GLOBAL COMPETITION

AND THE
EUROPEAN AUTOMOBILE INDUSTRY:
OPPORTUNITIES AND CHALLENGES

Professor Andrew P Graves

IMVP Annual Sponsor's Briefing Meeting

June 1993, Cape Cod

Draft
For discussion and comment only;
please do not reproduce, cite or
quote without the author's permission
Executive summary
In the 1980s the European Automobile Industry faced a period of dramatic restructuring due to the
downturn in car sales after the 1979 oil shock. This crisis of punctured profits and over-capacity was
only resolved during the early 1980s by the elimination of over one million units of capacity through
plant closures and more than 400,000 redundancies. Not until 1985 did European demand again
reach levels of the late 1970s. Although demand for new vehicles has remained at record levels
during the late 1980s, the European industry is now facing a severe downturn where demand is
precariously balanced.
The European industry now faces several severe challenges to its prosperity; in particular
two key tasks face producers. Namely the need to close the gap in productivity, quality and
technology with both the Japanese transplants in the UK and with those US producers who are
adopting lean production systems; and the need to construct a strategy for a post-national
automobile industry, which is global in nature and not just European.
Both European manufacturers and suppliers need to adopt significant structural changes to
meet these challenges, since the global nature of the Japanese production system means they can no
longer hide behind trade barriers and tariffs. The global strategy of Japanese car companies not only
allows them to avoid the instability of exchange rates, but enables them to avoid the consequences of
foreign protection.

This paper therefore has five major objectives:

First, it briefly outlines the historical development and context which will
determine the competitiveness of the European automobile industry.

Second, It outlines both challenges and opportunities facing the European

manufacturers, suppliers and governments as they strive to build a pan-European
industry post 1992.

Third, it analyses the options facing European manufacturers and suppliers in the
light of the establishment of Japanese transplants in the United Kingdom, and
the transferability of lean production techniques to indigenous producers.

Fourth, it argues that the key to future European competitiveness will be build
upon existing technological strengths and skills in the areas of styling and design,
environmental control and traffic management technologies.

Finally, the paper highlights some of the main issues which will inform future
International Motor Vehicle Programme Research in Europe.
Restructuring of the World Automobile Industry

Historical Overview
The automobile industry, now a hundred years old, is often regarded as the main engine of
industrial growth of the 20th century1 . Its effects on urban life and the environment are evident
everywhere. The industry is a complex and ever-changing system of manufacturing, sub-contractors
and alliances; and together, both suppliers and assemblers are a principal source of wealth and
employment in the industrialised economies. Its production techniques, and in particular the
assembly line, have had a profound influence on the organisation and technology of other industries
and services. The transformation, at the beginning of this century, from craft production to mass
production, heralded an explosion of manufacturing capacity which has had a pervasive effect on all
aspects of human activity. The industry's requirement for materials and components spread far and
wide throughout the mining, petro-chemical, engineering and electronics sectors. Today's
automobile, for example, contains over 12,000 separate parts sourced from a highly competitive and
diverse range of suppliers. The automobile industry remains an important and dynamic sector, even
through it has now been displaced by the electronics industry as the largest and fastest growing major
industrial sector.
Europe is the largest producer of automobiles in the world. Although production is slowly
declining, a record 13.7 million units were being produced in 1989 compared with 7.8 million for
North America and 9 million for Japan. Automobiles also account for over 12% of the value added
of the Communities' manufacturing industry. Directly, the European automobile industry employs
over 1.7 million people and more than 3.5 million in related supplier and service industries.
The outstanding change in the world supply of automobiles, after the post-war recovery of
European producers, was the enormous surge in Japanese production in the 1970s and 1980s. This is
shown in Table 1, which indicates that by the mid 1980s Japanese production had caught up with US
production.

Table 1: World Automobile Production (1950-1989)

1950 1960 1970 1978 1982 1986 1989

N America 6950 7001 7491 10315 5860 8890 7835
W Europe 1110 5120 10379 11321 10270 11805 13749
Japan 2 165 3179 5748 6887 7810 9052
UK 523 1353 1641 1223 888 1091 1299
World 8168 12985 22755 31226 27027 32848 35692

Sources: Data for 1950-86 SMMT year books

Data for 1989 DRI World Automotive Forecast
It also shows Japanese producers accounted for about a quarter of world car production. If Japanese
car production from overseas transplants and trade barriers against Japanese imports are taken into
account, Japan's share of automobile supply would have been even higher. By 1988 five Japanese
manufacturers were amongst the top fifteen world producers of automobiles; this is shown in Table
2.
Japanese car production in the USA by 1989 was 2.2 million units and in Europe (EC) was 240,000.
The latter is expected to rise to 1.2 million by the end of the 1990s.

Table 2: Leading World Automobile Production (million cars)

1988
General Motors 5.7
Ford 4.2
Toyota 3.1
Volkswagen 2.7
Peugeot 2.2
Nissan 2.0
Fiat 1.8
Renault 1.8
Honda 1.5
Chrysler 1.2
Mazda 1.0
Vaz (Lada) 0.7
Mitsubishi 0.6
Hyundai 0.6
Daimler-Benz 0.6

Source: US Motor Vehicle Manufacturers Association

The performance of Japanese automobile exports during the 1980s is even more extraordinary.
Table 3 shows the value of Japanese foreign trade in automobiles with the rest of the world. Japanese
penetration was greatest in the US domestic market, while the lower share of the European market
was due in large part to the non-tariff barriers and trade agreements limiting imports into Europe.
This is especially true in the cases of France and Italy, where Japanese penetration during this period
has been restricted to under 3% of the market and to 2.5 thousand cars respectively.
Table 3: Value of Japanese Trade in Automobiles with Rest of the World During
the 1980s (millions of dollars)

Year Export Import Auto Trade

Balance Balance
1981 18.445 326 18.119 +8.740
1982 18.017 347 17.669 +6.900
1983 19.535 400 19.134 +20.534
1984 21.899 461 21.438 33.611
1985 25.402 538 24.863 46.099
1986 32.945 1.069 31.875 72.743
1987 35.693 2.031 33.662 79.706

Source: White Paper on International Trade of Japan

Nevertheless, Japanese market share in Western Europe is now almost 12%, on a par with Ford and
GM. See Table 4.

Table 4: European Market Share : New Car Sales (1992)

January - November 1992 %

Volkswagen 17.4
Peugeot 12.1
Fiat 12.0
Vauxhall/Opel 11.9
Ford 11.3
Japanese 11.8
Renault 10.6
Others 12.9
Source: SMMT

Challenges for the 1990s

After a period of structural adjustment in the late 1970s and early 1980s (during which over
400,000 jobs were lost) the European Industry enjoyed rapid growth that seemed assured into the
1990s. However European producers now face a period of uncertainty brought about by various
external and internal factors that may be the most serious and traumatic in their history. Not since
the arrival of Ford and General Motors over sixty years ago has the industry faced such a period of
competition together with external challenges, some of which, such as environmental and traffic
regulations, are largely beyond its control.

A number of pressures are generating challenges for the European industry. These include:

. An inability to integrate 'Lean Production' techniques into existing assembler

and supplier companies within a timescale which meets increasing competition
from Japanese producers.
. Growing Japanese direct investment in Europe, which is characterised by world
best practice assembly plants and suppliers. In addition there is also increasing
market penetration from 'new entrant' companies.
. An inflexible cost structure and high overheads which reduce producers' abilities
to cope with demand fluctuations.
. The lack of a stable and dynamic economic and political environment as
reflected in fluctuating EC currency and exchange rates. The failure to achieve
a genuine Common Market with harmonised taxation levels, and the lack of a
mobile, highly skilled technical and managerial labour force.
. The managerial, financial and political costs of investment in Eastern Europe.
. The need to rationalise European automobile production on a Pan-European
basis, instead of within a national context, and to explore new possibilities for
global expansion.
. The need to reduce waste and increase efficiency by implementing lean
distribution and marketing systems.
. The importance of re-establishing European technology, design and
engineering as the world benchmark.
. The failure to capitalise on existing strengths in the emerging areas of
environmental technologies and Intelligent Vehicle and Highway Systems.

Whilst the global industry is forecast to grow at about 4% over the next year, the European
industry is set to decline about 3.5% to 12.8m units in 1993. This follows a fall of 1.7%, to 13.2m
units in 1992. Sales and production forecasts are reproduced in Tables 5 and 6.
If consumer uncertainty continues then sales in Germany, the strongest market and
historically the powerhouse of the European Industry, are set to decline from 4.16m units in 1991 to
3.45m units in 1993. The Italian market also faces contraction. Only France and the United
Kingdom are expected to show any recovery. UK production is expected to increase from the
present 1.3m units to over 2.5m units by the year 2000, moving the industry from fifth to third
place within Europe. By the end of the century the UK industry (by output) will be owned equally by
Japanese, UK and European producers.
Table 5: World Car Sales Forecast (000s)

1992 1993 1994 1995 1996

World Total 33,837 35,211 37,024 38,937 40,011
Germany 3,880 3,450 3,540 3,685 3,752
Italy 2,374 2,169 2,148 2,254 2,260
France 2,044 2,133 2,249 2,388 2,429
UK 1,559 1,660 1,869 2,065 2,203
Spain 976 920 1,000 1,103 1,211
EC Total 12,397 11,925 12,455 13,211 13,611
W Europe Total 13,293 12,830 13,430 14,257 14,727
East Europe** 1,683 1,927 1,983 2,286 2,400
US 8,444 9,422 9,731 9,852 9,826
Japan 4,471 4,493 4,707 4,838 4,934
South Korea 860 940 1,030 1,095 1,143

Table 6: World Car Production Forecast (000s)

1992 1993 1994 1995 1996

World Total 34,352 35,465 37,207 38,741 40,323
(net)*
Germany 4,761 4,355 4,353 4,426 4,531
France 3,266 3,203 3,329 3,465 3,627
Spain 1,872 1,823 1,907 2,074 2,137
Italy 1,517 1,394 1,597 1,640 1,708
UK 1,215 1,419 1,572 1,754 1,926
EC Total 12,895 12,571 13,216 13,927 14,566
W Europe Total 13,183 12,892 13,585 14,312 14,959
East Europe** 1,693 2,008 2,155 2,200 2,458
US 6,032 6,672 6,839 6,951 7,239
Japan 9,375 9,241 9,455 9,724 9,920
South Korea 1,292 1,431 1,566 1,704 1,747

* Excluding traceable double counting

** Including Commonwealth of Independent States
Source: DRI World Automotive Forecast Report. Winter 1992 : Cited in Financial Times 24.11.92
 It is largely the arrival in the UK of the leading Japanese producers, Nissan, Toyota and
Honda, that gives rise to optimism for the British industry. However, not surprisingly it has led to
uncertainty and concern amongst the rest of the European producers. For, as has happened in North
America, the Japanese transplants are viewed not as creating new products to increase market
opportunities but as replacing existing capacity at the expense of the least productive manufacturers.
It is unclear which producers will suffer the largest cuts, but an analysis of US 'Big 3' plant closures
clearly shows the effect the extra transplant capacity is likely to have in Europe (see tables 7 and 8).
Added to these concerns is the continuing falling sales and revenues from European luxury and sports
vehicles world-wide as a result of tough competition from the Japanese in Europe's traditional export
markets, particularly in the United States. Luxury manufacturers who have tried to escape this
challenge by driving their product range further upmarket have so far met with little success.2

Table 7: North America : Japanese Transplants and US Plant Closures

Japanese Location 1989 Announced

Transplants Production Capacity
Honda Marysville, OH 351,670 360,000
East Liberty, OH 150,000
Alliston, ON 86,477 100,000
Nummi Fremont, CA 192,235 100,000
Toyota Georgetown, KY 151,150 240,000
Cambridge, ON 20,859 50,000
Nissan Smyrna, TN 216,200 480,000
Mazda Flat Rock, MI 216,200 240,000

US Plant Closures Location Year Closed Capacity

GM Detroit, MI 1987 212,000
Norwood, OH 1987 250,000
Leeds, MA 1988 250,000
Chrysler Kenosha, WI 1988 300,000
1988 100,000
GM Pontiac, MI
1989 200,000
Framington, MA
1990 200,000
Lakewood, GE
Chrysler Detroit, MI 1990 230,00
St Louis, MS 1990 21,000
GM Pontiac, MI 1990 54,000

Source: Author's interviews/company data

Table 8: Europe : Japanese Transplants and European Plant Closures

Japanese Transplants European Closures

Company Location Capacity
Nissan Washington, UK 200,000
Barcelona 150,000
Honda Swindon 140,000
Toyota Burnaston, UK 200,000 None
Hanover 15,000
to date
Lisbon 15,000
Isuzu Luton, UK 80,000
Suzuki Linares 50,000
Esztergom 50,000
Mazda TBA 120,000
Mitsubishi Netherlands 200,000
Total 1,220,000
Source: Author's interviews/company data

This situation highlights two key issues for the European industry with regard to the
transplants. First, in order to compete, the European producers must implement forms of 'lean
production' that will enhance their overall performance. Their inability, so far, to implement
substantial changes is of concern. Second, with the intensification of technological change in the
industry in the 1990s the European producers need to regain their previous dominant position. Of
considerable concern to the European manufacturers, with regard to this issue, is whether the
Japanese manufacturing plants bring with them a fully supportive research, development and
engineering capability. These fears are reinforced due to internal pressures on the Japanese
manufacturers to maintain employment at home as their global trading position deteriorates. Nissan,
for example, is now experiencing world-wide losses and Toyota saw its profits halved during the past
year.

Challenges facing the European Industry

New Features of the Japanese Challenge in the 1990s: Product Development and Design
As reported upon in the First International Motor Vehicle Programme the growing Japanese
competitiveness in automobiles was largely due to the development of a new manufacturing
philosophy- lean production.3 In the case of automobiles, the development of a new 'Best Practice'
in manufacturing has enabled leading Japanese producers not only to concentrate on high volumes but
also to develop a high degree of flexibility in model runs, together with high productivity and high
quality products.4 As European producers close the productivity and quality gap with the Japanese
and begin to implement some lean production techniques, Japanese producers are driving the industry
further forward through radical technological innovation and further organisational innovations.
 The basis of Japanese competitive strength in the automobile industry was not size, low wages
or higher investment as often argued, but rather a new combination of technological and
organisational innovations. With its in-built training mechanisms and continuous improvement of
technology, this has culminated in the development of a lean production system which is now
displacing Fordism as world best-practice in manufacturing.
Parallel to the organisational changes which are now sweeping the car industry in its attempts
to meet world 'Best Practice' in productivity, is a technological transformation which is occurring
through a combination of factors on both the supply and demand fronts. On the supply side a range
of new technologies is being offered by traditional suppliers and new entrant companies especially in
the areas of electronics and new materials. On the demand side several factors are combining to
stimulate innovation: changing customer preferences regarding performance, style and fuel
economies; government policies on safety, environmental emissions and road traffic congestion. In
addition aggressive innovative marketing strategies on the part of some Japanese corporations have
forced western automobile companies to rethink radically their product development strategies.
In the automobile producing countries of Europe increasing resources are being invested in
new products and new production technologies by both manufacturers and suppliers. The early fruits
of the substantial increase in both R&D and patenting by the Japanese are now reaching the market
place and will increasingly pose a threat to the one area where the European industry has been
dominant. 5 Strengths in styling, design and engineering were the cornerstone of the European
challenge to the US domination of world automobile markets in the 1950s. During that period
European manufacturers quickly achieved full-production economies for specialised products offering
different technical solutions to an expanding range of design requirements related to strongly
diversified consumer demand. As noted earlier, their market share doubled during this period at the
expense of the US producers. This dominance was not just built on in-house capabilities but upon
strategic alliances and cleverly managed sub-contracting to suppliers, design firms and styling houses.
The Japanese producers have recently challenged this dominance, building upon their existing
advantages of high productivity with more efficient product development with shorter model
cycles.6
The importance of combining the Japanese R&D system, with its superiority in engineering
effort and thirty per cent reduction in development time, with the 'lean production' system means
that Japanese producers are able to make strategic choices regarding economies of scale. Average
volumes per model, for example, are almost half that of US and European producers.7 As the
average age of each Japanese model is approximately two years, half that of their western
competitors, then only 500,000 vehicles are produced, compared with almost four times that number
in the US and Europe. This flexibility of model numbers and volumes enables the Japanese producers
not only to exploit the increasingly fragmented markets of the world but also to generate their own
niches in the market place. In an era characterised by rapidly changing technology, it is important
for these innovations not only to be incorporated into the latest vehicles but also to be offered to
customers in the shortest possible time.
Leading Japanese producers are now not only challenging the Western European volume
producers, but as previously mentioned, are investing heavily in new products and production lines
for luxury and sports cars. The introduction of the Honda 'Legend', the Nissan 'Infinity' and Toyota
'Lexus' in the luxury car segment, has heralded a significant competitive threat to leading European
luxury car producers.
Since the 1950s the European manufacturers have been able to offer different technical
solutions to an expanding range of design requirements, related to a strongly diversified consumer
demand. Design has been an integral part of their portfolios - it has been as important to the volume
producers like Volkswagen, Fiat and Austin-Morris as it is to the specialised producers like Jaguar,
Volvo and Mercedes-Benz. This battle for market domination through design originality has also
been driven by an explosive growth in R&D activities by both producers and component suppliers -
who are playing an increasing role in the design of new products.
The implications arising from this are two-fold. First, the Europeans will be increasingly
pushed to reduce their own product cycles to keep technological advance in step with consumer
acceptance. Second, European producers may well end up having to rely on the Japanese to bring
consumers "up to speed" on new styles and designs. By following trends set by the Japanese, they
may well be more able to make greater steps in design change - but at the expense of losing their lead.
Therefore, the European automobile manufacturers may well become imitators rather than trend-
setters in the realm of styling and design - as is occurring in the sphere of technology.
The European response to these challenges lies largely in its ability to introduce 'lean
production' techniques into its manufacturing base, however there still exists some scepticism
regarding the effectiveness of these methods and their transferability to the European context.

The European Response: Is Lean Production Transferable?

There are conflicting arguments posed in the literature about the transferability of Japanese
lean production techniques to Western societies. Krafcik (1988) opened the debate when he argued,
based on his global quantitative analysis of plant productivity and management efficiency, that the
existence of highly competitive leading producers in the US - both Japanese transplants and new US
manufacturing facilities - attest to the transferability of Japanese methods of lean production outside
of the cultural context in which they originated. It is becoming clear that some US multi-nationals,
particularly Ford, are learning lean production techniques from their Japanese partners, in this case
Mazda, and GM has learnt some important manufacturing lessons from its partner - Toyota - at the
NUMMI plant in Fremont, California.
However, Dankbaar (1990) argues that in reality the situation is more complex and that
Krafcik's isolated examples of success in the UK and US can be explained by the fact that they are
greenfield sites, with hand-picked personnel and a unique management team aware of new procedures
and how to implement them. He goes on to say (Dankbaar, 1990 p 18), that efforts to introduce the
Japanese model into other countries will at best meet only limited success as long as management
fails to take account of the social context in which the plants are operating. Dankbaar cites evidence
of a range of factors in the Japanese case which cannot be reproduced easily in the European
environment. These include: in-firm vocational training, reduced labour mobility and short-cycled,
machine-paced labour on a continuously moving assembly line. The European context for
assimilating the Japanese model, he argues, will be inhibited by entirely different industrial policies,
labour relations and national systems of education and training. He goes on to make the case for a
new European model of production as illustrated by the 'German-Scandinavian model', which is
characterised by "the influence of socio-technical thinking, which is completely absent in the
Japanese model... and efforts to uncouple labour from the motions of machinery and to introduce
stationary work places... with longer work cycles" (Dankbaar, 1970, p17). Dankbaar argues that "the
most extreme example of this move away from the Fordist assembly line is the assembly plant of
Volvo in Uddevala, where a small group of workers is assembling a complete car on one spot".
(Dankbaar 1990, p17) However, he is inconclusive about the outcome of this model and points out
that Japanese producers in Europe may be quicker to learn from it than their Italian, French, Spanish
or British counterparts.
Generally, the leading Japanese producers have located away from traditional automobile
centres on greenfield sites. In North America, Nissan located its plant at Smyrna in Tennessee,
Honda at Marysville, Ohio and Toyota at Georgetown, Kentucky. In the UK, Nissan has located at
Washington, Tyne and Wear, Honda at Swindon and Toyota at Derby. These locations have two
major advantages for the lean producer. First, they avoid the company having to deal with a strong
trade union presence, being able to choose a single union deal or none at all, and being able to
introduce to a workforce new methods without them being encumbered by past practices associated
with mass production. The last point reflects Japanese practice in its own social context where
management and in-house labour unions develop a corporate loyalty and group solidarity. Second,
they bring advantages of being able to introduce new lay-out, equipment and work stations tailored to
the optimisation of space and new production practices.
This investment trend in production has been paralleled by the establishment of Japanese
R&D and technology development centres in Europe. These are summarised in Table 9.
Although their scale is still small compared with facilities in Japan, this does imply an effort
by Japanese companies to placate European fears about simply establishing "screwdriver" plants for
assembly. More importantly, these development centres indicate an attempt not only to attune
existing Japanese models to the European environment but perhaps later to develop entirely new
models to be built at their European production facilities. In addition, these R&D centres play a
crucial role in co-ordinating technology acquisition from suppliers, to meet local content
requirements.
 In the new transplants and joint ventures, Japanese managers have generally kept key
positions at senior levels and have maintained overall control. The evidence suggests that this is not
because Japanese companies have been unwilling to integrate Western senior management into their
corporate structures but that cultural, educational and management philosophy makes it difficult to
do so.

Table 9: Japanese Development Centres in Europe

Development Japanese European

Company Established Location
Centre Engineers Engineers
European Toyota
Toyota Sept 1989 Brussels 47 15
Technology and
Design Centre

European
Nissan July 1987 Sunderland 64 250
Technology Centre
(UK) July 1989 Brussels 35 33
European
Technology Centre
(Belgium)

Honda R&D Centre Europe June 1985 Frankfurt 47 15

European R&D
MMC April 1989 Frankfurt 11 4
Centre

European R&D
Mazda Nov 1989 Frankfurt 12 10
Representative Office

Liasion Office in
Subaru Aug 1980 Frankfurt 5 4
Europe
Suzuki Liaison Office Brussels 4 0
Daihatsu Liaison Office Brussels 4 0
Isuzu Liaison Office Brussels 2 1

Source: Author's interviews

The Japanese have therefore created with their new investments their own special social
contexts and, where successful, are often located in areas of high unemployment with specific
economic and political incentives. However, once production gets fully established, and workers gain
greater employment security then antagonisms with management (which have largely been
suppressed) may well reappear.
 Some analysts argue that the Japanese system is more humane because 'the Japanese have
shown that there is an important difference between working hard and working efficiently, and
between work that is a challenge and work that is a bore.' (Jones 1990, pp 222-233). But it should
be remembered that with just-in-time production discipline, the production line imposes a pace of
production on workers, in spite of their new responsibility, which can lead to growing levels of stress
and antagonism. Since lean production implies relatively more investment in skills and in-firm
training, workers' future negotiating capabilities might be expected to change. A lean production
system may well be at least as vulnerable to the type of labour discord that has characterised
industrialisation in western societies.
Furthermore, there are other factors which may impede the diffusion of lean-production
techniques, as shown for example in the cases of Motor-Iberica and Nissan in Spain and Rover and
Honda in the UK, where learning from Japanese partners has been slow. The former case shows that
even location in areas of high unemployment does not imply that a workforce will accept radical
change. Furthermore the overall company identity is unclear, with Spanish and Japanese managers
responsible for different sections and some reluctant acceptance by Spanish workers of their new
Japanese managers. Finally, the lack of a greenfield site has led to fragmented facilities and the
prevalence of former Spanish mass production work practices. The case of Rover Group and Honda
re-enforce these arguments. Their relationship has been at the vanguard of attempts to introduce
Japanese management and organisational techniques into the car industry in Europe, through learning
from the experience of a leading Japanese partner. Whilst Rover has had considerable success in
improving its productivity and quality, albeit begining from a low base, it appears to have done this
by exploiting a different product development and production philosophy than that which is
practised by Honda. Oliver and Wilkinson (1988), for example, argue in their book the Japanisation
of British Industry, that Rover has been incapable of creating a reliable supplier network operating
with a full just-in-time production system and go on to argue that even 'more problematic for Rover
is the creation of a new company culture.... and a failure on the part of the company to bond workers
to the company above all else and to give them aspirations identical to those of the company.'
(Oliver and Wilkinson, 1988, p56).
Japanese companies tend to see workers as the 'solution to their problems' and not as 'the
problem' as so often perceived by western companies. The point being that if workers are seen as the
problem then a production philosophy is developed to eliminate labour throughout the system or
treat it as a semi-skilled commodity as in the Fordist mass production model. This indicates that the
Japanese understand the importance of social context perhaps more than western companies and it is
clear that their relatively poor experience with joint ventures in Europe has strongly influenced them
to pursue a future strategy of stand-alone production facilities. The Japanese take great care to
ensure that the political and economic environment of the host country and location are conducive
for transplanting the lean production system. Since social context is so important to the diffusion of
Japanese production techniques, the appropriate environment may be easier to create in North
America and the UK at the moment and possibly more difficult in countries such as Sweden and
mainland Europe.
Sweden in particular, having pioneered an alternative production philosophy (based upon an
anti-hierarchical and highly-skilled team concept) to Fordism and lean production during the 1970s
and 1980s, is now facing the realisation that this model has failed to deliver the levels of productivity
and quality needed to match world best practice.
Three main reasons may explain this. First, whilst line discipline has largely been dispensed
with, the Scandinavian model does not appear to have introduced an alternative dynamic discipline or
system of 'best practice', as the lean production system has with the just-in-time discipline.
Second, in contrast to the lean production system in Japan, absenteeism amongst production
workers for a number of socio-political reasons can run as high as 30% (in the case of some plants in
Sweden). These levels may prove to be a severe impediment to the operation of the Swedish model
as it requires a high level of capability building in the teams over a long period of time. It is unlikely
that without a radical change in its social context the Swedish model will attain similar levels of
productivity and quality as the lean production system and it is also unlikely for the same reason that
lean production systems could be implemented effectively in that environment.
Third, wage costs, particularly in Sweden, are the highest in the industry due largely to the
social costs of employment. These costs mitigate against the chances of survival of any innovative
system of production and are one of the key reasons for Japanese interest in the United Kingdom,
whose wage costs are only 59% of Sweden and 61% of Germany. (See Table 10).

Table 10: Automobile Industry Wage Costs (1990)*

Country Gross Hourly Earnings Total Wage Costs

Sweden 24.56 43.72
Germany 24.30 41.87
US 23.76 32.07
Belgium 16.93 31.83
Italy 14.59 31.67
Netherlands 16.86 31.20
Japan 22.03 28.64
Spain 17.13 28.43
France 13.76 26.01
UK 18.27 25.58

* DM per hour
Source: German Automobile Industry Federation (VDA)
New Role for European Suppliers
Automobile assemblers throughout the world are requiring new and more demanding
relationships with their suppliers. Europe is no exception and many component suppliers will not
survive this restructuring. In particular European manufacturers now demand of their suppliers:
. World class levels of productivity, quality, technology and design.
. Increased R&D from first tier firms. (Many suppliers are now expected to supply
complete systems).
. To develop an 'organic' relationship with a single (often specialist) supplier, bringing
the supplier into the product development programme at an early stage, and build
stronger vertical relationships with assemblers.
. To supply (and manufacture if possible) in each region of assembly on a 'just-in-time'
basis and to service global assembly plants, if required.
. Continual improvement in cost structure
. Offer flexibility of supply in volatile market conditions.
. Attract new entrant suppliers who can address environmental and road traffic
informatics concerns (e.g. electric vehicles/information technology/new advanced
materials for weight reductions and recyclability).
As the vehicle assemblers continue to divest themselves of in-house suppliers, (from 50% to as high
as 70% from outside sourcing) they will have to build less adversarial relationships with independent
component manufacturers. In addition, the arrival of the Japanese transplants will offer significant
opportunities for European suppliers, particularly those based in the UK. European suppliers who
can successfully service the transplants will consequently be capable of competing on a global basis.
Toyota, for example, in the United Kingdom, intends to spend £100million a year with component
suppliers from within a 50 mile radius of its plant in Burnaston, Derby, when output reaches 100,000
vehicles per year in 1994. Already engines are being sourced from its new plant at Deeside in North
Wales. Toyota's aim is to increase local content to at least 60% by 1993 and to 80% by 1995. Of
the 160 suppliers Toyota has contracted to supply its UK transplant, about half are in continental
Europe and half in the UK. Table 11 offers a breakdown of major component areas of supply in
Europe. It will be of primary importance for their suppliers not only to increase their levels of
productivity and quality to those achieved by their Japanese competitors but also to make significant
cost reductions throughout their operations. In addition, there is a risk that if levels of technological
ability are not increased across the supply base then the transplants will be forced to source high
value added parts from Japanese components transplants who will be encouraged to locate in Europe.
This strategy could have significant political and industrial implications for the indigenous
components industry, undermining their core technological capability and resulting in a large part of
the European industry being dedicated to supplying low value added components requiring little or no
research and development input.Component suppliers in Europe also face two significant new
challenges in the 1990s from both Eastern Europe and from the increasing concentration and
globalisation of the assemblers. In Eastern Europe countries such as Poland, Czechoslovakia and
Hungary are seeking investment through joint ventures, licensing agreements and transplants in order
to build an export led industrial strategy. In particular these countries offer low wage and cost
effective production opportunities for Western European firms. In addition, they possess latent
engineering, especially tooling capabilities vital to building a powerful component and assembler base.
Their desire to earn hard currency will accelerate their need to build partnerships with other
manufacturers in Europe.

Table 11: Toyota Supply Base in Europe

Plant Location Investment

Toyota (Assembly) Burnaston, Derby, UK £700m
Engine Deeside, Wales, UK £140m

Suppliers:

Location Components
United Kingdom Steel
Paint
Electrical parts
Pressings/welded assemblies
Plastic parts
Functional body parts
Interior soft trim
Exhaust systems
Glass
Drive train parts
Ireland Electrical parts
Interior parts
France Steel
Audio equipment
lighting
Rubber parts
Spain Suspension parts
Engine parts
Belgium Catalytic converters
Engine Parts
Audio equipment
Netherlands Steel
Insulation material
Plastic
Germany Steel
Paint
Brake parts
Engine parts
Steering parts
Door frames
Austria Seat belts
Monaco Door handles
 Italy Castings
Wheels
Tyres

Source: Toyota Motor Co. (1992)

Particular concern by some supplier and assembler firms is now being expressed in Western Europe as
key managers and engineers are seconded to their Eastern European operations. This strategy may
well be undermining some firms ability to restructure their parent operations, whose priority should
be to meet the more important and current Japanese challenge emanating from the United Kingdom.
Automotive suppliers also face a threat from the assemblers increasing efforts to rationalise
component costs and piece-part numbers. In particular, the growing number of alliances between the
leading assemblers is being increasingly driven by their desire to reduce component costs through
joint development projects and shared components. The joint venture between Volvo and Renault,
for example, has led to a pooled purchasing strategy where Renault has already saved FFr 1 billion by
sourcing engines for their Safrane model from Volvo. Suppliers will increasingly be faced with a
greater interchange of both technology and purchasing information between their customers and will
face a significant rationalisation of parts across the industry. Attempts are already being made to
develop common parts for differing makes and models in components that do not contribute to
product differentiation.
In conclusion, the European supplier base will continue to experience continuing structural
change during the 1990s and will be forced to meet the Japanese challenge head on in Europe. Those
companies that can attune their organisations to these challenges will, for the first time, enjoy the
certainty of a long term relationship with their customer and will be able to utilise this new found
efficiency to become truly global players.

Policy Implications for Europe

The current EC strategy of creating a pan-European market will require new forms of
collaboration and alliances in production, component supply, technology development and
distribution. At the present time only Ford and General Motors can be considered as truly European
companies, with facilities spread throughout the whole of Europe. All the European producers are
dependent on the European market for sales and component supplies but all have markedly different
commercial and practical interests which influence future common policy.

The main European challenge is seen as reaching agreement on Japanese imports, the elimination of
intra-European sales and harmonised taxes. However, it is now becoming clear that too much time
has been spent debating policy measures to deal with local content and not enough attention has been
focused on analysing the implications of the auto-trade balance. The main problem relates to
Japanese vehicles built in North America, where a local content agreement of 75% has been reached.
Europe has historically been capable of maintaining a trade surplus in motor vehicle products with
the rest of the world, due largely to it exporting high-margin cars to the USA and kits and parts to
the rest of the world. This raises the concern that Europe will begin to face the reality of a trade
deficit in motor vehicles with the rest of the world. Even if Japanese exports stabilise in unit terms,
the move upmarket into sports and luxury vehicles built by the Japanese in the US, (with high levels
of local content and using a North American labour force), will be viewed by the US government as
legitimate exports to Europe to counterbalance this deficit in motor vehicles.
The importance of this is to show the complexity of the trade balance issue, and to
emphasise that Europe's future competitiveness will depend not so much on protectionism policies as
on developing its own technological strength and its own manufacturing 'best practice' in order to
close the gaps in productivity, product quality, product development lead times and technical and
environmental performance with the leading Japanese producers.
Notwithstanding the difficulties of Japanese entry into a post-1992 Europe, there are two
other issues relating to technology development which will need to be addressed within a common
policy framework. Moves in this direction are already underway. The first relates to environmental
pollution and related concerns and regulations regarding vehicle emissions. The second issue
concerns the need for improved traffic management systems, and in the area of Europe is already
making a determined attempt to spearhead advances with the development of 'smart cars' and
'Intelligent Highway Systems'. These powerful externalities reinforce the need for the European
producers to overcome the structural fragmentation of their current technological base. It is
becoming clear that a greater concentration of resources needs to be invested in R&D on a pan-
European basis to address these issues and that this will require closer collaboration between
manufacturers, suppliers, research institutes and governments.
As the authority which owns (or controls) the traffic infrastructure, government plays a
crucial role in deciding national policy options between public and private transportation.
Government also acts as a co-ordinator of regulations and protocols between countries and trading
partners. This is of crucial importance with regard to the development of 'Intelligent Vehicle and
Highway System' type technologies to be fitted to export vehicles which will be operated across
national and international boundaries. Government may also play a catalytic role by encouraging
collaborative R&D programmes in order to foster industrial synergies and encourage innovation
where firms lack the resources (or will) to invest in long-term projects. Whilst it is generally agreed
in the industry (and by some governments) that government decision makers, or their advisors, do
not always possess the full competence to assess properly technological and market opportunities, it
is clear that governments will, (either by their actions, or inaction), play a major role in deciding the
future trajectory of automotive research and development in the coming decade.

Conclusion
 In the 1980s the European Automobile Industry faced a period of dramatic restructuring due
to the downturn in car sales after the 1979 oil shock. This crisis of punctured profits and over-
capacity was only resolved during the early 1980s by the elimination of over one million units of
capacity through plant closures and more than 400,000 redundancies. Not until 1985 did European
demand again reach levels of the late 1970s. Although demand for new vehicles has remained at
record levels during the late 1980s, the European industry is now facing a severe downturn where
demand is precariously balanced.
As indicated earlier, the European industry faces several severe challenges to its prosperity;
in particular two key tasks face producers. Namely the need to close the gap in productivity, quality
and technology with both the Japanese transplants in the UK and with those US producers who are
adopting lean production systems; and the need to construct a strategy for a post-national
automobile industry, which is global in nature and not just European.
Both European manufacturers and suppliers need to adopt significant structural changes to
meet these challenges, since the global nature of the Japanese production system means they can no
longer hide behind trade barriers and tariffs. The global strategy of Japanese car companies not only
allows them to avoid the instability of exchange rates, but enables them to avoid the consequences of
foreign protection.
All European manufacturers have, to some extent, developed strategies to bridge the gaps in
performance, however, these strategies need to be based upon existing European strengths, for
merely to imitate the Japanese will leave producers lagging behind. The European automobile
manufacturers, suppliers and styling and design houses need to re-evaluate their strategies and inter-
dependencies as the Japanese manufacturers move forward through growing investments in
technology and design. However, as Japanese (and South East Asian) producers internationalise their
production, R&D and design and reduce reliance upon independent European design and styling
studios, they are developing a highly integrated and global design capability able to compete in all
automotive markets - thus challenging the continuation of what has always been the major strength
of the European industry.
The European single market strategy for post 1992 is challenging car producers to consider
how they move from being national producers, largely dependant on sales in their home market, to
becoming European. At the same time there will have to be a European initiative to replace national
barriers to trade and inward investment. A European harmonisation of fuel, sales and value added
taxes will also be required, but this process will probably not be complete until the end of the decade.
However, it is generally considered that 1992 has had little or no effect on real costs in the industry.
Nonetheless, the EC will, however, have to guarantee a level of free-trade and movement throughout
the community whilst trying to avoid trade imbalances and rising unemployment.
European companies and institutions are currently researching environmental pollution
controls and advanced traffic management systems.8 The PROMETHEUS research programme has
already produced some intra-European co-operation between companies and research centres both
inside and outside the automobile industry. Clearly the European Community must play a growing
role in not only setting standards and goals but in fostering R&D and technology commercialisation
on a pan-European basis. The time is now right for a global collaborative effort to target common
environmental concerns.
During the past decade, Japanese direct foreign investment has added to the global over-
capacity problem. This is now being resolved through the substitution of inefficient mass production
capacity by lean production. This outcome of substitution clearly raises cause for concern in the
European context, because of the implications for national competitiveness and employment as a
result of the transplants.
A clear EC policy will be needed to cope with the Japanese challenge. In particular, a
strategy is required to ensure maximum integration of Japanese production in Europe as it comes on-
stream, taking into account national economic, political and social concerns. Such a strategy would
need to include at least the following: a requirement that Japanese transplants (and suppliers)
undertake high levels of local R&D and ensure a high percentage of value-added local content;
Japanese company participation in European collaborative R&D programmes such as
PROMETHEUS; maximising the learning opportunities and demonstration effects from Japanese
investment through strategic joint venture agreements and business alliances; and finally, a wider
opening of the Japanese market in automobiles and other sectors to European investment.
The European car industry clearly faces the most critical challenges in its history, not only
from the arrival of the Japanese plants but through the global revolution in manufacturing - lean
production. It now has the opportunity to restructure and expand its capabilities in order to build a
world class manufacturing and supply base. It is, for example, significant that BMW and Mercedes-
Benz are prepared to risk investing in building their own transplants in the United States thereby
reversing the global perception of 'fortress Europe'. Europe has an industrial culture based upon
engineering and design that is increasingly in demand in the modern world and has a desire and
willingness to learn from the 'best practices' of its competitors. The immediate goal of the industry
must be to establish mutual trust and understanding between the assemblers, suppliers and the
governments of Europe in order to re-establish the automotive sector as the main engine for
economic growth and prosperity for the twenty-first century.
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NOTES
1 For an analysis of the major industrial transformations of the automobile industry over the last
100 years see Altshuler et al 'The Future of the Automobile' 1984.
2 See Krafcik (May 1989) whose study of the luxury/speciality segment found a six-fold productivity
and three-fold quality gap between the best (Japanese) and worst (British) plants. The primary
explanation is, as with the volume producers, the type of production system employed. Product
manufacturability also plays a key role in the pursuit of productivity and quality goals.
3 See Womack, J P; Jones, D T; Roos, D: 'The Machine that Changed The World' (1990)
4 For a debate regarding product variety see MacDuffie, J P et al: 'Product Variety and
Manufacturing Performance: Evidence from the International Automobile Assembly Plant Study'
(May 1992). See also MacDuffie, J P and Krafcik, J (Feb 1989) and Krafcik, J (Jan 1988).
5 For trends in European R&D, Design and Styling see Graves, A P (May 1987) and (May 1988).
6 For an analysis of the European model of product development see Clark, K B and Fujimoto, T
(May 1988).
7 See Sheriff, A (May 1988).
8 For a description of Intelligent Vehicle and Highway Systems and the PROMETHEUS programme
see Graves, A P (May 1989) and Klein, H (May 1989).