration of New Vehicles on Asian Markets

Buoyed by annual GDP growth rate of 8%, the Indian market was showing positive sales growth. According to the
Society of Indian Automobile Manufacturers, the sales of commercial vehicles alone were expected to grow at an
annual rate of 10-15%. India was also making its mark in the auto-components sector.
Total Sales Trend of Four-wheelers in India

Total Sales Trend of Three and Four Wheelers in India

In Japan, the domestic demand stood at 5.9 million vehicles. Top Japanese automobile component manufacturers
such as Ikeda, Yutaka Giken, Denso and Calsonic were making inroads into global markets following the popularity
of Japanese vehicles. In China, rising oil prices and decrease in availability of low interest car loans from public
sector banks were driving down the domestic demand. But of late many leading auto-makers were moving into
China. From a mere figure of 25 companies in 1990, the tally had risen to 137 in 2004.
The auto-makers were reaping the benefits of ‘natural hedging,’ such as cost advantages even during exchange rate
fluctuations happening in sales markets. But analysts opined that several government restrictions existed against the
entry of foreign auto-makers in China even after it joined WTO. On the other hand, positive initiatives such as
becoming a signatory in the global agreement for technical harmonization aimed at ‘tested once – accepted
everywhere,’ signaled the increasing emphasis given by the Chinese political leadership to become a global player in
the automotive sector . The uniformity in test procedures across nations helped in considerable cost savings for the
auto-makers.

Regional Distribution of International Locations

Industry Structure
In the automobile industry, transaction cost economics, and technology shifts determined the structure (Sako, M).
During the 1890s, craft production techniques led to the formation of a horizontally disintegrated industry,
completely devoid of consolidation. Manufacturing units evolved in regions boasting of skilled labor. By the middle
of the 20th Century, automobile companies like Ford and GM brought about consolidation in the industry. The
companies themselves were vertically integrated. The market was oligopolistic in nature. Huge production costs
deterred new firms from entering the market. GM emerged as the market leader, wielding high influence over
market prices. By 1920s, Ford perfected mass production techniques. The company also took initiatives for a high
degree of vertical integration by owning its own steel mill and forging factory. Other players followed suit to
achieve substantial cost savings. The integration of Fisher Body by GM marked one such instance.

But contrary to the trend for vertical integration by the US auto-makers, Japanese auto-makers practiced ‘relational
contracting (Sako, M).’ The practice of ‘Just-In-Time’ delivery as part of the lean production techniques gave rise to
a healthy relation between the assemblers and the suppliers of automobile components.

By 1980s the industry showed renewed signs of vertical disintegration. Chrysler formed strategic tie-ups with
suppliers for major components and in turn concentrated only in designing, assembling and marketing. These
initiatives helped Chrysler to realize the highest average profit per vehicle amongst the Big Three. Ford and GM
started depending on Visteon and Delphi, respectively, for sourcing their components. All the components of a car
were outsourced to suppliers who offered lowest prices. This increased the manufacturing capacity of the auto-
makers and the industry was soon saddled with overcapacity. In 1999, the global automobile industry had an excess
capacity of 20 million units.
Market for Auto-components

Towards the last quarter of the 20th century, globalization paved the way for deregulation opening up the markets to
foreign competition. The consumers stood to gain with more variety to choose from at competitive prices. In order
to stem the price war most of the major companies from the US, Europe and Japan entered into alliances with
companies from other regions of the world. In 1997, GM entered into a 50-50 joint venture with Shanghai
Automotive Industry Corporation (SAIC), a state-owned Chinese auto manufacturer to build a plant in China. In
1999, GM also increased its equity in Japanese companies like Isuzu (raised its stake to 49%), Suzuki (9.9% and
later to 20%) and Fuji (20%). All these deals ran into multi billion dollars and GM got access to advanced
technologies owned by the Japanese companies. It was widely opined that developing these technologies on its own
would have cost GM more money and time. GM’s alliance with SAIC helped it to gain access to the fast growing
Chinese market much before than any of its competitors.
In 2000, GM purchased a stake in Fiat with the option of buying the remaining shares by 2007. But with falling
fortunes, GM entered into a US$ 2 billion settlement to cancel the deal in 2004. The only success story was the
Renault/Nissan merger, with both companies registering profits in 2004. By 2005 mergers and acquisitions took a
backseat in the automobile industry. DC reduced its share in Mitsubishi from 37% to 14% by 2005. DC also
divested its 10% stake of Hyundai. DC was the only one among the Big Three registering increased sales in the US
market in 2005.
As for the Mercedes-Benz merger, the Mercedes section was reporting quality issues resulting in customer
complaints. Towards the end of 2005, consolidation activities had brought GM’s effective share in the US market to
29.3%, Ford’s share to 21% and DC’s to 14.3%
Market Share of Leading Auto-makers in US
Product Offerings
With increasing consumer awareness about the negative impact of automobile emissions, auto-manufacturers were
readily going for technological improvements, thereby launching new products. These innovations were broadly
classified under engine modifications and improved transmissions.
Engine modifications were aimed at reduction of pumping losses, reduction in engine friction and improved
combustion and some examples included:
 Variable Valve Timing (VVT) or Variable Valve Lift and Timing (VVLT) – This was the generic term used for
an automobile piston engine technology. The first functional system was developed by Fiat. Honda developed
the Variable valve Timing and lift Electronic Control to improve the efficiency of internal combustion engines.
Basically this innovation provided for a better fuel/air mix and improved combustion thereby reducing CO2
emissions.
 Cylinder Deactivation or Displacement on Demand – This technology, generally applicable for larger vehicles
with V-6 and V-8 engines, provided for shutting down of one or more cylinders when the extra power was not
needed.
 Engine downsizing combined with turbocharger or supercharger – This technology aimed at minimizing the loss
of energy power thereby reducing CO2 emissions.

Stoichiometric burn direct injection, variable compression ratio engines, and homogeneous charge compression
ignition engines were other improvements likely to be popularized in the near future.

Improved transmissions enabled the engines to operate at optimal speed more frequently, thereby reducing
mechanical losses associated with transmission operation. These included five or six speed automatic transmissions,
Continuously Variable Transmissions (CVT) and automatic shift manual transmissions, whose adoption improved
fuel economy by 4-8%.

Additional vehicle technologies like a sleeker design to reduce aerodynamic drag, use of a 42 volt electrical system
to reduce the engine load, improvements in catalyst technology to reduce N2O and CH4 emissions, use of
alternative refrigerants an low rolling resistance tires, were also helping to reduce GHG emissions.

Fuel cell technologies were another major breakthrough witnessed in the auto industry. A fuel cell vehicle utilized
the electricity produced by the fuel cell to power motors. But unlike in battery vehicles where recharging was
necessary, in fuel cell vehicles, no recharge was needed. These vehicles with onboard storage tanks could be filled at
hydrogen filling stations just like the refueling done in gasoline vehicles. But zero-emission was experienced only
when pure hydrogen was used as a fuel. When hydrocarbons were used instead, it resulted in emitting pollutants.
GM’s Hy-wire, DC F-cell passenger car, fuel cell uses (in Europe and Australia) and vans (Europe and US), Toyota
FCHV, Volkswagen Bora HY.POWER were some examples in this sector.

Based on technological innovations, auto-manufacturers were offering a wide range of products for consumers. A
shift in consumer preference in favor of fuel-effective light trucks in comparison to passenger cars was noticed from
2001 onwards in the US. Of late the demand was more for ‘crossover’ vehicles which combined the best features of
passenger cars and SUVs. These were first offered in 1997 by the foreign players in the US market. Honda’s CRV,
Mercedes’ M-Class, Subaru’s Forester, and Toyota’s RAV4 were some examples. This was soon followed by Ford
Escape, Pontiac Vibe, DC PT Cruiser, Volvo Cross Country, and Subaru Baja.

‘Green vehicles’ constituted another product range witnessing growing demand. These vehicles offered lower
emissions and better fuel economy. GM’s all-battery EV-1 and Honda’s EV Plus were the initial offerings in this
category, which appeared in the market in 1997. But even after concerted efforts only 1400 units could be sold in the
next five years. Studies proved that consumers were ready for environment-friendly vehicles as long as they were
comfortable with operating economy, comfort, performance, and price, especially in the light of government
regulations like the CAFÉ standards. Alternative fuel vehicles, which came under the category of ‘green vehicles,’
also showed immense potential for future growth. As of 2005, more than 3 million alternative fuel vehicles were
plying the road. The main challenge was in developing adequate infrastructure to provide alternative fuels such as
bio-fuel, natural gas, and propane. VW GofTDi, Ford Taurua, Dodge Ram 1500 truck, Dodge Stratus, Chrysler
Setring, GM Sierra Chevrolet Tahoe, GMC Yukon, Chevrolet Silverado, and Chevrolet Cavalier were some
examples for vehicles plying on alternative fuels.

These market situations paved the way for hybrid vehicles. Japan was the pioneer in developing a gas electric
hybrid. The resulting product named Toyota Prius was launched in 1997 in Japan. While US auto-makers were
focusing on hydrogen fuel cell engines, Japanese auto-makers prepared to enter the US market. Honda Insight was
the first hybrid launched in the US. This was on December 1999 and was priced at US$ 19570. But due to small
power backup the product failed to catch up in the market. Honda also launched a remodeled version of Honda
Insight, namely Honda Civic in 2002. By 2003, nearly 2000 units of Honda Civic were being sold per month. In
2004, Honda launched the first hybrid with a V6 engine, viz, Accord sedan, and a fuel economy of 37 mpg in
highway and 29 mpg in city. By December 2004, Honda hybrid sales jumped to a total of 74, 608 units.

Toyota also made significant gains from hybrid sales. In 2000, Toyota Prius, priced at US$ 19995 entered the US
market. The product had a fuel economy of 55 mpg and recorded sales totaling 20, 000 units in 2002. A higher
version was launched in 2003 which sold 25, 000 units. In 2004, there was an increase of 119 percent in the sales
figures (54, 000 units).

Ford and GM also entered the hybrid scenario by 2004, but had lost the head-start to Japanese auto-makers. DC on
the meantime concentrated on clean diesel technology and came up with Dodge Ram pickup truck in 2004.
Advanced engine and emission control strategies and use of ultra-low sulfur fuel contributed to making the diesel a
clean fuel. Ford Mondeao TDCi, BMW 530d and 740d sedan, Liberty jeep, Mercedes E320 CDi, Volkswagen
Passat TDi, AudiA8 TDi,Chevrolet Duramax, Ford Focus TDCi.

Competence formation for competitiveness in

the global auto industry
There are three areas in which locally-owned firms might prosper within the global auto components industry:
(a) as second-tier component manufacturers operating within value chains supplying assemblers in the domestic
market;
(b) allied with transnational companies and supplying specialized products for global markets;
(c) as suppliers to both domestic and international aftermarkets. The ability of locally-owned firms to compete in
each of these markets can be influenced by support provided by local and national institutions.
The first crucial area of support relates to standards. For firms linked into supply chains for the original equipment
manufacturing, where the buying enterprise gives all specifications to contracting firms (supplying assemblers and
certified replacement parts), quality system certification is essential.
Initially, ISO9000 was sufficient, but increasingly firms are expected to meet the more demanding QS9000 standard.
It is to be expected that greater emphasis will be placed in future on environmental standards, such as ISO14000. In
well-established markets, much of the process of certification and also the provision of consultancy services for
firms preparing to meet these standards can be supplied through market mechanisms. There is a booming global
standards business, led by international consultancy firms such as SGS and BVQI.
Nevertheless, there are three areas in which local and national institutions can provide support. First, private-sector
provision of certification services tends to follow the market. When standards requirements are first developed, both
governments and business associations can support their diffusion. For example, in the case of Brazil in the early
1990s, the Brazilian Programme for Quality and Productivity (PBQP) was critical for raising quality awareness in
industry. In a quite different situation, the case of the surgical instruments cluster in Sialkot in Pakistan, the local
business association played a critical role in raising awareness of the need for quality systems to meet the
requirements of overseas markets. Second, markets for consultancy services are notoriously imperfect. Firms
frequently do not have a clear idea of the services that they need, and they have difficulty in assessing the suitability
of both the services and those offering to provide them. Business associations and governments can provide
independent assessment of needs and some appraisal of service providers. Third, if the certification process is to
include locally-owned certifiers, then it is critical that the accreditation process for certifying firms is credible. There
have been difficulties in Brazil with respect to the credibility of certification agencies, and similar problems have
been registered in the case of Sialkot in Pakistan.
The second main area for support for local firms relates to education and training systems. Increasingly, buyers in
global industries impose exacting standards, but they do not wish to be involved in helping their suppliers to meet
them. Firms wishing to maintain their involvement in auto industry value chains must invest in engineering skills.
These are particularly important in the area of process engineering, so that technical and quality standards can be
met, but in certain segments of the components industry there is also increasing emphasis on materials science and
the use of new materials. Therefore, provision of skilled labour in these areas is vital. Testing and measurement
facilities are also important. The designs for these products need to be tested to exacting standards, and continued
control over their production requires that measuring equipment need to be calibrated. The provision of testing,
measurement and calibration facilities plays an important role in enabling firms to meet market requirements.

Future Outlook
Internet, telematics and other technological innovations were expected to serve as future drivers for global
automobile industry. The new age of internet-savvy consumers configured the precise vehicle they wanted on-line.
Such ‘built to order’ vehicles marked the era of mass customization. Technological innovations were likely to be
brought in by the auto-suppliers who were handling the outsourcing deals from the auto-makers. The auto-makers
themselves were going in for industry-wide electronic market for components to reduce their dependency on
suppliers.

Telematics referred to the art of using information technology inside the vehicle. Sako, M reported that such
equipments might include enhanced mode of personal communication (phone/fax, email), convenience facilities
(travel and restaurant reservations, interactive shopping), safety sensors to ensure safe distance between adjacent
vehicles, security aspects (stolen vehicle tracking), toll collection options and navigation (GPS locators with
directions to destination).

The German automotive industry was in the forefront of adopting the new technical breakthroughs. Digital Audio
Broadcasting, which offered continuous broadcasting at high speeds on long-distance journeys, was launched on a
big scale with options for internet connections. The system helped to locate a driver’s position every second to the
nearest meter. Also it helped the driver by giving accurate information about obstacles on the roadway, traffic jams,
uneven road surfaces, etc.
Hybrid vehicles and fuel cell technologies were regarded as the breakthrough innovations likely to alter the very
structure of the industry in the days to come. The market was being driven by consumer sovereignty. Ford was
producing hybrid SUVs to stem the falling demand for the non-hybrid versions whenever the gasoline prices went
up. Here the wants of the consumers had a say in the product strategy adopted by the auto-maker. Consumers were
not willing to pay high prices for the complimentary good (fuel). Instead they were ready to pay more for hybrid
versions. So the producers were altering the product and reallocating their resources to launch the hybrid version.

Though the price of hybrid car was more than the normal car, the consumers could save on fuel expenses. The
political machinery supported the market growth with attractive tax incentives. Generally, the US government
provided a federal tax deduction of US$ 2,000 for the purchase of a hybrid vehicle and some states provided
additional incentives or tax credits. This was mainly done to offset the disadvantages faced by the buyers of hybrid
vehicles like high cost of repair, higher price (nearly US$ 3000 more than the conventional one), and lack of trained
mechanics on the new engines. In 2004, 88000 units of hybrid vehicles were sold in the US, which constituted about
0.5 percent of the total market. But studies conducted by J. D. Power and Associates had forecasted for a
phenomenal increase in hybrid sales, which was expected to constitute 3% of the US market by 2010.

Hybrid market in the US was becoming highly competitive with auto-makers getting ready with new launches in
both passenger car and SUV sections. Toyota entered the SUV market with the launch of Lexus RX330 and Toyota
Highlander in April 2005. They were also serving as technology providers for other auto-makers like Nissan, Subaru
and Ford. While GM’s project to enter the hybrid market in SUVs suffered a set-back due to technological glitches,
Ford was able to make a head start by licensing the required technology from Toyota. Ford’s hybrid version of the
Mercury Mariner SUV would be launched in 2007. GM was credited with bringing the first hybrid pick-up truck to
the US market in 2005. This mild-hybrid version of Silverado at 18 mpg in city and 21 mpg in highway registered
10% improvement in fuel economy over the conventional model and was rated as the most fuel efficient full-sized
truck in the US market. GM was collaborating with DC to develop a full-hybrid version by 2007. In 2006 GM was
planning to launch the Saturn Vue SUV, a market segment where Ford had the first mover advantage among Big
Three. Meanwhile, DC’s diesel-hybrid version of the Dodge Ram pick-up truck was giving a 15% improvement in
fuel economy over the conventional version.
The auto-makers were also focusing on innovative marketing campaigns to increase the consumer awareness among
the customers about hybrid vehicles. In February 2006, Ford introduced a national marketing campaign along with
Kermit the Frog, to increase consumer awareness of the benefits of the Escape Hybrid, world’s first full hybrid-
electric SUV, giving 36 miles per gallon on the city cycle (as per Environment Protection Agency’s norms). The
price tag was nearly US$ 28000. In March they introduced zero percent financing for up to 60 months. In April they
launched a new hybrid tax hotline, to educate customers about the federal, state and local government tax incentives
available to Ford hybrid customers. The customers could save up to US$ 6000 as tax relief on both the Ford Escape
Hybrid and Mercury Mariner Hybrid. Ford Escape Hybrid was complying with the strict Super Ultra Low Emissions
Vehicle and Advanced Technology Partial Zero Emissions Vehicle standards. Ford Motor Company with more than
150 patents from technological innovations developed for its hybrid program was planning to increase its global
hybrid production ten-fold to nearly 250000 units annually by 2010.

Fuel cell technologies were another revolutionary concept expected to change the entire landscape of the automobile
industry. Backed with federal support, the technology was scheduled to become marketable by 2020. It was
developed on similar lines of powering a space shuttle. In a fuel cell, the chemical reaction between hydrogen and
oxygen produced electricity to run the motor. A joint initiative, namely the Partnership for a New Generation of
Vehicles (PNGV) between the automobile industry players and the US Government was launched way back in 1994
for developing a five-passenger car, running on fuel cell technology with a fuel economy of 80 mpg. But it was
replaced by another larger initiative with a project cost of US$ 500 million to develop ‘FreedomCAR’ (where CAR
was an acronym for Co-operative Automotive Research) in five years. This was supplemented with another US$ 1.2
billion project on commercializing Hydrogen Fuel. Fuel cells were expected to surpass the 3:1 cost advantage
realized in gasoline powered vehicles. Also, since the byproduct was only water vapor, fuel cells would result in
zero emissions. Another advantage expected was a drastic reduction in the consumption of steel and cast iron as fuel
cells had no moving parts.

The concept of fuel cell vehicles were already in the demonstration stage both in Europe and Japan. Fuel-cell transit
bus demonstration projects were being undertaken in several cities in the US like Chicago, Vancouver, California,
etc. GM had plans to launch 40 vehicles by 2008. By 2010 GM was planning to launch a commercially viable fuel
cell vehicle. The pertinent problems included limited range, extremely high costs, difficulties in starting in cold
weather, and development of a hydrogen infrastructure. For targeting the latter, Florida and California were working
with Chevron to start hydrogen refueling stations. GM was working with Shell to create an “East Cost Hydrogen
Corridor,” estimated to cost US$ 20 billion. As a beginning, refueling stations were already set up in Washington,
D.C.

The good performance of Asian countries in the economy front heralded the emergence of a strong market demand.
The future potential of India’s automobile sector was mainly based on the growing demand and availability of
skilled manpower with design and engineering abilities. SIAM estimated that from 2005 to 2010, global automotive
vehicle manufacturers would likely invest nearly US$ 5.7 billion in the Indian market. Bosch, the leading player in
Europe was investing in R&D through MICO, in the area of fuel injection equipment, ignition systems and
electrical. GM started a technical center in Bangalore to focus on R&D. Ford started the Ford Information
Technology Services India in Chennai to cater to the software requirements.

India's Competitiveness Compared to Other Countries

Thus by the end of 2005, the global automobile industry had transformed itself into a highly competitive market.
Initiatives to check product prices by way of collaboration with the auto-component manufacturers and innovations
in vehicles with better fuel economy were fast becoming mandatory if one needed to stay ahead of competitors. All
the major players acknowledged that fast depleting gasoline resources was a reality and were soon in the forefront of
adopting a bold approach investing on fuel efficient technologies, even rising against political machinery. As quoted
by William Clay Ford Jr, Chairman and Chief Executive Officer of Ford (2005), this approach went beyond
anything they had done in the past.

Strategies for developing countries’ auto

industries
Both assemblers and component manufacturers increased their global reach in the 1990s. At the same time, the
range of policy instruments available to developing country governments for the promotion of particular industries
had become more and more limited as a result of international trade agreements. In the 1990s, quantitative
restrictions were largely phased out, and tariffs on both vehicles and components were reduced significantly in many
emerging markets. The Uruguay Round trade reforms should lead to the phasing out of TRIMs, which include
policies such as local content requirements and the balancing of imports by equivalent exports. Local content and
trade balancing requirements were deemed to be inconsistent with GATT provisions on national treatment, and trade
and foreign-exchange balancing requirements were held to constitute quantitative restrictions. World Trade
Organization (WTO) member countries were required to notify the WTO of GATT-inconsistent TRIMs, to phase
them out within a set period (initially by 2000 for most emerging markets, although progress has been slow) and not
to introduce new TRIMs in the interim.

Developing countries need to consider strategies for the auto industry within the context of trends in global markets.
This does not mean that a single strategy is appropriate across all developing countries. On the contrary, the scope
for promoting the auto industry and the developmental impacts of current restructuring processes vary considerably
according to the nature of the insertion of national automotive industries into the global economy. The one exception
to this view on the continuing heterogeneity of experience for developing countries concerns ownership in the
components industry, where there is a large body of evidence, which suggests that there is a widespread process of
denationalization. This issue will be considered first, followed by trends in the auto industry in the peripheral
regions (Mexico and Central Europe), and then for other developing country vehicle markets.

Indian Automobile industry: future projections

With the domestic auto industry now moving in step with the WTO covenants, the stage is set for it to make rapid
strides domestically and internationally to attain its rightful place in the world trade. A global recession for last two
years notwithstanding, the industry has shown appreciable resilience and adjusted to the challenges of the
environment. Based on the general growth projections indicated by the Planning Commission of India for the next
five-year period, automobile industry is expected to register growth pattern as given below. This growth estimate
implies certain assumptions relating to segment-wise growth rates based on a study conducted by the National
Council of Applied Economic Research (NCAER).
Projections of India’s automobile industry, 2001-2012 (number)
Emerging trends in Indian automobile sector
Globalization is pushing auto majors to consolidate, to upgrade technology, enlarge product range, access new
markets and cut costs. They have resorted to common platforms, modular assemblies and systems integration of
component suppliers and e-commerce.
The component industry is undergoing vertical integration resulting into emergence of ‘systems and assembly
suppliers’ rather than individual component suppliers. Thus, while most component suppliers are integrating into tier
2 and tier 3 suppliers, larger manufacturers and multinational corporations (MNCs) are being transformed into tier 1
companies.
Environmental and safety concerns are leading to higher safety and emission norms in the country. India has already
charted out a road-map for reaching EURO-II norms across the country by the year 2005. Seven metropolitan cities
of India would simultaneously move to EURO-III norms in 2005. Most vehicle manufacturers are already producing
EURO-II compliant vehicles in the country to meet special requirements of capital city of New Delhi where the
Supreme Court verdict has already necessitated this.
To meet the concomitant testing and certification activities relating to higher safety and emission norms, testing
infrastructure in the country is being overhauled. A substantive state funding is being planned in upgrading the
testing infrastructure with participation of industry.
Environmental pollution and the need to conserve existing supply of fossil fuels have led to search for alternative
fuels. In addition to supporting Greenfield research in this area, an ambitious phased programme to upgrade carbon
fuel quality commensurate with higher emission norms is also being undertaken.
Foreign direct investment norms have already been considerably relaxed. Unhindered import of automobiles,
including new and second hand vehicles, has also been permitted. Most non-tariff barriers have also been relaxed or
removed. The Government has moderated and lowered taxes and duties on automobiles, including customs duty.
Value Added Tax (VAT) is also proposed to be introduced across the country from 1 April 2001. The Government
has also allowed private sector participation in the insurance sector. Norms guiding external commercial borrowings
(ECBs) have been liberalized and lending rates within the country have also been reduced further strengthening the
environment of investment. An ambitious programme to upgrade the quadrilateral of highways in the country, the
Government is laying an eight-lane expressway linking all metropolitan and several important capital towns across
the country paving the way for movement of heavier haulage vehicles.

Suggested measures for more conducive growth

of the automobile industry in the region
The automobile industry across the world has great potential to trigger sustained employment, mobility, inter-
sectoral industrial growth and thus conduce conditions for general economic and social well-being. However, there
is need to promote and sustain international cooperation between Governments and industry. There is need for
coordinated research and development, standardization of designs and broader technologies, effective cost cutting to
enhance affordability and loosening of trade barriers across the globe. There are separate measures, which require
addressing at the national and international levels. Some suggested steps at both levels are listed below.

1. Suggestions at the national level

Further lessening the incidence of taxes and loosening of non-tariff barriers has to be attempted with a faster pace
faster. A regime of single tax across the country is an ideal situation and possibilities of this should be explored.
A vehicle retirement programme which will assist not only in fleet modernization and reduction of emission but will
also provide quantum fillip to the demand should be put in place.
There is a need to brief the international communities on technological and quality related capabilities of Indian
automobile industry. Substantive efforts are required for educating opinion leaders and build a strong ‘Made in
India’ brand in overseas markets. Existing incentives for promoting exports are considered inadequate. An
institutional mechanism such as the Automobile Export Promotion Council, which can address industry-specific
issues and facilitate exports, is urgently required.
Labour laws’ reforms to facilitate better productivity and reduction in manpower costs as has already been
committed by the Government should be expedited.
Greater tax incentive on expenditure incurred on research and development in automotive sector.
Tariff rationalization and taming of avoidable competition between rail and road transport sectors should be carried
out. In this unhealthy competition, both the industries are unable to realize their full potential.
Easier availability of market credit for funding automobile acquisition is required. Despite lower interest rates,
availability of easy credit in rural and semi-urban areas requires more focused attention. This can substantially spur
the demand.

2. Suggestions at the international level

Serious and sustained dialogue on regional cooperation in automobile sector should begin at the earliest. Dialogue
should be regular and focused in which Governments and industry should both engage.
The recent statistics of custom duties show that the average tariff rates of different countries have declined.
However, it has been noticed that the problem of high tariffs is still prevalent in certain sectors. These high tariffs
are generally noticed in developed countries. Reduction of peak tariffs is necessary to facilitate free flow of
automobiles.
Non-tariff barriers should be phased out with mutual dialogue and consensus.
Mutual recognition should be accorded to the testing and certification agencies in various countries.
Countries should join hands in developing alternative fuels to replace the existing fossil fuels. Similar cooperation is
required in other critical areas of technological development. Fragmented and limited research in each country may
lead to delay and more expensive results.
Affordability of quality automobiles should be focus of industry across the world to facilitate volumes and
widespread ownership.

Conclusions
Easier and faster mobility of people and goods across the regions, countries and continents is a cherished yearning of
mankind. The automobile industry’s potential for facilitating this mobility is enormous. Wheels of development
across the globe would have to be powered by this industry. However, a seamless development of this industry
across countries and continents alone will help in realization of this objective. For such seamless and barrier-free
development of the sector, countries will have to come together and develop better understanding. Industry across
countries will have to meet challenges of newer technologies, alternative fuels and affordability of automobiles by
people at large through constructive cooperation. The earlier we are able to achieve this the better it would be for the
world development.
In the course of the 1990s, auto industries in emerging markets were substantially transformed as a result of trade
liberalization, globalization trends within the industry and the restructuring of assembler-supplier relationships. The
massive inflows of FDI into the assembly industries in emerging markets also attracted many new component
companies that are following the FDI of their major customers. The impact of this FDI has been affected by the
changing governance structures of the auto industry value chain. Global networks have replaced local supply
linkages. Even when production remains local, design and contract allocation is increasingly global. This has led to
considerable consolidation and restructuring of the components industry in countries such as Brazil, the Czech
Republic, India, Poland and South Africa. Local first-tier producers have been marginalized.
Nevertheless, there are opportunities for assembly and component plants in developing countries to enter into
international supply networks. The new value chains may link these plants to Triad markets or specifically to
developing country markets. For government, the most important question is how to develop a policy mix, which
maximizes the potential for insertion into global value chains. In this respect, the transition from qualitative
restrictions and local content requirements towards import-export balancing requirements has played an important
role. However, it is unclear to what extent these new sourcing arrangements would survive the abolition of TRIMs.
Clearly, trade policies must be complemented by policies aimed at skill development if transnational companies are
to be attracted not only towards the construction of low-cost production facilities, but also the development of
design and engineering skills in their operations in developing countries.
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