Ford and the Global Strategies of Multinationals; The North American auto industry

Ford and the Global Strategies of Multinationals

Today, the multinational enterprise (MNE) is seen as the leading agent in the process of globalization. As they adopt global strategies, MNEs are seen to be creating stronger, deeper, and more lasting linkages among countries, and shifting the balance of power inexorably in their favor to the detriment of the State. This book interrogates this idea by undertaking a historical anlysis of the global strategies of Ford. Through this case study, the author demonstrates the following points and discusses their implications: •

• •

Ford faces formidable barriers to creating global economic networks that are free of territorial, national borders, even within regional integrated systems. Outcomes in Ford’s negotiations with foreign governments, i.e. cross-border, can only be explained in the context of the triangular diplomacy game. Rather than implying a shift in the balance of power from the State to the MNE, the North American system of production reflects a kaleidoscope of power relations between different MNEs and States.

This work will be of essential interest to business historians and strategists as well as to international political scientists and economists. Dr Isabel Studer-Noguez is Director General for North America at the Ministry for the Environment and Natural Resources in Mexico and a lecturer at several Mexican universities. Her publications have focused on the role of multinational enterprises in the process of North American integration, mainly in the automobile industry, and on international relations in North America, particularly the Canada–Mexico relationship.

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Multinational Investment and Economic Structure Globalization and competitiveness Rajneesh Narula

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Entrepreneurship in a Global Context Edited by Sue Birley and Ian Macmillan

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The Global Structure of Financial Markets An overview Edited by Dilip K Ghosh and Edgar Ortiz

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Multinational Corporations Emergence and evolution Paz Estrella Tolentino

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Globalization of Services Some implications for theory and practice Edited by Yair Aharoni and Lilach Nachum

20

A Century of Foreign Investment in the Third World Michael J Twomey

21

Global Capitalism at Bay John H Dunning

22

Research Issues in Foreign Direct Investment Bijit Bora

23

Ford and the Global Strategies of Multinationals The North American auto industry Isabel Studer-Noguez

24

The World Trade Organization Millennium Round Freer trade in the next century Klaus Deutsch and Bernhard Speyer

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Ford and the Global Strategies of Multinationals The North American auto industry

Isabel Studer-Noguez

London and New York

First published 2002 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2003. © 2002 Isabel Studer-Noguez All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Studer-Noguez, Isabel, 1963– Ford and the global strategies of multinationals: the North American auto industry / Isabel Studer-Noguez. p. cm. Includes bibliographical references and index. 1. Ford Motor Company – Management. 2. Automobile industry and trade – United States – Management – Case studies. 3. International business enterprises – Management – Case studies. I. Title HD9710.U54 F695 2001 338.8′87292′097–dc21

2001019958

ISBN 0-203-16536-5 Master e-book ISBN

ISBN 0-203-25982-3 (Adobe eReader Format) ISBN 0–415–20579–4 (Print Edition)

To Thierry Nicolás

Contents

List of figures List of tables Acknowledgments Abbreviations 1 Introduction

xi xiv xvii xix 1

2 Ford motor company’s multidomestic strategy

14

3 Ford of Canada: confluence of interest in a liberal approach to automotive development

30

4 Ford of Mexico: confronting a nationalistic approach to industrialization

51

5 The 1970s: an era of structural constraints and narrowed strategic options

73

6 Ford’s survival strategy

98

7 Ford’s global strategy

118

8 Successful bargaining in a situation of increasing interdependence

142

9 Export dynamism: reconciling the Mexican and the US Big Three’s interests

161

10 A North American system of production

187

x

Contents

11 Conclusion

218

Notes Bibliography Appendix 1 Appendix 2 Appendix 3 Index

235 254 276 302 326 351

Figures

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4 4.5 4.6 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.1 6.2 7.1 7.2 7.3 7.4

Vehicle sales, production, imports and exports in Canada, 1960–73 Automotive trade balance in Canada, 1961–73 Canadian automotive exports with the United States and other countries, 1961–73 Canadian automative imports with the United States and other countries, 1962–73 Vehicle production in Canada by company, 1964–73 Vehicle exports in Canada by company, 1966–73 Vehicle sales in Canada by company, 1965–73 Vehicle imports in Canada by company, 1966–73 Ford’s production by selected models in Canada, 1971–78 Automotive output in Mexico, 1962–73 Vehicle production, exports and sales in Mexico, 1965–73 Mexican sales of vehicles by company, 1962–72 Automotive imports and exports in Mexico, 1965–73 Automotive trade balance in Mexico, 1965–73 Mexican sales of vehicles by company, 1952–65 Vehicle production in Canada by company, 1971–80 Vehicle exports in Canada by company, 1971–80 Vehicle sales in Canada by company, 1971–80 Vehicle sales in Canada by company, 1971–80 Vehicle trade balance in Canada by company, 1966–79 Mexican sales of vehicles by company, 1972–79 Ford’s sales in selected countries, 1971–79 Motor vehicle production in selected countries, 1970–79 Vehicle and auto parts exports in Mexico by product, 1971–79 The US and the Japanese Big Three world motor vehicle production, selected years Reductions in US labor force by the US Big Three International collaborative projects – Ford Motor Company Ford production by region, 1979–97 (units) General Motors production by region, 1979–97 Ford production–sales ratio by region, 1974–97

41 41 42 42 46 47 47 48 49 58 58 60 60 61 63 80 80 81 82 82 90 92 92 94 103 109 125 126 127 130

xii

Figures

7.5 7.6 7.7 7.8 7.9 7.10 7.11

Ford production–sales ratio in North America, 1974–93 Ford production–sales ratio in North America, 1994–97 Ford’s worldwide capital expenditures by region, 1974–97 Ford’s worldwide sales by region, 1979–97 Ford’s sales by region, 1979–97 Ford intercompany sales by region, 1977–97 Ford intercompany sales to total sales ratio by region, 1977–97 8.1 Vehicle sales, production, imports and exports in Canada, 1979–89 8.2 Automotive trade balance in Canada, 1979–89 8.3 Automotive exports with US and other countries in Canada, 1979–89 8.4 Automotive imports with US and other countries in Canada, 1979–89 8.5 Motor vehicle production in selected countries, 1979–89 8.6 Ford’s sales in selected countries, 1979–89 8.7 Ford’s production in selected countries, 1979–89 8.8 Vehicle production in Canada by company, 1979–89 8.9 Vehicle exports in Canada by company, 1979–89 8.10 Vehicle sales in Canada by company, 1979–89 9.1 Automotive imports and exports in Mexico, 1979–89 9.2 Automotive Trade balance in Mexico, 1979–89 9.3 Vehicle production, exports and sales in Mexico, 1979–89 9.4 Vehicle and auto parts exports in Mexico by product, 1979–89 9.5 Vehicle and auto parts imports in Mexico by product, 1979–89 9.6 Motor vehicle production in selected countries,1979–89 9.7 Mexican vehicle sales by company, 1979–89 9.8 Ford’s sales in selected countries, 1979–89 9.9 Mexican vehicle exports by company, 1979–89 10.1 Vehicle production and exports in Mexico and Canada, 1960–97 10.2 North American vehicle production–sales ratio, 1960–97 10.3 Automotive exports as a share of total exports in Canada and Mexico, 1961–97 10.4 Mexico’s vehicle production, exports, sales and imports, 1989–97 10.5 Auto parts net balance in Mexico and Canada, 1971–97 10.6 The US Big Three’s production and export shares in Mexico and Canada, 1960–97 10.7 The US Big Three’s sales and import shares in Mexico and Canada, 1960–97 10.8 Ford’s operations in Mexico, 1952–97 10.9 Ford’s operations in Canada, 1957–97

131 131 135 136 136 140 141 143 144 144 145 146 155 156 157 157 158 163 164 164 165 166 167 170 171 179 200 200 201 202 203 206 206 212 212

Figures 10.10 Ford’s production–sales ratio in Mexico and Canada, 1974–96 10.11 GM’s production–sales ratio in Mexico and Canada, 1974–97 10.12 Ford’s and GM’s production and sales in Mexico, 1960–97

xiii 213 213 215

Tables

4.1 6.1 6.2 6.3 6.4 10.1 10.2 10.3 10.4 A1.1 A1.2 A1.3 A1.4 A1.5 A1.6 A1.7 A1.8 A1.9 A1.10 A1.11 A1.12 A1.13 A1.14 A1.15 A1.16 A1.17 A1.18 A2.1 A2.2 A2.3

Ownership change in the Mexican automobile industry, 1962–80 Vehicle assembly labor productivity Labor–hours per vehicle (LHV) and labor and benefit cost per vehicle (LBCV) Worldwide profit per vehicle Research and development costs per vehicle sold Rules of Annex 300-A of NAFTA that apply to Mexico The Mexican automobile industry’s performance, 1989–97 The Canadian automobile industry’s performance, 1988–97 Ford’s production and exports in Mexico and Canada World motor vehicle production by company, 1976–97 World motor vehicle sales by company, 1969–97 Net income of the Big Three, 1969–97 Worldwide payrolls of the Big Three, 1969–97 Ford’s assets at 31 December, 1977–97 Ford’s worldwide capital expenditures by region, 1975–97 Ford’s production by region, 1974–97 General Motors’ production by region, 1974–97 Ford’s production to sales ratio by region, 1974–97 Ford’s production to sales ratio in North America, 1974–97 Ford’s worldwide sales to unaffiliated customers by region, 1975–97 Ford’s factory sales by region, 1971–97a Ford’s net income to assets ratio, 1977–97 Ford’s net income by region, 1975–98 Ford’s intercompany sales, 1977–98a Ford’s intercompany sales to total sales ratio, 1977–98 Ford’s average sales value by region, 1975–97 Ford’s average sales value by region, 1975–97 Automotive output in Canada, 1961–97 Auto industry employment in Canada, 1961–97 Vehicle sales, production, exports, and imports in Canada, 1960–97

59 106 112 115 115 192 195 197 210 277 278 279 280 281 283 285 287 289 290 291 293 295 296 297 299 300 301 303 304 305

Tables A2.4 A2.5 A2.6 A2.7 A2.8 A2.9 A2.10

A2.11 A2.12 A2.13 A2.14 A2.15 A2.16 A2.17 A2.18 A2.19 A2.20 A2.21 A2.22 A2.23 A2.24 A2.25 A2.26 A3.1 A3.2 A3.3 A3.4 A3.5 A3.6 A3.7 A3.8 A3.9 A3.10

Motor vehicle production in selected countries, 1970–97 Canadian automotive imports and exports, 1961–97 Canadian automotive exports with the US and with other countries, 1961–97 Canadian automotive imports with the US and with other countries, 1961–97 Capital expenditures in the Canadian automotive industry, 1961–97 Overall net production to net sales value ratios achieved by Auto Pact companies in Canada, 1965–96 Actual Canadian value added as a percentage of cost of sales compared with CVA commitments of all Auto Pact producers, 1965–96 Canadian vehicle production by company, 1960–97 Canadian vehicle sales by company, 1960–97 Canadian vehicle exports to the United States by company, 1967–97 Canadian vehicle imports by company, 1967–97 Canadian vehicle production to sales ratio, 1964–97 Canadian vehicle trade balance by company, 1966–97 Ford’s automotive production by selected models in Canada, 1971–78 Ford’s production in selected countries, 1974–97 Ford’s sales in selected countries Ford’s production to sales ratio in selected countries Ford’s net income in North America, Europe, and Latin America, 1975–90 Ford’s sales value in North America, Europe, and Latin America, 1975–90 Ford’s capital expenditures in North America, Europe, and Latin America, 1975–90 Canadian auto industry capital expenditures and Ford’s share of auto industry, 1977–90 Ford Canada and Ford US financial performance, 1977–93 Plants and installed capacity of the Canadian automobile assembly industry Automotive output in Mexico, 1962–97 Auto industry employment in Mexico, 1962–97 Vehicle production, exports and sales in Mexico, 1965–97 Motor vehicle production in selected countries, 1970–97 Mexican automotive imports and exports, 1965–97 Mexican automotive exports by product, 1971–97 Mexican automotive imports by product, 1971–97 Ford’s sales in selected countries, 1971–97 Mexican vehicles sales by company, 1962–97 Mexican vehicle production by company, 1962–97

xv 306 307 308 309 310 311

311 312 313 314 315 316 316 317 319 320 321 321 322 322 323 324 325 327 328 329 330 331 332 333 334 335 337

xvi

Tables

A3.11 A3.12 A3.13 A3.14 A3.15 A3.16 A3.17 A3.18 A3.19 A3.20

Ford’s production in selected countries, 1974–97 Mexican vehicle exports by company, 1975–97 Ford’s production to sales ratio in selected countries, 1974–93 Ford’s production to sales ratio in selected countries, 1988–97 General Motor’s production to sales ratio in selected countries, 1974–97 Plants and installed capacity of the automobile assembly industry in Mexico, 1983–91 Announced investment plans, Mexico, 1990–91 Production and sales in North America, selected years Capacity utilization in Canada and Mexico, 1993–98 US automotive trade, 1993–99

338 339 340 340 341 342 344 345 346 349

Acknowledgments

I was very fortunate to be able to count on the support of many people, without whom this book would not have been possible. I am particularly indebted to Charles F. Doran, who provided me with his intellectual and moral support from the day I began this project. For his infinite generosity, ability to listen, and good advice on this and other projects that I have undertaken since I arrived at the School of Advanced International Studies (SAIS) in August 1988, I am very grateful. His confidence in my ability to accomplish this undertaking was certainly a strong motivation for making progress and finishing it. I would also like to give very special thanks to Carol Wise. Although I met Carol in recent years, it seems that I have known her forever. I benefited from her friendship and intelligence in many different ways, but I am especially grateful for her patient and detailed comments on many parts of this book. To Sidney Weintraub, whose work has been always inspiring and a source of personal admiration, I am grateful for advice and participation in my PhD committee, when he commented on an earlier version of this book. I would like to give a very special thanks to Carlos Rico. Although he was not directly involved in this project, he has played an important role in my academic career. When he invited me to work as a research assistant in the Program on North American Studies at Instituto Latinamericano de Estudios Transnacionales (ILET) in 1986, I could not image how this event would affect my professional life. Not only did I learn many things from Carlos during my years at ILET, but, thanks to him, I also started to think about North America as a relevant field of research and study. Although I benefited enormously from his support, which was expressed in many ways, it was his passion for knowledge and his inquiring mind that inspired me to pursue my studies on Canada and North America. He strongly encouraged me to undertake the study of the North American auto industry almost 10 years ago. I am also very thankful to SAIS, the Center for Canadian Studies, the Canadian Embassy in Mexico City as well as the Consejo Nacional the Ciencia y Tecnología (CONACYT) for the different fellowships that have allowed me to prepare the field work for the present study. I also want to express my gratitude to Giannina Sampieri, who updated some of the figures, tables, and the appendices of this book. I also want to thank my family, Ivón, Ivette, Toño, Fernanda, and my mother,

xviii

Acknowledgments

Esther, and my friends, Rosa María and Laura Morales and Jim Robinson, for their moral support and understanding, without which I would not have had the strength to carry on. I wish my father had lived to see this book in print, but somehow I feel that he knew I would accomplish my goal, and I am also grateful for that. Finally, to Jean-Francois, there are no words that can accurately describe the importance of his solid presence and support for this book. Without his generosity of time, his unbroken confidence in me, and all his daily expressions of love, which seem to be lost in the larger picture of life, I simply would never have started or finished this project. Isabel Studer-Noguez August 2001

Abbreviations

AAII AGV AIF AJ AMC APEC AR AS ASEAN CAD CAE CAFE CAM CAMI CIM CKD CNC COLA CUSFTA CVA DPO EI FAO FCD FDI FMS FTA FTAA FTZ GATT GIS GSP IB IPE

Auto Alliance International Inc. automated guided vehicles annual improvement factor after Japan American Motors Co. Asia–Pacific Co-operation automated retrieval automated storage Association of Southeast Asian Nations computer-aided design computer-aided engineering corporate average fuel economy computer-aided manufacturing Canadian–American Motors Inc. computer-integrated manufacturing completely knocked down computer numerical control cost of living allowance Canada–US Free Trade Agreement Canadian value-added diversified product operation employee initiative Ford Automotive Operations Ford Corporate Design foreign direct investment flexible manufacturing systems Free Trade Agreement Free Trade of the Americas free trade zones General Agreement on Tariffs and Trade global integration strategies generalized system of preferences international business international political economy

xx

Abbreviations

IR ISI MES MNE NAFTA NHTSA NICs NIDL NUMMI OEM OTD PEMEX PROFIEX PRONAFICE R&D RS SM TNC UAW VAM VERs VPC WERS

international relations import substitution industrialization minimum efficiency scale multinational enterprise North American Free Trade Agreement National Highway Traffic Safety Administration newly industrialized countries new international division of labor New United Motor Manufacturing Inc. original equipment manufacture order-to-deliver process Petróleos Mexicanos Progama Integral a las Exportaciones Programa de Fomento a la Industria y al Comercio Exterior research and development retrieval storage strategic management transnational corporation United Autoworkers Vehículos Automores de México voluntary exports restraints vehicle program center worldwide engineering release system

1

Introduction

Economic integration and globalization are processes that describe the fundamental changes taking place in the international system. A reduced role for the State in economic affairs, both internationally and nationally, and an increasing centrality of non-State actors appear as concomitant developments of those changes. Very little can be discerned about these changes without understanding the role of the multinational enterprise (MNE). Although hardly a new actor in the international scene, today the MNE is perceived as having acquired a growing relevance that makes it a leading agent in restructuring the international economy. While it is generally accepted that it does not replace the nation-state as the main actor in the international system, in some extreme views the MNE has actually seized some of the traditional functions of the State. As they adopt global strategies, MNEs are seen to be creating stronger, deeper, and more lasting linkages among countries and gaining tremendous power to shape outcomes in the so-called global economy. From this perspective, the balance of power has shifted inexorably from the State to the MNE. Paradoxically, despite the pre-eminence that MNEs have gained in a more open world economy, mainstream theories of international relations and international political economy, which have largely centered on the State, have failed to incorporate the study of the MNE as a purposive actor. Also, despite the role of the MNEs in creating globally integrated systems of production, most explanations for cross-border integration tend to emphasize government actions in the form of either changes in the regulatory frameworks or formal free-trade negotiations. One could assume that at least in industries where MNEs hold a powerful position, those actors are responsible for creating the conditions that make cross-national integration an option for governments. This book suggests the need for studying MNEs as purposive actors, with goals, strategies, and organizational structures. It then looks at the factors that determine and influence the strategies of MNEs, and explores the conditions under which they contribute to the creation of cross-border integration. While assuming that the MNE has become a power broker with which States must contend, this book argues that economic cross-border integration, which is allegedly promoted by the global strategies of the MNEs, does not necessarily imply a shift in the balance of power between MNEs and States in favor of the former and to the detriment of the latter for at least two main reasons.

2

Introduction

On the one hand, MNEs face formidable barriers to create “global economic networks that are increasingly free of territorial, national borders” and even to reach high levels of co-ordination among a company’s worldwide subsidiaries. National borders, culture, institutions, economic, and physical conditions continue to matter in the strategic planning and decisions of major multinational enterprises. From a one-firm perspective, the uncertainty and risk associated with political and economic disruptions in different national locations is an important deterrent to the pursuit of a globally integrated system of production. This is particularly true in strategic industries, such as the automobile industry, that exhibit heightened levels of competition and where governments tend to be concerned with large trade imbalances. From this point of view, limited regional integration and inter-regional co-ordination appear as a second-best solution to global integration. On the other hand, industry outcomes, including cross-border economic integration, reflect a kaleidoscope of power relationships between MNEs and States, as they result from a more complex bargaining process that involves the reciprocal effects in three sets of interactions: between the strategies of MNEs and the policies of States (either home country or host country policies), between MNEs and other MNEs, and between States and States, as Strange’s concept of ‘triangular diplomacy’ (or Vernon’s notion of ‘multiple jurisdictions’ in MNEs– States relations) suggests. This is not a zero-sum gain, where what one actor loses the other gains. Rather, industry outcomes depend on the specific States and MNEs which are involved in the negotiations and the distribution of gains depend upon the bargaining dynamics. Also, MNEs’ strategies are but one set of factors affecting the power relations between MNEs and States. The empirical analysis presented in the following chapters shows that the integrated system of automotive production in North America is the result of a complex, three-level negotiation between the multinational auto makers and governments that lasted for over three decades. The outcomes in one negotiating table, for example between the multinational auto makers from the United States, Japan and Europe (efficiency-seeking strategies), affected (or are affected by) what happened in the others, either between the multinational and the governments of the United States, Canada and Mexico (the negotiation of domestic subsidies in exchange for new investments for the industry’s modernization) or between any pair of these three governments (the negotiation of bilateral or trilateral free-trade agreements) and vice versa. In this integration process, some actors, whether firms or States, have gained while others have lost. Thus, predictions about the balance of power between MNEs and States in a context of cross-border integration are ill-fated.

The need for new theoretical frameworks for MNEs–States relations Except for the transnationalist approach of the 1970s and some recent efforts, mainstream theories of international relations (IR) and international political economy (IPE) have generally disregarded the study of non-State actors, even

Introduction

3

powerful ones such as MNEs, as relevant actors in the international scene. Instead, those perspectives have considered the nation-state as the main actor in the international system and the principal unit of analysis. To be fair, some critical perspectives in IPE [such as the Dependencia school (A.G. Frank 1969; Cardoso 1972; Sunkel 1972; Amin 1977) or research on the new international division of labor (NIDL) (Fröbel et al. 1980)] have included MNEs in their analytical frameworks, but they appear as part of broader structures and not as purposive actors whose strategies could have an impact on policy or international outcomes. With the exception of Susan Strange’s eclectic approach (see below), those IPE perspectives that have studied MNEs as relevant actors in the international scene, which overlap with those in the field of international business, also have failed to focus on MNEs as purposive actors. Raymond Vernon’s “Sovereignty at bay” and “Obsolescing bargaining” and other negotiating approaches have analyzed how MNEs affect the power of home and host countries, but they do not sufficiently account for the strategies of particular MNEs. They tend to be largely industry-level analyses that center on the bargaining of MNEs and governments on specific project investments, and mostly focus on how domestic factors, including bureaucratic politics, shaped State policies. It is the literature on strategic management (Porter 1980; Hedlund 1986; Doz and Prahalad 1987; Hood and Vahlne 1988; Lecraw and Morrison 1993) that has been mostly devoted to the study of MNEs as purposive actors, as well as the impact of their strategies on the competitive advantage of nations. Some analysts have studied the ways in which governments affect the MNEs’ strategies and activities. But, in contrast to most IPE approaches, this literature has not explored the impact of those strategies on government policy or the MNEs– government power relationship. Nor has it studied those enterprises in their structural, cultural or institutional environments (Doremus et al. 1998). As already noted, the study of MNEs as purposive actors is the more relevant given the pre-eminence that these enterprises have gained in the “global” economy. The growing importance of the MNE has been associated with changes in the locus of power/authority and in the scope of economic decisions. As more and more cross-border exchanges and economic activities become internalized under the common governance of MNEs, the “scope for globality of decisions increases” (Ietto-Gillies 1992: 162). Since the Second World War, MNEs have not only multiplied, from about 7,000 to 390,000 in the last two decades,1 but they have also become “genuinely multinational” and more diversified in their origin (Strange 1995: 50). It is estimated that MNEs directly govern as much as one-third of world output, with a much higher level of indirect control if nonequity agreements or new forms of investment (mergers and acquisitions, joint ventures, and other alliances) are taken into account (Oman 1984; Mytelka 1991). MNEs also control a large and growing share of merchandise and financial trade, with sales of foreign affiliates surpassing exports as the principal means of distributing goods and services to foreign markets.2 In addition, a rising proportion of trade takes place within these multinational networks, as exhibited

4

Introduction

by a substantial increase in intra-firm trade in the last decades – from one-fifth of world trade in the 1970s to about one-third today.3 Foreign direct investment (FDI) generates linkages across countries that transcend the initial transaction, thus fostering deep integration, which is essential for the emergence of a global system of production and is more difficult to reverse (Strange 1988, 1996: Ch. 4; Julius 1990: 36; UNWIR 1994: 118, 129–31, 1996: 7). By gaining control over cross-border exchanges and national industries, MNEs are seen to have acquired significance in determining “who gets what” in the world system (Strange 1996: 54). For other analysts, the distinctive feature of the MNEs’ activities today is also qualitative: the new ways in which they are organizing and managing their multinational networks. “The type of strategy adopted by [MNEs] matters very much to the nature of deep integration and, by implication, to the way in which deep and shallow integration interact to establish a wider globalization process” (UNWIR 1994: 137). According to this view, the adoption of global integration strategies (GIS) by MNEs in the last decade or so is the distinctive feature that makes the multinational networks and their impact on governance, the world economy, and the nation-state qualitatively different from the past. Global integration strategies By adopting GIS, MNEs have allegedly generated new patterns of specialization between countries and a new “global” division of labor in production and trade (Gereffi 1996: 64). By enhancing the co-ordination of decentralized production locations, MNEs have created, for the first time, a truly global production system, rather than just “a collection of independent national economies linked primarily through markets” (UNWIR 1994: 140). In fact, according to some analyses, MNEs are in the process of replicating at the international level the degree of integration of production achieved at the national level (UNWIR 1994: Ch. III, 1996: Ch. IV). MNEs’ decisions in one country affect decisions elsewhere (Strange and Stopford 1991: 69), thus increasing economic interdependence and integration among countries. Supposedly, these GIS contrast with strategies that prevailed in the past (multidomestic or simple FDI strategies), when foreign affiliates were selfcontained production units identified with (or more responsive to) the host country needs or demands. They were merely an agglomeration of discrete units that either replicated the entire value-chain of the parent company – probably with the exception of technology and finance – or undertook only a limited range of activities and supplied parent firms with certain outputs in which they were competitive. Instead, under global integration strategies, foreign affiliates are interdependent members of a global network or system of value-added activities (Dunning 1993: 357–8; UNWIR 1994: 138–40, 1996: 99–103). A presumed corollary of the emergence of these new global systems of production, governed by core corporations, is that they are divorced from local or national conditions and therefore form the basis of a new economic global structure that escapes (or should escape, Ohmae 1990) national and even

Introduction

5

international regulatory powers (OECD 1992: 209; UNWIR 1994: 136–7; Cox 1996: 22–3; Mittleman 1996: 231). It is the MNE that co-ordinates its worldwide operations and has control over the entire product and production process: single countries do not have such control (Ietto-Gillies 1992: 162). But do these strategies explain changes in the balance of power between MNEs and States? If so, how? There has been little research on the topic to provide answers to these questions, but some are found in the strategic management literature. According to some studies, with multidomestic strategies, the competitive advantage of MNEs was determined by conditions within each country where the operations were performed; with GIS, competitive outcomes depend more on how the firm performs those activities on a worldwide basis: “economies of scale, proprietary learning, and differentiation with multinational buyers are not tied to countries but to the configuration and co-ordination of the firm’s worldwide system” (Porter 1986: 38). Against the view that MNEs become more footloose when they adopt GIS, a number of studies have suggested that those firms become increasingly dependent on the performance and stability of national economies. Once capital has been invested, the assets acquired by firms become less geographically mobile (Doz 1986: 36; see also Keohane and Milner 1996: 250), except for activities such as light assembly. This makes it difficult to maintain the argument that, with GIS, there is a divorce of the company from its national context, whether the host or the home country (Buckley and Casson 1992: 101; see also Krasner 1995; Doremus et al. 1998). If we were to accept the idea that MNEs are in fact transforming their operations into global integrated systems of production, then those different national production units would become more interdependent among themselves. As this happens, the companies become more vulnerable to disruptions in any part of the system, and this threatens the overall system. The host government or other local groups – labor unions – have the power to bring down at least part of the MNC system “by paralysing or disconnecting one of its critical components” (Doz 1986: 234). At the same time, more coordination of those geographically dispersed activities, which is facilitated by new technology, might also enhance the MNEs’ leverage with local governments, as long as the firm is able to grow or shrink activities in one country at the expense of others (Porter 1986: 3). Government and other national factors are also important determinants of MNEs’ strategies, and particularly global integration strategies, because MNEs’ demand for certainty and stability increases as their operations become more interdependent. It is paradoxical that, while many scholars in IPE have raised concerns about the retreat of the State and the narrower range of policy options for governments in their bargains with MNEs, in the international business and strategic management literature government is seen as having increased its role in the MNEs’ ability to create and sustain their global strategies. With their free-trade policies, for instance, governments have an enhanced role in creating the comparative advantage of localities, especially, but not exclusively,

6

Introduction

of those that have become global platforms for MNEs. More and more governments are key in creating competitive advantage, affecting transaction and production costs (through their role on education, training, technology policies, transportation and communications, environmental and fiscal policies, etc.), providing certainty in an increasingly uncertain and unstable international environment, and influencing the institutional framework and economic milieu for value-added activities. In sum, governments continue to affect directly or indirectly the competitive advantage and the strategies of MNEs (Dunning 1993: 67–74, 347–8; see also Porter 1986; Jenkins 1992). Although some studies in the field of international business have incorporated the government and other political factors as relevant variables in the analysis of MNEs (Kindleberger 1969; Behrman 1970; Kobrin 1982; Robinson 1984; Boddewyn 1988; Panic 1991; Safarian 1991; for a review see Doz 1986; Boddewyn 1992), there is a growing recognition that research on the relationship between MNEs and governments and on the specific effects of MNEs’ strategies and behavior on government policies is needed (Dunning 1993: 220).

A new theoretical framework: industries as complex systems of power In her eclectic approach to the study of IPE, Susan Strange emphasized the need to look at international relationships in terms of how power, wealth, and justice are distributed among actors. That approach also stressed the need to have a better understanding of the goals, strategies, and organizational processes of the firm (not only the MNE) in order to have a more complete picture of the sources and uses of power in international political economy. Strange’s main hypothesis is that the State has lost authority and is sharing it with other nonState authorities. This metamorphosis can be attributed to a combination of State policies and market trends, management strategies, and changes in manufacturing, transportation, and information technology. It is these multiple interactions among actors that set the agenda and determine the rules of the game in deciding the who-gets-what issues of politics, both domestically and internationally (Strange 1991a: 34). From this perspective, views such as Ohmae’s “borderless world” are misconstrued, because no matter how great the global reach of their operations firms belong to a home base (Strange and Stopford 1991: 223; see also Doremus et al. 1998). Like Porter, Strange emphasizes the importance of the national competitive context of industries and firms and the key role of governments in shaping that context. Unlike Porter, she also insists on the need to move beyond industry structures and include international structures in that framework to analyze MNEs’ strategies and performance. According to Strange, one of the two very profound changes that have taken place in the last two centuries was the gradual but inexorable change from a productive structure “geared primarily to serve national markets to one geared primarily to serve a world market” (Strange 1988: 62–3). This new global or regional productive structure has become increasingly dominated by MNEs, a

Introduction

7

trend which has created new opportunities but also new challenges to both firms and States. It has made it imperative for firms (not only MNEs) to look at world markets and adopt global strategies, a marked change because hitherto firms “were content to sell their goods or services locally” (Strange 1991a: 42). The adoption of these strategies implies, among other things, balancing two competing forces: worldwide integration and responsiveness to local demands. As they engage in international production and seek to secure a niche in global markets, firms are motivated not only by the maximization of wealth but, like States, also by the goal of achieving security and ultimately survival (Strange 1991a: 42). From this perspective, firms and States need to be studied as symmetrical actors. Both firms and States face the imperative of fighting their competitors for world market shares. In the new game, firms have more influence on government policies than in the past, whereas States have lost control of their national economies not only to other States (which was the argument of the interdependence school) but also to other authorities that include large and small firms, as well as other non-State actors – mafias, drug cartels, etc. (Strange 1991a: 45, 1996). States face multiple policy dilemmas as they enter the new game. For instance, although they need to establish partnerships with MNEs to generate wealth, this may mean restrictions to autonomy and freedom (Strange and Stopford 1991: 134–5). In sum, in this new competitive game for world market shares, firms have the upper hand. Consequently, it is important to analyze the role of firms as well as their relations with governments and other authorities. According to Strange, there is a need to study the firm in its transnational context – as a political actor developing and nurturing relationships with other hierarchies, whether other firms, political parties, governments, or international agencies. This perspective also proposes looking at specific firms, because generalizations at the industry level are difficult to make. Strange and Stopford concluded their study of different industries in three national cases, The interaction between governments wanting to change firms’ behaviour and firms resisting or acceding to pressure throws up a kaleidoscope of responses … Industry averages thus provide poor guides for how sectoral policy should be implemented in firm-specific bargaining. The questions can only be answered at the level of the enterprise. (Strange and Stopford 1991: 168) In sum, Susan Strange offers a complex framework to analyze the interaction between MNEs and States as purposive actors that are, however, embedded in structures of the international political economy. It looks at MNEs’ strategies in the more comprehensive framework that analyzes MNE–government interaction. From this perspective, firms and States are symmetrical actors, each with both economic and political goals that compete to get a share of world markets and to achieve security and survival. In that approach, as a group, States have lost control over some of the functions of authority and are sharing them

8

Introduction

with other States and non-State authorities. Explanations for this decline in State power are found in the game of triangular diplomacy, or the firm-to-firm, State-to-State, or State-to-firm interactions, that determine “who-gets-what” issues in the international political economy. Based on the broad outlines of this analytical framework, this book proposes a three-level negotiating framework of analysis, in which governments and MNEs are purposive and symmetrical actors. Given the lack of consensus over what constitutes a global integration strategy and the factors that determine MNEs’ strategies, this study presents a historical perspective of one specific firm, Ford Motor Co., which is analyzed both in its industrial context (the automobile industry) and in its interactions with the Mexican and the Canadian governments. But the book also suggests the need to complement Strange’s eclectic approach. It thus presents a bargaining framework where the automobile industry appears as a complex system of power, in which power relations are determined at least by three elements. First, structural rules or those factors which enable a given actor (MNEs or States) to participate and survive as an actor in an industry. Technology largely determines those structural rules which, following Buzan et al. (1993), might constitute the industry’s “deep structure.” A second set of elements is the number of players and their size (the distribution of power or the distributional structure) that reflect levels of concentration in the industry and therefore the range of strategic options available for specific actors. Structural elements do not completely determine the strategic options of an actor in the industry or its strategic decisions. While the industry’s structure sets the parameters or the range of choices for a given actor, those choices also vary depending on the specific context of the demand and consumer preference in major markets. They also depend on institutional facors, such as the type of relationship between MNEs and labor unions, suppliers, and the governments of home and host countries. The power of both States and MNEs to shape events in the international system is actor-specific, because each of those States and MNEs have distinct capabilities that are manifested in different power positions across national markets and in the international market. Governments are not passive actors, nor do they simply react to MNE strategies; they actively participate in the competitive game for world resources and thus reciprocally influence MNE strategies. Government policies and regulations, both in the home and in the host country, significantly affect the industry structure, for they reflect the broader values of the groups that dominate a given society. Governments use their authority to negotiate the basic rules of the game in a given industry with other participating actors, but that authority does not automatically guarantee a successful outcome. Each government negotiates and renegotiates the basic rules of production and competition with firms (domestic and foreign) and other governments, thereby shaping the characteristics of the industry structure in each national setting.

Introduction

9

In the empirical analysis presented in the following chapters, MNEs and States appear as purposive and symmetrical actors that are embedded in structures (or sets of institutions and inter-relationships of participating actors) of automotive production, at the national and international levels. Relevant industry features and dynamics are identified through a historical analysis and by general indicators on industry performance, internationally and nationally (Canada, Mexico, and the United States), during the 1960–93 period. A one-firm approach: the case of the Ford Motor Co. The study of States and MNEs as purposive and asymmetrical actors presents some analytical and practical problems. To start with, it should be noted that, like Krasner and the Realists, this book differentiates the State as an actor (referred to as government) and as a structure (Evans et al. 1985: 28; Krasner 1995: 259). While from this perspective, States and MNEs are symmetrical actors in that both have the power to determine the who-gets-what issues in the international economy, they are asymmetrical because MNEs are embedded in (and therefore dependent on) national structures (Giddens 1987: 290). Indeed, Katzenstein and Tsujinaka (1995) have demonstrated that domestic structures account for variations in the political behavior of transnational actors. One could argue, however, that even if the distinction between the State as an actor and as a structure is conceptually useful, it becomes blurred in the day-to-day life, because governments do make use of (or threaten to use) the power or authority of the State (sovereignty) in their negotiations with MNEs. Regarding the study of MNEs as purposive actors, the first difficulty is their complexity as organizations. MNE goals and strategies reflect their response to numerous exogenous and endogenous factors, including government policies at home and in host countries, the intensity of industry competition, the pace of technological innovations, and other internal factors such as management resources, administrative culture, etc. In other words, MNEs’ strategies reflect a plethora of past and present management preferences and decisions concerning how they perform, or plan to perform, different corporate functional areas [production, finance, marketing, research and development (R&D), etc.], how to distribute these functions geographically, how foreign locations affect the company’s strategy, and how these activities are administratively organized. While one widely accepted view is that the primary goal of firms is the maximization of profits, this, in itself, does not provide any basis for predicting or understanding the behavior of firms. It is the strategy of firms, designed in order to achieve the maximization of profits and to survive today’s tough competition, which explains their distinctive behavior. Firms face a narrow range of strategic options for achieving profit maximization in markets where competition is perfect or close to perfect, but that range is wider in oligopolistic markets. This makes generalizations about MNEs’ goals quite difficult. Consequently, an MNE’s strategy is an empirical question that cannot be assumed a priori. Another important problem is that sources of published information about

10

Introduction

the operations, goals, and strategies even of large MNEs are scarce. A company’s annual reports are valuable sources of information on their operations in the United States, but they do not provide thorough information on specific foreign operations. Data used for this study were gathered from those reports, as well as from information scattered in a number of industry periodicals and special reports from consulting firms or specialized public and private agencies. Another limitation is that, although recognizing that MNEs are not monolithic actors, it is difficult to document their internal dynamic. Consequently, this element is introduced into the analysis only when information permits. Largely because of the organizational complexity of MNEs and the scarcity of information about their strategies, this book focuses on one company: the Ford Motor Co. This study is centered on corporate activities that are measurable and for which information was available in published form – production, sales, R&D, capital investment, and profits; while finance, management culture, and marketing are largely, but not totally, ignored. Ford was selected as a case study because it is the second largest automotive company in the world and the most transnational of all auto makers. It has operations in more than 200 countries and territories, employing about 350,000 workers. Historically, Ford sought to compete against the industry’s leader, General Motors, by increasing its presence in foreign markets. Ford’s International Automotive Operations co-ordinates activities in twenty-six countries grouped in three principal regions (Europe, Latin America, and Asia Pacific). In the late 1970s, Ford produced outside the United States half of its worldwide vehicle production – compared with GM’s one-fourth. The Ford Motor Co. has also been a leader in introducing or rapidly adopting technological innovations in the industry. Henry Ford, the founder and president of the company, is considered the father of mass production. In the difficult decade of the 1980s, Ford showed its capability to rapidly adopt the Japanese system of production and to move faster than any other auto maker in seeking the integration of its operations on a global basis. The company was also a pioneer in the internationalization of production, as it was the first to open an assembly plant in Canada (1904), in Mexico (1925), and in many other countries. Historically, the company has had a leading role in developing an automotive capability in those countries, and its strategies have been characterized by its responsiveness to local government demands and its relatively high levels of export activity. A historical perspective The lack of consensus over what constitutes a global integration strategy complicates the analysis about changes in the power relationship between MNEs and States. For reasons that will become clear in Chapter 7, the adoption of a global integration strategy is firm-specific, and consequently an empirical question that cannot be assumed a priori. The idea that many industries have become global is a compelling one, but it does not necessarily suggest that all MNEs have increased the global scope of their operations. Longitudinal studies examining how MNEs built their global strategies are needed to build analytical

Introduction

11

frameworks which better explain the opportunities and constraints faced by MNEs when implementing those strategies (Taylor and Thift 1982: 14; Malnight 1995: 122; Ruigrok and Van Tulder 1995: 131, 175–8). This book presents a longitudinal analysis of the strategies of the Ford Motor Co. and its operations in Mexico and Canada, covering the 1960–97 period. The size and complexity of MNEs and the length of time required to put their strategies in place warrant this historical approach. In other words, a dynamic historical perspective is used to explain how MNEs’ global integration strategies are qualitatively different from past strategies. It helps to capture the nuances of how strategies are built and which factors facilitate or inhibit the implementation of such strategies. Also, since the main purpose of this book is to explain the changing bargaining dynamic between MNEs and governments in a context of regional integration in the North American automobile industry, it is necessary to establish a benchmark against which to measure that change. Since no published studies exist regarding one firm’s strategic effects on two national cases, it seemed that the most logical benchmark for investigating the interaction between Ford’s strategies and its operations in Canada and Mexico should pre-date the 1970s industry crisis. The two oil shocks in the 1970s and the global recession that severely affected the auto industry in the early 1980s, the rise of the Japanese producers to a worldwide leadership position, the growing internationalization of production, and the emergence of a new automobile capability in a number of newly industrialized countries (NICs) were elements that changed fundamentally the rules of automotive productions. The new rules created a new power distribution among relevant economic actors in the industry and high levels of industry competition in a truly global scope. This competitive dynamic turned the North American auto industry into a highly politicized arena where powerful actors strive not only to maximize power and wealth but also to assure their own survival. While Chapters 2, 3, and 4 look at Ford’s strategies and the Canadian and the Mexican auto industries before the oil shocks, Chapter 5 focuses on the dilemmas faced by Ford and the governments of those two countries during the 1970s. Chapters 6 and 7 analyze Ford’s strategies during the 1980s and 1990s. Government policy is a determinant factor in the formulation of MNEs’ strategies, but the inverse causal relationship (MNEs’ strategies as determinants of government policy) is less evident and/or has been little explored in analytical franeworks or empirical undertakings of MNEs–government relations or of the impact of MNEs’ activities. MNEs seek to influence directly policy outcomes by engaging in lobbying and public relations campaigns as well as in direct bargaining with governmental actors. Information about these kinds of activities, including direct bargaining that often takes place behind closed doors, is very difficult to get. One alternative is to look at how MNEs indirectly affect government policies; for example, by altering the industry structure, MNEs’ strategies indirectly determine the range of policy options available to governments to shape industry outcomes. But this methodology faces the problem that MNEs’ strategies are not the only element affecting government

12

Introduction

policies. Also, government policies and MNEs’ strategies are mutually determined. Only a dynamic historical perspective, like the one presented in this book, can isolate the reciprocal impact of MNEs’ strategies and government policies, as well as the relative significance of MNEs’ strategies in the complex web of factors affecting government policies. Another related problem is that, unless the firm has a leading position in a highly concentrated industry, it is generally impossible to prove that one MNE alters conditions or policy options in a nation-wide context. Chapters 3, 4, 5, 8, 9, and 10, which explore the inter-relationships between the strategies of MNEs and government policies, do not focus exclusively between national governments and the US Big Three, but they attempt to separate the specific effect of Ford’s behavior. The automobile industry in Canada and Mexico: a comparitive perspective The strategic importance of the automobile industry makes it a perfect case to examine how different factors interact to bring about broader changes in the distribution of power and wealth among countries and among powerful economic actors. Although a mature industry, it remains the largest manufacturing activity in North America as a whole, and it has a very significant participation in the individual economies of Canada and Mexico.4 It is also an important source of government revenues and of foreign exchange for both Canada and Mexico.5 Because of its backward and forward linkages, any changes within the auto industry have important repercussions in other industries, and thus influences the well-being of hundreds of thousands of workers and the overall economic performance of the North American countries. The automobile industry is also at the forefront of the current process of regional integration and global competition. Owing to the enormous amounts of capital and large economies of scale required in automotive production, the industry is dominated by a fairly small group of some of the most powerful MNEs in the world, which enables comparisons of the strategies of the different companies. The dominant position that the US Big Three vehicle producers (General Motors, Ford and Chrysler)6 have in the United States, Canada, and Mexico also permits the comparison of how those automakers’ participated in the creation of an integrated system of automotive production in North America. The regional context then becomes an interesting case to study the interactions between MNEs and States. The automobile industries of Canada and Mexico share common features: none of them has indigenous vehicle assemblers, they are both neighbors of the United States, and their market size is much smaller than the US market. These similarities make the comparison of those national settings particularly relevant to analyze the patterns of divergence and convergence in government policies and goals, in the interactions between governments and MNEs, as well as the distinctive impact of Ford’s strategies on the process of regional economic integration. For instance, the convergence of the Mexican auto policies of the

Introduction

13

1980s with those that the Canadian government had put into place since the 1960s promoted the industry integration into a North American system of regional productions. Before then, those countries exhibited different approaches to develop their own national automotive capability: Canada’s liberal, pragmatic, and export approach contrasted with Mexico’s nationalistic and importsubstitution strategies. Their policy convergence also meant a coincidence of interests with the US Big Three, which in the case of Mexico represented a dramatic change with respect to its traditional positions that conflicted with those of foreign automakers.

2

Ford motor company’s multidomestic strategy

As explained in the introduction, it is commonly assumed that the strategy of firms is derived from their key objective of profit maximization. But there are many strategies that a firm can pursue in order to achieve such an objective. Being complex actors, MNEs determine their strategies based on a variety of factors that are not only related to the firm’s specific assets but also to structural, institutional, and group dynamics elements. Without a complete understanding of how these elements shape an individual firm strategy, in this case Ford, the bargaining dynamics of MNEs with host country governments could not be fully appreciated. One example is how the structural elements, or the who-gets-what rules of an industry, limit the capacity of firms to make concessions to host country governments for the simple reason that, if they did, they could incur inefficiency costs or would simply not survive. For instance, GM’s moves were one constant in Ford’s strategies that confirms the relevance of the firm-to-firm negotiation in the triangular bargaining dynamic. The chapter shows how Ford’s international operations became a key source of the company’s competitive strategy vis-à-vis GM, and sets the basis for understanding the interaction between Ford strategies and the governments of Canada and Mexico that is explored in the following two chapters.

Structural rules under the system of mass production In order to survive and maximize profits, auto makers must comply with structural rules or the “who-gets-what” rules in the automobile industry. Structural rules are derived from production technologies (hard and soft technologies) that are successful in producing cars efficiently. An automobile is a complex product, which consists of over 10,000 parts and requires multiple and complex processes for its manufacture. Mass production proved successful in efficiently producing automobiles, which explains that for almost seven decades, it determined the structural rules for the automobile industry. But it is a complex system that needs to be understood in order to comprehend Ford’s strategies. Mass production emerged in the early 1900s as a revolutionary production system that sought to maximize profits through the production of a standardized vehicle at a low price. In order to achieve this goal, Henry Ford designed a

Ford motor company’s multidomestic strategy

15

system that increased vehicle output from the same amount of inputs and reduced overall time of assembly. The system was based on the principle of the assembly line, which would operate on a continuous basis without disruptions from labor or from the supply of materials, parts, and components. Three innovative techniques made the principle of a moving assembly line operational. The first was the use of large-scale, highly accurate and automated machines and tools1 that perfected the production of “interchangeable” or standardized parts that could be simply attached to each other. By reducing the number of skilled workers required to produce a car, the use of specialized machines and tools diminished labor costs, potential disruptions in the assembly line, and overall time of assembly. It also helped both to attain higher levels of precision in the production process and to lessen the need to reset machines (downtime or the time that a machine requires to function between pieces). However, one major consequence of the use of specialized machinery was a substantial increase in fixed costs, which set the first barriers to entry into the industry.2 Therefore, producing high volumes of parts from the same machines was central for spreading those costs and, thus, reducing the overall costs of producing a car. In this way, scale economies became essential for an auto maker to survive and to gain a competitive advantage in the industry.3 The second innovative technique was the progressive specialization of labor and the separation of skilled and unskilled tasks, which turned vehicle assembly into a deskilled and highly routine work.4 It also created a hierarchical industrial structure where managers specified the tasks of workers.5 In order to avoid disruptions of any kind, a system of “open shop-floor” (where workers were simply interchangeable parts of the production system) and high wages was maintained (Womack et al. 1990: 33, 42–3). The third innovative technique was a strong organizational capability for coordinating different stages of the production process that takes place within and outside the firm (Womack et al. 1990: 26–7). The complexity involved in producing a car (produce and assemble between 10,000 and 15,000 parts, each requiring different production processes) requires the masterful engineering of plants, the streamlining of production networks, including a tight and sequential connection of specialized machines and different production processes, as well as the storing of heavy inventories (Dyer et al. 1987: 29). The introduction of specialized machines in itself did not guarantee a reduction in the overall time of vehicle assembly, since a failure in the supply of any component, at the right place, at the right time, and in the right quantities, could spell disaster (White 1971: 78). A successful auto maker had to be capable of effectively co-ordinating, setting, and storing thousands of interdependent parts that had to be supplied to the assembly line in an uninterrupted, synchronized, and precise manner. A related element was vertical integration or a functional organization and a hierarchical structure in the production of parts (Filgstein 1991: 318). Considering the numerous steps involved in producing a car, vertical integration was a key element in avoiding any potential disruptions in the supply of parts and key materials,6 and in achieving efficient economies of scale and a rapid

16

Ford motor company’s multidomestic strategy

amortization of heavy fixed investments (Langlois and Robertson 1989). Since auto parts are made of different materials – metal, plastic, glass, and even textiles – which require different scale economies, auto makers have to attain efficient production scales for every step in the production process.7 The internal advantages of co-ordination and control, however, also contributed to increasing the industry barriers to entry. As one observer pointed it out, in the late 1960s, “integration into just the key areas of stamping, casting, machining, assembly, and design and development would require a $1 billion[8] investment for an efficient, viable producer. A single assembly plant would cost only $50 million …” (White 1971: 87). Despite the advantages deriving from vertical integration, vehicle assemblers could not be completely self-sufficient in producing the thousands of parts contained in a vehicle and, therefore, continued purchasing parts from thousands of independent suppliers. Nonetheless, vehicle assemblers maintained control over key mechanical parts and components, such as engine, drive-train and chassis production, and other key subassemblies (body stampings and electrical and non-electrical accessories). The duplication of manufacturing and engineering capability was combined with multiple sourcing and competitive bidding among suppliers, which reinforced the vehicle assemblers’ oligopolistic control over suppliers, strengthened their negotiating position vis-à-vis parts suppliers, and encouraged price competition among suppliers. Finally, the underlying rationale of mass vehicle production was the existence or development of “a mass-market” (Bloomfield 1978: 289; Shook 1990: ix). Only a low price for cars could develop a mass market, and only a large sales volume allowed scale economies and reduced production costs.9 Therefore, in addition to minimum efficient scales at the plant level, efficient scales at the firm or product level, measured in sales volume or market share, also became critical for the vehicle assemblers’ profitability and survival (Clark and Fujimoto 1991: 53). In sum, the structural rules for the industry under mass production consisted of high economies of scale at the plant, firm, and product levels; heavy capital investments; high degrees of vertical integration, multiple sourcing, and competitive bidding among suppliers; and a strong organizational capability for co-ordinating different stages of the production process that could take place within or outside the firm. These exacting requirements made mass production a rigid, high-risk, and costly system, which also encouraged a cautious behavior among auto makers.

Stability and vulnerability to change Mass production proved to be efficient in periods of stability, but not in periods of change (Morales 1994: 39, 58). For example, Ford’s failure to make a smooth transition from the Model T, as it became obsolescent in the late 1920s, to the Model A translated into the company’s demise as the industry leader. Then and now, the development of a totally new design or the introduction of radical product innovations represented hundreds of millions of dollars in tooling,

Ford motor company’s multidomestic strategy

17

engineering, and organizational changes. Under mass production, vehicle manufacturing tolerated only marginal changes of fundamental body design or power train of the car. This was partly because downtime or resetting of specialized machinery and/or machine tools implied a halt to the assembly line, and resulted in lower volumes and higher costs (Hoffman and Kaplinsky 1988: 52). Any changes in the product mix or design had significant consequences at the plant level, such as variations in the specifications of machine tools and parts, the number of workers and tasks, the introduction of new jobs. A new, single design would also demand the participation of thousands of suppliers, engineers, designers, and consultants (National Academy Press 1982: 21–5) as well as long lead times, or about 5 years from design to launch into the marketplace. The intrinsic rigidity of that method became evident as the first-car owner market in the United States progressed into “saturation” and the replacement market came to represent a growing share of the total market for vehicles (White 1971: 269; see also Langlois and Robertson 1989: 369–70). Another problem faced by auto makers was how to cope with the cyclical nature of vehicle demand,10 which tended to be particularly sensitive in the replacement market and implied substantial financial risks (White 1971: 31). In this market context, GM succeeded Ford as the industry’s leader. GM’s “system of flexible” mass production “allowed for model changes without trauma” (Langlois and Robertson 1989: 371). By combining body variations with common parts to achieve greater standardization of components, minimize costs, and maximize production, GM reduced technological differences between cars in a product line (National Academy Press 1982: 27–9; Quinn 1988: 16; Rubenstein 1992: 57). Two marketing strategies, which were associated to this manufacturing strategy, created a buffer in the event that consumer tastes changed from one segment to another. The first was the introduction of annual model changes that implied restyling the external appearance of cars (“facelifts”) and “an endless series of ‘hang-on features’, such as automatic transmissions, air conditioning, and radios, which could be installed in existing body designs to sustain consumer interest” (Womack et al. 1990: 42). The second was market segmentation on product lines, rather than independent designs, according to a price pyramid that offered “a car for every purse and purpose.” By developing a range of product lines that ran from cheap to expensive, GM “fully accommodated potential buyers of every income throughout their lives” (Womack et al. 1990: 41). With this formula GM generated a continuous demand for vehicles, thus solving the underlying conflict between standardization, required by scale economies, and model diversity, in style, color, and customization that was embodied in the changing situation in the US market for vehicles (Womack et al. 1990: 41–2; Clark and Fujimoto 1991: 45). GM’s successful management and organizational innovations, known as Sloan Scientific Management, also proved that, in order to succeed, mass production called for a system that could effectively manage the total system of factories, engineering operations, and marketing. GM created decentralized divisions and professionalized its management. Senior executives could manage separate

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Ford motor company’s multidomestic strategy

profit centers by offering detailed reports on sales, market share, inventories, and profit and loss, which allowed for reviews of capital budgets when divisions required funds from the central office (Womack et al. 1990: 40–1). Similarly, GM’s management structure allowed for the internalization of production at the parts level. Its multidivisional structure and its rich package of complementary assets – large dealer, consumer and finance networks – permitted reductions in the costs of internal organization, thus providing further incentives for vertical integration (Langlois and Robertson 1989: 375). Not surprisingly, levels of vertical integration coincided with company size. Until recently, GM remained the largest supplier of components to the world motor industry. According to one estimate, in the 1970s, GM bought 75 percent of its parts from in-house suppliers, Ford, 50 percent, and Chrysler, 40 percent.11 GM’s experience shows that an auto maker can alter the rules of competition and the industry’s structure if its strategies of technological capability and innovation prove successful in responding to new market conditions. Once one firm is able to introduce more successful strategies into the industry, new rules of competition, a new distribution of power, and a new pattern of behavior emerge. Over time, the exacting rules of competition required by mass production raised the barriers to entry into the industry (huge economies of scale and huge capital investments) and fostered the development of a concentrated oligopoly in the US automobile industry (Dyer et al. 1987: 28); the high level of homogeneity that emerged in the US Big Three strategies eventually undermined their competitive instincts. GM’s huge resources and market power prompted the disappearance of many companies or their consolidation into larger firms. Between 1921 and 1946, the number of vehicle assemblers in the United States was reduced from eighty-eight to nine.12 In the 1960s, there were only four producers of passenger cars in the US industry, the Big Three plus American Motors, accounting for almost 100 percent of total production in that country. The increasingly rigid power structure that emerged in the industry was exacerbated by the Big Three’s dominant position in the huge North American market and the low level of competition that they faced internationally.13 The US auto makers also exhibited a strong mutual interdependence that prevented one firm from entering “an expensive new product line until there [was] room for all of his fellow oligopolists to enter successfully” (White 1971: 175). In this typical behavior of oligopolists in a highly concentrated industry, GM became the industry leader. This implied that GM set the style and price trends in the industry (White 1971: 115). Product differentiation, rather than product and process innovation, became the new focus of automotive competition. Since then, “Detroit [became] basically convinced that it [was] styling that [sold] cars” (White 1971: 200, 73–4). Group responses based on strategic norms and patterns of behavior based on previous decisions were also shown in the US Big Three’s product strategies. The lack of competition made those strategies highly homogeneous: they shared the standard basic power-train technology (engines, transmission, and drive), focusing mainly on heavy rear-wheel-drive cars with V8 engines. Very rarely did

Ford motor company’s multidomestic strategy

19

they introduce new platforms, thus their product differences were achieved primarily in external styling and engine displacement. The progressive standardization of their product strategy also resulted from the existence for decades of a stable vehicle market in the United States. Americans were in love with the US product concept [the basic V8 engine, rear drive-automatic transmission power train and chassis] – annual styling change and the broad range of choice. It was a concept that generated huge volume and large profits. (Clark and Fujimoto 1991: 46) Since GM determined prices, and therefore the level of profits, the other auto makers could not follow an independent price strategy. Over time, price became irrelevant as the basis for competition, and the absence of price competition led to huge profits “in excess of the normal rate of return.”14 As White (1971) has argued, “once the invisible hand of competition [was] gone and oligopolists recognise[d] their mutual interdependence [aiming toward a maximization of joint profits], the setting of prices [was] a matter of conscious decision and choice and speculation about reaction of rivals” (White 1971: 109). Vertical integration also discouraged competition among independent supplier firms, abated the pace of technological change, and reinforced a faster pace of model change. Ford, as did the other US auto makers, not only adhered to GM’s style trends but also imitated the leader’s successful administrative strategies. This isomorphism was shown in Ford’s adoption in the 1950s of GM’s marketing concepts and organizational strategy, introducing independent product-line divisions, the Lincoln-Mercury and the Ford Divisions, each with separate engine and assembly plants.15 Also, after 1960 and following GM, Ford consolidated all North American production plants under a decentralized functional organization (National Academy Press 1982: 28; Dyer et al. 1987: 145). Higher levels of industry competition were also inhibited by the high industry wages, the institutionalization of an adversarial labor–management relationship, and the emergence of a labor monopoly. Since the Big Three’s recognition of the United Autoworkers (UAW) union in the late 1930s,16 the relationship between corporate management and the union became adversarial, although relative employment stability developed in the industry with the historic 1948 labor agreement between GM and the UAW.17 This agreement linked wage increases to productivity gains and cost of living allowances (COLAs), and provided substantial pension, health care, and unemployment benefits (National Academy Press 1982: 114–15; Morales 1994: 63). In exchange for accepting Taylorist practices of labor control, the UAW obtained substantial real wage increases, above the average wage level of employees in similar jobs outside of the industry, as well as other benefits.18 The UAW continued to view employers with hostility, as reflected in the nature of collective bargaining. The process of negotiation entailed periodic “battles,” where a gain for one side would represent a loss for the other. Nonetheless,

20

Ford motor company’s multidomestic strategy

strikes and other extreme measures gradually diminished, and were replaced by institutionalized rules of negotiation. In 1955, the UAW succeeded in institutionalizing through “pattern bargaining”19 an adversarial but more stable labor–management relationship, which increased considerably the power of the union on a national level and created a labor monopoly that matched the auto makers’ oligopoly. Interestingly, at least until the late 1960s, the UAW avoided direct confrontation with GM, “which had the financial reserves to withstand a strike,” and targeted the smaller competitors. Chrysler was targeted in 1961 and 1964, Ford in 1955, 1958, and 1967 (Rubenstein 1992: 237). Other institutional factors, such as US government policies of intermittent intervention in the industry, also helped to undermine the extent of competition in the US automobile industry. The adversarial relationship between government and business in the United States that emerged in the mid-1960s was founded on the underlying tension which existed between the neo-classical model or ideology that shaped US government policies toward the automobile industry and the system of managerial capitalism based on large, oligopolistic corporations. In the 1960s, and responding to growing public awareness on safety and fuel emissions, the US government increased and modified its forms of intervention in the automobile industry. Before the 1960s, US government intervention in the automobile industry was “intermittent and inconstant,” as “periods of mild support and benign neglect have alternated with periods of fierce scrutiny and sharp intervention” (Dyer et al. 1987: 45). Most government policies affecting the industry were shaped by the underlying ideology of laissezfaire, which justified government intervention only when there were strong demands by powerful economic or social actors to do so, or when it was justified to correct market failure (Gilpin 1996: 418–19). Intervention in the automobile industry on the part of the US government was particularly strong during the Great Depression20 and during the Second World War, when vehicle assemblers were subject to serious anti-trust investigations and the US Congress passed the Full Employment Act of 1945. But US government policies did little to preclude the Big Three auto makers from gaining tremendous market power, or to foster competition in the industry. As Morales (1994) has argued, although the purpose of anti-trust legislation was to ensure economic efficiency by prohibiting restraints on trade and the creation of monopolies, anti-trust regulations were ambiguously applied. Since interpretations of economic efficiency have varied over time, in the end they accepted tacitly the emergence of large firms.21 Direct US government intervention in the automobile industry was limited to procurement of vehicles and regulation of trade, although naturally other “implicit” policies also had an influence on labor and capital markets. In general, most US macroeconomic policies, such as fiscal and trade policies, and infrastructure projects that created long-haul transportation and wide and straight roads, fostered the automobile industry’s growth. The US government even adopted pro-consumer policies, such as low gasoline taxes, that contributed to the predominance of the standard American car in the US market (Clark and Fujimoto 1991: 37–8). All of these policies “were equally important in shaping

Ford motor company’s multidomestic strategy

21

industrialization, and … favoured the rise of standardized production over more flexible means of manufacture” (Morales 1994: 64). Institutional factors, such as the highly concentrated and stable oligopoly with high entry barriers and with a giant firm – GM – as a leader, thus hampered the incentives that the smaller companies had in pursuing independent and optimum strategies. This implied that Ford strategies were only marginally distinct from other US auto makers, particularly GM. Furthermore, because of the dominant position that the US Big Three auto makers enjoyed in the automobile industry worldwide, what happened in the US context was relevant to the operations that those auto makers had outside of their home country.

Ford’s strategies Where they existed, differences in strategy or goals between the US Big Three stemmed basically from each firm’s ability to conform to the rules of competition and from its relative power position in the industry. Since 1952, Ford became the fourth largest industrial corporation and the second largest vehicle producer in the world.22 In 1970, Ford’s vehicle production in the United States was about half of GM’s, although it was a leader in the production of commercial or truck vehicles. Being a smaller giant than GM meant that Ford was compelled to compete directly with the industry leader. Ford had to position itself to react quickly to GM’s marketing initiatives and to strengthen its competitive and financial advantages relative to GM. Also, having to take a price meant that its strategic choices for profit maximization were interdependent with the collective behavior of the other industry competitors. By using firm-specific traits, such as organizational/institutional structure, previous strategies and culture, and technological breakthroughs, individual companies may alter the industry rules and competitive structure or escape from traditional patterns established by group norms. For example, the introduction of innovative methods of mass production earlier in the century gave Ford enormous “first-mover advantages,” which enabled the company’s domination of the industry until the 1920s. Once GM consolidated as the industry leader, Ford faced key strategic dilemmas in light of its smaller size relative to GM. For instance, the latter had a range of five brand names: one luxury model and the rest spread across all market segments; Ford, like Chrysler, had only three brand names, reserving one for more expensive models (Bhaskar 1980: 96). The goal of offering a full range of models ran up against such inefficiencies as lower scale economies per make or model and this meant higher risks and competitive disadvantages relative to GM. In this situation, Ford had little room for designing strategies that were very different from those dictated by GM. For example, Ford showed lower levels of vertical integration than GM and tried to maintain a leadership in seeking market niches. Despite some failures to introduce new product lines, most notably the middle-sized Edsel, during the 1960s Ford’s leadership in seeking market niches propelled the introduction by its competitors of similar products

22

Ford motor company’s multidomestic strategy

within segments or even the creation of new categories. The Ford Fairlane, a mid-size car and a smaller version of the standard Ford and the Mercury Meteor, also a mid-size car, was an example of the introduction of new products, and the Mustang (1964), of new categories.23 As one observer noted, Ford’s public relations rhetoric … indicated that the company sees itself as a disadvantaged firm, dissatisfied with its market share and constantly seeking ways of increasing that share. This niche seeking behaviour can be directly related to this self-image. (White 1971: 207) The extensive transnational network of sales and production operations throughout the world was a key and distinctive feature of Ford’s competitive strategies. By the end of the 1950s, Ford and GM were the only auto makers with manufacturing operations in foreign countries,24 reflecting their colossal financial and sales growth in that period. Ford and GM international strategies followed a similar rationale (Quinn 1988: 35). They did follow each other in different national markets, first in Europe during the 1930s, when GM bought a number of companies in the largest markets where Ford had already established manufacturing operations. By doing so, Ford and GM introduced a new element of competition in the industry that was followed by their competitors, thereby contributing to make the automobile industry one of the most internationalized industries in the world. Their expansion of investments in production facilities in Latin America in the late 1950s and 1960s, which aimed at defending regional markets in the face of heightened competition from European auto makers, led to “a historical shift in location of production” that made automotive competition global in scope well before those companies adopted their global integration strategies of the 1980s (Quinn 1988: 16). Before the 1970s, the bulk of both GM and Ford’s vehicle production was concentrated in developed countries, while developing countries captured a relatively small proportion – between 10 and 20 percent – of those companies’ total production. Brazil, Mexico, and Argentina represented more than twothirds of that proportion. But the strategies of Ford and GM showed important differences which stemmed from each firm’s available resources, organizational and managerial capacities. Despite its larger financial resources, GM had a lower disposition to open operations abroad and became less transnational than Ford (Bloomfield 1978: 289). Compared with GM, Ford also tended to locate a relatively larger proportion of its production operations in developing countries, paticularly Latin America. Ford was one of the first corporations in the automotive industry to go international, with the opening of Ford Motor Co. of Canada in 1904. By exploiting first-mover and monopolic advantages that derived from its leadership position in the United States, early in the twentieth century Ford started building a broad network of foreign operations. Ford maintained a leadership position in several foreign markets, even after GM replaced it as the industry leader. In fact, Ford’s extensive and broad international network of sales and production

Ford motor company’s multidomestic strategy

23

operations was a distinctive feature of the company’s competitive strategy. On many occasions, Ford used the locational, internalization, and knowledge advantages gained in foreign countries to enhance its overall performance and competitive position against its main rival, GM. Ford’s international operations gave the company a certain level of independence from GM’s strategic moves and expanded its strategic options that were otherwise restricted in the United States. Market-seeking strategies Ford’s decisions to open foreign operations were driven by several factors. Ford’s market-seeking strategy in foreign locations was a natural consequence of the company’s goal to expand sales, which derived from the mass production rationale. But sovereign risks were high, owing to the high costs of automotive production and the existence of borders – from tariff barriers and government regulations to different consumer tastes and infrastructure development. Ford then followed a low-risk strategy in international markets. Ford preferred exporting cars and parts from the parent company to foreign markets to manufacturing abroad, so as to avoid such investment risks as political changes, currency adjustments, and unfamiliar work culture. Ford was also willing to open small assembly plants, as they did not have major cost disadvantages owing to the labor-intensive character of assembly (Doz 1986: 75). The common pattern of Ford’s market-seeking strategy outside the United States was from exports, to opening sales branches, to assembly plants of completely knocked down (CKD) products. Ford’s risk-minimizing strategy provided access to foreign markets without having to incur major financial costs and risks of establishing manufacturing operations unless a significant demand for their vehicles was guaranteed. That strategy was maintained only before 1929, a period when US companies faced relatively low tariffs and taxes, particularly in Europe. Those years were considered “a golden age for American exporters and overseas establishments” (Wilkins and Hill 1964: 361). Ford only opened more sophisticated manufacturing operations when it was necessary to defend a potentially large market, and tended not to close assembly, sales branches, or manufacturing operations abroad. (The exception was the closure of seven assembly and sales branches in the 1945–50 period. In the previous four decades, Ford had closed only four assembly or sales branches.) Ford’s market-seeking strategy created a diverse network of foreign operations that included CKD assembly operations, sales branches, sales companies, distribution channels in numerous countries, and only a few self-standing manufacturing complexes in foreign countries, and only a few self-standing manufacturing complexes in foreign countries. In the 1960s, Ford’s network of foreign operations consisted of fourteen branches or companies with assembly plants, eight sales companies, and eight manufacturing complexes.25 After establishing operations in different countries, Ford used its first-mover, location, internalization, and knowledge advantages there to compete with GM. Its foreign operations contributed to maintain Ford’s position as the second

24

Ford motor company’s multidomestic strategy

largest producer in the world. This position also explains Ford’s greater disposition to respond to foreign government demands for increased investments and local production, particularly of parts. Once Ford recovered its second position in the US industry in the early 1950s, the company invested heavily in expanding its European facilities and in strengthening both its British and German operations. Ford also opened new manufacturing operations in three Latin American countries and assembly plants in Venezuela, Portugal, Egypt, and Rhodesia. The creation of a system of component plant dispersion in its international operations, based on economies of scale and vertical integration, enabled Ford to exploit its internalization advantages through transfer price policies. In this way, the company was able to achieve control over the quality and costs of components and parts, to buffer itself against unstable currency fluctuations (Quinn 1988: 36), and to expand volume for efficient part and component production in the home country operations. This strategy was not different from that followed by GM. However, Ford’s lower level of vertical integration relative to GM allowed the company a greater leeway than GM in buying parts in the countries where it had assembly plants.26 A multidomestic organization In the 1960s, GM’s and Ford’s worldwide operations functioned on a multidomestic basis, with their foreign subsidiaries being self-standing and selfcontained units which conformed to local production practices, consumer tastes, and other host country needs or major government demands. This strategy applied in major vehicle markets or markets with a huge potential for growth, where market imperfections prompted Ford and other auto makers to open manufacturing operations. In these countries auto makers had to adapt the basic industry rules of production and competition to local conditions and negotiate them with local actors, including government, labor, suppliers, vehicle assemblers, and even consumers. Not surprisingly, Ford’s multidomestic strategy was also regionally differentiated, which meant that the company strategy was distinct in different geographic areas. For multinational enterprises seeking to expand overseas, government policy has traditionally been one of the most important sources of market imperfections. For instance, high levels of tariff protection and nationalistic sentiments in Germany forced Ford to open production operations there in 1931. During the 1930s, market imperfections arose from the highly restrictive Smooth-Hawley tariff (1930) in the United States, to which European countries responded with controls on production levels, higher tariffs, and aggressive export initiatives for auto makers.27 It was during this period that Ford turned some of its branch sales and assembly operations into manufacturing operations. The circumvention of tariffs and other regulations were not the only determinants that sparked Ford’s and other auto makers’ production abroad. For example, Ford’s operations in England, where the first manufacturing plant was opened in 1911, occurred 4 years before customs duties on automotive products were introduced (Wilkins and Hill 1964: 401). The high local per capita

Ford motor company’s multidomestic strategy

25

income base of some countries generated large vehicle markets, as well as the existence of, or the potential capability to develop, secondary manufacturers that could supply key materials, such as steel, and parts to produce automobiles. Also important were the installation of basic infrastructure that encouraged wide use of cars and the existence of political stability. Finally, particular consumer tastes and market conditions in certain regions were also factors that motivated the establishment of local production operations. For example, Ford Germany and Ford England developed the capability to introduce variations to US designs that better suited European tastes and market circumstances. Those subsidiaries offered a wider variety of products than Ford did in the United States.28 Not surprisingly, before the 1960s, Ford’s international operations were geared toward expansion into industrialized countries, such as Canada (with its access to markets of the British Commonwealth), England, and Germany. It was in those countries that Ford established the first integrated manufacturing complexes outside of the United States – Canada (1908), Dagenham, England (1930), and Cologne, Germany (1931) (Harvard Business School 1979: 7). Ford established a number of assembly or sales branches and not manufacturing complexes in Latin America, largely because most of the countries in that region did not have sufficient roads or local industrial suppliers, and their low level of per capita income offered poor market conditions for expanding sales or supporting economies of scale. Clearly, Ford’s main strategic goal of attaining access to Latin American markets was determined by the perception that those markets had a significant growth potential (see below). It was not until the early 1960s that some of those branches were converted into manufacturing operations, partly as a result of the competitive challenge that European producers posed in the region. A centralized, ethnocentric management While Ford strategies responded to the local opportunities and competitive advantages that were built over time in different national markets, the competitiveness of foreign operations was also dependent upon the company’s management capabilities and its overall position in the industry worldwide. Ford’s subsidiaries were part of a centralized and ethnocentric organization, where policies were dictated by the parent company. In Henry Ford’s concept of “one-man leadership,” subsidiaries were totally dependent upon the parent firm for products, product designs and engineering, parts, technology, and even materials. Managers of foreign operations were, with very few exceptions, US citizens (Womack et al. 1990: 39, 210). In Ford’s hub-and-spoke organization, foreign operations performed similar roles to the company’s US branches. Therefore, Ford’s multidomestic strategy meant that the subsidiaries were not part of an integrated transnational production system, i.e. the exchange of products or services between those subsidiaries or even with the parent company was kept to a minimum. The transfer of technology, design, and financial resources from the parent company to most subsidiaries was the only kind of exchange within the network of business units. Ford’s multidomestic strategy was almost inevitable considering the

26

Ford motor company’s multidomestic strategy

existence of protective policies in many parts of the world, which forced that company to adjust to national conditions. The company’s organizational structure became inefficient as the company became more complex and hindered Ford’s ability to manage its international network of subsidiaries, branches, and companies (Bloomfield 1978: 296). As we have mentioned earlier, the weakness of its organizational strategy also contributed to Ford’s loss of relative competitive advantage during the 1930s and 1940s. When Henry Ford II replaced his grandfather in 1945, the company was in “an advance state of disarray,” “organization, responsibility, co-ordination, and control had all disintegrated,” and was losing money – although nobody knew how much (White 1971: 12). The new president decided that “the key to the company’s survival was to replace his grandfather’s casual decision-making approach” with a structure based on that of General Motors (Rubenstein 1992: 90). Thus, in the 1950s Ford hired managers that had worked at GM and adopted the organization concepts of its main rival (Bloomfield 1978: 296), which implied the reproduction of a centralized, yet functional, organization for its worldwide operations. Exploiting Ford’s locational advantages abroad were necessary not only to meet the strategic goal of combating GM’s advantage in the US passenger car market but also to respond to heightened levels of competition in foreign markets, particularly from European auto makers. In 1949, and as part of the program of centralization, Ford’s Foreign International Division was created with the goal to formulate all international policies from Detroit (Wilkins and Hill 1964: 370). As in the 1920s, management of foreign subsidiaries was to come from the United States. Also, in a major departure from the past, Ford changed the strategy of financing foreign operations only by reinvesting profits earned locally to a strategy of using the parent company’s own capital to finance those operations. This, in turn, contributed to a further centralization of key operations in the parent company. While Ford kept its traditional reluctance to establish joint ventures,29 the company also embraced GM’s strategy of 100 percent ownership of its foreign operations. In the past, Ford had preferred to open its own subsidiaries, usually by raising capital through minority shareholders in the market where its foreign subsidiaries operated (another objective was to gain acceptance in foreign markets). Nonetheless, the company maintained majority ownership, with the notable exception of Canada, where it had a minority interest until 1949 (Wilkins and Hill 1964: 375). As a result of the new ownership strategy, Ford increased shareholdings in its companies in Italy, Egypt, Belgium, Holland, Denmark, Spain, and France. By 1962, ownership in Ford Canada was up to 75 percent, 99 percent in Ford Germany, and 100 percent in Ford England. It also wholly owned its enterprises in Argentina, Brazil, and Mexico, with the exception of Ford’s 51 percent ownership of Willys in Brazil (Wilkins and Hill 1964: 375–7, 423; Behrman 1972: 128). Some competitive gains derived from having full control over all foreign operations and organizing them under one common governance structure. Full

Ford motor company’s multidomestic strategy

27

ownership enabled Ford to protect the competitive advantages it had built over previous decades, to acquire flexibility in designing unilateral financial policies, use earnings from foreign operations for business expansion when the parent company deemed it advantageous, defend monopolistic or ownership advantages, and enjoy the full profits from investments (Wilkins and Hill 1964: 422–3). Rationalization of Ford’s European and Latin American operations Changes in Ford’s management strategy made in the 1950s resulted from the company’s need to regain its competitive position in the US market, but those in the 1960s were triggered by new regulations or policies introduced by governments in foreign countries. Ford saw opportunities to specialize and rationalize its worldwide operations on a regional basis and to develop a network organization in which its subsidiaries would increase their transnational linkages. Free-trade policies reduced the sovereign risks associated with foreign investment and allowed vehicle auto makers to maximize efficiency by exploiting economies of scale. During the 1960s, industrialized countries committed to reduce trade barriers in several trade rounds at the General Agreement on Tariffs and Trade (GATT). Automotive producers benefited from tariff reductions in the 1962 Dillon round (tariffs on industrial goods were cut by 20 percent) and the 1966 Kennedy round (reduced tariffs on a range of manufacturing products by 35 percent). During that decade, Ford’s goals of plant specialization and co-ordination of its overseas operations were most successful in North America and Europe, where market conditions of increased competition and freer trade offered the possibility of rationalizing production on a regional basis. Ford was well positioned to implement an efficiency-seeking strategy in these two regions because of the locational advantages that the company had created there over the years. The rationalization of its North American operations started with the US–Canadian Automotive Trade Agreement, implemented in 1965. As discussed in detail in the following chapter, the integration of Ford Canada’s operations into a North American system of production has begun since then. Ford of Europe, “a totally separate company” except financially, was “predicated on the development of the European Economic Community” (Foreman-Peck 1986: 155; Womack et al. 1990: 211), as it was established in 1967, just a year before the European Economic Commission consolidated the regional free market. The liberalization of internal trade and the setting of a 17.6 percent common external tariff were the key instruments in the creation of the common market, and they facilitated cross-border movement of automotive products. The new company’s objective “was to co-ordinate the various European subsidiaries through a single European company” (Solvell 1988: 200), under a functional organization, with each subsidiary specializing in a particular component or model line, in exchange for the rest of the company’s products.30 The process of integrating the operations of different national affiliates started with the Capri (1969), “the first Europe-wide model,” which integrated design and development functions between Ford Germany and Ford England.

28

Ford motor company’s multidomestic strategy

Ford of Europe did not function as a fully integrated regional company until the late 1980s, when it became a regional stand-alone structure (World Investment Report 1993: 147), but by 1972, it was already operating under an integrated model range31 and a dispersed and efficient system of component production, with single sourcing for some products (UNCTC 1983: 83).32 Largely as a result of historical differences in consumer tastes between Europe and the United States, Ford of Europe had built a capability to develop and produce a distinctive car not only for such a regional market but also for other markets around the world. The company had two engineering and research centers, one in Britain (at Dunton) and one in Germany (at Merkenich), which were the only two R&D locations outside of Ford’s Dearborn, Michigan, headquarters. By contrast, in Canada and Latin America, which share similar consumer tastes with the United States, Ford’s operations did not display the European independence in terms of either product development or management autonomy. Also in sharp contrast with the North American and European experience, in Latin America Ford found little scope to follow either an integrated production strategy, with certain models or parts being concentrated in one country and exported to others (UNCTC 1983: 128), or a strategy of co-ordination with its other international operations. Thus, Ford’s Latin American operations responded best to the concept of a multidomestic strategy, with the company adjusting to specific national market requirements and needs. While Ford’s primary goal in Europe was to increase efficiency at a regional level, the goal in Latin America was to guarantee market access. The combination of this strategy and the growing competitive scenario that emerged in the world auto industry in the 1960s resulted in the success of Latin American governments to attract automotive investments. When European carmakers began to challenge the dominant position of US capital in third markets, imports and local assembly were replaced by local manufacture (Jenkins 1977: 61–2). Ford’s commitment to open manufacturing operations in Argentina, Brazil, and Mexico was a defensive competitive reaction, aimed at preventing the company’s exclusion from potentially large markets for vehicles (Maxcy 1981: 270) and from losing its previous investments there. Other factors enhanced the attractiveness of Latin American markets for foreign direct investment, i.e. the introduction of import substitution for industrialization strategies (a broader trend throughout the developing world since the late 1940s),33 the high profits that auto makers could earn from exploiting price differentials and quasi-monopolic rents there, the existence of huge financial incentives offered by the Latin American governments in the form of tax breaks and other subsidies. According to one estimate, in Brazil 89 cents were granted in fiscal subsidies for each dollar invested in the automobile industry between 1956 and 1961. The figure for Mexico, during the 1963–72 period, was 50–60 cents (UNCTC 1983: 109). In Latin America, the US auto makers could not obtain parts from the leastcost source, export automotive products outside the region, promote interregional trade, or rationalize their operations on a regional basis (Behrman 1972: 132). The existence of rigid import substitution policies, which put

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29

significant restrictions on ownership, production, and vertical integration, created highly protected domestic markets and exacerbated problems deriving from the suboptimal size of Latin American markets. These policies, the dominant role of foreign investors in the industry,34 and the oligopolistic nature of competition, with its emphasis on a wide range of products, frequent model changes, and heavy advertising (this was particularly true of the Big Three’s pattern of behavior), created highly dispersed industrial structures and excessively fragmented markets (a large number of firms assembling multiple makes), which translated into a low-volume and high-cost automotive production. Since the late 1960s, Argentina, Brazil, and Mexico have introduced a number of export programs to reduce the high costs and inefficiency that plagued their automobile production lines. In general the US Big Three preferred to export locally produced parts to other Latin American countries but not to their own home markets or other industrialized countries. Compared with GM, Ford was more willing to export parts to the United States and Canada. By the mid1970s, for instance, Ford had produced four-cylinder engines in Brazil for its North American assembly operations. Ford increased local sourcing of parts because during the 1960s it started to purchase components from foreign independent suppliers, rather than selling its own auto parts. The world became a source of supply for Ford’s domestic and all of its overseas operations, “not merely for the nation in which a factory was located.” In an executive communication, Henry Ford II stated: In order to further the growth of our worldwide operations, each purchasing activity of the Company or an affiliated company should consider the selection of sources of supply not only in its own company but also sources located in other countries. (as quoted in Wilkins and Hill 1964: 422) By doing so, Ford combined its market-seeking strategy with a resource-seeking strategy, at least in terms of having access to cheap sources of parts, and sought to change its worldwide organization from a hub-and-spoke to a networked configuration (Kobrin 1987: 21). This would enable the company to exploit fully the advantages deriving from its relatively lower levels of vertical integration and from the infrastructure that it had previously built in some foreign countries, and to respond to new government demands in foreign countries. With this, the company gained a competitive edge vis-à-vis GM. In spite of Ford’s efforts to better co-ordinate its European operations and to increase its intersubsidiary trade worldwide, by the late 1970s Ford’s worldwide operations still functioned on a “multiregional” basis. Largely because of the different consumer tastes that existed in North America and Europe, Ford held the component and vehicle exchange between its subsidiaries in those regions to a minimum (UNCTC 1983: 83; Quinn 1988: 15; Clark and Fujimoto 1991: 36–56). This meant that Ford’s North American, European, and Latin American operations became regionally self-contained (Womack et al. 1990: 211; Cowhey and Aronson 1993: 94).

3

Ford of Canada Confluence of interest in a liberal approach to automotive development

As already suggested in the introductory chapter, structural rules that set the range of policy or strategic options apply equally for firms and States. In order to advance their own objectives, governments use their authority to negotiate and renegotiate basic rules of production and competition with firms and other governments in a triangular diplomacy dynamic, thereby also shaping the characteristics of the industry structure in each national setting. Mass production favored free trade, which enhanced efficiency and reduced the risks involved in foreign production, but many countries used tariff protection as a means to develop a national automotive industry. Factors that are specific to each national context, such as market size, consumer tastes, or geographic proximity to large markets, are important to understand the negotiating dynamics between States and MNEs. For instance, Canada’s relatively small vehicle market was at odds with the US auto makers’ mass production strategies. Its vicinity to the US mass market became valuable for Canada’s automotive exports, but at the same time it was a constraint to developing a stronger Canadian auto parts industry. Structural elements that limited Canada’s policy options also included the dominant position of the US auto makers in North America and the world, the Canadian dependence on those automakers, and the oligopolistic competition in the industry. But the Canadian government overcame these limitations through a liberal and pragmatic approach to the industry’s development that led to the gradual integration of the Canadian auto industry into that of the United States. That approach created a basic convergence of interests between Canada and the US Big Three, because it did not fundamentally restrict mass production practices. But the game of triangular diplomacy, however, was clearly established: despite the common interests between Canada and the auto makers, the oligopolistic industry dynamics aggravated the sovereign risks associated with tensions between the US and the Canadian governments over trade agreements and limited the full rationalization of the Canadian auto industry on a continental basis Finally, since Ford kept a leadership position for decades in the Canadian auto industry, there were different moments when the company had a key role in that industry’s development. At the same time, Canada’s liberal approach to the auto industry’s development was important in Ford’s overall competitive performance.

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Import substitution policies in Canada: a pragmatic approach The establishment of operations by the Ford Motor Co. in Canada inaugurated the development of a national automotive industry there. Gordon McGregor, together with other Canadian businessmen, founded the Ford Motor Company of Canada with $125,000, “of which fifty-one percent was to be allotted pro rata to shareholders in the parent Ford Company.” Ford of Canada was incorporated on August 10, 1904, only 1 year after the parent company was created in the United States, and became the first of Ford’s foreign operations. Other auto makers established in Canada years later: in 1908, the MacLaughlin Motor Car Company, which merged with Chevrolet Motor Company of Canada to become General Motors of Canada Limited 10 years later, and Studebaker in 1910.1 As explained in the previous chapter, Ford preferred exporting cars built in the United States and establishing sales branches or assembly plants of CKD products rather than manufacturing cars abroad. Not surprisingly, Ford’s strategy was at odds with the Canadian government’s goal of developing a national automotive industry. Canada’s geographic and cultural proximity to the US market made it cheaper to import automotive products from the United States. Ford had then few incentives to undertake local manufacturing. Decisive factors in Ford’s move to locate in Canada were Canada’s 35 percent import duty on cars and chassis,2 and McGregor’s well-timed proposal to open assembly operations in Canada – a few years later Ford seemed indifferent to tariff protection because of the great worldwide market success of its low-priced cars and its virtual monopoly of the market for cheap cars in North America (Nevins and Hill 1952: 364).3 Canada’s membership of the British preferential trade system also influenced Ford’s location decisions (Wonnacott and Wonnacott 1967: 239; Beige 1970: 19, 22). The guaranteed preferential access to the British Empire markets allowed US auto makers to achieve production volumes that were otherwise hindered by the relatively small size of the Canadian vehicle market. Ford Canada’s organization structure shows the significance of that preferential access. When the Canadian subsidiary was incorporated, the parent company acquired the exclusive right to manufacture and sell Ford products not only in Canada but also elsewhere in the British Empire.4 Except for Great Britain5 and Ireland, from the outset India, Malaya, South Africa, New Zealand, and Australia came under the Canadian subsidiary’s control (Wilkins and Hill 1964: 18). By the mid-1920s, Ford of Canada already had assembly plants in twelve cities that spanned four countries (South Africa, India, Malaya, and Australia) and owned five companies, two of which were located in Australia (Wilkins and Hill 1964: 116). At some point, Ford of Canada’s sales to the colonies and territories of the British Empire represented about 60 percent of the subsidiary’s total vehicle output. Not only did Ford export more vehicles than its rivals in Canada, but the Canadian subsidiary also exported more vehicles than any other Ford operation, including the parent company.6 Ford Canada was, therefore, Ford

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Motor Company’s most important foreign operation, at least until 1937 when Ford England earned that title (Wilkins and Hill 1964: 132–3, 300–1, 322). Ford’s performance did have an impact on the Canadian automobile industry. Until 1929, Canada ranked as the third largest vehicle producer and exporter in the world, with a total vehicle production capacity of 265,000 units (compared with 80,000 a decade earlier), half of which were exported to the British Empire markets. Having located assembly operations in Canada, Ford gained considerable advantages from the geographic and cultural proximity to the United States. In contrast to the European experience, similar consumer tastes in Canada and the United States enabled US assemblers to build in Canada the same type of vehicles that were produced in their own home country, thus saving the cost of designing special models for the Canadian market7 and reducing some of the high risks that are normally involved in penetrating a different national market. For US assemblers, the geographic proximity also meant that they could import, without paying high transportation costs, the high-technology parts and components which could be built in Canada only at prohibitive costs. Indeed, Ford of Canada located assembly operations in the old Walkerville Wagon Works building, which was situated on the Detroit River opposite central Detroit. The company imported engines and transmissions from Detroit, while the wheels and bodies were purchased in Canada. From this perspective, being next door to the most successful auto makers in the world gave Canada an enormous advantage over other countries that also lacked national producers and that wanted to develop an automotive capability of their own. All who survived in Canada were allied to successful US motor vehicle companies. It was the master mechanics of Detroit who developed the techniques of mass production for mass consumption which were necessary to make the automobile a practical, commercial, and profitable product. (Dykes as quoted in Reisman 1978: 3) But that proximity also created disadvantages for Canada. Parts production was limited, as the US subsidiaries primarily assembled parts and components that were imported from the United States. In 1920, for instance, Ford Canada had yet to establish a foundry operation, a body-making plant, or an engineering department. The annual deficits in parts imports were not contained by tariffs, and, in some cases, not even high tariffs induced producers to buy locally or produce parts (Reisman 1978: 1–4). The deficit in the import of auto parts became a recurrent problem for the Canadian auto industry. The small size of the Canadian market left little room for high-volume specialization, and vehicle production volumes in Canada did not justify the purchase of the costly, high-speed, single-purpose machinery that would have enabled parts producers to achieve economies of scale. This was especially true for major parts such as engines, large body stampings, and automatic transmissions that required manufacturing processes for which the

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optimum scale of production was very high and for which even total Canadian demand would not have warranted national production. Also, while labor rates in the automobile industry were lower in Canada than in the United States, the labor cost per unit of production tended to be higher in Canada because small production volumes forced frequent changes in setting up different specialized machines (Bladen 1961: 24–6). Although the Canadian government sought to protect its infant auto industry by means of tariffs, its policy approach was liberal and was fundamentally distinct from the protectionist policies that prevailed in other countries because it promoted exports and sought to favor consumers by reducing vehicle prices. Since the mid-1920s, Canadians had expressed their demand to reduce the price differential that existed between similar automobiles sold in Canada and the United States.8 But this demand posed a dilemma for the Canadian government: free trade meant cheaper vehicles, but it also implied a risk of further undermining automotive production and jobs in Canada.9 Higher levels of tariff protection were necessary in order to maintain the jobs that had already been created in the assembly sector. In 1931, for instance, the government increased tariffs and adopted other protective measures10 in order to alleviate the industry crisis that ensued after the 1929 Depression. Even vehicle assemblers were in favor of some level of tariff protection,11 as it became clear in a statement made by Henry Ford to the New York Times: Though I am not a tariff advocate in the United States the situation of the two countries is quite different … The United States has attained industrial maturity and should be able to stand on her own feet in competition with the world, but Canada is still in formative stage industrially, and if a higher tariff will foster industry there, who can object to that? (as quoted in Wilkins and Hill 1964: 132) Automotive imports dropped between 1931 and 1933 and three companies established plants in Canada (Hudson Motors, Graham-Paige, and Packard) but in the long run the protective measures had negative welfare effects, raising production costs in Canada and affecting vehicle prices. The dilemma for the government in Canada was therefore how to attract auto investments without creating an inefficient industry. A solution to this dilemma was found in a pragmatic policy approach that combined protective and liberalizing measures. Along with tariff reductions in 1936,12 the Canadian government adopted an ingenious local-content method, which combined protection by tariff and a conditional duty-free entry for auto parts and accessories.13 The objective was to reduce the cost of imported parts and components and thus consumer prices, but at the same time to maintain a certain level of parts production in Canada (Reisman 1978: 11). Products that were used by the parts industry – i.e. bearings and compressors – could be imported duty free if they were of “a class or kind not made in Canada”; for parts used by the automobile manufacturers, including chassis, frames, horns, locks, etc., they could be imported duty-free if they were of “a class or kind not

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manufactured in Canada” and if they met a Canadian (literally Commonwealth)14 content requirement, which was 40 percent, 50 percent, or 60 percent of the factory cost of passenger vehicles depending upon levels of production.15 For parts of a class or kind manufactured in Canada, the 17.5 percent tariff applied, irrespective of the content level achieved. Also, a list of parts, including engines, paid a 25 percent duty. The increase in automotive investments and Canadian content that ensued from the 1936 policy modifications illustrates the degree to which the interests of the Canadian government converged with those of the US auto makers. The combined Canadian content of the US Big Three manufacturers increased from 55 percent in 1934 to more than 67 percent in 1938. New capital investments by vehicle manufacturers increased by $19 million between 1934 and 1938, that of the parts producers rose by $26 million during the 1936–9 period (Reisman 1978: 13). The Canadian content system did encourage US producers to undertake more parts production than would have taken place otherwise, because it was less restrictive to mass production than other local-content schemes. With Canada’s pragmatic system, the manufacturer was “left to discover what particular part of production should be undertaken in Canada if additional costs imposed by the necessity of meeting the content requirement were to be reduced to a minimum” (Bladen 1961: 10). But the Canadian content system favored the largest manufacturers. Although the content method should have promoted the production of those parts where the disadvantage from low volume was at a minimum, the differential in tariff rates between products limited the range of choice, and, thus, parts manufactured in Canada were not those for which the disadvantage of lowvolume production was the least. In addition, the 17.5 percent tariff on the completed vehicle permitted “prices of some parts made in Canada to be well above the prices of similar parts in the United States” (Bladen 1961: 9–10). Only producers with relatively large vehicle assembly operations in Canada, such as GM and Ford, could economically justify investments to establish highvolume parts production plants in that country. For the smaller, low-volume producers – Studebaker Corporation of Canada Limited, Hudson Motors of Canada Limited, and Packard Motor Car Company of Canada Limited – the content requirement continued to represent such a cost burden that they had to cease manufacturing in Canada.16

An export promotion strategy: overcoming structural constraints While for decades Ford Canada’s production was geared toward export markets, after the Second World War the company sold most of its output in the Canadian market. The Canadian subsidiary lost both its leadership position in the production of vehicles in Canada17 and its competitiveness vis-à-vis other Ford subsidiaries. By 1958, Ford Canada’s vehicle production had been surpassed by Ford Werke (Germany), and, 2 years later, the former was building half as many vehicles as the latter (Wilkins and Hill 1964: 413).

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A number of international factors upset Ford Canada’s traditional export orientation and production performance: (1) the competitiveness earned by European auto makers after the Second World War, by means of lower wages and labor costs relative to North America, and the cost advantage and success of their compact cars throughout the Commonwealth markets; (2) the existence of high trade and non-trade barriers in European markets for imports of large North American cars (Kirton 1980–1: 44; Arthur1985: 7) and other political events, such as the departure of the British from India18 and more generally the dismantling of the British Empire, with subsequent demands for local production by governments in foreign countries; (4) the high prices of Ford vehicles in the world and the shortage of Canadian and American dollars in countries of the Commonwealth.19 Ford’s reluctance to produce the small cars that were highly demanded in North America and Europe also affected the Canadian subsidiary. Although Ford of Canada enjoyed an unusual administrative independence from the parent company,20 it followed Detroit’s product designs, labor, sales policies, and expansion plans. Since Ford accounted for almost half of all vehicles produced in Canada and for more than two-thirds of all trucks sold there, a drop in Ford exports during the 1950s affected the Canadian auto industry performance.21 Canadian vehicle exports dropped so drastically (from 480,000 to 326,000 between 1953 and 1960) that Canada lost its position as the fifth largest vehicle producer in the world.22 The import strategies of Ford and the other US auto makers also contributed to the deterioration experienced by the Canadian automotive trade deficit in the 1950s. Canada became a net importer of automotive products to satisfy a growing domestic demand.23 By 1953, it was importing one-third of all vehicles sold in the domestic market (Kirton 1980–1: 44) and the industry’s trade deficit of $500 million accounted for 31 percent of the total Canadian current account deficit (Beige 1970: 35; Reisman 1978: 16). In order to cope with the increasing competitiveness of European auto makers,24 the US Big Three imported compact cars from Britain that were demanded in Canada but not produced in North America.25 Certainly, a Canadian trade regulation of 1936, which allowed for the duty-free importation of vehicles from Britain without reciprocity, facilitated those strategies.26 In the early 1960s vehicle imports had decreased, but the inflow of parts continued to grow. While US vehicle assemblers reached Canadian content levels above 55 percent – 65 percent for GM, 60 percent for Ford, and 50 percent for Chrysler – they continued to import parts from the United States, which maintained a cost advantage of 33 percent over Canada. The efficiency gap stemmed from the combined effect of the US vehicle assemblers’ oligopolistic competition, which was based on model proliferation,27 and the small Canadian market. The proliferation of models offered by the US Big Three to the Canadian consumer (in 1961, alone, five manufacturers produced forty-nine nameplates totaling 327,000 passenger vehicles)28 hindered efforts to achieve economies of scale “at a time when the onrush of technology was putting an increasing premium on high volume output” (Reisman 1978: 21). An example used by Bladen illustrates this situation. When the standard

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manual transmission, which was produced in Canada at “reasonably” economic cost, was replaced by the automatic transmission, a plant required a yearly output of 400,000 transmissions in order to achieve optimum efficiency. In 1960, only 60 percent or 230,000 units of all vehicles produced in Canada were equipped with automatic transmissions. “On that basis, he pointed out, it would not have been economical to maintain a plant to produce them for the Canadian market even if all models could employ one basic transmission – which, of course, they could not” (Bladen as quoted in Reisman 1978: 21–2). Certainly, the extent to which US vehicle assemblers were committed to produce parts in Canada varied from firm to firm and according to their size and their traditional patterns of vertical integration. General Motors had the most highly integrated operations in the country, as it manufactured a large variety of parts not made by the other Canadian automobile manufacturers.29 By contrast, Chrysler mainly assembled vehicles and engines and did very little manufacturing in Canada. Ford Canada fell somewhere in between. It is interesting to note that, as a result of the parent company’s major reorganization of its international operations, in the 1950s Ford of Canada committed major investments ($32.5 million) not only to open a new plant in Oakville but also to transform its Windsor assembly plant into an engine plant and to enlarge and re-equip its foundry operations, which were also located in Windsor (Wilkins and Hill 1964: 398–9). By the end of the decade, the company had extensive body-building, machining and stamping facilities, and foundry operations “to supply the major part of its requirements for castings, particularly its engine blocks” (Bladen 1961: 23). As in the past, the Canadian government faced the dilemma of encouraging automotive investments without promoting an inefficient industrial structure that would result in higher consumer prices (Holmes 1983: 259; Arthur1985: 7– 8; Wonnacott 1987b: 4). But this time, the Canadian government had to face strong protectionist pressures that emerged from a weak economic context, a rapidly growing labor force, and a “resurgence of nationalism” that was nourished both by the rising flow of foreign capital during the 1950s and the price differential between vehicles sold in Canada and in the United States (which fluctuated in the range of 10–17.5 percent). The vehicle manufacturers’ trade performance had also become a matter of concern for the government (Keeley 1983: 284–5; see also Kirton 1980–1: 46–7). Naturally, nationalistic sentiments and fears of economic dislocation resisted the idea of a free-trade option or integration with the United States, as proposed by the UAW, which represented Canadian and US auto workers,30 and the US vehicle manufacturers (particularly Ford).31 In Bladen’s words: The resistance [toward the idea of integration] was largely to integration with the automotive industry in the United States, and it was based, in part, on nationalistic sentiments. I believe that the maintenance of our national identity is of prime importance, but I do not believe that the interdependence which stems from trade is a threat to national independence. [Trade that] increases our wealth and industrial strength

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can contribute to the development of our cultural and political independence. Resistance to the idea of continental integration also stems, in part, from the fear of economic dislocation. (Bladen 1961: 51–2) Free trade was seen as a “socially irresponsible” policy that might have led to the drastic contraction of automobile production and the loss of thousands of jobs (Bladen 1961: 48). Protectionism, which was demanded by parts manufacturers,32 was not a better option, particularly considering the inability of the Canadian vehicle market to sustain large economies of scale. Following its traditional pragmatic policy approach, in 1962 the Canadian government adopted a duty-remission plan that consisted of the remission of duties on a dollar’s worth of engines and automatic transmissions for every dollar of increased Canadian content in exports above the level attained during the base year. One year later, those programs expanded to include all original equipment parts. The objectives were to create an opportunity for Canadian producers to gain access to extended markets that would permit specialization, longer production runs and lower costs; to solve the industry’s trade deficit; and to increase automotive output and employment (Reisman 1978: 23; Grey et al. 1985: 9; see also Kirton 1980–1: 43; Winham 1984: 476). Canada’s policy measures converged with the interests of the US vehicle assemblers, as evidenced by the increase in automotive investments and the reduction in the industry’s trade deficit. In 1964, Ford opened a new assembly plant in Ontario (a truck plant) and GM opened one in Ste Therese, Quebec.33 Automotive output increased in real terms by almost 70 percent and the industry’s employment by close to 60 percent between 1961 and 1965. Export growth was spectacular, passing in only 2 years from Can$9 million in 1962 to Can$79 million (DesRosiers 1987: 123); in 1965, vehicle exports reached 103,447 units – compared with 20,000 in 1960 – reducing the Canadian vehicle trade deficit from 162,000 to 42,000 units.

Triangular diplomacy and the Auto Pact But the very success of the duty-remission programs spawned a pattern of triangular diplomacy, due to the tensions that emerged in Canada–US trade relations. Independent US parts producers saw the Canadian programs as a subsidy to exports and in early 1964 fourteen complaints were filed at the US International Trade Commission. This set in motion US trade remedy laws, “in which there was little room for administrative discretion” (Keeley 1983: 287), increasing the likelihood that countervailing duties to Canadian auto parts exported to the United States would be applied.34 The US government had been sympathetic to Canada’s concerns for its trade deficit, and had even proposed exploring the possibility of an automotive trade agreement. If countervailing duties were applied by the United States, Canada’s policies would have been destroyed and “Canada would then either have to turn to other, possibly more protectionist, measures or abandon the objectives of its automotive

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policy ….” In order to avoid a trade dispute, the governments of both countries searched for another option. The formalization of bilateral negotiations culminated in 1965 with the Agreement Concerning Automotive Products Between the Government of the United States of America and the Government of Canada, also known as the Auto Pact (Keeley 1983: 287; see also Beige 1970: 2; Wonnacott 1987b: 5; Fuss and Waverman 1990: 173). Once the Auto Pact negotiations started, the US and the Canadian governments found themselves defending conflicting objectives. The US government’s main goal was “to counter a growing trend toward Canadian nationalism,” which was also reinforced by “the example of Mexico [that] in 1960 had initiated a program of reducing automobile imports from the United States.” In the early 1960s, the United States was also facing problems in its trade deficit, and Canada’s unilateral programs represented a hurdle in the US attempts to promote world trade liberalization – attempts that crystallized in the Trade Expansion Act of 1962 (Kirton 1980–1: 46–9; Keeley 1983: 285). In the United States, there was also a “visceral interest” in promoting a bilateral sectoral free-trade agreement with Canada. The Canadian government pursued the same goals sought in the dutyremission programs, i.e. to solve inefficiencies in its automobile industry that resulted from a structure of production that was oriented toward a limited domestic market and insulated by tariff barriers at home and abroad (Holmes 1983: 260). Free trade with the United States was seen as a means to create broader markets for Canadian automotive products, and a more efficient pattern of investment, production, and trade in North America. But the Canadian government also sought to preserve local content and automotive production which had been “the mainstay of Canadian protectionism in the auto industry since 1926” (Winham 1984: 477–8). Obtaining a “fair share” of total North American automotive production for Canada meant that the existing gap between the proportion of Canadian production and trade relative to Canada’s consumption would be reduced (Beige 1970: 77). In order to achieve these objectives, Canada proposed the introduction of production safeguards into the agreement, which were the quid pro quo for a continentally rationalized industry. Not all US auto makers favored the integration of the North American auto industry. GM was not very favorable to the integration project, although it wanted to improve the industry efficiency and looked positively at the possibility of taking further advantage of cheaper Canadian labor. By contrast, the Ford Motor Co. had indicated that such integration “could provide Canadian producers with the full benefits of US mass production which would then be passed on to Canadian consumers [through lower prices]” (Bladen 1961: 41). This position contrasts with that maintained by Ford in the 1920s, when it favored higher Canadian tariffs. The change may have reflected Ford of Canada’s difficult position in the 1950s and the modifications undertaken in Ford’s organization at the worldwide level, which encompassed a greater co-ordination of foreign operations. Indeed, as part of that reorganization, in 1962 Ford increased the interest in its Canadian subsidiary from minority ownership to 75 percent. The Auto Pact was not a free-trade but a managed-trade agreement: while it

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included free trade of new vehicles and original equipment parts, it excluded the aftermarket parts and accessories, tires, tubes, batteries, and specialized and used vehicles; only “qualified manufacturers” (the US Big Three, plus American Motors, and Volvo)35 were allowed the duty-free importation into Canada, from any country, of a specific class of vehicles and parts if they met two conditions. First, that they produced that class of product during the base year (1964) and in each subsequent model year; second, that they met the production safeguards requirements, which consisted of preserving an absolute level of Canadian value-added in Canadian-built vehicles (the absolute dollar amount achieved in the 1964 model year), and maintaining a ratio of net value of vehicle sales to net value of vehicle production in Canada at a minimum of 75:100 for each model year, or the percentage attained in the 1964 model year (in practice, the ratios were 95–100 percent for cars and 75–100 percent for commercial vehicles) (Mackenzie 1988: 290). Vehicle producers were able to import duty-free vehicles and parts into the United States as long as they met the 50 percent North American content. For the Canadian government, production safeguards were permanent features of the agreement that guaranteed both a “floor” in vehicle production relative to vehicle sales and certain levels of auto parts production in Canada (Fuss and Waverman 1988: 277; Mackenzie 1988: 289). But for the US government the Auto Pact was just the first step in creating a bilateral freetrade market for automotive products and, therefore, the safeguards were transitional (to be removed in 1968 when the two governments committed to undertake a review of the agreement). Separately, the Canadian government negotiated with the US vehicle assemblers letters of undertaking that, although not having legal value, would guarantee an increase in overall automotive production and in Canadian valueadded. In those letters, the US vehicle assemblers committed to guarantee an increase in overall automotive production by the end of the 1968 model year: in Canadian value-added (CVA) by an amount equal to 60 percent of the growth in net sales – 50 percent for commercial vehicles – in Canada, and by Can$260 million of CVA in the production of vehicles and OEM parts.36 The letters were motivated by the Canadian government’s fear that the US producers would not realize “the potential efficiency of Canadian production or that even if mindful of these advantages they would prefer to play safe by serving the North American market from their home base” (Beige 1970: 48). In other words, Canada’s concern was that there were many “institutional barriers,” originating in the industry’s oligopolistic structure, as well as in the control of that industry by a handful of US firms that could seriously impair the proper working market forces and preclude Canadian companies from getting a fair share of North American automotive production (Reisman 1978:32; Wonnacott 1987a: 1; Wonnacott 1990:2).37 In exchange for those letters, the Auto Pact offered US vehicle producers an effective shield from foreign competition, a concession that was appealing at a time when the competition in the industry worldwide had intensified. In 1961, Ford had manifested its support for a free automotive trade scheme in North

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America as long as it was “controlled by inter-company and inter-government agreement to insure continued growth of the Canadian industry relative to the Canadian economy …” (Bladen 1961: 41). Such a protection also helped the US Big Three to cement “their position as the key players in the Canadian auto industry” (Molot 2000: 10). The commitments surprised some US public officials who thought that the US vehicle assemblers had “given away so much.” Probably, as Keohane and Nye (1977: 207) argued, the US government did not understand the extent to which there was a convergence of interests between the Canadian government and the US vehicle assemblers. Or the Canadian subsidiaries were interested in the Auto Pact’s production requirements or the letters of undertaking, maybe because, as one analyst pointed out, they enabled those subsidiaries to demand their head offices for a continued allocation of important new vehicle assembly in Canada (Molot 2000: 22). The Auto Pact: a success story of managed trade The Auto Pact had positive effects on the Canadian economy overall38 and inaugurated an era of rapid expansion of the Canadian automotive industry and its progressive integration into a North American system of automotive production. While the industry’s output almost doubled as a percentage of Canada’s manufacturing GDP between 1965 and 1973, from close to 4 percent to 7.5 percent,39 Canadian vehicle exports expanded at an impressive average yearly growth rate of 125 percent, passing from 103,500 units in 1965 to 1,128,800 in 1973 (see Figure 3.1). Imports of vehicle and parts from the United States also increased, but this country experienced a decline in its traditional automotive trade surplus with Canada.40 Despite the initial disparity in the trade statistics of both countries, the reconciled figures indicated that in 1970 the United States had a deficit of US$169 million, as shown in Figure 3.2. Also, trade patterns shown in Figures 3.3 and 3.4 show that the Canadian subsidiaries of the US auto makers specialized in vehicle assembly,41 and the United States became a supplier of auto parts. While in 1964, trade of vehicles and parts between Canada and the United States was nearly balanced, by 1967 Canada was a net exporter of vehicles (mainly to the United States), and the United States a net supplier of parts to Canada (Beige 1970: 87; MacMillan 1987: III-24–5). Labor productivity rose, whereas industry employment increased only in the longer term. In the assembly sector, employment remained relatively constant between 1965 and 1970, but the value-added per assembly worker increased by 60 percent between 1964 and 1969 (Beige 1970: 85; Holmes 1983: 261). Similarly, labor productivity in the auto parts sector rose by over 50 percent, with employment increasing from 30,500 to 37,300 between 1964 and 1968 (Holmes 1983: 262–7; Winham 1984: 483–4). While the price differential for vehicles sold in Canada and the United States did not totally disappear, it dropped from 10.5 to 4.5 between 1965 and 1973.42

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Figure 3.1 Vehicle sales, production, imports and exports in Canada, 1960–73 (units). Source: Table A2.4 in Appendix 2.

Figure 3.2 Automotive trade balance in Canada, 1961–73 (millions of US dollars). Source: Tables A2.7 and A2.8 in Appendix 2.

Finally, the Auto Pact was a very successful policy instrument in terms of the Canadian government’s objectives, as embodied in the safeguards and the letters of undertaking. It also secured a “fair share” of automotive production in North America. Canada’s shares of the total output of the North American automobile industry increased from 4 percent in 1965 to 6 percent in 1977; total consumption rose from 6 percent in 1965 to 8 percent in 1973; and employment rose from 8.9 percent to more than 11 percent in 1977 – although automotive jobs in Canada tended to be less skilled than those in the United States.43 Investment flows into the industry also expanded, with the US Big Three auto makers and American Motors investing about Can$400 million or over one-tenth of total North American investment (Reisman 1978: 32, 69, 105, 154). Despite this success from the moment it was signed, the Auto Pact became a

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Figure 3.3 Canadian automotive exports to the United States and other countries in 1961–73 (millions of US dollars). Source: Table A2.7 in Appendix 2.

Figure 3.4 Canadian automative imports with the United States and other countries in 1961–73 (millions of US dollars). Source: Table A2.8 in Appendix 2.

source of political controversy in both countries. Besides the opposition expressed by groups on both sides of the border,44 the two signatories’ conflicting aims pursued during the negotiations on the Auto Pact made the discrepancies that later emerged over that agreement unavoidable (Winham 1984: 478). The United States government pressed for abandoning the safeguards, arguing that they

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prevented market forces from determining the patterns of auto investment, production, and trade in North America – which was one objective of the Auto Pact. For its part, the Canadian government adamantly refused to abandon those safeguards because they were seen as the key to enabling the Canadian auto industry “to participate on a fair and equitable basis in the expanding North American market,” which was another stated goal of the Auto Pact. The disparities that existed in the trade statistics of Canada and the United States aggravated the conflict between the two countries, as the auto trade balance was seen as the main indicator for the success or failure of the Auto Pact. Based on trade figures that did not favor the United States, members of Congress even demanded in 1968 the termination of the Auto Pact. The initiative did not prosper, but the political climate in the US Congress remained opposed to the Auto Pact’s safeguards and the letters of undertaking (Reisman 1978: 35–43).

A limited integration of Canada into a North American system of automotive production As already noted, free-trade policies favored mass production because they allowed for an expansion in production volumes and therefore a more efficient use of productive resources. The US vehicle assemblers’ dominant position in the North American automobile industry and the Canadian consumer preference for US-type vehicles facilitated the rationalization of Canada’s automotive production on a North American basis. That rationalization brought US vehicle assemblers direct benefits: through the Auto Pact they were able to import into Canada the vehicle models and parts that were produced more efficiently in the United States or in any other country.45 Also, a higher volume of a lower number of lines and models were assembled in Canada in order to achieve economies of scale. Before 1965, Ford’s Oakville plant was producing sixty variations of six models – compared with two or three models in its US plants. Similarly, GM’s Oshawa plant was assembling a total of 595 different passenger car and truck model variations, while the number for its most complex assembly operation in the United States was only 256 models (Helmers 1967: 85, as quoted in Fuss and Waverman 1990: 172). By 1968, GM had cut by half the number of models it produced in Canada (such as the Buick, Pontiac, and Oldsmobile models), and concentrated on the assembly of its Chevrolet models. Ford phased out two chassis in Canada and concentrated on the production of its Ford Division cars and one truck make; in addition, Chrysler reduced the number of models produced at its Windsor plant to two (Beige 1970: 64–5; Holmes 1983: f.n. 23, 265). Also, by the mid-1970s, most vehicles produced in Canada were small to medium sized. Something similar happened in the auto parts sector. About sixty Canadian parts plants closed in the 1965–9 period, but the output of the Canadian auto parts sector almost doubled as a percentage of North American parts production, from approximately 5 percent in 1965 to 10 percent in 1969 (Holmes 1983: 196). Since Canadian auto parts firms were generally small and lacked the

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necessary capital for expansion or modernization, the bulk of new investments in the Canadian parts sector was made by big multinational parts producers, which also acquired many Canadian firms. After 1965, 230 new parts plants were established in Canada (Holmes 1983: 262–7; Winham 1984: 483–4). But the patterns of North American automotive production and trade that emerged after 1965 showed that vehicle manufacturers were reluctant to fully exploit the benefits of complete rationalization in the Canadian automobile industry. First, they seemed to have preferred the rationalization of their assembly operations rather than of parts production. Interestingly, the vehicle assemblers’ overfulfill their Auto Pact CVA commitments, by US$396 million between 1964 and 1968 (Beige 1970: 89–93). Although no published information is available regarding the way each firm fulfilled its CVA commitments after 1968, the industry’s levels of Canadian value-added exceeded substantially the minimum requirements, rising from 58 percent in 1964 to 95 percent in 1971 – both in vehicle assembly and original equipment production (see Table A2.11 in Appendix 2). Second, data for Canadian production by model in the early 1970s demonstrated that regardless of the unexpected expansion of Canadian vehicle assembly, US auto makers failed to fully rationalize their vehicle assembly operations on a North American basis. In consequence, although the Auto Pact did have an impact on some reductions in unit costs of production, it did not close the existing gap in efficiency between Canadian and US automobile production. The Canadian industry maintained an efficiency disadvantage of 20 percent relative to that of the United States (Fuss and Waverman 1990: 174– 5, 196–7). Explaining this pattern of rationalization is important in order to understand the individual company strategies and their effects on the development of a North American system of production, but it also requires responding to two separate issues: (1) why did producers decide to focus on the rationalization of vehicle assembly rather than parts production, and, (2) why did they fail to fully rationalize their assembly operations on a North American basis. The Auto Pact’s protective rules have been the focus of industry analysts who have tried to explain the first issue. For instance, according to one view, auto parts production was not rationalized because the Auto Pact’s preferential treatment for trading goods duty free across the border was granted to vehicle assemblers and not parts producers. Auto parts firms had to sell directly to vehicle assemblers rather than export their products duty free to the US aftermarket (market for replacement parts). Another view was that the Auto Pact safeguards, particularly the Canadian content provision, did nothing to change, but rather reinforced, what had been the more efficient pattern of production before the agreement, i.e. to locate assembly plants in Canada and captive parts plants in the United States (Fuss and Waverman 1990: 177). Such a provision thus acted as “either a nuisance factor or a barrier to maximum efficiency in Canadian operations.” On the one hand, the in-vehicle content provision inhibited further rationalization of the auto parts sector because it forced vehicle assemblers to continue purchasing Canadian parts for Canadian-

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built vehicles. On the other hand, vehicle manufacturers found out that they could meet the 60 percent in-vehicle value-added condition by expanding Canadian assembly, and then they had no further incentives to purchase more Canadian-made parts (Beige 1970: 66–9). Regarding the Auto Pact’s production–sales ratio provision, industry analysts have argued that the “all-or-nothing” penalty for non-fulfillment of that ratio, i.e. payment of duties on all of their automotive imports on the basis of the old tariff structure, combined with the difficulty of forecasting vehicle demand due to the cyclical pattern exhibited by automobile sales, forced US vehicle assemblers to expand Canadian assembly beyond expected levels in order to have a safety margin in the event that market forces raised Canadian sales or lowered Canadian production (Beige 1970: 100; see also Holmes 1983: f.n. 21, 260; Keeley 1983: 290; Mackenzie 1988: 289).46 In fact, Chrysler faced this situation in 1974–5, when it had to pay Can$250 million in import duties for non-compliance with the Auto Pact regulations. As DesRosiers (1993a,b) explained, there was a substantial increase in Canadian demand for Chrysler vans in those years. Since vans were produced primarily in the United States, Chrysler met that rising Canadian demand through imports.47 Therefore, the production–sales ratio provision made it impossible for vehicle producers to drop, for instance, truck production and concentrate on passenger car production, because it required different ratios for each class of vehicles. Finally, Fuss and Waverman contended that the safeguards only guaranteed a “floor” for vehicle assembly in Canada, and that the US auto makers’ rationalization decisions responded to the rapidly growing Canadian demand for vehicles48 and the lower Canadian factor prices, which allowed Canadian producers to be cost competitive in vehicle assembly despite the relative inefficiency of the Canadian automobile industry. A related issue was the “lumpiness of auto investment in relation to the small scale of Canadian activities” (they were only one-tenth the size of those in the United States; Winham 1984: 478). Together, these two factors and the fact that in 1965 North American vehicle sales had reached a pronounced peak explained that a firm, which in that year required additional capacity in North America, would open a plant in Canada rather than in the United States. Otherwise, the firm would have risked operating at levels above planned capacity existing in the US plants (Beige 1970: 100–1). The industry rationalization from a firm’s perspective These explanations for the pattern of rationalization of the Canadian automobile industry after 1965 focus on the industry as a whole and do not account for variations in individual firms’ strategies and performance. After 1965 the combined vehicle production of the US Big Three auto makers grew at a faster rate than new registrations in Canada, but GM did not expand its vehicle output as much as Chrysler and, particularly, Ford did (see Figure 3.5). Also, while GM preferred to increase vehicle assembly for the domestic market and to invest mostly in parts production, the bulk of Ford’s investments were

46

Ford of Canada

devoted to expand assembly operations (compare Figures 3.5, 3.6 and 3.7).49 Ford’s assembly plant in St Thomas, which opened in late 1967, was the only new assembly plant in the years that followed the Auto Pact’s implementation (in 1964, GM had opened its Ste Therese, Quebec, assembly plant and Ford had opened its Ontario truck plant). From this perspective, Ford made a relatively greater contribution than GM to the Auto Pact’s export success and thus to the rationalization of the Canadian vehicle assembly on a North American basis. Between 1968 and 1975, Ford was a leader in Canada’s vehicle production and exports, although not in the Canadian market. The different strategies of GM and Ford reflected the companies’ size and willingness to undertake risks. The Auto Pact’s safeguards imposed a relatively higher burden on Ford than GM, given the former’s competitive disadvantages, especially regarding its more limited financial capability and a narrower range of line/model diversification than GM. Ford may have indeed perceived a higher risk of investing in parts production compared with assembly for two related reasons. First, as explained in Chapter 2, parts production requires “very heavy capital investments” and is less readily adaptable to changing circumstances. Second, given the significant opposition of US parts producers to the pre-1965 duty-remission plans, “a substantial use of Canadian parts in US assembly may have been difficult to achieve” (Fuss and Waverman 1990: 176). Based on these considerations, Ford may have indeed seen the benefits of meeting the 60 percent in-vehicle value-added condition by increasing vehicle assembly in Canada rather than expanding parts production. Also, in order to reverse the disadvantages of having a narrower range of models and in the face of the production–sales ratio requirement, Ford pursued an aggressive export and import strategy. Not only did Ford Canada remain a net exporter of Canadian-built cars during the period 1965–8, but it also imported more cars into Canada than any other manufacturer (in 1968, for instance, Ford’s imports satisfied about 55 percent of Canada’s demands for Ford cars; see Figure 3.8). Until 1975, Ford was a leader in vehicle exports, accounting for 40–50 percent of total vehicle exports from Canada during the 1966–75 period. In 1973, GM’s car exports from Canada

Figure 3.5 Vehicle production in Canada by company, 1964–73 (units). Source: Table A2.12 in Appendix 1.

Ford of Canada

47

Figure 3.6 Vehicle exports in Canada by company, 1966–73 (units). Source: Table A2.14 in Appendix 2.

Figure 3.7 Vehicle sales in Canada by company, 1965–73 (units). Source: Table A2.13 in Appendix 2. *Data for these years are vehicle registrations. Information is not available for 1969 and 1970.

represented 65 percent of Ford’s. Thus, and according to these data, the benefits from rationalizing their Canadian vehicle operations on a North American basis were presumably greater for Ford than for GM. By contrast, investing in parts production in Canada was not perceived by GM as a high-risk strategy, largely because the company’s market leadership, huge size, financial capability, and typical preference for higher levels of vertical integration made its Canadian assembly operations relatively efficient. Although GM reduced the number of models it produced in Canada after 1965, the company still produced, without a significant cost disadvantage, more models than those made by Ford and Chrysler together. Therefore, because in 1965 GM’s Canadian operations had a larger scale than those of either Ford or Chrysler, GM did not seem to have, not even with the Auto Pact, strong incentives to rationalize its Canadian vehicle assembly operations further (Beige 1970: 65; Fuss and Waverman 1990: f.n. 8, 172). Despite the greater benefits that Ford derived from the rationalization of its Canadian operations on a North American basis, in the 1973 calendar year the

48

Ford of Canada

Figure 3.8 Vehicle imports in Canada by company, 1966–73 (units). Source: Table A2.15 in Appendix 2.

company was still building eight different models in Canada, compared with nine by GM and three by Chrysler. If measured by output per plant, Ford Canada achieved the minimum plant scale economies, which in 1970 were set at 180,000– 220,000 units.50 But if measured by model, none of the Canadian-built products of Ford achieved minimum efficiency of scale. The average output of Ford Canada’s model was about 55,000, and only three models achieved a total output of over 110,000 units (Figure 3.9). This evidence leads to the question: Why did Ford not concentrate on building one or two models in Canada? Why did Ford decide not to assemble in Canada a car such as the Mustang, or even the Galaxie 500, for which US demand at that time was much higher than for the Falcon or the Fairlane, which were being produced in Canada in the 1960s and early 1970s? One reason could be that the uneven and sudden changes in US demand for different types of vehicles during the 1960s and 1970s aggravated the traditional difficulty for vehicle manufacturers of forecasting changes in the marketplace. Had it focused on producing only one line (or model) of cars in Canada, Ford would have run the risk of drops in annual production that could be substantial (as actually happened in the 1960s with its Falcon sales) and, therefore, face the application of duties on the company’s vehicle imports into Canada.51 Another more significant reason is related to institutional factors that shaped the collective strategies of the US Big Three auto makers and encouraged a cautious behavior of individual firms. The oligopolistic structure in the automobile industry, combined with the Auto Pact’s protection against foreign competition, provided strong incentives for the US auto makers to defend their collective profits in detriment of achieving maximum industry efficiencies. Being a “halfway measure” of selective trade liberalization that protected US vehicle manufacturers against foreign competition, the Auto Pact could not increase competitive pressures for cost-reducing rationalization. Therefore, the possibility of higher efficiency levels depended on the behavior of oligopolists

Ford of Canada

49

Figure 3.9 Ford’s production by selected models in Canada, 1971–78 (units) Source: Table A2.18 in Appendix 2.

for its realization. By nature, oligopolies have minimal incentives to increase the competitive pressures to increase efficiency (Fuss and Waverman 1990: 203). Based on an Eastman and Stykolt (1967) study, they argued that because of: … the sunk nature of many of the industry-and-firm specific-assets (e.g., dies for body panels), and the long lead times in constructing plants [3–5 years], each firm in the oligopoly is aware of the highly risky investment of a plant of m.e.s [minimum efficient scale] if its rivals build equal-size plants [Thus,] each oligopolist might be unwilling to substantially increase efficiency relative to his rivals, for fear of upsetting a delicate oligopoly equilibrium and of unleashing a price war among vehicle producers, where all firms would be worse off . (Fuss and Waverman 1990: 171–2; 176) As the industry leader, GM adopted the cautious behavior of an oligopolist and expressed it as a reticence to expand the size of its Canadian assembly plants beyond a point that was acceptable to maintain the industry oligopoly equilibrium and to prevent a US reaction against further expansion of Canadian auto exports. This may also explain the strong domestic orientation of its Canadian vehicle production operations. By expanding vehicle assembly, Ford was able to exploit its smaller size relative to GM, but not to the point of upsetting the oligopoly equilibrium. Risk-adverse oligopolists, who also compete on the basis of product differentiation, are strongly inclined to ‘play it safe’ by offering different models in case of sudden shifts in Canadian or US demand for a particular model. Despite the potential for complete integration of their Canadian and US operations offered by the Auto Pact, vehicle assemblers adopted a cautious behavior in the face of uncertainties associated with political borders. This type of behavior was further encouraged by political skepticism about the future of the Auto Pact, which emerged from the lack of clarity about the goals pursued in that agreement and the ensuing tensions between the US and the Canadian

50

Ford of Canada

governments over such agreement. Political uncertainties also included possible changes in economic policies on either side of the border as well as the negative impact that new optimum-sized assembly plant – or plants – would have had in Canada’s trade balance with the United States. From this perspective, the border between the two countries emerged as a relevant factor in the auto makers’ strategies, one that did not disappear with the Auto Pact.

4

Ford of Mexico Confronting a nationalistic approach to industrialization

As in Canada, in Mexico the lack of efficient, indigenous vehicle assemblers and the small market for automotive products created structural barriers for the development of a national automotive industry under mass production. In contrast to the Canadian case, Mexico’s goal was not only to develop an auto industry but to develop an independent one, owned by Mexicans. This goal fashioned a fundamental conflict with the US auto makers that wanted to have full control of their operations there. The 1960s industry context of heightened levels of oligopolistic competition at the worldwide level, however, acted in favor of the Mexican government, which was able to attract automotive investments through import substitution policies and a nationalistic approach. Since it was the leader, Ford played a key role in encouraging other auto makers to comply with Mexico’s requirements. Ford’s positive reaction to the Mexican government’s demands to assist in the development of an auto parts sector also stemmed from the parent company’s strategy of gaining first-mover advantages abroad, in order to compete with GM. The basic conflict between the vehicle assemblers’ strategies (ownership, product differentiation, and multiple sourcing and competitive bidding, for example) and the Mexican government’s nationalistic and protectionist policies exacerbated the inherent difficulties of the Mexican auto industry to achieve economies of scale. Other structural factors frustrated the Mexican government’s goals of creating an independent automotive industry, such as the geographic proximity to the United States, the US assemblers’ strategies of product differentiation, and the Mexican consumers’ preference for US-styled cars. The game of triangular diplomacy was also present in the development of the Mexican auto industry. The Mexican government’s interests conflicted with the US vehicle assemblers and also with those of the US government, which assisted US companies in blocking the Mexican government’s attempts to exclude full foreign-owned assembly firms and to restrict the number of vehicle assembly firms operating in the Mexican market.

Import substitution in Mexico: a nationalistic approach As in many other countries, Ford Motor Company’s opening of an assembly plant for vehicles in Mexico is associated with the origins of an automobile

52

Ford of Mexico

industry in that country. In 1925, when the Mexican government passed a regulation that offered special fiscal treatment to Ford in the form of a 50 percent reduction of import duties on parts and components for vehicle assembly. Ford’s decision to invest in Mexico was driven by its good sales performance in Mexico at the time. Ford’s Mexico business was so good that in 1925 total sales of the Model T “far exceeded those of any of Detroit’s forty competitors” in Mexico (Wilkins and Hill 1964: 147). At the time, the company already had a broader strategy to penetrate other Latin American markets in order to gain first-mover advantages and to exploit its technology advantages in the region. By 1927, Ford already had enough companies and branches in Latin America to be the “leader in all industry” and its profits there were substantial (Wilkins and Hill 1964: 148). GM and Chrysler followed Ford’s move into Mexico a decade later, each pursuing a different strategy. GM established a truck assembly plant and then added an assembly line for cars.1 Chrysler entered the Mexican market through a licensing agreement with Fábricas Automex, a Mexican vehicle assembler. By 1940, there were six CKD (completely knocked down) assembly plants that supplied 60 percent of Mexico’s total demand for vehicles (Samuels 1990: 114– 15). The Second World War had positive effects on the emerging automotive industry in Mexico. With US auto parts manufacturers participating in the war effort, parts producers started to appear in Mexico, forming the basis for “independent automotive manufacture.” As Wilkins and Hill (1964: 335) stated, the war “exerted a compensatory influence on the foreign companies in the long run, creating bases for independent industries where nothing had existed but assemblies, and with companies already developed, plowing the field of activity for larger post-war harvest.” The war also meant, for the auto makers, growing profits from their Mexican operations. Ford of Mexico registered annual profits throughout the war years. Some of these positive effects turned negative with the end of the war: a rapid increase in automotive imports, required to meet a surging Mexican demand for vehicles, generated an automotive trade deficit and prompted action on the part of the Mexican government. In 1947, the Mexican government enacted the Regulation for the Automotive Assembly Plants, a measure designed to protect the still incipient national automobile industry. Imports became subject to control by a quota system: each assembly firm was assigned an import and a production quota, setting a “maximum number of vehicles of specified makes and models that could be manufactured during a 6-month period. Government officials were to decide on the total amount of foreign exchange to be allocated to the importation of auto parts by the assembly industry” (Samuels 1990: 115–16). This system was preserved in future regulations for the industry, at least until the early 1980s. Despite the 1947 regulations, imports of vehicles continued to rise throughout the 1950s. In 1959, 68 percent of total Mexican vehicle sales (less than 40,000 units) were assembled locally with CKD kits, while the rest were imported. By 1960, the proportion of imported vehicles relative to total domestic sales had

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53

risen to 41 percent. Also in 1960, the industry’s imports represented 13 percent of Mexico’s total imports and, since automotive exports did not exist until the 1970s, the industry registered substantial trade deficits (Bennett and Sharpe 1985b: 152; Dambois 1990: 39–42; Holmes 1993: 41). These deficits indicated the low level of auto parts production in the country: before 1962, there were few auto parts firms, and those that did exist produced mainly low-technology items, such as batteries, interiors, suspension springs, and glass for windows and windshields (Bennett 1986: 18). Local content was very low, estimated at less than 20 percent, and was limited to certain material inputs, such as lubricants, electricity, a small number of parts and components, and the valuedadded of the assembly process. In order to address this problem, in November 1960, the Mexican government created a mandatory local-content list of parts that the auto firms had to buy instead of importing. This was the first regulation that challenged the strategy of vertical integration of vehicle assemblers (Samuels 1990: 116–17). But it was not until 1962 that the Mexican government introduced a more comprehensive set of import-substitution policies that would promote the creation of a national automobile industry, which in turn would become the “engine” of industrialization. There was a strong conviction among government officials that, if left to market forces, vehicle assemblers “might not have expanded their Mexican operations,” and, thus, state action was required to “create an industry where none existed” (Domínguez 1987: 292). The 1962 Auto Decree’s objective was to attract large new investments that could create an automotive production capacity in Mexico and help to establish a nationally controlled auto parts sector. Progress in the import substitution strategy would, in turn, help to improve the country’s balance of payments situation, which had become a measure of Mexico’s independence from foreign markets (Bennett and Sharpe 1985b: 97–100). The key regulations stipulated in the 1962 Auto Decree were compulsory incountry production that provided access to the Mexican market, prohibition of finished vehicle imports, Mexicanization or limitation of foreign ownership to 40 percent in auto parts firms, and a high local-content requirement of 60 percent. Production quotas for vehicle assemblers and price controls on vehicle sales established in 1960 were maintained, and a new mandatory list for parts and components to be produced in Mexico was introduced. Vehicle assemblers were prohibited from producing in Mexico anything other than engines and a few other drive-train components (for details see Box 4.1). The government in Mexico faced a dilemma: in its quest to develop a national automotive capability, it had no choice but to depend upon foreign capital to achieve that goal. However, unlike Canada, Mexico’s policy measures threatened to frustrate the vehicle assemblers’ production and marketing strategies, which were based on the rules of mass production. While the vehicle assemblers’ strategies stressed full ownership, economies of scale, vertical integration, product differentiation, and annual model changes, as well as competition unfettered by government intervention, the Mexican government regulations emphasized Mexicanization, limits to the number of producers, lines and models,

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Box 4.1 1962 Auto Decree August 25, “Decree that Established the Basis for Integration in the Automotive Industry in Mexico” •

As of September 1, 1964, imports of engines and power trains for assembly in cars and trucks were prohibited.

•

CKD assembly kits or finished vehicles could not be imported into Mexico.

•

Local content must reach 60 percent of direct production cost (both for vehicles and components).

•

It was mandatory to use Mexican-made engines, batteries, shock absorbers, radiators, transmissions, rear axles, and drive shafts.

•

Auto parts firms could not be owned by assemblers and foreign ownership was restricted to 60 percent.

•

Each firm had a production quota and price controls remained in place.

in-country manufacturing and local content, production quotas, price controls, and restrictions to vertical integration. Given Mexico’s dependence on foreign capital and know-how to develop its automobile industry, the 1962 Auto Decree represented the compromises reached between the Mexican government and the multinational vehicle assemblers in their negotiations. Mexicanization and market access During the negotiations between the Mexican government and foreign auto makers in the early 1960s, the two main issues of contention were market access and Mexicanization. An original proposal that preceded the 1962 decree, also known as the proposal of Nacional Financiera (NAFIN; the Mexican industrial development bank), made Mexicanization of the auto industry a central goal. The government’s objective was to create an industry structure based on five vehicle assemblers for passenger cars and two for middle-sized trucks, all of which favored Mexican-owned firms.2 For the sake of efficient production, it also proposed a limit on the number of makers to five for each company, with a 5-year freeze on model changes, and a setting of standards for key manufacturing stamping processes. The NAFIN proposal therefore implied restricted access for multinational vehicle assemblers. In 1962, there were four major Mexican-owned assembly firms that would have fitted into the NAFIN proposal, two of which were linked to the US and two to European vehicle assemblers, producing large and small vehicles respectively. Ford and GM were the only fully foreign-owned vehicle assemblers that would have been excluded from the Mexican market had the NAFIN proposal been accepted (Chrysler had a minority equity in AutoMex, Volkswagen a license agreement with Promexa, and Nissan did not apply for inclusion until 1964). Thus, the bargaining process over the NAFIN proposal took place between the Mexican government and the two largest US vehicle assemblers.

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Mexicanization, the government’s second goal, was a mainstay of Mexico’s policies toward foreign investment, applying not only to the automobile industry but also to the economy in general. Although put in place during the Second World War, these policies reflected the government’s resistance to foreign control that dated back to the Mexican revolution (1910–20). At this time, the Mexican state took over much of the means of production, ending foreign participation except in manufacturing. As one analyst stated, after the 1930s, “Mexico pursued a strategy of economic autarchy – import substitution with a vengeance … Equality, secularism, and independence had become the central goals of the new state” (Domínguez 1987: 277). Mexico’s nationalistic policies toward foreign capital sought to maintain control over the economy, but also to foster economic growth. In fact, Mexicanization did not mean total exclusion of foreign capital, since there was an awareness of the benefits derived from it in the form of investments, knowhow, technology, and expertise. Rather, Mexicanization referred to a condition that the majority of a firm’s equity capital and directors should be Mexican. This policy was supported broadly among Mexican business groups since it allowed them to become partners of large multinational firms “on terms more favorable than pure market transaction [would have allowed]. They would buy equity in the multinational firm’s subsidiary at prices artificially depressed by the state’s pressure on the parent for partial disinvestments” (Domínguez 1987: 291). Although the Mexican government, like many others, would have preferred purchasing know-how from foreign firms, these firms often felt that they would not be able “to earn an adequate return on a license basis” (Baranson 1969: 21). As explained in Chapter 2, full ownership of foreign operations was central to the multinational vehicle assemblers’ competitive strategies because it meant control over their technology and know-how and it was the basis for exploiting monopoly rents. Full ownership also allowed for intercompany transfer pricing, reinvestment of profits for future growth, and managerial control over manufacturing operations. However, attitudes toward ownership vary over time and from one corporation to another. General Motors insisted on 100 percent ownership, whereas Chrysler was “much more flexible and willing even to accept minority interest.”3 Since the late 1950s and imitating GM, Ford also embraced full ownership of its foreign subsidiaries as a strategy to improve co-ordination and control over its worldwide operations and to recover its overall market position. Local content versus vertical integration and product differentiation Foreign vehicle assemblers expressed resistance to the 1962 decree’s condition of compulsory in-country automobile manufacturing in order to gain market access, arguing that this stipulation was in direct conflict with their manufacturing strategies. Ford and GM preferred servicing the Mexican market through completely knocked down (CKD) assembling kits for at least two reasons. First, they could gain more from scale economies in parts produced in the United States.4 Export of US-built parts and components allowed for

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economies of scale and economies in transportation, particularly when those parts were exported to nearby countries such as Mexico. The second reason is that parts production is key to successful vehicle manufacturing. In the absence of automotive production, skilled labor, and/or technical automotive infrastructure, producing auto parts in Mexico required huge, high-risk investments. In contrast to assembly operations, investments in key parts plants (such as engines, transmissions, or large stampings) are considered riskier given their capital-intensive nature. If forced to produce locally, vehicle assemblers preferred to pursue high levels of vertical integration. This was the best way to reap the benefits of scale economies and gain control over the supply, the quality, and the cost of parts and components. As already noted in Chapter 2, vertical integration was central to the auto makers mass-production methods and their competitive strategies, although the levels of vertical integration varied from firm to firm. It was the combination of Mexicanization of the auto parts sector and the restriction on vehicle assemblers to manufacture automotive parts that created a fundamental contradiction in light of the government’s efforts to develop the auto industry with an import substitution strategy. Not only were vehicle assemblers prevented from producing parts themselves, but also they were forced to buy parts produced by Mexican-owned suppliers. This meant that vehicle assemblers basically had to develop the supplier industry in Mexico, a situation that was the reverse of that found in developed economies. There, vehicle assemblers relied on the parts suppliers’ know-how, thus allowing for reduced risks and lower costs for investing in technological development. If forced to manufacture vehicles in Mexico, however, those firms preferred to produce at least those parts which were key to the company’s production strategies, i.e. drive-train parts such as engines. Despite their conflict of interests, the vehicle assemblers and the Mexican government reached a compromise. Vehicle assemblers accepted in-country manufacturing, restrictions to vertical integration and to foreign ownership in the auto parts sector, as well as production and import quotas. The Mexican government accepted that foreign vehicle assemblers could hold full ownership in all but the auto parts sector and could manufacture engines, and restrictions on annual model changes were removed. Moreover, local-content requirements that permitted for the importation of body stampings and other parts were lowered. These concessions clearly undermined the Mexican government’s goals for the industry. For example, permitting full ownership to foreign companies contradicted the goal of creating a nationally controlled industry; admitting a large number of vehicle assemblers into a small, closed domestic market delayed the industry’s capacity to achieve economies of scale; granting permission to import body stampings signaled the acceptance of the vehicle assemblers’ marketing strategy of annual model changes, which exacerbated inefficiencies in the industry; finally, establishing a relatively low level of local content could unleash much higher levels of imports. As the following sections show, these initial concessions also constrained the Mexican government’s future ability to promote the industry’s growth.

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The mixed effects of the 1962 Auto Decree: inefficiencies in the emerging industry’s structure Based on an assessment of the Mexican industry’s performance, substantial progress had been made in achieving import substitution in automotive production by the end of the decade. Between 1962 and 1969, the value of automotive production registered impressive growth rates (see Figures 4.1 and 4.2). Auto production doubled as a percentage of Mexico’s manufacturing GDP, generating about 60,000 jobs5 and a near doubling of new investments in the industry between 1962 and 1966 (Samuels 1990: 122; Scheinman 1990a: 49). This explained the growth in vehicle assembly to 166,000 vehicles in 1969, compared with 103,000 in 1965. This latter year was the mandatory year, established in the 1962 Auto Decree, for manufacturing – and not just assembly – vehicles in Mexico. During these years, “a machine-tool industry” emerged and permitted the replacement of a number of parts imports. The Mexican auto parts sector showed a dramatic expansion between 1965 and 1969, with an average annual growth rate of 83 percent (Figure 4.1), although by the last year mentioned it represented less than 2 percent of Mexico’s manufacturing GDP (see Table A3.1 in Appendix 3). Nationally produced engines and transmission systems were integrated into the vehicles assembled in Mexico, and locally purchased parts increased by 150 percent during the same years (Samuels 1990: 122), boosting levels of national integration from 20 percent in 1960 to 63 percent in 1972 (Wionczeck, as quoted in Dambois 1990: f.n. 11, 42; see also Moreno 1988: 5). These achievements notwithstanding, the consequences of the 1962 Auto Decree shaped the structure of the Mexican automobile industry in a way that would constrain the government’s ability to achieve its goals for the automobile industry in the future. First, by 1969, the assembly sector had undergone a process of denationalization, hindering the Mexican government’s objective of Mexicanization.6 Thus, the goal of securing the presence of Mexican vehicle assemblers in the domestic market, by means of maintaining production quotas, had not been fulfilled. Denationalization resulted largely from the Mexican vehicle producers’ inability to compete against the foreign subsidiaries, given that the former did not have access to quality parts, economies of scale in parts production, advanced management strategies, or financial resources. Despite continuous growth and some progress in rationalization through higher concentration (the number of assembly firms had dropped from twelve in 1959 to seven by 1969, as shown in Table 4.1), the emerging automobile industry was plagued with inefficiencies. One major problem in the Mexican automobile industry was the inability to achieve economies of scale, which derived mostly from the large number of vehicle assemblers operating in the relatively small Mexican market. The new assembly plants in Mexico had a lower level of integration than those in the United States and Canada and used relatively obsolete technology because their production was fully oriented to the still small Mexican market. Although by 1969 total Mexican production of vehicles was 166,000, this level was still below the total output of a single plant in the United

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Figure 4.1 Automotive output in Mexico, 1962–73 (millions of pesos) Source: Table A3.1 in Appendix 3.

Figure 4.2 Vehicle production, exports and sales in Mexico, 1965–73 (units). Source: Table A3.3 in Appendix 3.

States (it should be recalled from Chapter 2 that minimum efficient economies for vehicle assembly in the 1960s were set between 180,000 and 250,000 units per plant). In the 1960s, Mexico was producing less than half the number of vehicles manufactured in Brazil. By 1969, the market was still very fragmented. Annual production by the major companies ranged from 10,000 to 30,000 units, which embodied a wide variety of models (as Figure 4.3 shows, by 1968 Ford held 23 percent of the Mexican market, which represented about 30,000 units).7 The Mexican industry’s inefficiencies were reflected in the costs of automotive production, which were higher than those of Canada and the United States (by 50 percent), as well as Brazil.8 In 1968, for instance, the cost penalties for using Mexican-made parts over imported parts averaged 73.5 percent (mostly engines plus axles, brakes, and transmissions that were required to be made or purchased locally). The

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Table 4.1 Ownership change in the Mexican automobile industry, 1962–80

Firm

Ownership status, 1962

Ownership change, 1962–70

Ownership change, 1970–80

Ford

100% foreign

None

None

General Motors

100% foreign

None

None

Fábricas Automex

67% domestic

Chrysler increased equity to 45% (1968) Chrysler increased equity to 99% (1971)

Diesel Nacional

100% domestic (state-owned)

None

Planta Reo de Mèxico

100% domestic

Ceased operations (1963)

Representaciones Delta

100% domestic

Ceased operations (1964)

Impulsora Mexicana 100% domestic Automotriz

Ceased operations (1969)

Promexa

100% domestic

100% equity sold One to Volkswagen (1963)

Vehículos Automotores Mexicanos (Willys)

100% domestic

Nissan Mexican

100% foreign

40% equity sold to American Motors; 60% acquired by Mexican government (1963) None

Renault acquired 40% equity (1978)

Mexican government increased equity to 94% (1977)

None

Source: reproduced from Bennett and Sharpe (1985a: 119, 234).

cost penalties for some individual parts were several times the international levels; the differentials ranging from 10 percent to 1,500 percent on some of the smaller items (Behrman 1972: 137, 143). The industry’s trade deficit also continued to grow, yet another sign of the weaknesses in the government’s import-substitution strategy. According to Figure 4.4, the industry’s automotive imports continued to grow at an average annual rate of 7 percent between 1965 and 1969. Since there were no automotive exports in 1965, and since in 1969 the value of these exports represented less than 5 percent of the industry’s import value, the industry’s trade deficit remained almost unchanged, even when analyzed as a percentage of Mexico’s total merchandise imports (Figure 4.5 and Table A3.6 in Appendix 3). Like Canada, the automobile industry in Mexico “had been born with a miniature replica structure that was to limit its performance and development” (Péres Nuñez 1990a: 111). An overcrowded market structure, with model proliferation, high production costs, and growing trade deficits, was the most important obstacle to achieving the import substitution goals of the Mexican government.

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Figure 4.3 Mexican sales of vehicles by company, 1962–72 (units). Source: Table A3.9 in Appendix 3.

Figure 4.4 Automotive imports and exports in Mexico, 1965–73 (millions of US dollars). Source: Table A3.5 in Appendix 3.

The basis for co-operation: a firm’s perspective Although the Mexican regulations fundamentally contradicted their strategies, vehicle assemblers decided to comply with the Mexican regulations for three main reasons: the oligopolistic competition that prevailed in the automotive industry; prevailing perceptions about the potential growth of the Mexican market for vehicles and for other automotive products, given the context of increasing competition in the world automobile industry; and the direct incentives offered by the Mexican government.

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Figure 4.5 Automotive trade balance in Mexico, 1965–73 (millions of US dollars). Source: Table A3.5 in Appendix 3.

Ford of Mexico and defensive investments under conditions of oligopolistic competition During the 1960s, the automotive industry went through a period of intense competition worldwide, driven largely by European auto makers that were striving to capture foreign markets. This intensification of competition became obvious in Mexico during the early 1960s, when twenty-five firms had selling operations.9 In 1961, there were thirty-one firms selling approximately fortyfive makes with 117 models in Mexico, with European auto makers challenging the leadership position traditionally held by US auto makers. This high level of competition, combined with a growing Mexican demand for vehicles and strong measures of protection through high tariffs and prohibitions on vehicle imports, actually magnified the importance of the Mexican market and raised each company’s stake in the forfeit of such a market to its competitors. The Mexican experience, in fact, confirmed Knickerbocker’s (1973) observations about the strategic behavior of MNEs in oligopolistic industries (once one company moved to enter a given market, the other vehicle assemblers had to follow suit in order to maintain their competitive positions and to prevent losing a potential market share; see Whiting 1992: 213). As Shapiro (1993: 113) argued, Mexico “would have had less bargaining power vis-à-vis the transnational firms if they had faced a ‘tighter’ oligopoly or had [it] still been confronting the virtual duopoly of Ford and GM that prevailed before World War II.” It must also be noted that, at the time, the vehicle assemblers’ interest in foreign markets was not driven by the objective of reducing costs, but rather by that of expanding sales. They followed market-seeking strategies. Ford was the first to move in, complying with the Mexican auto decree in a bid to capture that market, and the other firms followed suit. There are several specific factors, as well as country-related factors, that accounted for Ford’s move. There are four main factors. First, since its origins, Ford had shown a relatively high tendency to launching operations in foreign markets because of the company’s strategy of creating mass markets around the world and because

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of its superior technology that allowed first-mover advantages to be exploited. Since the 1930s, foreign operations became essential to balance GM’s strengthened position in the US market, and ultimately for the company’s survival – although it was not until the late 1950s that the company adopted a more aggressive competitive strategy that sought to exploit fully its extensive transnational network of subsidiaries. Second, and equally important, was the fact that Ford’s Latin American operations had traditionally been very profitable, with Mexico being one of the most important markets in the region. Although in 1962 Mexican vehicle sales represented less than 1 percent of those in the United States, between 1953 and 1962 Mexican vehicle sales had registered a 15 percent average annual rate of growth. At that time, Latin American markets were considered to be of strategic importance to US auto makers. Henry Ford II did share the perception that the markets in the region had substantial growth potential. As Wilkins and Hill stated: By 1962 Ford was committed to expansion in Latin America. There was full recognition of the risks involved: intense nationalistic sentiment (from both right and left), continuance of government intervention in business, political instability in many countries, and inflationary difficulties; but there was also an awareness that the company had large investments in Latin America and that these markets had enormous promise. (Wilkins and Hill 1964: 419) Third, Ford’s leadership role in complying with Mexico’s new regulations could also be explained by the rising levels of competition within the Mexican market. Figure 4.6 shows that in 1962 Ford’s share of the Mexican market had dropped to 27 percent, compared with 37 percent during the 1950s, in part because of the arrival of other vehicle producers in the Mexican market and because of the strengthened position of GM. During the 1950s, GM was a leader in vehicle sales in the Mexican market, with Ford close behind, but by the early 1960s the gap in sales between these companies had widened in favor of GM. Thus, an abandonment of the Mexican market by Ford would have automatically translated into a strategic gain for GM. As for the country-related factors, the relatively high growth rates and strong protectionism surrounding the Mexican auto industry played a significant role in attracting investment from foreign vehicle assemblers. According to some Organization for Economic Co-operation and Development (OECD) estimates, total assembly plant profits in Mexico in 1960 were US$211 million, or more than 10 percent of total sales, with assembly operations enjoying an effective protection rate of 4,100 percent (OECD data, as quoted in Samuels 1990: 118). The Mexican market was also an attractive sales area for automotive products other than vehicles. In 1965, for example, the value of automotive imports into Mexico was $176 million, representing over one-tenth of Mexico’s total imports. As Baranson and others have pointed out, although manufacturing subsidiaries

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Figure 4.6 Mexican sales of vehicles by company, 1952–65 (units). Source: Table A3.9 in Appendix 3.

in the less developed countries “only account[ed] for a small percentage of total earnings, they represent[ed] a ‘sizeable customer for components and parts … their investments in overseas manufacturing facilities [were] in a sense an investment in future demand for components and parts” (Baranson, as quoted in Samuels 1990: 118). These benefits were guaranteed despite Mexican requirements for local content, because the 60 percent level still allowed vehicle assembly firms to continue importing a substantial amount of parts produced in the United States. Finally, operating in Mexico had some other advantages for vehicle assemblers, such as direct government incentives. Not only did subsidies reduce the cost of capital investments but they also “guarantee[d] a return if the market [did] not materialize” (Shapiro 1993: 113).10 Some estimates indicated that, between 1963 and 1972, Mexico’s subsidies to the automotive industry were between 50 percent and 60 percent of the total value of investments during that period (Gudger 1975, as quoted in UNCTC 1983: 109). Given these factors, it was not surprising that Ford and the other auto makers bargained strongly to guarantee their access to the Mexican market in the early 1960s. From this perspective, the international industry’s structure and heightened levels of competition, the strategic interaction between oligopolistic firms, as well as the Mexican government’s tariff and investment incentives explained the latter’s success in attracting foreign direct investment despite the numerous restrictions that existed. Paradoxically, these same factors laid the foundations for future problems in the industry, as the following sections demonstrate.

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The limits to nationalistic preferences Despite Mexico’s tough bargaining stance and its central goal of Mexicanization, the government allowed Ford and GM to start building vehicles in Mexico and to own their local subsidiaries fully. This decision “marked an ideological turning point. It mattered less who owned the firm; it mattered more what the firm did” (Domínguez 1987: 29); it also had important consequences for the industry’s structure. As Bennett and Sharpe have argued, once Ford’s and GM’s subsidiaries were accepted as fully foreign owned, it was “politically impossible” to deny applications from other firms (Bennett and Sharpe 1985b: 110). In total, the Mexican government approved eleven out of the eighteen firms applying for import licenses. In 1964, the Mexican government accepted both Nissan’s proposal for a fully foreign-owned subsidiary and Volkswagen’s 100 percent purchase of Promexa. Given the small size of the Mexican market and the inward development orientation of the 1962 Auto Decree, accepting such a large number of firms created an industry structure that impaired it from operating efficiently in the future. Why, then, did the Mexican government grant access to so many vehicle assembly firms? Bennett and Sharpe (1985b) contend that the answer lies in the support that Ford and GM received from the US government in their negotiations with the Mexican government, and, more importantly, in the disagreements that existed within the Mexican bureaucracy at the time of the 1962 Auto Decree. The US government, through its Ambassador to Mexico, explicitly notified Mexican government officials that exclusion of US vehicle assemblers from the Mexican market would be “viewed as not a very friendly act.” According to Bennett and Sharpe (1985b: 109–10): explicit backing of the position of Ford and GM meant that Mexican policy toward its automobile industry would be linked with and would affect what happened in other spheres of US–Mexican relations. The Mexican government found itself facing sanctions beyond those that the firms themselves could have brought to bear. A similar situation evolved in the case of Nissan. Although Nissan submitted a proposal 2 years after the deadline set by the Auto Decree, it gained entry into the Mexican market because the Japanese government intervened on its behalf. “The Japanese government threatened to cut purchases of Mexican cotton if Nissan’s application were not approved.” By that time, Japan was the most important export market for Mexican cotton, which also accounted for 20 percent of Mexico’s total foreign earnings (Bennett and Sharpe 1985b: 111). Bennett and Sharpe also argued that, despite these home government pressures, Mexican policy-makers did have the option of restricting market entry to only a few vehicle assemblers. The support that foreign vehicle assemblers received from their own governments: would have made their exclusion difficult and costly, but not impossible. There were alternatives that might have been pursued, either to force

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exclusion or to obtain terms of entry that would have been more compatible with the state’s wishes regarding Mexicanization and product differentiation. (Bennett and Sharpe 1985b: 111) For the Mexican government to strengthen its bargaining power vis-à-vis the US or the Japanese governments, “it would have needed a high degree of internal cohesion among key ministries and between the políticos and técnicos within ministries” (Bennett and Sharpe 1985a: 112). According to this view, there was a co-ordination problem between the Ministry of Industry and Commerce (Secretaría de Industria y Comercio; SIC) and the Ministry of Finance over policies which regulated the automobile industry (the former was in charge of tariffs and import licenses, the latter of industrial policy, tax rebates, and subsidies); there was also a split within SIC, between políticos wanting to avoid conflicts with foreign firms and técnicos who were more concerned about the industry’s efficiency in the long run. Finally, the lack of unity within the Mexican government also stemmed from the Mexican President’s episodic and ad hoc involvement in formulating the policies regulated the automobile industry (Bennett and Sharpe 1985b: 114).11 In sum, according to Bennett and Sharpe’s reasoning, had it not been for these interbureaucratic disagreements the Mexican government could have approved one US firm over another, thus “undermining US government assertions of discrimination against foreign investment by its nationals. Alternatively, Mexico could have approved all proposals, on the grounds that the MNEs accept majority Mexican ownership or limit their production to a single compact model” (Bennett and Sharpe 1985b: 111–12). Yet, hindsight suggests that these were simply not options for the Mexican government. Explanations for this are found in the industry’s competitive dynamics in the 1960s and the Mexican government’s preferred goals of developing the automobile industry. Although interbureaucratic disagreements might have influenced these bargaining outcomes, the determining factor for Mexican policy was the competitive structure of the auto industry. To start with, the Mexican government could not have opted for approving just one of the US firms. The option of approving both, but insisting on majority ownership by Mexican capital, was also foreclosed. It was highly implausible for Ford to be excluded from the Mexican market, owing to the company’s leadership sales position in the country, and its strong involvement in helping the Mexican government to develop an automobile industry (for instance, the company’s manager in Mexico had established a close personal relationship with the head of SIC and had contributed industry reports to assist Mexican officials the design of an automotive policy; see Bennett and Sharpe 1985b: 97–9). The preference for large, US-style cars on the part of Mexican consumers also favored the presence of US firms, as explained below. Since Chrysler was already an established producer in Mexico – as a result of its joint venture with Fábricas AutoMex – it would have been difficult to exclude GM. GM was not only a sales leader in the Mexican vehicle market but also the industry’s worldwide leader.

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Thus, the Mexican government was constrained by an industry in which the levels of competition to capture foreign markets had intensified significantly. Although the Mexican government had more leeway for limiting the number of vehicle assemblers operating in the national market, this was an option that it chose not to exercise. The government could have restricted the number of Mexican-owned firms applying for quotas to only one or two, instead of seven, and it could have enabled them to compete with the foreign auto makers (for example with a better designed strategy for the auto parts sector, see below). Alternatively, Mexico could have also restricted the entrance of other foreign firms, such as Nissan (European firms had not applied for entry into the Mexican market, although they had reached licensing agreements with Mexican vehicle assemblers).12 Excluding Nissan from the Mexican market was difficult to justify, especially after having accepted Ford and GM, but not impossible.13 The Mexican government could have argued that the small Mexican market, and the need to avoid inefficiencies, prevented it from accepting another vehicle assembly firm. Although the political cost of a conflict with the Japanese government could have been high (one which Mexican public officials were apparently not willing to bear, according to Bennett and Sharpe), that cost would not have been as high as that of an open conflict with the United States. Therefore, the Mexican government’s goal of diversifying trade and economic partners seems to have been a more important factor in its decision to accept Nissan. The Mexican government’s concerns about the increasingly dominant position of US firms in the auto industry were exacerbated by the industry’s progressive denationalization between 1962 and 196414 (see Table 4.1). By the 1960s, Mexican policy-makers began to view Mexico’s increasing economic dependence on the United States with apprehension. This further explains the Mexican government’s decision to accept Nissan’s application, as well as Volkswagen’s purchase of Promexa. Inefficiencies in the assembly sector: product differentiation and Mexican consumer tastes As previously mentioned, model proliferation was another feature of the Mexican automobile industry. Contrary to Bennett and Sharpe’s view, forcing foreign vehicle assemblers to produce a single compact model was not an alternative for the Mexican government. Policy constraints in terms of limiting the proliferation of models in Mexico were rooted in the marketing and production strategies of the US auto makers, in Mexican consumer preference for US-style cars, and in Mexico’s geographic proximity to the United States. Although a rational strategy in a small market such as the Mexican one, the restriction on the number of models or lines ran directly against the US auto makers’ strategies. It has been argued that, more so than their European competitors, US auto makers relied on product differentiation and annual model change as a risk-adverse competitive strategy. The Mexican consumers’ general preference for modern US-style vehicles reinforced those marketing strategies. Although growth rates for the Mexican vehicle market were high in the 1960s,

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those Mexicans that could afford to buy a car still constituted a relatively small group. This group, however, was accustomed to having a large choice of vehicles, thus “it would have been difficult to reduce that choice without affecting the demand.” The geographic proximity of the US market also influenced Mexican demand for US products. Thus, it made no sense for Ford and GM to limit their production to a single model or line. From this perspective, the previous success of the US assemblers’ marketing strategies in Mexico “provided them with added bargaining power” (Samuels 1990: f.n. 18, 121). The Mexican government also lacked any leverage to force US firms to assemble compact cars in Mexico, not only because of local demand conditions but also because of those firms’ production strategies. Despite the success of the European small cars in the 1960s, the US Big Three were reluctant to invest in developing and building smaller cars. This reluctance stemmed from the low profitability of small cars, compared with large cars, the firms’ risk-adverse behavior, and their strong incentives to protect their joint profits. Also, vehicle assemblers tended to use obsolete technology in countries where market conditions inhibited them from achieving efficient levels of production. Making any adjustment in product design and production techniques to those markets implied disruptions in the industrial transplant process, a high risk that vehicle manufacturers refused to undertake (Baranson 1969: 24–5), especially when they could continue earning rents on their old technology. For these reasons, the US Big Three were not eager to build compact cars in Mexico. Taking into account the oligopolistic nature of competition in the industry, such a project would have been justified (at least for US vehicle assemblers) only if the Mexican market had been large enough to sustain efficient production and collective gains for all auto makers. Economic considerations concerning vehicle demand and supply, and macroeconomic policies, might have also explained the Mexican government’s concession to the US vehicle manufacturers to import body stampings. These manufacturers demanded permission to import body stampings because these parts were of basic importance to their marketing strategies of product differentiation through annual model change. These parts require the highest economies of scale in vehicle production, amounting to a million units per year to reach optimum levels. Production is undertaken in batches at lower volumes, thus requiring periodic changing of dies and higher costs because of downtime. Given this, and the size of the Mexican market, manufacturing those parts in Mexico would have forced vehicle assemblers to either raise prices or to maintain model styles for more than 1 year. The latter choice was made in countries such as Argentina and Brazil (Behrman 1972: 142). Considering the demand situation in Mexico, either choice by the US Big Three would have meant reduced sales. In addition, raising prices contradicted the Mexican government’s policy of desarrollo estabilizador, the centerpiece of Mexico’s economic development program that sought high growth and profits under conditions of low inflation. For example, policy incentives encouraged private-sector investment by way of longterm, low-interest loans for industrial development, low taxes, tax exemptions and fiscal subsidies, corporatist control to keep wages down, as well as orthodox

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fiscal and monetary policies (Bennett and Sharpe 1985b: 27). The domestic goal of maintaining low inflation was compatible with a stable and overvalued exchange rate (from 1954 to 1976, the Mexican peso was pegged to the dollar, at 12.5 pesos per US dollar) that favored the import of capital and intermediate goods, thus assuring capital-intensive manufacturing while discouraging the exportation of other labor-intensive manufacturing products. Thus, although it seemed paradoxical that the Mexican government agreed to impose a relatively low level of local content – especially if compared with levels imposed by Brazil and Argentina15 – which had negative consequences for the industry’s trade balance, that decision seemed to be consistent with the government’s macroeconomic policies. Not only were body stampings the largest imported automotive items in Mexico (equal to about 20 percent of the value of auto imports, with US firms accounting for 100 percent of those imports), but it aggravated inefficiencies in parts production because its importation enabled redesigned components to be imported and the unchanged ones to be supplied in Mexico. Apparently, the designated level of local content was adopted on the understanding, shared among many Mexican officials, that once the industry was well established “the level of local content could be raised to mandate domestic manufacture of the exterior body parts” (Bennett and Sharpe 1985b: 103). Finally, as in Canada, the geographic proximity of Mexico and the United States also made it more rational to import those parts than to produce them in Mexico. Body stampings were made in Brazil, for instance, simply because it was costly to import those bulky parts from the United States. Brazil could thus afford to establish high local-content requirements and still reach economies of scale, mainly because of its larger market. By contrast, Mexico had a small market for vehicles and its proximity and trade ties with the United States meant that its negotiating position with US firms was weaker than that of Brazil (Shapiro 1993: 114). As Shapiro has observed: High domestic content requirements [in Brazil], combined with policies that banned the import of components and parts for which there were domestically produced equivalents, insulated the domestic industry from the world. As a result, cars on the street tended to be antiquated as firms changed models infrequently in order to amortize tooling costs. Mexico’s lower domestic content allowed firms greater flexibility in production, particularly by allowing metal stampings to be imported [and meant] that the sector continued to generate trade deficits that grew proportionally with the numbers of vehicles produced. (Shapiro 1993: 114–15) In 1965, the Mexican government tried again to impose the local production of body stampings, so that it could cut the potential 60 percent cost penalty by forcing one body style on all producers, but all companies protested vigorously and successfully (Behrman 1972: 125).

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Inefficiencies in the auto parts sector: the Big Three’s sourcing policies and restrictions on foreign ownership Another feature of the Mexican automobile industry was the high degree of fragmentation in the auto parts sector. According to Behrman (1972), the failure to achieve efficiency in parts production was a more important problem than the failure to do so in vehicle assembly. The importance of economies of scale in vehicle assembly was actually less in Latin America than in the United States or Europe, because vehicle assemblers were able to substitute labor and general purpose tools for some of the specialized tools used in the United States. As a result, with an annual volume of only 20,000 vehicles, “assembly costs [in Latin America] exceeded US levels by only 6 percent” (Behrman 1972: 141). Behrman points out that while the failure to achieve scale economies accounted for over 50 percent of the differential between US and Latin American automotive production costs the rest stemmed from non-scale costs, such as higher costs of raw materials and capital as well as unskilled labor and longer learning times. In the Mexican case, inefficiencies in the auto parts sector also stemmed from the structure that emerged in that sector, the Mexican regulations on vertical integration and foreign ownership in parts firms, and the vehicle assemblers’ sourcing and marketing strategies. The more flexible approach to vertical integration required by the 1962 Auto Decree, compared with the original NAFIN proposal, permitted foreign firms to produce those parts that they had been producing before 1962, mainly powertrain components, such as clutches, transmissions, and axles. This, combined with a cap of 40 percent on foreign ownership in parts firms, created two groups in the auto parts sector. One, a relatively small number of large firms, with foreign equity and/or technology licenses to produce original equipment components for vehicle assemblers; the other, a group of small and mediumsized firms, the majority of which were Mexican owned, that produced parts with lower technological content, most of which were oriented to the aftermarket, i.e. replacement parts (Bennett and Sharpe 1985b: 130–6). Those with foreign equity held a monopoly on their product – which translated into higher prices – owing to the government’s mandatory list of parts that had to be bought locally and to the high cost of machinery (for example for axles, brakes, and transmissions; see Behrman 1972: 138). The set of policies that protected the auto parts industry from foreign competition exacerbated the market power of parts manufacturing firms. Furthermore, these firms were able “to install and maintain a capacity that caus[ed] excess demand for domestic production to prevail in the OEM a significant percentage of the time … The net result is that output and employment is lower in the parts industry, and the level of imports of parts is higher than might be the case under a differently designed set of public policies” (Bennett 1986: 62). Mexico’s policies restricting vehicle assemblers from vertically integrating and forcing foreign firms to own minority shares of Mexican-owned auto parts firms reflected the government’s goal of maintaining a nationally controlled industry. According to one view, the Brazilian parts supply base was able to

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reach international standards, in part because Brazil had no limitations on vertical integration or on foreign investment in the automotive parts sector (Shapiro 1993: 114–15). As already explained, US vehicle assemblers gained concessions from the Mexican government to produce engines and therefore did not oppose further restrictions on vertical integration as much as they did oppose restrictions on foreign ownership in the auto parts sector. But, considering Mexico’s proximity to the United States and the efficiency of US auto parts producers, Mexican parts suppliers would not have survived foreign competition without such restrictions. This outcome clearly contradicted the Mexican government’s goal of creating a nationally controlled automobile industry. Even in light of the Mexican government’s concern for national control, there was still a range of policy options that could have created a more efficient auto parts industry. According to one view, the Mexican government could have provided stronger support for the supplier base and been more responsive to the needs of small manufacturers operating in specialty markets, thus attracting “European manufacturers dependent on quasi-market relationships. Instead, [its] own policies limited them to trying to replicate an inappropriate model for development” (Morales 1994: 127). There are two problems with this option. One is the effect of geography. As Mark Bennett (1986) showed in his study of the Mexican auto parts industry, because of their distance from Mexico, German suppliers: offered technology licenses and asked for no ownership participation. Thus, a group of auto parts firms was created, managed by Europeans, employing German technology, and entirely locally owned. This group of firms may, in fact, be less Mexican in character than the joint venture firms [often with a US minority equity]. (Bennett 1986: 19) The other problem with Morales’s argument relates to the issue of whether ownership determines performance or not. Bennett and Sharpe (1985b) and Bennett (1986) argue more plausibly that it was the industry’s structure and the existing barriers to entry, more than ownership, which determined inefficiency in the Mexican auto industry. From this perspective, two options for the Mexican government were to promote foreign competition, especially for those auto parts manufactured by the large, joint venture firms, and/or to select a few “national champions” from the smaller group of Mexican-owned firms. Finally, although vehicle assemblers blamed the Mexican regulations and the parts suppliers for the poor quality and slow delivery of auto parts,16 their sourcing strategies also contributed to inefficient auto parts production. By demanding special designs that varied with annual model changes, their strategies resulted in shortened parts production runs, unused installed capacity, and reduced profit margins for parts firms. A certain level of standardization was achieved, but only for a few original equipment parts. While vehicle

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assemblers were able to exert limited leverage on monopoly component suppliers that manufactured original parts and sold them according to the mandatory list of parts to be purchased locally, they exercised tighter control over small auto parts firms by threatening to import components that they were already manufacturing. This helped to reduce prices, but it did not translate into higher efficiency. Through their practice of intra-firm trade, vehicle assemblers were able to create a cost-price advantage over Mexican parts suppliers because they could afford a profit loss by reducing the price of manufactured components and parts to levels under their real cost (Bennett and Sharpe 1985b: 149–51). These sourcing policies were also facilitated by Mexico’s levels of local content that left vehicle assemblers to decide which parts would be imported and which would be sourced locally, thus preventing Mexican suppliers from achieving efficient use of their installed capacity. Ford’s leading role in developing a “national” automotive capability It must be emphasized, however, that not all firms followed the same strategy regarding vertical integration and local content – although all of them opposed restrictions on foreign ownership in the auto parts sector. It was in the MNEs’ best interest to develop an auto parts sector in Mexico, given the constraints on vertical integration (Bennett 1986: 18); therefore, they provided “the nascent majority Mexican-owned parts industry with markets, technological assistance, and ‘matchmaking’ services” (Bennett and Sharpe 1985b: 116). The transfer of technology was implemented through direct technical assistance to new auto parts firms, technology contracts, and training of personnel both in engineering and quality programs. Of all foreign vehicle assemblers established in Mexico, Ford showed the strongest commitment to the Mexican government’s goal of creating an indigenous auto parts sector. Ford was very active in matching foreign firms with Mexican firms to produce key automotive parts and in helping completely Mexican-owned companies to become reliable suppliers, as illustrated by the establishment in Mexico of such groups as Transmisiones y Equipos Mecánicos (Tremec) and Spicer, S.A. (which manufacture transmissions and axles, respectively; for further elaboration on this point, see Bennett and Sharpe 1985b: 131–4; see also López-de-Salines 1991: 93). The parent company’s policies partly explain Ford’s active matchmaking role. Ford’s relatively lower degree of vertical integration gave its Mexican subsidiary more flexibility than GM’s in responding to local content, since it allowed the subsidiary to discontinue buying auto parts from its US suppliers or to convince them to move to Mexico. Instead, it was more difficult for the GM subsidiary to discontinue buying from parent US divisions, given the parent company’s strategy of achieving high levels of vertical integration. In order to strengthen its relationship with the Mexican government and to compensate for the disadvantages in being a newcomer in the Mexican industry, Volkswagen pursued an aggressive strategy of high local content. But in contrast to Ford, the Volkswagen subsidiary insisted on being allowed to obtain higher

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levels of vertical integration. Two obstacles that blocked the company’s strategy of high local content were that local suppliers were not manufacturing the parts required by the Volkswagen subsidiary and that volume was not sufficient to justify local manufacturing. The US subsidiaries had the advantage of sharing the same local suppliers – thus benefiting from economies of scale and lower prices – and were able to buy from US suppliers that had already established in Mexico. Thus, Volkswagen fought rules prohibiting vertical integration, “producing its own parts whenever possible”; it even got permission to have a stamping facility (Nissan followed a similar strategy; see Samuels 1990: 138–9). The Mexican government’s concessions to Volkswagen show how determined the government was to prevent the US firms from dominating the Mexican automobile industry. The US vehicle assemblers’ importation of body stampings and other parts, facilitated by the Mexican government’s requirements for local content, created successive trade deficits in the industry. These deficits were incompatible with the Mexican government’s import-substitution approach to industrialization, and proved the existence of a fundamental conflict between that approach and the industry’s structural rules, which were based on mass production. Ford’s strategy clearly showed those structural constraints. Being the foreign auto maker that was most willing to co-operate with the Mexican government, Ford could have fully complied with the Mexican regulations only at the expense of the financial viability of its Mexican operations. From the Mexican government perspective, negotiating against the industry’s basic rules had its limitations.

5

The 1970s An era of structural constraints and narrowed strategic options

The climate of uncertainty that prevailed in the North American automobile industry after the 1973 oil shock exacerbated the traditional structural and institutional obstacles that Ford had to face in order to set its competitive strategies. This uncertainty was rooted in a macroeconomic context characterized by rampant inflation, unstable rates of growth, balance of payments problems and an erratic North American demand for vehicles, which combined with stricter safety and emissions regulations in the United States limited Ford’s strategic choices. The bargaining dynamics with other auto makers and with the US government also explain Ford’s problematical position and the industry outcomes during the decade. The collective strategic choices of the US auto makers and a series of actions undertaken by the US government reduced Ford’s margin for action and paved the way for the structural changes that permeated the industry throughout the 1980s. As the Canadian and the Mexican cases discussed in this chapter show, US government policies, the industry’s competitive environment, and the difficult North American context of the 1970s also affected Ford’s capability to respond to demands to increase investments in those countries. Government intervention, by means of subsidies, was required in both Mexico and Canada to entice US vehicle assemblers to invest in the host country, not only because of the minimum-risk strategies pursued by those companies but also because of the use of those subsidies in the United States. This again confirms the validity of the triangular diplomacy dynamics. Ford exploited the competitive advantages built into its foreign operations, particularly those in Europe and Canada, to compensate for its difficult situation in the North American market, but it was only partly successful. The restrictions faced by Ford were particularly felt in its Mexican subsidiary.

A changing North American context A number of analysts have argued that the US Big Three’s failure to compete effectively with the Japanese auto makers in the late 1970s stemmed from their complacent attitude toward the competitive challenges posed a decade earlier by European auto makers. Since the late 1950s, European auto makers, which having mastered mass production and offering products that were different from

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those produced in the United States, were rapidly increasing their ability to compete in the United States, in their own national or regional markets, and elsewhere in the world.1 Rather than producing small cars in North America, the US auto makers decided to import their smaller products built in their own European subsidiaries – such as Ford’s Capri, the Mercury Taunus, and the Ford Anglia (Wilkins and Hill 1964: 410). They also introduced designs that would add varying size to the traditional standard models,2 such as GM’s Chevrolet Corvair, Ford’s Falcon and Comet (introduced in 1960), and GM’s Chevy Nova (1963). But the new products were only smaller versions of the basic full-sized American car and even continued to be “larger, heavier, and more expensive than the imports” (National Academy Press 1982: 70). When imports of European cars dropped in the mid-1960s, the US Big Three’s compact models were transformed, either through enlargement or upgrading in size, or extensive restyling (Bhaskar 1980: 92). This drop in the US demand for European cars reaffirmed the US Big Three auto makers’ belief that the demand for small cars was temporary, which explains their decision not to develop and produce smaller cars that could compete against foreign vehicles. Structural and institutional factors also played a significant role in shaping the US Big Three’s strategic responses. One major obstacle to the US Big Three’s ability to develop new, more successful cars was structural and related both to the rigidities intrinsic to the system of mass production and to the engineering and logistic complexities involved in vehicle production. As already argued in Chapter 2, one key feature of mass production was the tight co-ordination of different production processes, in which even small changes in one part of the manufacturing process required massive changes in production facilities. Long lead times for developing new products also obstructed the auto makers’ ability to elaborate new technologies and respond rapidly to the sudden changes in vehicle demand that took place in the 1960s and later in the 1970s. Although the smaller, more efficient cars produced by the Europeans in the 1960s and later on by the Japanese implied changes in just one part of the manufacturing process – in basic components, from rear-wheel to front-wheel drive – even a minor change had major ramifications owing to the fact that various types of facilities were tightly linked (National Academy Press 1982: 22). Therefore, although the US Big Three started developing their new frontwheel drive cars – GM’s Chevette, Chrysler’s K cars, and Ford’s Escort – after the first oil shock, they were not ready to launch them into the marketplace until 1980–1. In some cases, their attempts to respond quickly to changes in vehicle demand had the downside effect of poor quality in their products. At the end of the 1970s, for instance, Ford faced a number of lawsuits over the “exploding Pintos,”3 and, in 1978 alone, the company recalled approximately 4 million vehicles, which represented the mainstay of its US production that year (Ward’s Communications 1980: 221; Shook 1990: 11, 65). Also, organizational inertia and the existence for so many years of a stable and predictable market conditioned the auto makers’ strategic decisions and obstructed their ability to cope with the new competitive industry’s situation.

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The recognized interdependence among the US Big Three had two major effects. First, there were profit considerations in their decision to continue building their larger cars; while selling prices of large and compact cars could differ by 175 percent, labor costs were only about 30 percent more for a large car than for a compact (Morales 1994: 63). The smaller cars were also seen as a threat to the sales of the larger, more profitable cars (White 1971: 177–8). Second, the US auto makers were also concerned with “room for all” considerations, refraining from entering the small-car market until they were convinced that the market was large enough to support all three. High costs and high risks of developing wholly new models reinforced this pattern of behavior. For instance, although Ford was the first to move into the mid-size market segment with its compact Maverick (1962), in 1959 the company had dropped its plan to produce the Cardinal, a smaller car that could have been a better rival to the small cars imported into the United States. Ford’s decision was based on “room for all” considerations, and on the constraints posed by GM’s leadership in setting style in the industry. In fact, GM was the most “sceptical about the virtues of small cars and the most vulnerable to the loss of big car sales to the new small cars” (White 1971: 188). Partly for these reasons, Ford decided to locate the production of the subcompact Fiesta in Europe and not in North America. The US Big Three had to cope with abrupt changes in the demand for vehicles from large to small, fuel-efficient cars that emerged after the two oil shocks. With the demand for small cars dropping as oil prices stabilized during the 1976–8 period, and then increasing after the 1979 oil shock, US auto makers found it very difficult to make the right strategic choices. The situation was further aggravated as US standards on emission controls,4 fuel efficiency, and safety for the auto industry became more exacting. The US government had introduced regulations since the late 1960s to set guidelines for certain features that the vehicles should contain. Regulations in the 1970s were often contradictory, with safety standards demanding an increase in the weight of vehicles, and fuel efficiency demanding a decrease in it (Harbour and Associates 1990: 8; Shook 1990: 7, 64). The Energy Policy and Conservation Act, adopted by Congress in 1975, mandated that all auto makers selling in the United States should comply with fuel efficiency technology by 1978 and set a schedule for progressively stringent corporate average fuel economy (CAFE) standards, with a target of 27.5 miles per gallon by 1985.5 One effect of these regulations was to enhance the European and Japanese competitive lead over the US Big Three, since foreign producers were already producing small and fuel-efficient cars. In addition, in 1977 the National Highway Traffic Safety Administration (NHTSA) issued new safety standards, such as passenger seat belts and/or air bags, 5-m.p.h. impact bumpers, and “shatterproof ” glass, that had to be included in vehicles from the beginning of 1981 (Quinn 1988: 95). For the US Big Three, meeting these two sets of regulations signified a major boost in capital expenditures in order to develop the new technology and a reduction in their overall profit margin per vehicle. This situation was troublesome in a market context that demanded huge investments to face mounting foreign competition.

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Ford’s product strategy: overcoming institutional constraints The new competitive context affected US vehicle assemblers to a different extent. While US vehicle sales dropped sharply after the first oil crisis in 1973, Ford’s sales dropped more than the industry average (Ward’s Communications 1976: 187). With less financial strength and a narrower range of products than GM, Ford was less able to cope with sharp fluctuations in vehicle demand. In order to meet the new energy-conservation regulations, Ford started to rely more heavily than GM or Chrysler on downsizing its existing products and concentrated on producing conventional compact cars rather than offering new subcompacts. Even by the late 1970s, while GM offered five subcompact models, Ford offered only two, the Pinto (1971) and the Fiesta (1976), which were imported from Europe. The lopsided North American demand for vehicles created additional strategic dilemmas. Ford retooled its Wayne, Michigan, assembly plant to start production of the compact (medium size) Maverick; as the retooling was completed in 1974, oil prices had stabilized and Maverick sales dropped. The company even increased the price of optional V8 engines “to get people to stick with the fours and sixes” (Ward’s Communications 1974: 99). The better performance of its rivals forced the company back into production of its larger models and pick-up trucks (Harbour and Associates 1990: 6; see also Ward’s Communications 1976: 187, 1980: 221). Compliance with the new US regulations on emissions control and safety standards hampered Ford’s financial leverage to make long-term product decisions based on changing market and competitive conditions. For instance, in 1974, Ford opted to downsize its LTD/Marquis and Mustang/Capri and to import its subcompact, front-wheel-drive Fiesta from Europe instead of spending $2 billion to build a small car in the United States (Schnapp and Cassettari 1979: 20). Ford’s strategy consisted of selling a maximum number of the large, higher priced, and more profitable cars; downsizing some of its products; and producing a minimum volume both of small cars and of high cost components, such as air bags and catalytic converters. Since it could not build a small car in North America, Ford used the competitive advantages that had been developed over the years in its foreign operations. In the 1970s, Ford’s vehicle production in the United States was about half that of GM’s, while its worldwide production and sales represented, respectively, about 80 percent and 70 percent of those vehicles produced and sold by GM worldwide. Ford assigned the responsibility for developing and manufacturing the Fiesta to its European company. Europe was already considered to be one market, and one that was the most suitable for a small car. In 1972, Ford of Europe was already operating under an integrated model range6 and a dispersed and efficient system of component production, with single sourcing for some products (UNCTC 1982: 83).7 Also, the different consumer tastes and product characteristics that have historically existed between Europe and the United States helped Ford of Europe to acquire the capability to develop and produce a distinctive car not only for such a regional market but for other markets around the world as well. In the early 1970s, Ford of Europe had two engineering and research centers, one in Britain (at Dunton) and one in

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Germany (at Merkenich), which were the only two R&D locations outside of Ford’s Dearborn, Michigan, headquarters. No other Ford subsidiary displayed the European independence in terms of either product development or management autonomy. Total investment in the Fiesta amounted to $1.1 billion, and production was shared among several European countries, including Great Britain, Germany, Belgium, and Spain. Besides the engine and car assembly plants opened in Spain, in the early 1970s Ford built a new large plant for mechanical components in France. Ford also expanded mechanical parts manufacturing in the United Kingdom (such activities are less sensitive to labor disruptions) and body and assembly in Germany, where the work force was more efficient. Since the Ford Fiesta was a “well-designed and attractive small car, and had a unique product range covering almost all significant market segments in Europe” (Doz 1986: 67), it was a major market success and recorded “the highest unit sales of any new European car in history” (Dyer et al. 1987: 166). In addition, Ford took advantage of the strategic changes that had been implemented since the late 1960s, when it decided to source more parts and components from foreign independent suppliers for its network of subsidiaries around the world. The world had become a source of supply for Ford’s domestic and all of its overseas operations, not merely for the country in which a factory was located. In an executive communication, Henry Ford II stated: In order to further the growth of our worldwide operations, each purchasing activity of the Company or an affiliated company should consider the selection of sources of supply not only in its own company but also sources located in other countries. (as quoted in Wilkins and Hill 1964: 422) Ford was moving toward an efficiency-seeking strategy that sought to change its worldwide organization from hub and spoke to a networked configuration (Kobrin 1987: 21). In turn, this strategy would enable the company to fully exploit advantages deriving from its relatively lower levels of vertical integration and from the infrastructure that it had previously built in some foreign countries. The strategy required government policies that facilitated trade of parts across borders. For instance, through Canada’s multilateral application of the Auto Pact, Ford was permitted to source parts duty free from non-North American countries. As early as 1968, Ford’s Pinto was built in Canada with Brazilian engines and French transmissions (Reisman 1978: 139). Besides giving the company a competitive edge vis-à-vis GM, Ford’s sourcing strategy made it possible to respond to new government demands in foreign countries. This happened in the late 1960s when Argentina, Brazil, and Mexico introduced a number of export programs aimed at reducing the balance of payments deficits associated with the auto industry and the high costs and inefficiencies that plagued their automobile production (UNCTC 1983: 115– 18). Compared with GM, Ford was more willing to increase its sourcing of parts from Latin America. For instance, in 1972 Ford made the largest investment

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commitment of all foreign auto makers operating in Brazil to produce engines and other parts for export markets (UNCTC 1982: 117). By the mid-1970s, Ford was already producing four-cylinder engines in Brazil for its North American assembly operations. Ford’s new sourcing strategy also enabled its Mexican subsidiary to lead other auto makers to export locally produced parts, particularly from independent suppliers (see below). While Ford continued with its regional integration strategy in North America in the 1970s, its integration program in Europe encountered various difficulties, which were related to the company’s failure to overcome cross-national logistical barriers. In 1978 a labor strike paralyzed the Fiesta project in Britain,8 and questioned Ford’s ability to integrate its European operations in a truly regional European company. Many analysts did consider the company’s European operations as only a pair of two large successful subsidiaries (Harvard Business School 1991: 9). Ford’s European integration strategy was further compromised in the late 1970s, when shortages of the parent company’s resources forced a difficult trade-off between sustaining a leading position in Europe through continued reinvestments, or using cash flows from Europe to support ailing US domestic operations (Doz 1986: 155). Thus, in spite of Ford’s efforts to better co-ordinate its North American and European operations and to increase its intersubsidiary trade worldwide, in the late 1970s Ford’s worldwide operations still functioned on a “multiregional” basis. Nonetheless, at that time Ford was considered to be the most advanced of all auto makers in achieving high levels of intersubsidiary co-ordination/ integration at a regional basis.

The Canadian automobile industry’s deteriorating competitiveness The 1973–9 period was one of relatively slow growth in the Canadian automotive industry. During those years, Canada’s trade surplus in vehicles was cut by six, and the total automotive trade deficit registered a more than threefold increase, growing from US$800 million to US$2.9 billion. Vehicle imports from Asia registered a dramatic expansion, with cars rising from 77,000 units in 1967 to 195,000 units in 1977, or over 20 percent of Canada’s total vehicle imports. The value of auto parts imports from other countries than the United States increased by about 80 percent, growing from a low of US$15 million in 1965 to US$269 million in 1973, and to US$484 million in 1979. One major problem was a consistently accumulating Canadian trade deficit on non-Auto Pact trade, which included replacement parts and accessories, original equipment parts for special types of vehicles, tires, and batteries. This suggested that, “despite significant tariff protection – 15 percent – Canadian producers, particularly of replacement parts, ha[d] become increasingly uncompetitive” (Reisman 1978: 55–6). Without the Auto Pact, “the portion of the industry covered by the agreement would have had a much greater deficit” than that registered in 1978 (Winham 1984: 480; see also MacDonald 1989: 12).

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But Canada also reported a trade deficit under the Auto Pact. In 1977 alone, it was in the order of $2.7 billion. A large proportion of the $6.2 billion imported from the United States was made up of costly parts such as engines, transmissions, and major stampings, which were normally produced in house by vehicle assemblers (Reisman 1978: 185). In addition, the production–sales ratio of the Auto Pact companies and their Canadian value-added (CVA) levels also showed a steady decline between 1971 and 1979. In passenger cars, alone, production–sales ratios dropped from 149 percent in 1971 to about 120 percent in 1973 and 1976. The CVA level was cut down from a peak of 95 percent to 64 percent in the same years. Altogether, these indicators and the growing trade deficit confirmed the widely held belief in Canada, particularly among parts manufacturers, that the Canadian automobile industry was not getting its “fair share” of North American automotive production (MacDonald 1989: 12). Ford Canada’s loss of its competitive advantage As the Canadian auto industry became more integrated into a North American system of production, it became more dependent on the US auto makers’ strategies. The rationalization of operations on a continental basis was not complete, but the Canadian subsidiaries devoted a larger proportion of their vehicle production for sale in the US market than before, and owing to the smaller size of the Canadian market, they were forced to respond to changes in the US demand for vehicles. The subsidiaries thus became totally dependent on decisions made in Detroit. But, as noted earlier, each of the US Big Three responded to the climate of uncertainty faced by the North American automobile industry in the 1970s in a different fashion. Although second to GM in the Canadian market, Ford was the largest vehicle assembler in Canada between 1968 and 1975. In 1970, Ford accounted for almost half of Canada’s overall vehicle output and sold about two-thirds of its Canadianbuilt vehicles in the United States.9 By 1973, the company was exporting more than 460,000 vehicles from Canada, or about 43 percent of Canada’s total vehicle exports, but in the following years the company’s exports started to ebb (see Figures 5.1 and 5.2). Ford’s decline in production and exports, between 1974 and 1975, accounted for 83 percent of the drop in total vehicle exports from Canada and for 95 percent of the fall in Canadian vehicle production during those years. In 1975, Ford lost its export and production leadership in Canada, largely because of the parent company’s failure at North American product strategy. As already noted, with less financial strength and a narrower range of products than GM, Ford decided to downsize its existing products and to concentrate on producing conventional compact cars rather than offering new subcompacts. After the Auto Pact, Ford Canada became more dependent than ever before on its parent for product development and technology. Although it sold the same products that were offered in the United States, the Canadian subsidiary specialized in the production of a limited number of cars that could profit from

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Figure 5.1 Vehicle production in Canada by company, 1971–80 (units). Source: Table A2.12 in Appendix 2.

Figure 5.2 Vehicle exports in Canada by company, 1971–80 (units). Source: Table A2.14 in Appendix 2.

a bilateral rationalized system of production. Until 1975, Ford Canada specialized in the production of compact and medium-sized luxury cars in Canada, which composed about 40 percent of its total vehicle production in Canada. Until 1974, this strategy was the basis of the company’s export and domestic sales success, given that demand for smaller cars was increasing in both the United States and Canada. In 1975, vehicle sales in Canada were booming, but GM stole market share from Ford partly because the former offered vehicles with catalytic converters whereas Ford did not introduce them until 1976 (Ward’s Communications 1976: 159; see also Figure 5.3). Between 1976 and 1978, the US demand for big cars rebounded as a result of

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a drop in oil prices, and US sales of Ford compact models produced in Canada – the Pinto and the Maverick – dropped substantially. But, Ford Canada exhibited a recovery in exports and production, particularly of large cars, which by 1976 composed about 40 percent of Ford Canada’s production. Also, in 1977 Ford undertook a US$95 million investment to retool both its Oakville and St Thomas plants. To meet a rising demand in Canada for vans and larger models, Ford started production of its Econoline van at Oakville, dropped its Pinto production, and introduced its new Ford Fairmont and Mercury Zephyr compact models at the St Thomas plant. Despite these efforts, in 1978 GM recorded historic levels in the company’s vehicle production and exports from Canada, while Ford came at a distant second place both in sales and exports. This difference in performance illustrates Ford’s overall failed product strategy in the 1970s. Nonetheless, Ford Canada’s strategies continued to have a significant impact on the Canadian automobile industry’s output and export performance during that same period. As can be inferred from Figures 5.4 and 5.5, during the 1970s Ford Canada maintained the highest levels of production–sales ratios (measured in units) as well as the largest trade vehicle surplus among the Big Three. Minimum commitment strategy The US Big Three vehicle producers also showed that they “little incentive or capability” to expand investments above the levels necessary to meet the minimum growth and ratio requirements of the Auto Pact. Between 1965 and 1977, the US Big Three (plus American Motors) retained US$1 billion of their Canadian earnings for reinvestment in Canada, but repatriated to their US parents US$1.1 billion in net income generated by their Canadian operations. According to a different source, between 1974 and 1980, vehicle assemblers and

Figure 5.3 Vehicle sales in Canada by company, 1971–80 (units). Source Table A2.13 in Appendix 2.

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Figure 5.4 Vehicle sales in Canada by company, 1971–80 (units). Data are not available for 1969 and 1970. Source: Table A2.13 in Appendix 2.

Figure 5.5 Vehicle trade balance in Canada by company, 1966–79 (units). Source: Table A2.17 in Appendix 2.

parts manufacturers repatriated more than half of their earnings to the United States. In 1977 GM and Ford received a net inflow of funds from their parent corporations, but the other companies, Chrysler and American Motors, Renault and US-owned multinational parts manufacturers, appeared to have disinvested in their Canadian operations (Perry 1982: 56, 62). The minimum investment commitment strategy of the US vehicle assemblers

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in the early 1970s took place despite strong labor productivity gains achieved in the Canadian assembly industry and the higher profitability of the Canadian subsidiaries. In fact since the late 1960s, their Canadian operations had registered a large increase in corporate profits, in the order of 9 percent. Meanwhile, total wages and salaries grew by 6.5 percent and real wages per employee increased moderately by less than 3 percent in the decade (Wilton, as quoted in MacMillan 1987: III-20–1). Traditionally, and despite the existence since 1970 of a nominal wage parity agreement between both countries, Canada also had a labor cost advantage in vehicle assembly (Holmes 1983: 268–9). The Canadian dollar’s depreciation versus the US dollar between 1977 and 1978 reduced even further the costs of labor and such inputs as energy in Canada, although it also contributed to the disappearance of the price differential between Canadian and American cars (Reisman 1978: 159–62; see also Holmes 1983: 262; Winham 1984: 483). The US government factor and other institutional barriers Some actions taken by the US government also inhibited auto investments in Canada. The stricter safety and emissions regulations that had been introduced by the US government during the 1970s made particularly prohibitive the spiraling financial costs of developing new products and technology that could meet those regulations. The US Big Three had therefore a very limited financial ability to expand their investments outside of the United States. Their Canadian subsidiaries, which were completely dependent on the parent’s technology, also faced rising surcharges for “engineering design and business services” that amounted to US$90 million in 1973 and US$256 million in 1980 (Perry 1982: 58). In the triangular diplomacy dynamics, the adoption in Canada of emissions and safety regulations that were less strict than those in the United States10 was not a factor in the US vehicle assemblers’ investment decisions. Designing different product strategies for the two national markets was not an option in the context of integration of the auto industry into a North American system of production. From this perspective, this integration process constrained the policy options available to the Canadian government to attract higher levels of automotive investment. The US government’s concern for trade imbalances was behind the Department of Treasury’s demand in 1976 that US vehicle manufacturers ended the differential that existed between the price of Canadian vehicle exports to the United States and that of vehicles sold in Canada. This was a measure to avoid the application of anti-dumping measures given that, at that time, Canadian-built cars were, arguably, more expensive than those built in the United States but were sold at a lower price in the United States. Vehicle manufacturers argued that they had to pay a 4 percent premium on Canadian vehicle production because of the high content of imported parts and the additional overhead costs in advertising, marketing, and distribution. By not allowing vehicle manufacturers to pass those additional manufacturing and

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overhead costs to the Canadian consumer, the price parity commitments debatably constrained the profitability of Canadian vehicle sales and therefore discouraged US vehicle producers from increasing their investments in Canada.11 These actions taken by the US government aggravated the political uncertainty that already existed over the Auto Pact, and further deterred the US vehicle manufacturers from planning long-term investments in Canada. As already explained in Chapter 3, that uncertainty was created by both the Auto Pact’s indefinite duration and the periodic disputes over the agreement that existed between Canada and the United States. For example, in 1971–2, when Canada had moved from a chronic deficit to a small surplus in automotive trade, the United States demanded an end to the Auto Pact’s safeguards (Winham 1984: 479). In 1975–6, resulting from an investigation requested by the Senate Finance Committee, the US International Trade Commission concluded that Canada had not complied with “the letter and spirit of the agreement by phasing out the so-called ‘transitional provisions’”(Wonnacott 1987b: 11). At the same time, Canada’s growing trade deficit after 1973 and the reductions shown in the production–sales ratio and the CVA levels confirmed Canada’s concern that the industry’s oligopolistic structure and its control by a handful of US firms was seriously impairing the proper working of market forces and precluding Canada from getting a fair share of North American automotive production. The situation was further aggravated by problems in the US and the Canadian balance of payments, rampant inflation in both countries, falling demand for the US Big Three’s products, intensification of foreign competition, strict safety and environmental regulations, and so on. Other “institutional barriers” included the prejudice of some US consumers for vehicles “Made in the United States of America” and the US auto makers’ desire to ensure that production was close to the major automotive regional markets in the United States (Reisman 1978: 163). The risk-adverse behavior of the US auto makers was exacerbated by the perceived “sovereign risk” in the face of potential significant shifts in the political relations between the federal and provincial governments in Canada, and in US or Canadian commercial, investment or exchange rate policies, which would have been “adverse to Detroit’s intra-corporate trade with its Canadian subsidiaries” (Perry 1982: 59; Keeley 1983: 291). Even if this political uncertainty did not exist, one should recall also from Chapter 3 that the Auto Pact required only a modest level of direct investment, the production–sales ratio guaranteed only a “floor” for Canadian vehicle assembly, and the in-vehicle requirement became obsolete with spiraling inflation in the 1970s because it was calculated on an absolute value basis. The letters of undertaking required only a one-time investment by vehicle manufacturers, and the 60 percent CVA over increases in the Canadian sales value, which could have still applied, could not be enforced by the Canadian government given that the legal status of those letters had been unclear since their signing. Considering these factors and in the face of the uncertain international context of the 1970s, it was expected that US auto makers would consolidate future investments in the United States (Perry 1982: 60).

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Furthermore, government intervention in other countries, either through more stringent requirements placed on vehicle assemblers or subsidies, also explained why the rate of disinvestments in those countries had not been as swift as in Canada (Perry 1982: 62; Winham 1984: 481). For instance, bids to lure auto investments had become a common practice in the United States. The VW assembly plants in Pennsylvania and Michigan received US$120 million in the property tax abatements, loan and interest rate subsidies, and road and rail improvements. Honda’s assembly plant in Ohio received US$3 million plus property tax abatements, and GM’s engine plant in Michigan received US$15 million in property tax abatements (Perry 1982: f.n. 48, 72). Government intervention in Canada thus became a requirement to reverse the companies’ “risk-adverse” behavior that was exacerbated by the climate of political uncertainty over the Auto Pact and the changing conditions of the automobile industry worldwide (see Chapter 8). Thomas contended that the rationalization of production that took place after the implementation of the Auto Pact allowed vehicle producers to make production decisions on their estimates of the best locations for the production and distribution of their cars. Canada and the United States [were] now highly competitive locations for automotive investment, as exemplified by specific bidding wars and diplomatic battles over incentives. This bidding dynamic has contributed greatly to worsening outcomes for Canada, in that the government has had to give ever-increasing incentives to the Big Three to induce them to locate in Canada. (Thomas 1995: 19) The same author also suggested that the threat of moving capital elsewhere, to production facilities in Europe, Australia, and Asia, put pressure on the Canadian government, thus making the status quo intolerable (Thomas 1995: 19).12 Ford’s decision to invest, in 1978, US$535 million to build a V6 engine plant in Windsor (Essex, Canada), employing 2,600 workers was partly explained by the Canadian government’s offer of a US$68 million subsidy.13 Ford Canada was indeed competing with Ford’s plant in Lima, Ohio, for which the engine investment was originally planned. At the time of the investment, Canada offered unit production costs that were similar to those in the United States. Other factors may have influenced Ford’s investment in Canada. First, that the investment was required so that Ford could meet its CVA commitments as V8 engine production was being phased out (Perry 1982: 71–2). Second, that it was a defensive reaction to GM’s announcement in 1977 of a US$200 million investment to double its production capacity of several Canadian parts and components plants.14

The constraints on Mexican import substitution policies During the 1970s, the Mexican auto industry also faced successive trade deficits, which were incompatible with the Mexican government’s import substitution

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approach to industrialization, and this remained the most contentious issue between the Mexican government and the multinational vehicle assemblers. Only an export-oriented policy could overcome the constraints that the small Mexican market imposed to achieve efficiency maximization and offered some common ground for the Mexican government and the multinational firms.15 Reducing the number of firms would invoke the wrath of multinational vehicle assemblers, especially after 1964, when Mexican vehicle assembly firms had ceased operations in the Mexican market. The multinational auto makers also opposed higher local-content requirements because this meant an increase in production costs in Mexico (Bennett and Sharpe 1985a: 151–4). Reducing the level of local content or removing restrictions on vertical integration and/or foreign ownership undermined the government’s explicit goal of developing a national parts supply industry. The 1969 Export Acuerdo and the 1972 Auto Decree demanded that vehicle assembly firms help to achieve the goals of the Mexican government: to reduce the industry’s inefficiencies by exposing Mexican parts firms to international competition, and to rectify the industry’s trade deficit (see Box 5.1). But export promotion was not seen as the route to free trade for Mexico mainly for ideological reasons. Thus, an export strategy launched under the auspices of an Import Substitution Industrialization (ISI) model faced important obstacles. Namely, the inefficient structure of the Mexican automobile industry, the opposition of domestic producers, and the fact that the automotive operations of vehicle assemblers in Mexico were basically oriented to the domestic market and integrated only marginally into the international operations of parent companies, through the selling of parts (Jenkins 1985: 65). The success of an Box 5.1 1969 Export Acuerdo and 1972 Auto Decree “Decree that Establishes the Basis for the Development of the Automotive Industry in Mexico” •

Assemblers were encouraged to export.

•

Modification of production quotas set in 1962 decree.

•

Export performance (of auto parts) was used to determine production quotas.

•

Local content remained at 60 percent, except for vehicles exported – in this case 40 percent local content was necessary.

•

Each terminal had to compensate with exports being a steadily rising proportion of its import of parts and components, according to the following schedule:

•

1969, 0 percent; 1970, 5 percent; 1971, 15 percent; 1972, 25 percent; 1973, 30 percent; 1974, 40 percent; 1975, 50 percent; 1976, 60 percent of the ratio of the value of exports to the value of imports.

•

Forty percent of each company’s exports had to consist of products of Mexican parts suppliers (firms owned at least 60 percent by Mexican capital).

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export strategy required certain minimum levels of efficiency in automotive production, and this was inhibited by the new regulations that continued to place significant restrictions on the foundations for mass production. The international industry context of a fluctuating demand for vehicles further detracted from the success of the Mexican government’s export goals. Between 1970 and 1976, vehicle production in Mexico registered a significant growth, from 190,000 to 325,000 units, as did the value of automotive output in real terms, and 33,000 jobs were created, mostly in the auto parts sector. For the 1969–72 period, automotive exports also showed a dramatic expansion, although by 1972 the industry’s trade deficit had remained practically unchanged and by 1976 it had doubled in dollar values (for details, see Tables A3.1–A3.5 in Appendix 3). The new Mexican regulations thus failed to induce vehicle producers to comply with the stipulation that imports be offset through higher exports. By 1976, the value of the industry’s total exports represented only 14 percent of the total value of auto imports, well below the government’s 50 percent requirement for that year. But the 40 percent value of the industry’s exports coming from Mexican auto-parts suppliers was maintained throughout the period, except for 1976 when that percentage dropped to 28 percent (Tables A3.6 and A3.7 in Appendix 3). Thus export promotion regulations were relatively successful, at least until 1974. Contradictory policy measures and bureaucratic disagreements One explanation for the relative success of export promotion was that for the first time the Mexican government exhibited a willingness to introduce measures which overlapped, at least partially, with the multinational auto makers’ secondbest strategy – to export some locally produced parts rather than focus solely on high local content. By the mid-1960s, there were differing opinions among policy-makers in government agencies as to the best policy option for the industry. Export promotion was challenging import substitution as the most appropriate path of development for the Mexican economy (for further discussion of this issue, see Bennett and Sharpe 1985b: 155–75). The deficit in the balance of payments had been an important concern for the Ministry of Finance and the Bank of Mexico. These agencies supported an AutoMex–Chrysler plan,16 which sought the reorganization of the industry’s structure by strengthening the Mexicanization of the assembly sector. Instead, the Ministry of Industry and Commerce, also concerned with the industry’s efficiency and trade balance, supported an export plan promoted by Ford (Bennett and Sharpe 1985b: 158–65; Whiting 1992: 215– 16). The AutoMex plan was designed to solve some of the industry’s inefficiencies and to prevent further denationalization of the assembly sector. The plan included a reduction in the number of car makes and models as well as producers, through the merging of all four Mexican-owned vehicle assemblers (Chrysler would participate with a minority equity). By controlling 50 percent of domestic

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vehicle production, the new firm would promote economies of scale, thus reducing production costs and eventually requiring higher local-content requirements. These “future doses of import substitution” would also help to reduce the industry’s trade deficit. Ford, supported by GM, opposed that plan, mainly because it would have strengthened the position of Chrysler vis-à-vis the other foreign vehicle assemblers. Increasingly, these disagreements within the US Big Three made it difficult for the US government to intervene effectively in their bargaining with the Mexican government. The Ford proposal pushed for mandatory exports as the best means to solve the industry trade deficit, which the Mexican government perceived to be the industry’s most pressing problem. Neither Ford nor GM would agree to higher local-content requirements, because this would displace products from their home countries and cut into the cost advantages of their multinational operations. As mentioned previously, cheaper parts and components would result from transfer prices, greater scale economies, and superior technology. Higher local content in Mexico would have hindered efficient production of exterior body stampings and adversely affected entrenched non-price forms of competition, such as frequent model changes. Instead, mandatory exports allowed foreign vehicle assemblers to “maintain … accustomed production and marketing strategies and to rationalize production among its various international operations” (Bennett and Sharpe 1985b: 168; see also Whiting 1992: 216). From the Mexican government’s perspective, the export plan had at least four advantages over the AutoMex–Chrysler proposal: first, it promised an immediate solution to the balance of payments deficit; second, it conformed more readily with the methods of production of vehicle assemblers, especially from the United States, and thus carried the potential for resolving production inefficiencies in the Mexican parts sector; third, it was less conflictive, both internationally and within the Mexican bureaucratic agencies; and, fourth, it did not contradict the anti-inflationary policy, which had been key to the desarrollo estabilizador model, whereas a higher local-content strategy did (Bennett and Sharpe 1985b: 153). So, the 1969 decree replaced the previous import system with a mandate that vehicle assemblers must earn their basic production quota by compensating for imports through higher levels of exports (Scheinman 1990a: 50). Government power versus international constraints and MNEs’ worldwide strategies Several elements encouraged vehicle assemblers to accept the new regulations: by 1968, non-compliance represented a real cost for these firms: losing the capital already invested in Mexico, compared with the situation in 1962, when that decision implied only an opportunity cost. In addition, the Mexican government offered significant export incentives to encourage auto firms to comply with export levels. In 1971, the Mexican government established a duty-remission program – Certificados de Devolución de Impuestos – whereby companies could

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take a tax credit that would be deducted from their tax liabilities, which was calculated at 11 percent of the value of exports and applied to most manufactured products (UNCTC 1983: 116). According to Moreno (1988: 14), in 1975 the overall amount of tax exemptions in the assembly sector was equal to more than 100 percent of those firms’ gross profits. Total subsidies for vehicle assemblers between 1970 and 1975 amounted to US$1.02 billion (SPP and SEPAFIN 1982: 82; Ramírez de la O 1983: 160). Between 1969 and 1970, the value of total investments in the industry amounted to $455 million and $502 million, respectively, representing a 10 percent average annual growth rate compared with investments made in 1968 (Bennett and Sharpe 1985a: 115). Finally, and in order to create additional incentives, the Mexican government made some limited concessions regarding the prohibition placed on vehicle assemblers to produce parts. For instance, Chrysler got permission to manufacture condensers for air conditioners and Ford got permission to manufacture hubs and drums (Bennett and Sharpe 1985a: 179). It should be remembered that vehicle assemblers were allowed to produce only a limited number of parts. Again, as in the past, Ford was a leader in complying with the Mexican export plan. Ford was the only subsidiary in Mexico with a consistent export program already in place, a networked configuration that meant that sister subsidiaries would accept increased exports from other subsidiaries, as well as a close relationship with key Mexican subsidiaries of US parts suppliers. “Ford’s export activity was an integral part of the strategic sourcing network of its US parent, but it was mostly limited to its suppliers’ exports,” which coincided with the Mexican government’s new regulations (Samuels 1990: 145). Ford started to source some engines produced in Mexico for its affiliates in Venezuela and Chile, as well as tooling and engine parts for the United States and Europe. Also, in the first major export sale involving a Mexican-owned supplier firm, Ford agreed in the early 1970s to buy 400,000 transmissions, valued at $39 million, thereby receiving an export credit in Mexico in order to expand its production quota (Behrman 1972: 134).17 While Ford had lost its export leadership position by 1973, in 1975 it became the most active company in the promotion of parts exports from auto parts firms established in Mexico.18 In that year, 72 percent of the total value of Ford’s exports came from parts produced by Mexican-based companies, compared with Chrysler’s 28 percent and GM’s 54 percent.19 Since Ford’s strategic goal in Mexico was increasing its market share, and since production quotas were tied to export performance, Ford’s willingness to increase its exports from Mexico also reflected the company’s need to halt growing competition from other auto makers, particularly posed by Volkswagen, in the Mexican and other national markets (see Figure 5.6). The other vehicle assemblers followed Ford’s move, but not with the same strategy. GM, Chrysler, and Ford, as a group, were more alike than the other multinational subsidiaries, being more reluctant to comply with high levels of local content than with export targets (Samuels 1990: 144; Scheinman 1990a: 50). GM, in fact, had also started to export voluntarily. Since 1965, engines and auto parts were being exported to the United States and to subsidiaries in South

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Figure 5.6 Mexican sales of vehicles by company, 1972–79 (units). Source: Table A3.9 in Appendix 3.

America and South Africa. However, GM’s international sourcing network was more limited than Ford’s.20 The export requirements on Automex had faced opposition by Chrysler in the United States, but the US partner decided to increase its ownership participation in Automex to 99 percent after the 1972 Auto Decree. According to T. J. Andersen, former managing director of Chrysler Mexico, “As a majority owner … the Chrysler parent would thereby increase the subsidiary’s exporting potential and its capacity to … identify economic products the US could buy in Mexico.” Chrysler therefore increased its investments substantially in Mexico in order to produce for export markets. In 1973, the company started to operate a $6 million plant to manufacture air conditioner condensers for export, valued at $8 million annually. One year later, another $5.2 million was invested to expand its engine production in Mexico also destined for export markets. It also exported transmissions to its US parent, as well as trucks to other markets. In total, Chrysler exported automotive products from Mexico to more than twelve countries (Samuels 1990: 140). By 1975, that company became the largest exporter of Mexican automotive products. Nissan and VW were more willing to comply with high local-content regulations than with export targets, largely because their parent companies or other subsidiaries were not as geographically close as those of the US firms. Volkswagen did increase its exports between 1972 and 1974, but after 1974 shifted its policy toward parts exports (Scheinman 1990a: 50). Also, a higher local-content requirement was a more attractive option to Volkswagen than to the US Big Three, because the former had already installed body-stamping equipment in Mexico. In addition, the popularity of the “Beetle” meant that there was no need for annual model changes (the production of the Beetle shifted to Mexico and Brazil in 1974). Notwithstanding these new investments, vehicle assemblers failed to achieve sustained increases in exports and to comply fully with the requirement that

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they offset imports. The US vehicle manufacturers used the “poor quality” of Mexican automotive products argument to justify their non-compliance with the Mexican government’s export requirements. Had they been allowed to manufacture parts in Mexico, they would not have exported more from their Mexican export operations because the design and technology of parts destined for international markets needed to conform to specifications for vehicles produced in and for the largest developed-country markets. For them, efficiency was key in light of the competition that was being generated by the Japanese auto makers at the time. Most important, the world recession triggered by the 1973 oil shock and the subsequent collapse of vehicle sales in the markets of developed countries rendered Mexican exports a lesser priority in the global strategies of vehicle assemblers. In this context, it was unlikely that new exports would be generated just to comply with the new Mexican regulations. The drop in US demand for automotive products forced US vehicle assemblers to sacrifice the low-volume exports from Mexico to maintain the performance levels of their production facilities in the United States (Whiting 1992: 216–17). Also, the expanding Mexican market made it rational to sell there the parts that were more efficiently produced elsewhere, rather than selling Mexican-built parts in the United States.21 By 1974, Ford of Mexico was facing the limits set by its parent policies on its exports from Mexico and other countries. Mexico’s ranking in the world production strategies of the multinational auto firms was still marginal, although as a market for vehicles Mexico acquired relatively higher importance in the international context of economic recession in the 1970s (Bennett and Sharpe 1985b: 184–5). For example, Mexico retained its peripheral position within Ford’s worldwide production strategies (as Figure 5.7 clearly shows), as was the case with total Mexican vehicle production if compared with other countries (see Figure 5.8). Similarly, while in 1974 and 1975 there was an important increase in Ford’s vehicle sales in Mexico, this country’s proportion of Ford’s worldwide sales was only 0.75 percent in 1973, and 1.04 percent and 1.22 percent in 1974– 5. In the mid-1970s, Mexico’s market for Ford vehicles was three times smaller than Brazil’s. The Mexican government could have used the threat to reduce Ford’s and the other vehicle assemblers’ production quotas, although there was awareness that in a situation of a worldwide recession the Mexican market’s relevance for the US Big Three was not enough to sacrifice production in other, more efficient production sites. As already noted, Mexico maintained a peripheral position within Ford’s worldwide production strategies and its vehicle sales were very small even when compared with those of Brazil (Figure 5.7). The failure of government policies viewed in a comparative perspective If the automobile industry’s unfavorable international context in the 1970s was the most important obstacle to the vehicle assemblers’ export activities from

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Figure 5.7 Ford’s sales in selected countries, 1971–79 (units). Source: Table A3.8 in Appendix 3.

Figure 5.8 Motor vehicle production in selected countries, 1970–79 (vehicle units). Source: Table A3.4 in Appendix 3.

Mexico, the hurdles put in place by host government regulations were no less significant, a point that can be illustrated by briefly comparing Ford’s operations in Mexico and in Spain in the early 1970s. In 1973, Ford invested $300 million to establish an assembly plant in Spain. During the negotiations, the company stressed that its operations in Spain would have to provide a competitive cost base. Doing so required a relaxation of component-import regulations, so that Ford could sell its product in France and Italy as well, where the company had traditionally held a cost disadvantage. Ford’s requirements were to lower Spain’s

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70 percent local-content level to 50 percent, and to be allowed to import into Spain all power-train components as well as unlimited quantities of parts at a decreased tariff rate – all of this in exchange for exporting two-thirds of Ford’s vehicle production there. Spain offered conditions similar to those existing in Canada. The final agreement included a 65 percent local value-added requirement (value-added is lower than local content) and no restrictions on parts imports. Ford also benefited from Spain’s protected market. The Spanish government had established a ban on car imports and offered Ford a prohibition on other auto makers’ entrance into the market, at least until 1982, when Spain would become a member of the EEC.22 Thus, “Ford could serve the EEC’s markets from Spain and still be secure that no other [multinational auto maker] would compete with it in Spain” (Doz 1986: 72–3; see also Jenkins 1985: 65–6, 70). Although there were some similarities, such as a labor cost advantage and a protected and growing market, the Spanish and the Mexican cases were different in many respects, e.g. the size of the market, which was almost three times larger in Spain than in Mexico, and the prospects for Spain’s integration with the European markets. Two other differences were that, first, the Spanish government did not restrict parts imports from more competitive sources or vertical integration, while the Mexican government did. Second, the Spanish government encouraged economies of scale by restricting access to a larger number of vehicle producers, while the Mexican government did not. The Spanish government’s policies did not contradict the rules of mass production, therefore making Ford’s export strategy from Spain attractive and feasible (Figure 5.8). An important problem for the Mexican government was the small Mexican market: although it grew somewhat between 1973 and 1974, it was still just one-third of the Brazilian market. One option enabling the Mexican government to consolidate the automobile industry was the removal of production quotas, which were major obstacles to the promotion of economies of scale in automotive production. Profits on Mexican sales were being hurt by the combination of quotas and price controls, and by the high price on parts produced in Mexico. Although the Mexican government tried to use controls on vehicle prices to foster efficiency and cost competition, by the early 1970s these controls were actually limiting the vehicle assemblers’ profitability and, hence, their inclination to consider additional investments in Mexico. In 1971, only two of the seven firms operating in Mexico earned a profit, three went bankrupt and two were losing money. Vehicle producers argued that the “very substantial increases in fixed investments that were required to compete in international markets were not justified unless they could obtain price relief and have domestic production quotas eliminated so that economies of scale were achievable” (Scheinman 1990a: 49–50). Production quotas had been maintained in the 1962 Auto Decree to protect the Mexican-owned assembly firms against the “superior market power” of foreign firms; yet, when those Mexican-owned firms had ceased operations, quotas were continued as a coercive instrument for the Mexican government

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vis-à-vis foreign vehicle assemblers. Until 1974, the Mexican government’s threat to sanction firms with a reduced production quota was still effective in forcing auto makers to comply with the import compensation requirements. This explains the growth in the export value of engines and vehicles registered between 1969 and 1974, as shown in Figure 5.9.23 But the firms’ cost for that penalty was reduced when the severe international recession hit, because lowering quotas for all vehicle firms would have hurt Mexico as much as the vehicle assemblers. Thus, after 1974, the Mexican government was less powerful in altering vehicle assemblers’ behavior (Bennett and Sharpe 1985b: 180 and 187). Furthermore, the combination of restrictions on vertical integration and Mexican ownership requirements was fundamentally inconsistent with the logic of mass production. Efficient production, in turn, was a prerequisite to compete in international markets. In fact, vehicle assemblers did urge the Mexican government to allow them to manufacture auto parts, so that they could sell in foreign markets. Womack argued that the refusal of multinational auto makers to view Mexico as the new Spain in North America was the result of their “frustration with historic Mexican government policies and concerns about the quality of Mexican products and their acceptance by [US] consumers. Instead [US] firms went to East Asia.” (Womack 1989a: 3). The Mexican government could have achieved a sustained export strategy, especially after 1976 with the recovery of the US automobile industry, if restrictions on vertical integration and foreign ownership had been removed. But the removal of those restrictions was contrary to the Mexican government’s goal of maintaining a nationally controlled industry. Also, by 1971 foreign capital had consolidated its dominant position in the

Figure 5.9 Vehicle and auto parts exports in Mexico by product, 1971–79 (millions of US dollars). Source: Table A3.7 in Appendix 3.

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Mexican assembly sector, and Mexican-owned firms had been completely driven out of that sector (see Table A3.20 in Appendix 3). That consolidation of foreign capital nullified the option of achieving further efficiency through a reduction in the number of vehicle assemblers established in Mexico. As discussed in Chapter 9, once the export option was embraced, policies aimed at advancing in import substitution were doomed to fail.24 As Bennett and Sharpe (1985b: 179) noted, the new regulations for promoting the export of auto parts “raised subtle threats to the restrictions on vertical integration that had been established in the 1962 decree to protect the Mexican-owned parts industry.”

A strengthened bargaining position for the Mexican government The 1970s ended with a new Auto Decree (1977) that emerged on the heels of a drastic, 50 percent devaluation of the peso in September 1976.25 The new decree’s main objective was to eliminate the industry’s chronic trade deficits, introducing annual foreign exchange budgets for each vehicle assembler. Exports became a condition for producing in Mexico. By 1981, all vehicle assemblers had to operate with a balance of payment surplus, either by increasing exports or local content26 (see Box 5.2). The requirement that 40 percent of each vehicle assembler’s exports had to consist of products from Mexican parts suppliers was raised to 50 percent. But price controls and production quotas were eliminated, as long as vehicle assemblers complied with local-content and foreign exchange requirements.27 Vehicle assemblers, particularly from the United States, strongly opposed the new decree. For the first time, Ford opposed the Mexican government regulations while GM became a leader in moving toward compliance. At least until the mid-1980s, Ford’s weakened competitive situation in the United States limited its ability to respond aptly to GM’s strategy of seeking cheap sources of automotive production. Ford considered that its Mexican subsidiary was in a disadvantageous position relative to the subsidiaries of other multinational auto makers. Ford’s automotive deficit in Mexico was one of the largest, although GM and Chrysler were also running negative trade balances. The export requirements of the 1977 Auto Decree, designed to reverse that deficit, implied huge new investments, which were simply not feasible given Ford’s position in the US market. Unlike GM, in order to survive in the United States, Ford was under intense pressure to invest heavily in new product development. Ford’s delay in responding to the 1977 decree was based on the conviction of company officials that they could reverse the Mexican government’s decision. Henry Ford II, president of the company at the time, launched a personal campaign to reverse the 1977 Auto Decree. He encouraged US public officials to pressure the Mexican government into changing its new regulations (Bennett and Sharpe 1985a: 216–24), and even paid a personal visit to Mexican president, José López Portillo. Like other vehicle producers, Ford did not oppose the new decree’s export promotion strategy, since it was preferred to import substitution. In fact, Ford estimated that “each $1.00 of foreign exchange saved annually

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Box 5.2 1977 Auto Decree June 20, “Decree for the Promotion of the Motor Vehicle Industry” •

Exports were required as a condition for producing in Mexico.

•

Vehicle assembly firms had to move in the following 5 years to operate with a positive balance of payments. Each assembler was assigned with an annual foreign exchange budget to pay for both imports and other payments abroad

•

Each assembler faced strict limits on new foreign-owned investments not dedicated to export.

•

Fifty percent of the value of exports had to come from Mexican auto parts suppliers.

•

Price controls were eliminated as well as production quotas.

•

Each firm decided its level of production as long as it complied with localcontent and foreign exchange requirements.

•

Local content had to be calculated on the cost of parts rather than direct cost of production, this is final that firms could not include the cost of assembly. Also, local content had to be calculated on a per model and not per plant basis.

•

If companies complied with a minimum of 50 percent local content, then higher exports would be required; if 75 percent of local content was accomplished for passenger cars – and 85 percent for trucks – then a higher quota of foreign exchange and a lower level of exports would be assigned.

between 1980 and 1985 through exports would require an investment of only $0.60, whereas an equivalent saving through increased local content would require a $2.50 investment” (UNCTC 1983: 128). Ford opposed the new decree because of the “manner in which it was to be carried out” (Whiting 1992: 218–19), and argued that the volume of exports demanded by the government was too high and that the period stipulated to generate those exports was too short – by 1981 firms would have to compensate fully for all imports with an equivalent amount of exports. In addition, Ford agreed to promote exports of large parts suppliers, but was against doing so for smaller firms, which were mostly Mexican owned, because these companies were not able to match the level of investments made by the assembly sector as a whole. Ford stated that the new decree’s higher local-content requirements for firms not complying with the designated export targets put a significant constraint on the company’s domestic operations. A main bottleneck was that Mexican suppliers could not produce the parts needed, particularly for new models, which would jeopardize Ford’s annual model change strategy. Ford was not in a good position to make the investments necessary for compliance with the export requirements demanded by the Mexican government, largely owing to the fact that the company took longer than GM to

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devise a global strategy (see Chapter 7). The 1977 Auto Decree was perceived as presenting major problems for the entire Ford operation worldwide. As Samuels put it: As the US automotive TNC [transnational corporation] with the greatest overseas experience, Ford was moved to make an unusual statement in its 1977 Annual Report: Increasing sophistication is required to deal with the complexities of doing business in international markets. [One] example is the action taken by the Mexican government in 1977 to increase exports and enlarge the local content of Mexican-built vehicles. Decisions of this kind are making it more difficult to achieve potential market gains in some parts of the world … Ford of Mexico is searching for ways to cope with the impact of these new regulations. (Samuels 1990: 150–1) In February 1978, and after intense bargaining between the Mexican government and the multinational auto makers, GM publicly announced plans to build four new plants in Mexico, one for assembly, one for engines, and two for engine parts. “Those investments were expected to expand GM’s exports from about $10 million in 1977 to $150–$200 million in 1983, and thus to allow GM to capture a much larger share of the Mexican market” (Bennett and Sharpe 1985b: 222). The new plants would become a major source of engines for sister subsidiaries in other countries, not only in Latin America, but also in Canada, South Africa, Australia, Great Britain, and Belgium. More than 2 years passed before Ford would agree to comply fully with the new Mexican regulations. A situation contrasts with the major investment made by Ford in Canada in 1978. At the time, Canada’s more favorable exchange rate, more flexible regulatory framework, and better production quality gave it superior location advantages over Mexico, particularly as a production site of key parts, such as engines, for export markets. In a situation of international competitive vulnerability and scarce financial resources, Ford favored investment in countries where sovereign risks were low. As demonstrated in Chapter 9, the auto industry’s new competitive rules and the dynamic of oligopolistic competition would allow Ford, again, to lead in transforming the structure of the Mexican automobile industry.

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The Japanese auto makers became “the measure of competitive excellence in the world.” Their system of production, known as lean or flexible production, changed the industry’s competitive rules. In the industry context of the early 1980s, only a complete renovation of their production operations would allow the US Big Three to meet the Japanese challenge and to arrest their substantial drop in market shares, particularly in the United States. Exploiting the competitive advantages built in their foreign operations and trying to integrate those operations on a global basis was seen as a logical strategy to achieve an overall reduction in production costs and boost competitiveness. Ford seemed to be best prepared to implement such a strategy, because of the superior competitive advantages of its foreign operations compared with GM and Chrysler. Paradoxically, Ford’s rivals showed a greater disposition to use resources from outside of the United States. It was not until 1994 that Ford focused on developing a global strategy as a means to enhance its competitive position in the industry. Before then, Ford largely focused on building a strategy that would allow the company to recover its competitive position in its own home market, which was essential for survival. An analysis of the structural and institutional factors that shaped Ford’s strategic response both to the new industry rules and the short-term challenges posed by other industry competitors explains this paradox.

The Japanese system of production: changing the rules of the game The difficult US economic context of the late 1970s, with soaring inflation and interest rates, sharp fluctuations in consumer demand due to changes in the price of oil, and chaotic government regulations, set the basis for the Japanese auto makers’ market success. Between 1978 and 1981, while sales of US-built cars dropped dramatically from over 11.5 million to 9.5 million (the lowest figure registered since the 1950s), imports of Japanese-built cars remained at about 2.5 million (Harbour and Associates 1990: 63). The situation was so critical that at the decade’s end Renault acquired a 46 percent stake in American Motors Co. (AMC) and the US government bailed out Chrysler, which was near bankruptcy. The Japanese auto makers’ success stemmed from their ability to

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produce small and medium-sized cars that were appealing to US customers and that had a superior quality and a substantial cost advantage (between $2,000 and $3,000) over those offered by the US auto makers (Dyer et al. 1987: 152). The Japanese system of automotive production, known as flexible or lean production, gave Japanese auto makers remarkable advantages over their US and European competitors. Their system yielded higher levels of labor productivity, greater utilization of fixed capital and lower unit capital costs, as well as lower inventory related costs and fixed investment costs than mass production (National Academy Press 1982: 90–107; Hoffman and Kaplinsky 1988: 114: see also Harbour and Associates 1990: 1, 6–7). The Japanese thus questioned the dominance that the US Big Three auto makers had held for decades in their own home market and in the world. Their success and the industry context of the late 1970s led to structural transformations, which included a complete overhaul of the methods of production, the rules of competition, the type of inter-firm and labor relationships, and the patterns of trade and investment in the industry worldwide. In order to understand fully why this new system of automotive production represented such a formidable competitive challenge to the US auto makers, it is necessary first to at least briefly explain the ways in which the rationale of the new production paradigm departed from that of mass production.1 One of the key features of lean production is that competition is based on “flexibility and change,” rather than the “standardization and status” that prevailed in mass production (Dyer et al. 1987: 98; Hoffman and Kaplinsky 1988: 113). A rich product mix and short product life cycles, found in matured and fragmented markets for vehicles,2 were associated with high costs in mass production. By contrast, flexible production is a demand-driven system in which radical product innovation is the essence of competition. In this system, building a wide variety of versions of one model from one assembly plant3 and developing new models in record times is possibly the result of the use of lean or flexible labor processes, co-operative inter-firm relationships, and electronics-based automation technologies. Besides economies of scale, which are achieved by reducing assembly time (set-up and -down times), economies of scope and shorter lead times (the time needed from development to launch of a new production) also became competitive factors in flexible production. Whereas labor specialization is the key to achieving economies of scale with mass production, the workers’ ability to perform different tasks (operate the machines, reset them, and conduct routine functions of maintenance and repair) is central for reaching both economies of scale and economies scope in flexible production (Hoffman and Kaplinsky 1988: 126; Alcorta 1994: 759).4 Reducing inventories close to zero and implementing tight quality controls and zero-defect policies are also imperative to achieve the overall success of lean production. Inventory control contrasts with the mass producers’ practice of holding substantial inventories “just in case” anything goes wrong and their emphasis on cost reduction. In the absence of inventories that can back up the system, quality becomes a concern not only for managers but also for every

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worker. This, combined with the product-led innovation competition, shifts responsibility for incremental technical change from R&D (research and development) departments5 to the plant worker. One corollary of this flexible system is co-operation and a two-way flow of information in labor-management relations, which reversed the Taylorist labor practices in which control of production was removed from workers that had prevailed under mass production (Hoffman and Kaplinsky 1988: 53, 137, 330–1). The emphasis on radical technological innovation as the basis for competition also encourages the utilization of automation techniques and creates greater interdependence in different subsystems of production. Also, market responsiveness in flexible production and the lack of inventories required that product planning and development become more integrated with manufacturing. The use of new automated manufacturing technology that is adapted to product technologies makes that integration possible (Morales 1994: 30–1). For instance, computers are used not only to design products and the productive process but also to shape the physical process (Alcorta 1994: 763).6 Equipment used to implement integrated manufacturing includes computer numerical control (CNC), machine tools, industrial robots, computer-aided design/engineering (CAD/CAE), computer-aided manufacturing (CAM), automated guided vehicles (AGV), automated storage and retrieval (AS/RS), flexible manufacturing systems (FMS), and computer-integrated manufacturing (CIM).7 Simultaneous engineering or integrated manufacturing, combined with rapid changes in vehicle demand, also contributed to reductions in both the development time for new products and the life cycle of vehicles. In turn, the use of these technologies has substantially raised the cost of new product development,8 and these spiraling R&D costs have, in turn, increased the minimum efficient volume of sales required for a firm to survive in the industry to 2 million units per year, compared with 800,000 in the early 1970s (National Academy Press 1982: 20–1; Quinn 1988: 23–4; OECD 1992: 21). What is less clear is the extent to which technological solutions have contributed to a decline in plant scale economies (Doz 1986; Hoffman and Kaplinsky 1987). Alcorta, for instance, contends that, while scale economies at the product level have decreased, scale economies at the plant level have remained the same as in the past, because set-up times continue to be sensitive to changes in the product.9 Other characteristics that distinguish the lean system from mass production are the replacement of vertical integration with vertical co-ordination and the existence of co-operative relationships between assemblers and suppliers (Hoffman and Kaplinsky 1988: 159; OSAT 1992: 100). In general, the Japanese auto makers exhibit low levels of vertical integration. Toyota’s level of vertical integration is 25 percent, which may be compared with 30 percent for Chrysler, the lowest vertically integrated of the Big Three. In addition, assemblers rely on one supplier as the sole source for a purchased part or component, but suppliers are organized in a pyramidal structure or system of tiers, with each tier supplying the companies in the tier above it. Thus, although the Japanese assemblers depend on a network of 10,000 parts suppliers, they deal directly

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with 500 first-tier suppliers. This network of relations is based on cross-holdings of minority equity shares that assemblers keep in supplier firms (the keiretsu system)10 and facilitates establishing long-term and stable contracts, sharing design secrets and other technological capabilities, spreading R&D efforts, exploiting all possible economies of scale, and reducing risks. This pyramidal organization provides Japanese suppliers with a “more secure business environment, and a longer period for planning investments and securing returns.” Normally, they are offered contracts that run the life of a vehicle model, rather than just the 1-year contracts which were typical with mass production (OSAT 1992: 110). In exchange, in the new system, suppliers, particularly those in the first tier, have to face more responsibilities throughout the production process and new organizational requirements than those operating under mass production.11 They face constant and heightened pressures to improve quality, productivity, and product range: they commit not only to joint cost reductions but also to the production of zero-defect components; to collaborate in the scheduling of production, which requires the establishment of operations physically close to assembly plants; to increase considerably their investments in R&D; and to guarantee high co-ordination levels between assemblers and suppliers as well as between different tiers of suppliers. One implication of the new assemblers–suppliers relations is an overall increase in the technological and organizational barriers to entry in the component industry (Hoffman and Kaplinsky 1988: 53, 63–4, 253). The new organizational requirements for inter-firm relations, the geographic concentration of suppliers, and other institutional factors that refer to the relationships between labor, management, and government are key to the effective operation of lean production. According to some estimates, these organizational and institutional factors account for as much as 60–70 percent of the existing production gap between the Japanese and the US auto makers in the early 1980s. Only 30–40 percent are attributable to differentials in labor compensation in the motor vehicle and parts industry of the two countries (Whitman 1981: 9–10; Dyer et al. 1987: 102; Harbour and Associates 1990: 17; Morales 1994: 33–5; see also Fuss and Waverman 1990; Womack et al. 1990). In sum, by becoming the best manufacturing practice, lean production has set new competitive rules in the industry. It is generally accepted that the Japanese cost advantage derived from systemic rather than from one or more isolated factors (OSAT 1992: 9, 81; see also Hoffman and Kaplinsky 1988; Fuss and Waverman 1990). The view that their cost advantage was obtained from exchange rate differentials12 and lower labor costs in Japan was questioned when Japanese auto makers proved capable of maintaining a $600 cost advantage after the 1986 yen revaluation and one of $1,000 in the late 1980s, when they started to produce vehicles in the United States (Hoffman and Kaplinsky 1988: 216).13 Independently of whether the US Big Three auto makers have succeeded in adopting that system or not, during the 1980s and early 1990s they still faced the Japanese competitive challenge and they had to respond to it if they wanted to survive as industry players. This meant that they were forced to focus on quality and not just cost; to move from incremental technological change to

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radical product innovation; to use of technological solutions that optimize both economies of scale (quantity) and economies of scope (variety); and to change the way they related to both suppliers and labor. They were also forced to build a new relationship with their rivals in order to cope with the new competitive situation in the United States and the world. The new competitive requirements implied a complete overhaul in the way the US automobile industry operated. For the US Big Three, meeting the new industry rules required time, the use of formidable resources, and learning. The poor quality and the high production costs of their products demanded fundamental changes at the factory level and substantial investments in R&D, in product development, and in process technological innovations. They also had to reduce their levels of vertical integration and reorganize their relations with suppliers. The new role of labor in the production process demanded transforming the institutional rules, attitudes, and bargaining models that had operated for decades. Meeting the new competitive rules was further complicated because achieving some of the new requirements compromised the ability of the US auto makers to carry others out. For instance, the use of new technologies and equipment and outsourcing (i.e. the purchase of parts, components, and even complete cars from an outside supplier rather than manufacturing them in house) helped to enhance the manufacturing performance of their US operations. But, as these actions implied a reduction in the labor force, they created an adverse context for the establishment of a co-operative relationship with labor. While one could argue that the UAW has lost the war against competitive forces in the industry, the bargaining relationship between the union and the US Big Three has mattered in the ability of the latter to meet the new industry challenges and to maintain their overall competitiveness. In addition to structural changes in the automobile industry worldwide, the consolidation of the Japanese auto makers as relevant competitors in the industry altered the distributional structure that existed in previous decades. As a lessconcentrated industry structure and more volatile competitive situation replaced the old industry oligopolistic equilibrium, each individual company pursued strategies that varied from those pursued by others in very important ways. No longer would the US Big Three follow identical strategies. For instance, each auto maker followed a distinct labor strategy, and sometimes they even implemented different labor strategies within the same company (which explains the large degree of variance in US labor practices). At the same time, while Ford’s strategies could be more independent from GM’s strategic moves than in the past, Ford had to consider the strategies not only of GM and the Japanese rivals but also of smaller companies, such as Chrysler, or other competitors, such as the European or Korean auto makers, in its strategic considerations. Individual company strategies also became different from each other because the industry situation in the aftermath of the 1979 oil crisis affected differently each of the US Big Three auto makers. Whereas Ford and Chrysler were “suffering mightily at the hands of the Japanese,” particularly in the small-car segment of the market, GM was performing relatively well.14 Over a span of two decades and after having invested massive resources, the

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US Big Three recovered some of the terrain lost in the world automotive industry (see Figure 6.1). But, while the performance gap between the Japanese-owned plants in Japan and in the United States and the US-owned plants narrowed by the late 1990s, it still remained significant (Fine et al. 1996: 49). For instance, while the US Big Three assembly operations improved productivity from 24.1 direct labor–hours per vehicle in 1989 to 20.7 labor–hours in 1994, the Japaneseowned plants in Japan maintained productivity levels of 15 labor–hours per vehicle. They also produce cars faster, “on average they assemble a car over 5 hours faster than the US Big Three” (i.e. in 25 percent less time). Also, Japanese plants in Japan and in the United States continue to lead the world in the use of teams, job rotation, and suggestion systems, and they maintain the highest levels of product quality and variety (Fine et al. 1996: 26, 30).

Ford’s survival strategy The industry crisis during the 1970s threatened Ford’s position as the second largest vehicle producer in the world. In 1980, the company was suffering staggering losses for the first time since 1956: its market share reached historic record lows, with a total sales loss of more than 1.4 million vehicles between 1978 and 1982 (Shook 1990: 16, 65, 70). In value terms, the company losses in 1982–3 alone were in the order of $3.3 billion and represented 43 percent of the company’s net worth (Harbour and Associates 1990: 15, 26–7). In addition, of

Figure 6.1 The US and the Japanese Big Three world motor vehicle production, selected years. Source: Table A1.2 in Appendix 1.

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the Big Three, Ford possessed the oldest plants in the United States,15 and its products, particularly small cars, suffered from serious quality problems. The company did not have the financial resources to develop the products that were being demanded by US consumers. As an industry observer pointed out, “[c]aught between GM, with all its money, and Chrysler, with a federal sugar daddy, Ford ha[d] to husband its limited resources” (Maryann Keller, as quoted in Shook 1990: 11). Had it not been for its healthy North American truck and overseas operations, Ford might not have survived as an industry player. Ford’s foreign sales were indeed strategic during the worst years of the industry crisis, since they provided the cash flow needed by the parent company to survive.16 Operations outside of North America also contributed, with about one-fourth of the funds required to cover Ford’s worldwide capital expenditures (about $40 billion) for the 1980–91 period. The situation was such that many analysts concluded that Chrysler and Ford could survive only if they ceased to manufacture cars in North America and rather built them in “greenfield” sites overseas and sold them in the United States (Jack Hall, Head of Personnel for Ford’s North American Automotive Operations, as quoted in Shook 1990: 18). Concerns that there would be a massive relocation of automotive production outside of the United States were associated with the internationalization of production or global (or efficiency seeking) strategies of the US Big Three. Ford was considered to be better prepared than any of its competitors to adopt and put a global strategy into place.17 The company’s extensive network of foreign operations was considered a significant advantage at a time when every US and European auto maker was trying to reduce costs fast. Also, as mentioned in Chapter 2, Ford was seen as a leader in achieving a high level of co-ordination in design and production facilities, at least on regional basis, and its management had developed a unique “global” expertise by having been “exposed to radically different ways of solving problems” (Womack et al. 1990: 207). It was not until 1994 that Ford took full advantage of these locational and learning advantages in order to implement a global strategy. Before then, Ford had focused on refurbishing its US operations. One explanation for this strategy is the fact that the United States was both Ford’s home market and the market where the Japanese waged their competitive war.18 Although being the most transnational of the US Big Three auto makers, Ford’s assets in the United States represented about two-thirds of the company’s assets worldwide. The company also continued to locate the bulk of its production and R&D operations in its home country, which also remained the most important market for Ford vehicles and, except for the 1979–82 recession in the auto industry, the most important source of revenue and net income. This is consistent with the results of two recent studies which demonstrated that economic activities (production, sales, assets, R&D, finance, and management) performed in the home countries (not in foreign countries) of the largest MNEs are central to the economic well-being of these enterprises (Hirst and Thompson 1996: 95–6; Ruigrok and Van Tulder 1995: 156–9). Ford emerged from the 1970s crisis as one of the most successful companies

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in one of the most competitive and strategic industries in the world. Ford’s leadership in productivity and profitability, quality, and market success for over a decade was not accomplished as a result of its global strategies or the relocation of production abroad. Rather, it was the outcome of a combination of a longterm strategy that focused on the fundamentals of regaining its competitive position in the new industry context and a number of short-term strategies that allowed an immediate response to competitive challenges mainly in its home base. This recovery had little to do with the company’s global strategy. Ford’s precarious market and competitive position in the early 1980s posed difficult trade-offs for the company’s management. The response was a carefully designed strategic plan for continuous improvement that embraced all aspects of the corporation, which was flexible enough to enable a balance of long- and short-term requirements in the United States and abroad. Ford’s “after Japan” (AJ) program, for instance, was a comprehensive “defect prevention” approach to quality improvement and cost reduction that sought to increase the overall company’s flexibility by rationalizing its US operations and improving relations with labor (Cowhey and Aronson 1993: 106; Drucker 1992: 311). In order to improve productivity and quality, Ford addressed the basics of manufacturing, established productivity goals for every operation and plant, and made preventive maintenance the rule. Ford also brought the UAW into the process early in 1980. Besides improving relations with labor, Ford’s “after Japan” strategy included a series of programs aimed at improving the company relations with dealers19 and suppliers in order to increase the company’s overall competitiveness (Hoffman and Kaplinsky 1988: 197). The success of Ford’s long-term strategy also depended on the company’s ability to combine such a strategy with short-term actions that could respond to industry changes or immediate challenges from competitors and not just its traditional rival. During the 1979–84 period, Ford undertook massive cutbacks for its US operations and a strict austerity program. Ford’s key strategic goals for this period were cutting costs, developing high-quality products, and boosting the productivity of their US operations by using production and managementoriented solutions. Ford maintained a careful approach to spending, which meant developing only a few, but successful, products. But GM continued to condition Ford’s margin of maneuvering for most of the 1980s. Two strategies posed significant challenges to Ford, at least in the short term. The first one was GM’s massive investments in technology and automation, new products, and new plants in the United States and abroad, which was upheld by the relatively stable market position that GM enjoyed until 1987 and 1988. The second strategy consisted of GM’s aggressive strategy of outsourcing small cars from Asian producers, which gave it a strategic advantage in that segment of the market and freed resources to enhance its position in other, more profitable market segments. Ford was unable to respond to these competitive challenges until 1984, when the company had returned to profitability and its vehicle production had surpassed the 3.5 million level. Over the next 5 years, the company strategy was to increase its capital expenditure for the modernization (automation) of its plants and for the development of

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new products. Also, Ford activated its outsourcing operations through its strategic alliance with Asian auto makers. But, even then, Ford’s outsourcing operations were limited, because of the priority the company gave to maintaining a cooperative relationship with US labor which was a keystone in Ford’s long-term strategy. Ford’s strategy of focusing on quality improvement, reliability, and durability of its products paid off. Ford vehicles were maintained in the top ten positions of best-selling cars in the United States throughout the 1980s and 1990s.20 Ford also proved capable of developing a unique styling as well as “an incredible customer loyalty base” that have guaranteed strong sales for its products (Harbour and Associates 1996: 154). Ford’s commitment to quality was best embodied in Ford Taurus/Mercury Sable lines, in which Ford invested $3 billion.21 A team that included 100 members “approached the design and production of the car in a concurrent rather than sequential fashion,” used the “Best in Class” concept analysis of 400 separate features of fifty mid-size cars from around the world, and incorporated more than 500 suggestions from hourly workers and repair shops. The marketing strategy for the Taurus/Sable lines, which was designed to take on GM’s bread and butter of the US middle-market car segment, was also a success. The 1986 supply of those vehicles was sold out in the first months of production, demonstrating Ford’s ability to produce a competitive product. Those cars also marked the first significant breakaway in style from GM, and thus a major departure from the traditional role of GM as the style leader.22 No longer would Ford depend on GM for style (Dyer et al. 1987: 244; Harvard Business School 1990: 14–15). During the 1980s and until the mid-1990s Ford also maintained the best record of labor productivity (see Table 6.1. Many Ford plants have been productivity leaders in North America, including those in Atlanta, Chicago, and Louisville, and are also “some of the first to rival the transplant manufacturers in low workers per vehicle” (Harbour and Associates 1996: 154, and other years). Ford achieved this performance without facing a major strike for almost 15 years. Ford’s manufacturing strategy: labor as a priority Ironically and despite this record of performance, until the mid-1990s Ford was still a “very traditional” US manufacturing company that did not attempt “to emulate the Japanese, but rather to develop a low cost, high quality American Table 6.1 Vehicle assembly labor productivity (workers per vehicle)

Chrysler Ford GM

1979

1989

1990

1992

1994

1996

1998

NA 5 5

6 3 5

5 3 5

4 3 5

3 3 4

3 3 3

3 3 3

Source: Harbour and Associates (several years).

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system” (Harbour and Associates 1993: 71). On the manufacturing side, Ford reduced product complexity, designed easier to build products, and carefully studied the activity of each worker to ensure full utilization of their time. Ford also followed a cautious but steady process of incremental change, focusing heavily on the use of various total quality management tools and methods, such as statistical process control (Fine et al. 1996: 49). In the mid-1990s, when Ford’s quality and productivity started to quiver, the company introduced Ford’s production system (FPS), which was based on the principles of just-in-time production and aimed at eliminating waste and enhancing quality throughout the entire operating system. Before then, lean manufacturing did not exist at Ford. Automation played a key role in Ford’s productivity strategy, but only after the company had improved both its labor productivity and its financial position (Harbour and Associates 1990: 13; Womack et al. 1990: 86–8). Ford’s higher levels of plant automation than GM and Chrysler gave the former a direct labor productivity benefit (Harbour and Associates 1993: 71). While there were concerns that the high investments in automation would affect the company’s cost structure and its relations with labor, none of this happened, mainly for two reasons. First, because Ford did not increase automation until it had achieved significant labor productivity gains (Harbour and Associates 1996: 154, 1998: 195); and, second, rather than employing additional indirect labor workers to maintain the robots, the company engaged in preventative maintenance programs, such as “total production maintenance”, which was designed to eliminate breakdowns and unplanned maintenance. It is quite remarkable that Ford maintained the industry’s best productivity performance for almost two decades as well as high levels of automation while developing a co-operative relationship with labor. Early on, Ford management understood that manufacturing practices could not be isolated from labormanagement practices if the deal was to achieve quality and productivity, for it is the integration of those aspects that determines the highest levels of manufacturing performance (Fine et al. 1996: 48). Ford’s success in overall highquality manufacturing and productivity would have not been possible without the priority that the company assigned to labor in its overall competitive strategy. Ford’s co-operative relationship with labor resulted from a balanced labor strategy that consisted of a series of actions. To start with, Ford implemented a series of programs that sought to improve communication between labor and management.23 Two of these programs were “participative management” and “employee involvement” (EI). The former was designed to train all supervisors and managers to “teach them how to involve employees in setting goals, making decisions, solving problems, and planning” (Ford Motor Company’s Annual Report, 1987: 7). EI consisted of committees that organized shop-floor problem-solving meetings,24 during which workers, who participated on a voluntary basis, were asked what they needed in order to do their jobs better. In exchange, workers could earn an extra 4 hours’ overtime pay per month.25 These programs were more successful than similar programs at Chrysler and GM, largely because the latter tended to emphasize more the relationship with union officials rather

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than plant workers (see Harbour and Associates 1990). While these programs cannot solely account for Ford’s impressive productivity achievements during the 1980s, they certainly acted as a “lubricant” that allowed other more difficult decisions to go ahead. Another, more fortuitous element in Ford’s success in building a co-operative relationship with labor was the company’s ability to reduce its labor force substantially without creating disruptions with the UAW. Although Ford did not close as many plants as GM, it made substantial cuts in its US (hourly and salary) labor force just after the 1979 oil shock (see Figure 6.2). Between 1979 and 1980 alone, the number of Ford hourly paid workers dropped from 158,000 to 109,100, and the number of salary workers dropped from 82,900 to 72,000. These levels remained the same for the rest of the decade (Harbour and Associates 1990: 29). The company was able to make these adjustments without generating problems with the UAW, in large part because its difficult financial situation at the time turned into an advantage in the negotiations with the union. Also, Ford downsized its workforce and improved its productivity “long before the union or Ford’s competitors knew what was going on” (Harbour and Associates 1996: 183). Other important factors that favored Ford’s labor strategy included the company’s extensive use of overtime and profit-sharing payouts, which compensated for the massive labor cuts that the company undertook in the early 1980s. Despite having the oldest plants in the United States of the Big Three, Ford opted to follow a conservative capital-spending strategy. This strategy was maintained even when Ford’s capacity in North America was reaching its limits by the mid-1980s. Rather than building new plants or investing in automation, the company decided to balance capacity with demand by keeping assembly plants operating at full volume (Harbour and Associates 1990: 253).26 Because of massive overtime schedules, Ford workers felt protected from plant closings, except for isolated cases. This feeling was reinforced from 1984 on as the company’s financial performance allowed for profit-sharing payouts, which became “a sign of true sharing in the company’s good fortune and partnership with management” (Keller 1989: 244). A comparison with GM’s approach to labor shows the competitive advantages gained by Ford’s labor strategy over the long term. Based on the old concept that building more cars would translate into higher market shares, GM did not reduce its labor force as much as Ford did. GM’s strategy of massive capital investments in automation, new plants, and the development of new products ended up with fixed costs piling up for the future. In 1987, when its passenger car sales fell by one million (“the equivalent of losing Chrysler’s entire United States passenger car operation!”; see Keller 1989: 204, 229), GM started to cut costs by trimming jobs and sought to improve its relations with labor. It was too late. The company’s drop in market share “meant continued anxiety” for workers, even in those plants where joint programs were successful. Decisions to close plants and the lack of profit sharing became constant irritants for GM workers. As GM closed more plants in the late 1980s,27 the union felt betrayed and abandoned the quality network that had been established by the GM–UAW

Figure 6.2 Reductions in US labor force by the US Big Three (total). Source: Harbour and Associates (several years).

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hierarchy (Keller 1989: 267). Establishing more co-operative labor–management relations and revising work practices seemed useless “in facilities perceived to be vulnerable to permanent closure” (Dyer et al. 1987: 163). Ford’s bargaining dynamic with the UAW is the third factor that explains its success with labor. Many issues were subject to bargaining with the union, and it would be impossible, for reasons of space, to treat them fairly here. At the risk of making a very broad generalization, one could argue that the negotiations focused on the industry’s competitive forces that led to a drastic reduction in the UAW membership, i.e. downsizing and productivity improvement, outsourcing and modular assembly, relocation of automotive production to nonunion, low-cost assembly and parts plants, either within or outside of the United States, as well as a diminished US production capacity for the Big Three due to the combined effects of the growing importation of vehicles and parts and the construction of transplants by Japanese and European producers in the United States. Ford “chose in the 1982 national contract [with the UAW] to begin a process leading to increased competitiveness through improved labor relations, rather than to go for a quick fix of draconian wage cuts” (Dyer et al. 1987: 167). Although it eliminated the annual improvement factor (AIF) for 2.5 years of the contract duration and deferred for 18 months three cost of living allowance (COLA) quarterly increases, the 1982 labor contract stressed joint problem resolution outside the normal collective bargaining process and instituted some innovative concepts, including profit sharing, mutual growth forums, guarantee income stream or long-term payments to displaced workers, and employee development and training (Dyer et al. 1987: 146, 166–8). In the 1982 contract and those that followed in the 1980s and 1990s, Ford committed to restrict outsourcing and offshore sourcing in order to guarantee employment in the United States (Ford Motor Company’s Annual Report 1987: 7; Ward’s Communications 1988: 263). Ford’s management clearly gave a priority to maintaining its good relations with labor, and accepted the economic costs associated with this strategy. Peter Pestillo, Ford’s vice-president for labor relations in 1982, stated this trade-off in the following terms: A simple economic analysis might say to bring in the top of the line from Europe (say the Granada from Germany) and the bottom of the line from Japan. But we can’t pursue a maximization strategy. My position is to back off from the economics and face the trade-offs, because you cannot implement a pure economic strategy. We must search for some equipoise – some compromise position to keep a strike from happening. (Dyer et al. 1987: 167) Ford’s outsourcing operations In the 1980s Ford manufactured its subcompact Escort in the United States, and since 1987 imported a proportion of that car’s output from Mexico. Meanwhile, GM and Chrysler imported their subcompacts or had transplant manufacturers produce them in the United States (Harbour and Associates

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1990: 265). GM’s small-car strategy28 relied heavily on its associations with Asian auto makers to import low-cost produced subcompacts (Isuzu Motors and Suzuki, 1982; Toyota, 1983; and Daewoo, 1984);29 by 1984 GM had introduced three new cars into that segment (Bhaskar 1980: 9). By allowing for the delivery of small cars in North America at low costs, GM’s aggressive outsourcing strategy gave this company a competitive advantage over Ford. At the beginning of the 1980s, Ford’s model range was dense in conventional compact cars and it had only two subcompacts, the Pinto and the Fiesta (the latter was built in Europe). GM had two cars in that segment too, the Chevette and the Pontiac T-1000, but it had a higher range of models in each segment than Ford; subcompact cars represented less than 8 percent of GM’s total US output but close to one-third of Ford’s. At the time, Ford earned less variable profit per vehicle even in successful small cars, such as the Escort,30 a situation which limited the company’s financial ability to cover its overheads and fund the development of the Escort replacement. By contrast, with its outsourcing strategy, GM neutralized its competitive disadvantage in the small-car segment of the US market and protected its access to first-time buyers, which freed resources for its more profitable business – the large, luxury, prestige, and sports cars (Dyer et al. 1987: 153). This enhanced GM’s traditional competitive advantage over Ford in the luxury market, in which the European and the Japanese auto makers were making substantial inroads (Dyer et al. 1987: 165). If Ford continued its “self-imposed constraint” on additional outsourcing, its only option was to retreat into a smaller number of market segments where the company retained a competitive advantage. But since volume, economies of scale, and commonality of parts were still the key to success in this industry, that option would have exacerbated Ford’s cost problem and led to strategic decay (Dyer et al. 1987: 168–9). Therefore, in the mid-1980s Ford increased its outsourcing operations, but these were kept limited. Ford relied heavily on Mazda for its outsourcing operations, since its partner could build a subcompact car with 25 percent fewer labor–hours than Ford. Through that alliance, Ford earned higher profit margins on cars that were fully or partially assembled cars by Mazda, increased its resources to renew these products, and matched the delivered cost of its competitors. With the yen revaluation vis-à-vis the US dollar after 1986, Ford and Mazda located a joint venture, named Auto Alliance, in Flat Rock, Michigan. Ford also established alliances with Lio Ho Motors, a Taiwanese auto maker, to produce the Mercury Tracer and with Kia Motors in South Korea to build the Ford Festiva. In 1987, Ford also started to export its Mexican-built Mercury Tracer and Ford Escort to the United States. By 1993, Ford’s offshore sourcing and outsourcing of small cars in that year represented 40 percent of all small cars sold by that company in the US market, compared with 23 percent in 1988 (author’s own calculations based on Ford Motor Company’s Annual Reports, several years, and Ward’s Communications 1995). But still Ford maintained the lowest levels of outsourcing and offshore sourcing of vehicles of the US Big Three. Whereas in 1989 Ford’s vehicle imports into the United States were 85,000 or half of GM’s and 80 percent of Chrysler’s, by 1995 Ford imported only 60,000 (Automotive News Market Data Book 1994; Ward’s Communications 1997: 209).

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GM’s competitive advantage over Ford did not last long, however. As automotive production costs dropped in the United States, largely because of exchange rate considerations, US vehicle imports declined and the US Big Three preferred to build those cars previously imported into assembly plants that Asian producers had established in the United States.31 For instance, in the late 1980s, passenger car imports into the United States accounted for almost one-third of that market; by 1997, that figure was 16.5 percent. In that same year, transplant production accounted for 24 percent of total US passenger car sales (Whitman 1981: 9; Rubenstein 1992: 154; Morales 1994: 67; Automotive News Market Data Book 1995: 8, 1998: 6). Rather than following GM’s strategy of relocating auto parts production (particularly to the Mexican maquiladoras) or Chrysler’s strategy of maintaining high levels of component outsourcing (about 70 percent), Ford revamped its inhouse component operations and closed only a limited number of plants for parts and components.32 They included its Rouge steel plant, which had supplied all of Ford’s steel requirements and had been a symbol of Ford’s vertical integration. The products of these plants (radiators and heaters, aluminum die castings, and wiring harnesses), as well as manual transaxles, some automatic transmissions, and front-wheel-drive half shafts, were bought from Mazda and other Japanese manufacturers.33 By 1985, imports of components made in Japan and Taiwan represented only 5 percent of Ford’s total manufacturing costs (Dyer et al. 1987: 170). In addition, Ford reorganized its diversified product operations (DPO), which manufactured a range of products from iron castings to plastics, from radiators to electronic engine control modules, including non-automotive business.34 The labor force at DPO was reduced,35 but those divisions that gave the company a strategic advantage, such as castings, glass, electrical, and electronics, were kept intact (Dyer et al. 1987: 146; Harbour and Associates 1990: 49–50, 225; Harvard Business School 1990: 8). While in the long run this strategy translated into some major costs (see below), in the medium term it enabled Ford to maintain a stable relationship with labor. Ford’s labor strategy did translate into major strategic advantages over Chrysler and particularly GM for almost two decades. Besides the actual economic benefits of Ford’s impressive labor productivity performance (see Table 6.2), Ford profited from not having experienced any major labor strike for over a decade. Until 1998, Ford continued to replace fewer workers than were lost to attrition with no labor unrest. The lack of labor conflict just made additional Table 6.2 Labor–hours per vehicle (LHV) and labor and benefit cost per vehicle (LBCV) 1998

Chrysler Ford GM

1997

1996

LHV

LBCV

LHV

LBCV

LHV

LBCV

44 35 46

1,191 1,566 2,052

46 35 47

1,957 1,493 2,000

41 38 45

1,743 1,616 1,917

Source: Harbour and Associates (several years).

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workforce reductions much easier (Harbour and Associates 1998: 195). GM’s situation was quite the opposite. As GM brought more foreign-made components, in order to cut production costs, the incentives for many workers to co-operate with the company declined. Between 1994 and 1999, GM faced nineteen strikes, some of which are among the most expensive labor conflicts in the United States. GM’s strike in 1998, which paralyzed the company’s North American operations for almost 2 months, cost more than $2.8 billion (Chicago Tribune October 4, 1998: 3; The New York Times August 25, 1999: 2). Another strike in 1996 had a total cost of $1.2 billion for the company. Chrysler also suffered several strikes and walkouts. In 1996, in the biggest strike against Chrysler in 30 years, the company had to shut down five assembly plants. The strike took place in an engine factory, where workers protested against Chrysler’s plans to buy certain drive-shaft parts from the Dana Corporation instead of continuing to produce them in house (The New York Times May 8, 1997: 26). As on several previous occasions when it was picked to conduct talks with the union first, Ford had the advantage of setting the terms of the national negotiations with the UAW. This allowed the company to make commitments that its US rivals were not prepared to make. For instance, in the 1987 labor contract, when the US Big Three auto makers36 committed to job security and profit sharing, Ford already enjoyed competitive employment levels that GM and Chrysler simply did not have (Harbour and Associates 1996: 183). Similarly, in the 1996 labor contract, Ford accepted minimum employment levels for UAW hourly workers which implied replacing workers who retired, died, or quit on a one-for-one basis if US hourly employment fell below 95 percent of an employment baseline that was agreed after the contract was ratified (Ward’s Communications 1997: 149). This was seen as a risky strategy that would jeopardize the competitiveness of a company such as GM, which had 40,000 hourly workers more than Nissan (the company with the highest labor productivity in the United States), at a $1.2 billion annual cost.37 By 1999, there were concerns that Ford’s labor advantages might vanish in the future, as GM and Chrysler were approaching Ford in labor productivity performance and were able to get rid of more hourly workers. GM, which has an older hourly work force, may be able to shed as much as 40 percent of its UAW members who could be eligible for retirement in 2004 (Chicago Tribune October 31, 1996: 1). Ford also might have problems in improving its productivity further considering the company’s high levels of automation. Most of that improvement will have to come about by either introducing lean manufacturing methods or increasing outsourcing of parts and components. In 1999, for instance, the potential for problems with the UAW became evident as Ford announced it was prepared to subassemble more of its cars and to spin off or sell its auto parts division. In 1997, Ford’s Automotive Products Operations was a low-margin company, although it was still the world’s second largest inhouse automotive supplier, with sales of $16.4 billion in 1996. Ford decided to set it up as a separate components group, giving it a new name, Visteon, that could shed its image as a captive supplier, increase its business outside of Ford, and help the company improve its per vehicle profitability. These actions were

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perceived as Ford’s first steps to spinning off its auto parts division. The UAW was concerned that by selling or spinning off its auto parts division Ford could get rid of the 23,500 Visteon workers who were unionized, which would mean a drop to 76,200 of UAW members who were employed by Ford in 1998. In addition, like GM’s Delphi, Visteon announced that it would shift more manufacturing resources overseas while pressing for lower US wage and benefit packages that matched its rivals. The UAW’s failure to negotiate better with the auto makers that had recently established in the United States also accounted for the disadvantage that the US Big Three face vis-à-vis their foreign rivals regarding labor costs. This disadvantage continued in spite of the drastic reductions in their combined workforce, which slipped from 548,000 to 388,500 between 1989 and 1998. Hourly labor wages have steadily increased to $43 in 1998 (including benefits) for the US Big Three, compared with $18 paid by foreign producers in US plants. The transplants have a young labor force that is not unionized and is willing to accept lower wages and benefits than those paid to workers affiliated to the UAW. By 1999, about 25 percent of workers in each US auto assembly plant was nonunion (The Detroit News May 14, 1999: 1–4). Thus, the US Big Three’s disadvantage lay not only in the fact that they have maintained a unionized (even if smaller) labor force but also in that they adopted systems that expanded the role of the union. Their disadvantage became greater as the UAW failed to unionize a growing proportion of the industry producers (Fine et al. 1996: 51), both in vehicle assembly and increasingly in parts production. In 1998, only 23 percent of the workforce in parts production was represented by the UAW represented, compared with 52 percent in 1978. As vehicle assemblers turn a growing proportion of the production process to parts manufacturers (modular assembly), large, powerful, and efficient parts suppliers are performing functions, such as the design and production of expensive hand-assembly work and parts development, that were previously fulfilled by vehicle assemblers themselves. While the bulk of new jobs created in the auto industry between 1993 and 1998 (they reached 930,000 in 1998) have been confined to the auto parts sector (The Detroit News May 14, 1999: 4), hourly labor wages in the auto parts industry are lower than those paid in the assembly industry, i.e. $10–18 per hour compared with $21 in the assembly industry (The Detroit News April 11, 1999: 3). Therefore, for some companies, modular assembly is a key factor in determining their profitability and performance. In the case of GM, for instance, modular assembly was seen as the answer to reducing manufacturing costs, cutting jobs (the company needs to reduce its labor force from 225,000 to 135,000), and become competitive. Modular assembly was Chrysler’s main source of success in terms of development costs and its leadership in profitability per vehicle during the 1990s (see Tables 6.3 and 6.4). Chrysler’s strategies of massive parts outsourcing, strong reliance on its suppliers, and lean domestic product development were key in that company’s renaissance in the early 1990s (Fine et al. 1996: 57). Low levels of vertical integration and massive outsourcing enabled Chrysler to effectively cut costs,

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Table 6.3 Worldwide profit per vehicle (US dollars before tax)

Chrysler Ford GM

1991

1992

1993

–589.00 –719.00 NA

369.00 1,475.00 –329.00 209.00 NA 127.00

1994

1995

1996

2,024.00 1,090.00 1,868.00 875.00 479.00 386.00 459.00 577.00 362.00

1997 1,336.00 1,020.00 –16.00

Source: Harbour and Associates (1997, 1998).

Table 6.4 Research and development costs per vehicle sold (US dollars)

Chrysler Ford GM

1994

1995

1996

1997

471 785 758

531 985 868

540 1,025 983

590 911 934

Source: Harbour and Associates (1997, 1998).

improve quality, and save capital resources that otherwise would have been invested to retool the facilities that made the component parts and assemblies (Harbour and Associates 1990: 25, 237). Chrysler’s massive reorganization also focused on centralizing its worldwide product development process in its Technical Center in Auburn Hills, Michigan, using platform teams, and granting suppliers a key role in engineering large built-up assemblies (Harbour and Associates 1994: 3; Fine et al. 1996: 35–6). Through its concept of “extended enterprise,” first-tier suppliers were early integrated in product design and continually involved in cost reductions to second- and third-tier suppliers. Through this strategy Chrysler has gained access to new product and process technology, maintained the lowest product development costs and kept the shortest amount of time among the Big Three to bring a vehicle to market (Harbour and Associates 1995: 115). Although it also created some tensions with labor (as evident in the different walkouts and strikes in 1996–7), these costs were smaller than the benefits deriving from exploiting modular assembly. In the 1990s, Ford’s development costs were consistently higher than Chrysler’s and slightly higher than GM’s (see Table 6.4), largely owing to Ford’s limited outsourcing, poorly developed relations with suppliers, and product development approach. Ford’s efforts to reorganize its supplier relations were only partially successful. Some actions taken by Ford in that direction included the creation of its Q-1 Preferred Quality Award (1983), which set different quality, delivery, and technology ratings for parts suppliers,38 and of Ford’s Quality Institute, which trained plant and supplier executives on the principles of quality management. Ford also spent significant resources to improve the technological capability of its suppliers,39 and offered suppliers long-term agreements and got them involved in the early stages of product design. Notwithstanding this, and in contrast to Chrysler’s emphasis on building a truly productive working relationship with suppliers, Ford substantially reduced the number of suppliers40

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and increased the pressure on them to obtain massive price cuts. These actions were often achieved at the expense of quality, launching times, and other tangible and intangible costs (Harbour and Associates 1996: 6). In 1997, for instance, Ford raised the bar on its Q-1 quality rating system and removed the Q-1 status from more than forty supplier plants, while demanding that suppliers cut prices by 5 percent more than the 1 percent annual cut established in the 1991–7 period (NTIS 1993: 35; Ward’s Communications 1998: 148). Ford’s strategy toward its suppliers was particularly ambivalent when labor issues were involved. For instance, in 1996 the company’s management reiterated its commitment to preserve jobs by limiting outsourcing. In exchange, the UAW agreed that, if Ford bought a part from an outside supplier that it used to produce itself, “Ford could count two-thirds of that supplier’s workers towards its minimum employment pledge if they were represented by the UAW” (Ward’s Communications 1997: 148). Also, in early 1997 Ford refused to accept seats from Johnson Controls Inc. because the seat supplier used replacement workers to break a UAW strike. Ford’s actions forced Johnson Controls to settle with the union. This was an isolated incident and, although Ford management declared that “it was not in the business of managing the affairs of its suppliers,” it has had repercussions in Ford’s already tenuous supplier relations (The Detroit News April 11, 1999: 5). Ford’s high development costs also resulted from the company’s decentralized approach to product development, its tendency to develop many unique platforms, and its techniques to achieve quality design (Ward’s Communications 1998: 149). From 1989 to 1994, Ford’s development activities were undertaken by centers of expertise, which specialized in products by market segment, and were dispersed in Japan, the United States, Great Britain, and Germany. Ford also used teamwork that allowed for the joint design of specific models between subsidiaries. Besides the co-ordination problems that derived from this approach, as explained in the following chapter, many of these centers’ activities were redundant, adding to overall development costs. Ford faced additional cost penalties, estimated at about $1,500 per vehicle, as high-cost features (double overhead cam engines, fully independent suspensions, electronically controlled transmission, etc.) were increasingly incorporated in its vehicles so as to achieve higher quality (Harbour and Associates 1998: 112). While these features made those vehicles more attractive to customers, they added “tremendous complexity … inflating material cost, assembly time and quality problems” and offset gains made in design for assembly and in labor efficiency improvement (Harbour and Associates 1996: 155). Development costs did restrict Ford’s profit potential. Ford’s record profitability in 1997 and 1998 largely resulted from the market success of its high-margin trucks and small utility vehicles, which represented over half of the company’s profit (Harbour and Associates 1999: 196). But, except for the large rear-wheel-drive models, the company lost money on most of its passenger cars sold in the US (Ward’s Communications 1998: 149). Cutting costs by reducing expenses on product development is not possible in the new industry competitive scenario, where model variation is key for survival. Furthermore,

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the intense competitive context based on product development that prevails in the industry is the consequence of more profound structural changes, such as the progressive maturation of large markets for vehicles in the developed countries, the increasing fragmentation of such markets, and the shorter life cycle for automotive products which is also encouraged by the use of new process and product technology. US government environmental and safety legislations are also relevant factors at play. Ford’s strategy in the 1990s competitive environment was twofold. On the one hand, it dropped numerous vehicle lines, including the Probe, Thunderbird, Cougar, Korean-sourced Aspire, Aerostar, and the Mark VIII. Ford departed from its traditional strategy of trying to have a vehicle in every segment. The new company’s strategy was based on the belief that fewer vehicles and more focus on those vehicles translate into higher market shares. On the other hand, Ford launched a corporate worldwide reorganization, named Ford 2000, to change completely its product development process and to massively reduce overall production costs and capital investments, as is explained in the following chapter.

7

Ford’s global strategy

As explained in previous chapters, traditionally Ford’s international operations were a source of strength that allowed the company to maintain its position as the second largest auto maker in the world and to respond to GM’s competitive moves. During the worst years of the industrial recession in 1970s, those operations provided the cash that saved the company from bankruptcy, and gave it key products that were essential to stem its competitors’ moves while it invested in new product development. Today, and even if its US operations still represent the bulk of Ford’s total operations and world assets, its foreign operations still make substantial contributions to the company’s strong performance and leadership in the industry. As the previous chapter demonstrated, the company’s long-term strategy of adopting the industry’s new best practice of production and the strategic importance of its US operations (as production site, market, and source of revenue) explained the paradox that Ford did not fully utilize the advantage of having an extensive network of foreign operations, which were also superior to its competitors. Once Ford decided to use its foreign assets in order to maximize efficiency it did so on a trial-and-error basis. It was not until April of 1994, when Ford 2000 was launched, that Ford undertook the most comprehensive worldwide reorganization ever undertaken by the company. The underlying aim was to transform the company’s organization from one based on regional profit centers to a global car-manufacturing business organized by product line. The program was built on the basis of several organizational reforms and innovations that had been previously introduced to exploit corporate competencies throughout Ford’s network of subsidiaries around the world. In the year 2000 that global strategy was again modified to recuperate Ford’s regional competencies, which had traditionally constituted the basis of that company’s strength in different markets around the world. The global organization that managed global priorities in manufacturing, purchasing processes, and technology resources and platforms, introduced by Ford 2000, was maintained. The last organizational changes introduced at Ford are so recent that it makes it difficult to evaluate how the company’s worldwide operations are presently structured. Assessing the extent to which a multinational enterprise has succeeded in implementing a global integration strategy is further complicated by the different views that exist about the meaning of such strategies. As

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described in Chapter 1, one argument is that global integration strategies are associated with the multinational companies’ goals of enhanced efficiency, which means that, through the geographic dispersion of each or some parts of the production chain (assembly, procurement, finance, research and development) in locations that offer the best competitive advantage, firms seek to increase their own competitive advantage while simultaneously promoting the integration of the production process across national borders. These globally dispersed functions then become integrated into one global governance or management structure. Consequently, through these strategies, multinationals are at the same time increasing levels of interdependence and strengthening the linkages among countries where they have established manufacturing operations. Ultimately, they are creating a truly global production system (Porter 1986: 23; Gereffi 1996: 64; UNWIR 1996: 98, 138–40). The complexity, diversity, and heterogeneity of MNEs render useless generalizations about the type of strategies that they implement. For example, MNEs could disperse each or all of the activities of the value-chain – production, marketing and sales, service, technology, development, procurement (Porter 1986: 23–7). Research may not be dispersed at all, whereas sales may be integrated at a worldwide level and manufacturing at a regional level, with marketing being integrated in certain aspects (pricing) but not in others (advertising). Furthermore, MNEs that choose a global integration strategy may rationalize their international operations in a number of ways, standardize some products and/or diversify others, and integrate manufacturing vertically or horizontally (Kobrin 1991: 18). This variety of options means that alternative rankings could be used to assess the level of internationalization or globalization of MNEs’ strategies (for a discussion, see Ruigrok and van Tulder 1995: 152–74). For instance, although international production is estimated to account for about one-third of world output (production of parent firms and its affiliates), the output generated by foreign affiliates alone represents only about 6 percent (De Meyer and Ferdows 1991: 6; INSEAD 1990, as quoted in Ruigrok and van Tulder 1995: 159). There is naturally no way of measuring to what extent this percentage represents MNE operations that are part of global strategies (UNWIR 1994: 14). It is even more difficult to assess the strategic importance of the MNEs’ international activities in the overall corporate strategy, not to mention the effect of those operations on cross-border integration (Hirst and Thompson 1996: 97). In addition, rather than emphasizing where a firm operates or the extent to which the firm has geographically dispersed its activities, the relevant question could be how MNEs manage and structure their worldwide activities (Malnight 1995: 122). Thus, even if a company has failed to implement a global integration strategy, this does not mean that it has not considered global integration as a strategic goal. If the adoption of global strategies reflects adjustments in these non-measurable variables, how do we know the extent to which those strategies are currently dominating the networks of MNEs? As the following pages will show, answering this question is not an easy task. If the meaning of a global integration strategy is the geographic dispersion

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and integration of each activity in the value-chain of production, Ford does not have one in place and never did. But if it means the dispersion and integration of some activities in the value-chain of production, the results are mixed. One challenge is to overcome the methodological problems of measuring such key variables as geographic dispersion and integration of some or all of the functions of the value-added chain of production. While some functions could be integrated globally (R&D, for instance), others may remain locally determined. Therefore, the levels of “globality” for a given strategy are subjective, and depend upon the type and number of variables chosen for the analysis. Four areas are used to assess the degree to which Ford has globally dispersed its value-chain of production, i.e. corporate organization, vehicle and parts production, product development and design, and competitive strategies, which include sales, marketing, and trade strategies. These areas were chosen in large part because of the availability of information in published form. Finally, a discussion of Ford’s global strategy would be incomplete if no reference were made to the strategic alliances and international joint ventures with other auto companies (most notably with Mazda, but also with other Asia, European, and even some US auto makers) that have been established in order jointly to develop, engineer, design, market, and even produce vehicles in the United States and abroad. These associations, which preceded Ford 2000, have proliferated and have become key in maintaining a competitive position for a company not only in specific local markets but also at the global level. They also represent a marked change both from Ford’s previous practices that maintained full ownership of their operations and protected know-how and other ownership advantages, and from the US anti-trust laws that prohibited large firms from entering into such associations. Through them, Ford was able to serve local and global markets, to reduce production, development, and marketing costs, and to cope with excess capacity in the industry. These partnerships also contributed to the geographic dispersion and inter-regional integration of different functions of the value-chain of production. While this integration took place outside the borders of the corporation, it complemented Ford’s efforts to design a global configuration for its organization and network of subsidiaries.

Management In the early 1980s, Ford seemed to have been well positioned to build a global and flexible structure that responded strategically to changing conditions in the automotive industry and markets around the world. Among other considerations, and compared with other auto makers, Ford’s management had more experience working with foreign subsidiaries. However, during the 1980s Ford implemented different corporate organization strategies that aimed at integrating specific corporate functions on a regional, inter-regional, and global basis. These efforts were on a trial-and-error basis and focused on creating interregional co-ordination, basically between Ford’s headquarters in North America and Ford of Europe, for specific projects, such as the world cars, and for a limited number of activities, including R&D and design. Other initiatives incorporated strategic and co-operative relations with foreign auto makers.

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Ford 2000 was a more ambitious program that sought to reorganize the company’s network of subsidiaries on a global basis by centralizing Ford’s strategic leadership. A matrix management system based on product lines replaced the company’s traditional regional/functional organization. Five vehicle program centers, each devoted to developing cars and trucks for the entire world, were established one level below Ford Automotive Operations (FAO), which was the new global profit center that consolidated all regional organizations. Functional areas responded to the needs generated by vehicle program centers. Many managers were relocated from regional offices to Dearborn. Levels of management at FAO were cut from fourteen to only seven, which represented a 15 percent decrease of its top 25,000 executives (Automotive Industries February 1997: 98). While one of the main goals of Ford 2000 was to improve the company’s product development process, the reorganization touched virtually every aspect of the corporation and strove to create a single, global set of worldwide processes and systems in its product development, manufacturing, supply, and sales activities. One example is Ford’s worldwide engineering release system (WERS), a computerized global communications network, established in 1989 – before Ford 2000 was launched – to facilitate the co-ordination between subsidiaries and affiliates. Today, this system allows about 20,000 Ford workers around the world to share design and manufacturing information as they develop new products (Ford Motor Company’s Annual Report 1989: 8; Fine et al. 1996: 37). Through this approach, Ford was able to tap into global resources; for instance, German experts in vehicle dynamics teach classes in Dearborn; US software is used in Europe for configuration and topology optimization (Automotive Industries February 1997: 98). Other initiatives included Ford’s global enterprise process, which sought to exploit economies of scale and generate huge savings from reducing the number of platforms and drive trains,1 from having an integrated, worldwide supply base (Ford worldwide integrated purchasing system), and from using the best practices worldwide and other common systems and processes, such as a single manufacturing system (Ford’s production system) and the order-to-deliver (OTD) process, across the entire organization. As already noted, the most recent organizational changes maintained a global approach for global priorities, which included manufacturing, purchasing, technology resources, and platforms. Some of these initiatives still face the challenge of becoming “a way of life integrating them into the fabric of how Ford does business in all plants, at central office and in the field” (Harbour and Associates 1998: 196). For some analysts, Ford 2000 merely created a centralized, unwieldy global bureaucracy. However, efficiencies were gained from Ford’s strategy to lever global economies of scale and streamline global business processes: the company increased its product offerings, improved quality and productivity, reduced total costs by more than US$5 billion, and achieved thirteen consecutive quarters of improved profits (Universal News Services October 15, 1999). At the end of 1999, Ford Motor Company executives, led by Jack Nasser, introduced a new strategy that moved away from Ford 2000. While maintaining

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a global functional approach, the new strategy sought to create a consumerfocused organization that responded to consumer needs in different markets. In order to do so, the new strategy aimed at reversing the centralization of decision-making that had taken place with Ford 2000 and which had put in jeopardy the competencies of Ford in markets outside of the United States. The centralization of purchasing operations in Dearborn, for instance, had forced local managers to deal with their pairs in the United States rather than doing so with local suppliers. On many occasions, the activities of local managers in the local market were reduced to sales and public relations. They, consequently, lost touch with local suppliers, which in turn risked the company’s competitiveness in local markets. The new leadership recognized that no single vehicle model could satisfy all consumers and that organizational changes had to restore the autonomy that brand and regional units had before Ford 2000. Purchasing, engineering, and quality departments were reopened in individual subsidiaries after having been closed under the centralization model of Ford 2000. Beginning on January 1, 2000, Ford established eleven independent strategic business groups that were organized around brands and regions, in order to help create “a culture that focuse[d] on every point of contact with the consumer.”2 Each of the four global regions – South America, North America, Ford Asia Pacific, and Ford Europe – became responsible for brand marketing and product development. The Ford North America business unit includes Ford Car, Ford Truck, Ford Division, Ford Canada, and Ford Mexico. Mazda and Visteon operate as separate global business units. All corporate departments in each subsidiary had to respond to the regional and the functional areas. In sum, at the beginning of the twenty-first century, Ford’s new organizational approach was to think globally but act locally.

Product development and design Before Ford 2000, the company’s decentralized approach to product development and design was based on centers of expertise, which were geographically dispersed: Mazda (Hiroshima, Japan) in small cars; Ford North America (Dearborn) in mid-size and full-size cars; and Ford of Europe (Dagenham, UK, and Cologne, Germany) in compact or small cars.3 During its almost 20-year association with Mazda, Ford developed and produced jointly a number of components and at least five vehicles to market in North America and the Pacific Rim: the Probe (based on Mazda’s 626 platform), several models of the Mexicanbuilt Ford Escort and Mercury Tracer (Mazda’s 323 front-drive platform), and the 1990 Ford Laser, a subcompact built and sold in the Asia Pacific region. Ford’s global car Contour was based on Mazda’s 626 platform. Other collaborative projects included the Ranger and B2000, the Explorer and the Navajo. Mazda also provided the mechanical engineering of the Australian-built Capri, designed by Ford’s Ghia studios in Italy. Mazda, for instance, could develop a car such as the 323 or 626, counterparts of the Escort and Contour/Mystique series, for as little as one-third what Ford had to pay out. This meant a net advantage of $500 million to $1 billion per model; in other words, Ford would

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have to sell between 1 and 2 million units just to cover its cost disadvantage (Automotive Industries February 1997: 98). In the long run, Ford’s decentralized system for product development turned out to be highly inefficient and contributed to restricting the company’s profit potential, as it failed to facilitate co-ordination between the company’s subsidiaries and to solve their different approaches to vehicle design.4 In the late 1980s, for instance, Ford of Europe argued that the new Mazda 323/Escort was too small for Europe and pushed ahead with its own design. Similarly, the European subsidiary introduced a new Fiesta model in the next size class after rejecting the Mazda 121 design, also considered too small for European markets. Ford Europe also opposed the inclusion of the European large car (the Scorpio) in the Taurus/Sable replacement program, arguing that “no single design [could] satisfy both American and European consumers in that class of cars” (Womack et al. 1990: 212–13). One of the main goals of Ford 2000 was to introduce a more efficient productdevelopment process that could save the company about $2–3 billion annually or a total of $11 billion by the end of the century (Ward’s Communications 1998: 149). One single process to develop cars, rather than a different one at each engineering center in the world, could create such efficiencies (Automotive Industries February 1997: 98). Its seven worldwide design operations (Michigan, California, Turin, England, Germany, Australia, and Japan) were merged into one group called Ford Corporate Design (FCD), and Ford’s North American and European operations and its Automotive Components Group (today, named Visteon) were integrated also into a single operating unit, Ford Automotive Operations (FAO). Five vehicle program centers (VPC), four in the Ford research and engineering center in Dearborn and one split between the United States and Germany, were set up under FAO. Each VPC had a worldwide responsibility for the design, development, and engineering of the vehicles assigned to it. The European center was responsible for small, front-wheel-drive cars, and the Dearborn center for large front-wheel-drive cars, rear-wheel-drive cars, personaluse trucks and commercial trucks. The manufacturing manager for each program was thus responsible for plants all over the world, i.e. the small-car program center was responsible for plants in Europe, the United States, and Mexico that produce that type of auto. In a further move toward the centralization approach, in 1996 Ford consolidated its five VPCs into three: one for small/mid-size cars, located in Mekernich, Germany, a second for large cars, and a third for light trucks, both of which were located in Dearborn, Michigan (Ward’s Communications 1997: 148). By streamlining its product design and development activities, Ford’s goals were to improve the use of common systems, common processes and components, and reduce staff employment (Harbour and Associates 1997: 182). Besides reducing the number of engineers, from 35,000 to 22,000 between 1994 and 1997, and decreasing product development time from 33 to 24 months by the year 2000, one of Ford 2000’s key objectives was to reduce the number of unique platforms (from sixteen to eleven after 2000) and drive-train configurations, while increasing the number of vehicles and model variations per platform (Ford

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Motor Company’s Annual Report 1996: 1). Ford’s Ka is one example of some of the achievements of Ford 2000. The car was developed on a cross-functional, Fiesta platform in only 24 months and with a $250 million investment. But reducing the number of unique platforms was not an innovation of Ford 2000. Well before the launching of that program, Ford had established “common development programs” with Asian vehicle companies with the objective of designing and engineering “vehicles with common platforms and power trains whose driving characteristics and exterior and interior designs can be modified to meet the needs of different markets” (Ford Motor Company’s Annual Report 1989: 12). As shown in Figure 7.1, some of those alliances were with Nissan (Villager and Quest),5 Volkswagen (European Minivan), and Kia (Aspire). One of the benefits of having a common product development process was enhancing Ford’s management ability to respond to special needs that would emerge in a particular subsidiary around the world. For instance, the Fiesta was launched in Brazil and Argentina in only 12 months, after Autolatina (the joint venture with Volkswagen in South America) was dissolved. Before Ford 2000, “the corporation would have made a decision about South American independently of the rest of the company … the decision would likely have been to pull out and try again another time …” (Automotive Industries February 1997: 98). As already noted, in the company’s latest reorganization, a regional approach to product development was reintroduced, without abandoning some of the benefits of maintaining global processes. In addition to these organizational changes, Ford decided to build corporate synergies with the purchases of Aston Martin, Jaguar, and Volvo. For instance, Ford spent $6 billion on Volvo, which builds about 500,000 units annually. It has been suggested that Ford weighed the acquisition against the cost of developing a vehicle in market segments where the company had a weak position, i.e. upper/ middle-auto segments, particularly in the luxury brand (Harbour and Associates 1999: 4, 198).

Global dispersion of production? In the 1970s and 1980s concerns were high in the United States that there would be major shifts in automotive production to low-wage sites, mainly in the developing world. The maquiladoras (in-bond assembly plants mainly located in the US–Mexican border region) became the most visible symbols of the threats that low-wage countries could pose to jobs in countries where, traditionally, multinationals located their automotive production operations. The belief was that, through their global or efficiency-seeking strategies, multinationals in the automotive industry would disperse the value-chain of production (including assembly, parts production, R&D, design, marketing) to the most productive location sites around the world (Doz 1986; Porter 1990; Womack et al. 1990: 204–9). They would also purchase parts, components, and even complete vehicles from offshore producers rather than manufacture them in house. Compared with GM and Chrysler, Ford was best positioned to exploit its locational and learning advantages which derived from its more extensive

ysia

Source: Ward’s Communications (several years)

Figure 7.1 International collaborative projects – Ford Motor Company

Ltd

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network of international operations. At the end of the 1970s, Ford already had a quite dispersed network of vehicle assembly and manufacturing operations around the world. Figures 7.2 and 7.3 show that, historically, the proportion of Ford’s vehicles produced outside of the United States has been higher than GM’s. Today, while both GM and Chrysler have increased their presence in international markets in recent years, Ford continues to have the most-developed network of international operations, with sales operations in about 200 countries and territories and production operations in twenty-six countries. Paradoxically, Ford did not choose to expand its manufacturing operations in low-cost production sites or rationalize its operations (closing more plants, downsizing the labor force further, or increasing the movement of parts and components between various locations) on a worldwide basis. GM and Chrysler, instead, pursued aggressive strategies of outsourcing parts and small cars from low-cost sites and locating greenfield plants outside the United States that allow them to deliver products, particularly small cars, into the North American market at low costs. As explained in the previous chapter, Ford’s long-term strategy of strengthening its US operations limited its ability to respond to its US competitors’ strategies. Other explanations include institutional factors in the United States and Ford’s realization that its long-term relations with US labor were key for the successful implementation of the new system of automotive production; the high risk and costly nature of automotive production and Ford’s cautious approach to open only a limited number of production operations in foreign countries; and the existence of high exit barriers in the automobile industry which made it very expensive and difficult that Ford relocated manufacturing operations. In addition, Ford seemed to have taken the “sunk

Figure 7.2 Ford production by region, 1979–97 (units). Source: Table A1.8 in Appendix 1.

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Figure 7.3 General Motors production by region, 1979–97 (units). Source: Table A1.9 in Appendix 1.

costs” of previous investments in manufacturing operations – physical facilities, technical infrastructure, and human resources – very seriously. Thus, contrary to popular views about the “global” orientation of the multinationals’ production operations, Ford seems to be far from being the kind of organization that easily moved production operations from one country to another. The company did not shift the location of its vehicle production from one region or country to another, nor did it serve world markets from one location. Neither does the evidence show major changes in Ford’s locational patterns around the world. As data in Figure 7.2 show, since the early 1970s, about half of Ford’s vehicle production has concentrated in the United States – accounting for about 45–50 percent of Ford’s total production. As in the past, they were located mainly in industrialized countries, keeping pockets of vehicle assembly in developing countries. Ford’s production outside of the United States showed a slight growing trend since the early 1980s, and there were some changes in the geographic distribution of the company’s production operations. It should be emphasized that automotive manufacturers locate production operations abroad not only to reduce costs but also to establish production operations in major markets, to overcome trade barriers, achieve protection from exchange rate fluctuations, and/or meet different national or regional consumer tastes, among other things. The geographic dispersion of Ford’s manufacturing operations in recent years responded to this logic, and not to the objective of manufacturing automotive products in those countries for international markets. Some examples are Ford’s investments to produce Transit vans in China (1997), Thailand (1998), and Vietnam (1997); the Fiesta in India (1999); and the Escort and Transit vans in

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Poland. Ford also established production operations in South Africa, Egypt, Belarus, Philippines, and Turkey and made major investments to expand its operations in Brazil and Argentina (Ford Motor Company’s Annual Report 1995; Automotive Engineering June 1998: 10). Ford’s operations in these countries are young and relatively small, but production capacity is expected to grow as those emerging markets for vehicles expand over the next two decades. As explained below, Ford made those investments to defend its competitive positions worldwide and they were mostly devoted to serving local/regional markets. Expansion of sales is also relevant to achieve higher economies of scale at the firm level. The most significant change that was registered in Ford’s vehicle production took place in its Latin American operations, and particularly in Mexico. The profound changes in the rules and patterns of competition in the automobile industry during the 1980s meant, among other things, that a company’s profitability and survival depended on its ability to increase revenues not only by expanding sales, as in the past, but also by reducing production costs and improving efficiency and quality. Therefore, companies needed to assure access to growing and/or potentially large markets that could also guarantee low production costs. Only a limited number of less-developed countries met this requirement. In the mid-1980s and in order to keep up with GM’s and Chrysler’s aggressive competitive strategies, Ford activated its outsourcing and offshore sourcing operations, with Mexico and Brazil playing a key role in Ford’s strategies. Figure 7.4 shows that, while during the 1975–89 period the bulk of Ford’s vehicles produced in Latin America were sold there, after 1987 a growing proportion of vehicles produced there were sold elsewhere in the world, as confirmed by a growing production–sales ratio, which reached 2.3:1 in 1996 and 1.2:1 in 1997. Many analysts have argued that relocation of production outside of the United States has taken place in auto parts and components production, rather than in vehicle assembly. But, because of the complexity of the auto parts sector, assessing location changes for parts production to low-cost sites is more difficult than doing so with vehicle production. While some argued that, under the new rules of competition, developing countries would become major producers of automotive products, others contended that lean production has actually reduced the attractiveness of developing countries as sites for automotive production. Only a few countries would be attractive mainly for automotive products with low technological content (Hoffman and Kaplinsky 1988; OECD 1992; Morales 1994). There are also different interpretations of how organizational changes in the automobile industry have affected location and sourcing patterns of parts suppliers. According to one view, shifts in parts production follow relocation of vehicle assembly, as a result of the new location dynamic introduced by the Japanese system of production which requires physical proximity between assemblers and suppliers. From this perspective, if relocation of vehicle assembly does not take place, there is no relocation of parts production. But, according to another view, without relocating their production operations, vehicle assemblers can still buy parts and components that are fabricated in foreign locations from second- and third-tier suppliers. As already noted in the previous chapter, under the new system of automotive production, vehicle

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assemblers are turning a growing proportion of the production process to parts manufactures. Large and powerful parts suppliers are performing functions previously carried out by vehicle assemblers. First-tier suppliers have thus become world-class producers that manufacture bulky items, generally components or subassemblies that operate under the just-in-time system of production. While they serve their customers in different national or regional markets, there is evidence of a “de-clustering” trend. Many second- and thirdtier suppliers may not need to be physically close to vehicle assembly plants and may locate in low-wage areas, such as the southern region of the United States, Mexico, Thailand, or Eastern Europe (Rubenstein 1992: 171; Fine et al. 1996: 22). From this perspective, while still having formidable monopsony power,6 vehicle assemblers have less control regarding the location of parts production than they had in the past, when levels of vertical integration were higher. The consistent increase in auto parts imports into the United States over two decades suggests that there has been some relocation of parts production. Between 1972 and 1989, the value of automotive parts imports rose from $2 billion to $32 billion, and then to $54.4 million in 1998. A very significant growth was registered in US auto parts imports from Mexico, whose value was multiplied by more than six times in the 1985–98 period – from $2.3 billion to $14.5 billion. Between 1989 and 1998, Mexico’s share of US total auto parts imports increased from 14 percent to 26 percent. In total, US auto parts imports from Canada and Mexico combined increased their proportion of US automotive parts imports from 43 percent to 53 percent between 1989 and 1998 (Table A3.18 in Appendix 3). Unfortunately, there are no systematic and compatible data that are publicly available regarding Ford’s or other vehicle assemblers’ auto parts offshore production and outsourcing operations. Furthermore, as the automotive supply sector comprises thousands of firms of different size, it is almost impossible to account for their relocation patterns and sourcing operations. Anecdotal evidence suggests that, overall and until the mid-1980s, Ford’s strategy was to maintain offshore sourcing of parts as relatively limited, which represented a change from Ford’s traditional strategy of being more willing than GM to purchase parts produced by foreign suppliers. Nonetheless, Ford made some investments in parts production in countries where it had recently established assembly operations and had market potential, but they were devoted mainly to supply local or regional markets and generally preceded vehicle assembly projects in emerging markets. This was the case of four joint ventures in China that Ford established to produce auto interior trim, glass, electronic, and audio components (1994); two component joint ventures in Thailand for the production of electronic and plastic components, as well as climate-control products; and several component plants in Hungary and the Czech Republic (1994) (Ford Motor Company’s Annual Report 1995 and 1997; Automotive Engineering June 1998). A regionally integrated system of production During the 1980s and early 1990s, Ford continued making progress in the integration of its production operations on a regional basis – mainly North

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America and Europe. As data in Figure 7.4 show, except for the Asia Pacific region, after 1981 most Ford vehicles sold in each major regional market – North America, Europe, and Latin America – were produced within each region. Perhaps the most important change taking place in this regard was Mexico’s incorporation into Ford’s North American system of production (compare Figures 7.5 and 7.6). Despite the geographic proximity of Mexico to the US market, the opportunities to incorporate Ford’s Mexican operations into a regional system of production did not emerge until the early 1980s, when the Mexican government started to liberalize its rules for the automobile industry and Ford sought to reduce production costs by making important investments to boost its parts production there and to strengthen the company’s small-car strategy (see Chapter 9 for further discussion). With the establishment of Mercosur, Ford was also expected to integrate production operations on a regional basis in Brazil. Nonetheless, Brazil’s auto trade policies in 1995, which raised tariffs on imported cars, created some uncertainty about trade policies between Brazil and Argentina, even if Mercosur was supposed to have achieved free trade within the region in 2000. Efforts to advance in the regional integration in South America slowed down, also because auto makers decided to balance production and trade between those two countries as an insurance against future changes or controls in the flow of automotive products between those countries (Ward’s Communications 1998: 100). The world-car projects Although they consisted of only one line of products, the world cars were supposed to create corporate synergies that would be the foundations of a truly, globally

Figure 7.4 Ford production–sales ratio by region, 1974–97 ( percent). Source: Table A1.10 in Appendix 1.

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Figure 7.5 Ford production–sales ratio in North America, 1974–93 (percent). Source: Table A1.11 in Appendix 1.

Figure 7.6 Ford production–sales ratio in North America, 1994–97 (percent). Source: Table A1.17 in Appendix 1.

integrated organization. The failure of Ford’s “world-car” projects suggest that Ford’s complex organization required time, learning, and substantial resources to restructure the R&D, design, and management operations that could made cross-border integration of production, on a global level, possible. The rationale for these projects was based on the method of mass production,

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which dictated that only enormous economies of scale and large sales volumes of one single design could produce the cost structures which would enable survival in the new competitive environment. One assembly plant or subsidiary would be responsible for developing and engineering one single design that would fit all vehicle markets; the completed design would then be transferred to other subsidiaries for total manufacture or would be jointly built by several subsidiaries or divisions in different countries. This process would permit auto makers to reap maximum economies of scale at all stages of production, spread initial development and engineering costs, reduce direct production unit costs on scalesensitive components, such as mechanical parts and body stampings, etc. (Whitman 1981: 11; Doz 1986: 68; Hoffman and Kaplinsky 1988: 97–8, 182). Ford’s first world car, the Fiesta, ended up being a “regional car,” produced as a collective effort of different plants in Europe. Even this “regional” integration program encountered major difficulties in overcoming cross-national logistical barriers and meeting different consumer tastes in different markets. The 1980 Escort, Ford’s second world-car program, was jointly designed and engineered by Ford of Europe and Ford North America (Doz 1986: 68; Womack et al. 1990: 211). Rather than integrating production globally, Ford compartmentalized it into two regions and kept component exchange between North America and Europe to a minimum. Problems related to market and product differentiation created tensions within the company: the operating companies specified so many changes in the Escort to accommodate European and US tastes and manufacturing preferences that, when introduced into their markets, the European and US Escorts “shared only two parts – the ashtray and an instrument panel brace” (Womack et al. 1990: 212). As Hoffman and Kaplinsky (1988: 99) have noted, “the demise of the world-car was fairly rapid. Corporate planners soon discovered that markets are much more heterogeneous in the real world than they might appear on paper.” The need to accommodate European and US tastes and manufacturing preferences foreclosed the benefits that derived from using common designs or parts (Doz 1986: 172; OECD 1992: 33). The failure of Ford’s world-car strategy also demonstrated that economic considerations, such as transportation and co-ordination costs, would more than offset the perceived gains from higher economies of scale achieved through the integration of production operations on a global basis. In addition, different national/regional consumer tastes and the existence of shortened product-life cycles required proximity of assemblers to the marketplace, thus frustrating efforts to standardize products and/or integrate production on a global basis. Despite these difficulties, in 1985 Ford started to work on a new “world-car” project, renamed the “global car,” the Mondeo lines of mid-size cars launched in the European market in 1992 and the Contour/Mystique models in North America in 1994, and subsequently sold globally. Again, Ford of Europe and Ford North America participated in the development and production of these global cars. Their focus was on sharing basic design and R&D as well as main components that could be single-sourced or supplied by affiliates and subcontractors in both regions. Ford of Europe was responsible for product

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development and design, program management, and production engineering, along with the development of the new four-cylinder, multivalve Zetec engine. Ford’s North American Automotive Operations provided the distinctive design for the North American version and developed a new V-6 engine, and the transmissions and steering components were produced in several US facilities. The program also involved the modernization of nine major plants around the world that were going to produce those cars. As with the world cars that preceded them, these global cars faced major hurdles that suggested the difficulties to achieve production integration (or certain functions of the value-chain of production) on a global or even on a regional basis. Their development was very expensive, costing about $6 billion, more than four times what Chrysler spent on its Dodge/Plymouth Neon and they took too long to develop. Their cost required at least a cumulative production of 2 million units of the same model to recover the initial fixed costs (Doz 1986: 69). However, they did not have the expected market success required to achieve economies of scale, and they “were conspicuously missing from any of the top rankings” (Harbour and Associates 1998: 195). While Ford’s own goal for 1995 was to sell up to 800,000 cars annually in fifty-nine countries (Ford Motor Company’s Annual Report 1993: 3, 8–9), total sales that year amounted to only 260,000 units (Ward’s Communications 1995: 114). Ford managed to sell the Ford Contour and Mercury Mystique in the United States only by discounting them heavily. By contrast, the Mondeo was a total success in Europe. Although some observers argued that the cars were simply not “correctly positioned” in the US market – they were positioned closely to the Taurus, but were too expensive for their market segment (Automotive Industries February 1997: 98; The Economist August 7, 1999: 51) – others contended that their market failure raised serious questions about the overall feasibility of the world-car projects, in particular the difficulty of designing one car that is appealing to both the European and the US markets, let alone to all world markets. Also, critics argued that product development on a global basis, which was the driving force of Ford 2000, simply did not work because most of the development cost was spent on tooling. “If a program costs $1.2 billion, a billion of that is for tooling and the rest for development. You can’t save on the tooling because you now need it in both the US and Europe … so you waste more time trying to reduce the $200 million than you end up saving” (Automotive Industries February 1997: 98). Alex Trotman, Ford’s President until January of 1999, defended the global approach and suggested that the cost of differentiating the external appearance of the cars was small, given the huge savings earned from sharing main components and platforms (as quoted in Ward’s Communications 1998: 150). Despite the failure of the Contour and Mystique, Ford went ahead with the development of yet another global car (Ward’s Communications 1998: 150). The Ford Focus, the Escort replacement, was the first product to be developed entirely using the lean process of global re-engineering introduced by Ford 2000. Like previous world-car projects, the planned worldwide volume was of more than one million vehicles, which meant that the company wanted to turn the car into “Ford’s Model T for the 21st Century” (Ford Motor Company’s Annual Report 1998).

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The car was designed and developed by Ford of Europe, but engineering was done in parallel, rather than in sequence, by cross-functional, transnational teams that early on got input from customers. Ford managers argued that the new technology was eliminating the barriers to communication and therefore permitting transnational manufacturing and engineering co-ordination. New technology, such as a global CAD/CAM/CAE system, used by engineers around the world, allowed for paperless transmission of data, reducing the number of engineering steps, of people needed, and of prototypes.7 The cost of developing the Focus was calculated between $2 and $3 billion, one-third to one-half of the cost of the previous global car. This substantial cost reduction resulted from the use of lean product development processes, but also from the tight integration of engineering design, manufacturing, marketing, and finance, achieved under Ford 2000 (Automotive Industries October 1998: 1). Unique components for versions in each specific market were not allowed; the vehicles were instead expected to share the same parts kits, so that the investment delivered higher returns. In fact, the Focus project benefited from the introduction of a global system of purchasing operations that helped to reduce the number of commodities used by all of Ford’s subsidiaries – seats, for example. Before Ford 2000, there were over 100 commodities; in 1997, thanks to modular assembly, there were fifty to sixty and were expected to drop to less than ten by the year 2000. In order to spread fixed investment costs, there were plans to use the Focus platform as the basis of ten to twelve variants of the car, including the Mondeo replacement and a pick-up version for South America, to produce 1 million units of these cars. Whether Ford management will be able to create one truly, global manufacturing system around the world remains to be seen. The most recent reorganization at Ford stressed the need to rescue a regional approach, while promising to maintain some of Ford 2000’s global priorities, including setting a global manufacturing process. The regional and customer-focused organization seemed to suggest that no single design would serve all markets. The challenge then will be that Ford finds a balance between regional market needs and the introduction of a global system of production that actually responds to those needs.

Global competition Although some observers have argued that major markets for vehicles have not become globalized because they are still dominated by indigenous auto makers (Solvell 1988), this does not mean that those markets are still largely insulated from foreign competition. The US Big Three have traditionally kept an important presence in European markets, while Asian and European producers have increased their sales and production operations in the US market since the 1970s. After the first investments made by Asian producers in assembly and parts production plants in the United States in the early 1980s, new plans for expansion or establishment of new vehicle assembly plants in North America were announced in the mid-1990s by Japanese and European auto makers, including BMW and Mercedes-Benz (Ward’s Communications 1998: 135).

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For any multinational corporation, managing cash flows and strategic coordination is key, even if “global integration across subsidiaries in terms of product flow does not take place” (Doz and Prahalad 1987: 39–40). Since markets rarely move in tandem, having access to foreign markets has traditionally reduced the risks derived from the natural cyclicality of automotive markets, which is particularly pronounced in the United States (Womack et al. 1990: 207). As long-term growth in matured markets, such as the United States and Europe, is projected to drop, the auto makers have stepped up their search for securing access to emerging markets that have huge potential for growth. In this industry context, maintaining or strengthening a presence in multiple national markets is a requirement for survival as a global player (see Figure 7.7). Expanding abroad also allows for economies of engineering and economies of scale. Even relatively smaller producers, such as the Korean auto makers, have been very aggressive in strengthening their sales and production operations in other Asian countries, Eastern Europe, the Middle East, and even Africa (Ward’s Communications 1998: 135). While Ford has one of the most extensive networks of foreign sales, the United States continues to be by far the largest market for Ford in terms of sales volume and value, accounting for over 60 percent of Ford’s worldwide sales (Figures 7.8 and 7.9). Historically, Ford has had a presence in major markets, with Europe representing its largest foreign market, where it sells on average one-third of its total worldwide sales. In the 1990s, Ford’s sales in dollar values outside of

Figure 7.7 Ford’s worldwide capital expenditures by region, 1974–97 (millions of US dollars). Source: Table A1.7 in Appendix 1.

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Europe and the United States represented an average of 12 percent of the company’s worldwide sales, i.e. a relatively small percentage of Ford’s overall business. Ford’s sales in Latin America reached record highs of over 10 percent in

Figure 7.8 Ford’s worldwide sales by region, 1979–97 (millions of US dollars). Source: Table A1.12 in Appendix 1.

Figure 7.9 Ford’s sales by region, 1979–97 (units). Source: Table A1.13 in Appendix 1.

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1980–1, but then declined continuously until 1987 (data for 1987–97 are not available in published form). The company’s investments in the region were related to efficiency-seeking strategies, but more recent ones, particularly in Brazil and Argentina, also responded to the new competitive situation in those markets and the need to expand sales and/or defend its regional market position. Between 1995 and 1997, Ford announced a total investment of $2 billion in South America to build a new assembly plant, and some component factories, and to replace its product line-up (Ford Motor Company’s Annual Report 1997; Ward’s Communications 1998: 150). The investment was announced after Ford dissolved its co-production association with Volkswagen in South America (Autolatina), which was established in 1985.8 A declining market share for Ford during Autolatina’s lifespan, a change in the Brazilian government policy (increased duties on imports and raising taxes on popular cars), the establishment of Mercosur, and, most importantly, expectations about a growing Brazilian market for vehicles that could reach 2 million units annually by year 2000 prompted Ford to dissolve Autolatina and to refurbish its operations in the region (Ward’s Communications 1995: 86). Since vehicle demand in the United States and Europe is projected to be slow and will be mainly for replacement, major multinational auto companies have been investing heavily in less-developed countries where automotive demand promises to be high. The huge potential for growth of Asian markets9 have attracted a substantial flow of automotive investments into the region, even if those investments may take 10–50 years to pay off. China alone, which accounts for 20 percent of the world’s population, produces only 1 percent of total worldwide vehicle production. In recent years, the country has attracted large amounts of automotive investments, all this in spite of China’s highly regulated market and limited economic liberalization policies (Ward’s Communications 1997: 55). Thus, the so-called emerging markets have become decisive in the global competitive strategies of vehicle manufacturers. GM announced several projects to set up production operations in China and Thailand. GM has agreed to invest in twenty-five component-making ventures in China; has agreed to participate in a $1 billion project to make luxury cars in China; and has announced a $1 billion assembly plant investment in Thailand. In order to defend its competitive position worldwide, Ford has recently strengthened its presence in other emerging markets such as China, India, Eastern Europe, and/or expanded its sales in markets where the company was already operating. The company announced a total $1 billion investment project to set up factories in China and Southeast Asia (Fine et al. 1996: 24). Establishing local partnerships is required in order to comply with foreign investment regulations and to get a better understanding of local customer needs (Ford Motor Company’s Annual Report 1997). Although they were rejected in the past by Ford, joint ventures have been used as the most efficient means of attaining access to foreign markets. This is the case with Ford’s joint ventures with Jiangling Motors in China (1984), Mahindra & Mahindra in India (1996), and South African Motor Corp. Ltd in South Africa (Ward’s Communications 1997: 148).

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Co-opertion alliances are also needed to cope with excess capacity, excess capacity in the industry and the highly competitive market on a worldwide basis has increased marketing costs, reduced “normal pricing” for vehicles, and lowered profit margins. This situation prevailed even in the mid-1990s, when all the US Big Three auto makers saw their profits considerably expanded as a result of a boost in utility vehicle sales – pick-up trucks, vans, sport utility vehicles, etc. (Ward’s Communications 1995: 13–14). Rising sales often leads to more capacity, which in turn leads to excess capacity and puts downward pressure on pricing. Cost control then becomes more important, thus increasing the urge to establish co-operation alliances or merge with other companies. Ford’s marketing arrangements with Mazda, Kia, Suzuki, and Fiat were thus strategic in coping with rising marketing costs. For example, Ford and Mazda operate Autorama, an expanded dealer network that distributes about 75,000 Ford cars in Japan each year. Ford also moved ahead of GM and Chrysler in establishing two-sided relationships with Japanese makers, becoming the first US auto maker to supply a vehicle for sale under a Japanese badge (the Mazda Navajo in 1991). Also, the partners reversed roles for the first time in 1993, when Ford started to supply Mazda with US-built trucks sold by Mazda through its US dealer network. Also, beginning in 1996, Ford of Europe started to supply Mazda with a version of its Fiesta for sale in Europe (Ford Motor Company’s Annual Report 1991: 9; Ward’s Communications 1992: 17, 1995: 135). Trade: protecting regional markets Competing in emerging markets has translated into efforts to open those markets to foreign trade and investment. Therefore, Ford has supported trade and investment liberalization initiatives, such as the Asia-Pacific Co-operation (APEC) forum, the Free Trade Agreement of the Association of Southeast Asian Nations (ASEAN), the Free Trade of the Americas (FTAA), and the North American Free Trade Agreement (NAFTA). Demands for liberalization have been especially strong in countries such as Japan and Korea which, while having a large vehicle production capacity, have kept close to foreign competition. However, Ford and the other US auto makers are not unconditional supporters of free trade. Rather, they often bolster managed trade, particularly in order to protect large markets for vehicles, national or regional. The organization of markets and production systems on a regional basis responds to the competitive needs that have compelled US auto makers to find a balance between expanding markets and rationalizing operations. This, in turn, explains their demands to introduce regional trade policies that protect their market share from foreign producers. Their demands for preferential access and strategic trade were not new to the 1980s, as they had been previously expressed as a defensive response to growing levels of worldwide competition in the industry during the 1960s. In order to protect market shares against the Japanese auto makers, since the late 1970s Ford and Chrysler joined the UAW’s lobbying effort to protect the US market from Japanese competition through imports. GM had been

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reluctant to adopt that position, but joined them in 1981, resulting in the Voluntary Export Restraint agreements negotiated between the US and the Japanese governments.10 In the early 1980s, Ford of Europe dominated industry calls for the establishment of an 80 percent local-content rule in the European market, which could be explained by the fact that Ford’s subsidiary depended mostly on trade of parts and components within the European region. By contrast, the US Big Three opposed the UAW’s demands for local content in the United States. “As [auto] parts from Mexico and imported vehicles from Japan and South Korea became a more integral part of the Big Three’s competitive response to Japanese-based firms, local content threatened to interfere with the US auto makers’ plants as well as their competitors” (Hertzenberg 1991: 257). Ford also supported Brazil’s auto policy (1995–9), under which manufacturers in Brazil were permitted to import vehicles at half the prevailing tariff rate of 70 percent, and opposed the Australian government’s measures, in 1996, to reduce auto tariffs to 15 percent in 2000. Ford and GM, in fact, “threatened to pull production out of Australia” and demanded, along with Toyota and Mitsubishi, a 25 percent level as the minimum tariff rate. Ford went even further, declaring that it would then pick India or Indonesia rather than Australia as new sites of a small “Asia” car for the Pacific region (Ward’s Communications 1997: 55). A similar situation unfolded regarding the US Big Three position in favor of non-tariff barriers contained in the Canada–US Auto Pact of 1965, the Canada–US Free Trade Agreement of 1988, which granted them a 50 percent rule of origin, and the NAFTA, which raised that rule to 62.5 percent (see Chapter 10 for further discussion). Political considerations played an important role in Ford’s trade strategy. As long as trade balances are important to governments, auto makers – like other multinationals operating in other strategic industries – have to consider the trade impact of their production and sales operations not only in foreign countries but also in their home country. Considering that personal consumption for purchasing cars in developed economies is high – about $240 billion in North America alone – it appears difficult for auto makers to offset exports that could balance automotive trade among regions. The risks associated with national borders thus prevent auto makers from supplying a major market from their own home country or from any other country (Whitman 1981: 12; UNCTC 1983: 79; Womack et al. 1990: 204), and explains Ford’s investments in production operations in major markets for vehicles. This behavior was also found in situations where regional trade agreements had removed obstacles for freer trade across borders, as was the case of Ford’s production operations in both Canada and Mexico in the context of NAFTA and in Brazil and Argentina after Mercosur. In both cases, and as discussed in detail in Chapter 10, Ford not only maintained but also refurbished its production operations in those countries after trade liberalization measures were institutionalized. In the absence of series data of Ford’s trade, intercompany sales are one way of measuring the exchange of automotive products and therefore integration levels within Ford’s network of production operations around the world. In absolute dollar values, Ford’s intercompany sales almost doubled between 1984

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and 1996, shifting from approximately $13 billion to almost $29 billion, and then to $34 billion 1 year later. But during the 1984–96 period, those sales remained on average at 22 percent of the company’s total worldwide sales each year; in 1997, they reached the 30 percent figure (compare Figures 7.10 and 7.11). Data in Figure 7.11 show that levels of integration have increased in the United States and in regions outside of the United States. The growth in intercompany sales from the United States and outside of the United States more than doubled between 1986 and 1997, as sales shifted from $7.2 billion and $8.7 billion in 1986 to about $15 billion and $19.1 billion in 1997 respectively. As a percentage of total sales, intercompany sales outside of the United States shifted from about 20 percent in the early 1980s to record highs of 49 percent in 1985, then fell to 38 percent in 1987, and thereafter remained at an annual average of 35.5 percent until 1996. One year later, they increased to almost 44 percent. It is impossible to know whether higher volumes of intercompany sales indicate that integration is taking place on a global or regional basis because this indicator does not show the direction of sales. However, the difficulties encountered by Ford’s different world-car projects, which were designed to reduce costs by trying to build a globally integrated network of production operations, Ford’s strong regional competencies in North America and Europe and its strategy of protecting regional markets by non-tariff barriers, and the company’s recent modifications to Ford 2000 suggest that Ford’s trade of automotive products takes place on a regional basis. Thus, Ford’s production operations are and will continue to be regionally integrated.

Figure 7.10 Ford intercompany sales by region, 1977–97 (milliions of dollars) Source: Table A1.16 im Appendix 1

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Figure 7.11 Ford intercompany sales to total sales ratio by region, 1977–97 (percent). Source: Tables A1.16 and A1.17 in Appendix 1.

8

Successful bargaining in a situation of increasing interdependence

During the 1980s, the Canadian automobile industry exhibited a significant expansion in output and exports, and boosted further rationalization of automotive production on a North American basis. New investments were triggered by Canada’s successful bargaining approach, which exploited heightened levels of industry competition and took advantage of the US auto makers’ strategies of restructuring their manufacturing operations. Canada’s policy measures that attracted investments from non-regional producers again formed a triangular diplomacy dynamic that favored the Canadian auto industry. The interdependence between the Canadian auto industry’s and the US Big Three’s interests was such that offering special conditions to non-regional producers to enter the Canadian market would hurt the US Big Three as much as the Canadian auto industry. But, by attracting non-regional auto investments, Canada forced the US Big Three to enhance the industry’s competitiveness and to end the limitations that the oligopolistic competitive dynamics had traditionally placed on the industry’s full rationalization. In this round of triangular diplomacy, the US Big Three joined the US government, demanding both an end to the special programs offered by Canada to Asian producers and more protection for their regional system of automotive production. Finally, Ford Canada’s performance was outstanding in spite of its conservative investment strategy. Canada’s high-quality labor and cost advantage, compared with the United States, allowed the Canadian subsidiary to make an important contribution to the parent company’s overall restructuring strategy and its efforts to reduce production costs and enhance efficiency.

Interdependence and the declining supremacy of US vehicle manufacturers The difficulties that the Canadian automobile industry faced throughout the 1970s were aggravated after the 1979 oil shock. While US vehicle sales dropped from 10.3 million in 1979 to 7.8 million in 1982, those in Canada fell from 1.4 million to about 920,000 in the same period (see Figure 8.1). In 1982, Japanese imports had captured more than 40 percent of Canada’s total vehicle imports, and that same year Chrysler, GM, and VW cancelled some of their previous

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Figure 8.1 Vehicle sales, production, imports and exports in Canada, 1979–89 (units). Source: Table A2.4 in Appendix 2.

investment plans for Canada. Canada’s automotive output and employment decreased significantly, with 25,000 automotive jobs lost in only 3 years and a drop of 25 percent in vehicle production in the same period (see Tables A2.2 and A2.3 in Appendix 2). In Canada, the US Big Three suffered a combined net loss of Can$870 million, or about 6.5 percent of their total worldwide losses between 1980 and 1982 (Canada Federal Task Force 1983: 40). As shown in Figure 8.2, for the first time since the early 1970s, Canada registered a substantial automotive trade surplus, in the order of US$2.3 billion, which resulted from an important growth in the value of auto exports to the United States, particularly of parts. The value of both imports from US auto products and from other countries increased (see Figures 8.3 and 8.4). The combination of rising imports from Japan and the strategies of the US Big Three to cope with the new competitive environment (plant closings, wage reductions, automation, outsourcing, etc.) raised concerns in Canada about the automobile industry’s future in that country, particularly given the disinvestment pattern that US vehicle assemblers had exhibited during the 1970s and the Canadian automobile industry’s inefficiency relative not only to the United States but also to Japan.1 For some industry observers, all the Canadian automobile industry’s actual or perceived problems stemmed from the “compelling fact” that Canada did not have an indigenous automobile industry (Reisman 1978: 229–31; see also Perry 1982: 8–15; Winham 1984: 481). Canada’s dependence on US vehicle assemblers constrained Canada’s policy options to arrest the industry’s deteriorating competitive position. Between 1973 and 1978, the US Big Three, plus American Motors of Canada – which stopped production in Canada in 19872 – accounted for over 95 percent of Canada’s vehicle production, for almost 80 percent of total Canadian automotive trade, for 73 percent of the industry’s Canadian value-added, and for 94 percent of the industry’s total capital investments between 1978 and 1981 (Perry 1982: 13). At the time, Canadians

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Figure 8.2 Automotive trade balance in Canada, 1979–89 (millions of US dollars). Source: Tables A2.7 and A2.8 in Appendix 2.

Figure 8.3 Automotive exports with US and other countries in Canada, 1979–89 (millions of US dollars). Source: Table A2.7 in Appendix 2.

feared that they did not have many options to solve this situation. The prospects for a Canadian vehicle company or a joint venture between a vehicle manufacturer and a Canadian businessman or the government seemed unlikely. Even if this could be a viable option, any manufacturer established in Canada would naturally view “Canada as part of the North American market, not as a separate entity” and, from this perspective, the requirements of the US market took “priority in the allocation of scarce resources” (Reisman 1978: 227). In the early 1980s, and as had happened in the past, foreign competition magnified the inefficiency and vulnerability of Canada’s automotive production. Canada’s higher proportion of labor-intensive assembly operations compared with the United States made it particularly vulnerable to new competition (Winham 1984: 487–8). The competitive challenge came not only from Japan

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Figure 8.4 Automotive imports with US and other countries in Canada, 1979–89 (millions of US dollars). Source: Table A2.8 in Appendix 2.

but also from the newly industrialized countries (NICs) that were offering lower costs for automotive production and had substantially increased their automobile industry’s export capability. Figure 8.5 shows Spain rivaling Canada in vehicle production and South Korea exhibiting fast rates of growth since 1980. Concerns in Canada were also strong for the introduction of flexible production systems, which implied a complete reorganization of production facilities, both at the assembly and parts plant level. For instance, GM and Ford announced plans to increase by 1990 the number of robots used in their Canadian plants to 1,200, as compared with 130 and seventy, respectively, used in 1983 by those companies (Canada Federal Task Force 1983: 75). For Arthur (1985: 17), “only the GM Oshawa complex with its two automobile plants and one truck assembly plant and in-house and independent locally positioned parts suppliers appeared to have the core features of the new flexible production system being developed.” Neither Ford nor Chrysler had established or positioned production facilities with flexible production methods in Canada. Canadians were especially troubled by the US auto makers’ outsourcing practices. In order to match the Japanese productivity and cost advantage, US vehicle firms were moving assembly operations and parts production to lowcost production locations,3 such as Brazil, Mexico, and South Korea. For the US Big Three’s Canadian subsidiaries, outsourcing had become common practice with the Auto Pact’s provision that vehicle manufacturers imported duty-free materials, parts or vehicles from third countries into Canada. The United States, instead, allowed duty-free importation of those products, provided that a 50 percent North American content requirement was met. The most salient form of offshore sourcing was the importation of major power-train components, such as engines and transmissions. In 1982, for instance, the Big Three were importing

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Figure 8.5 Motor vehicle production in selected countries, 1979–89 (units). Source: Table A2.5 in Appendix 2.

765,500 engines and 1,022,500 transmissions annually to North America (Van Ameringen 1985: 278). While there was a rising North American demand for small and fuel-efficient cars that required larger quantities of four-cylinder engines, the bulk of Canada’s automotive output was centered on V8 and sixcylinder engines (Canada Federal Task Force 1983: 81). Four-cylinder engines had been traditionally imported into Canada from other countries, such as Brazil. In the early 1980s, when the US Big Three opened engine plants in Mexico, mostly for export markets, Mexico became an important source of small engines for Canadian-built cars.4 During the 1980s, and partly as a result of their outsourcing or relocation strategies, the US Big Three closed a number of parts operations in Canada. Ford closed its Windsor iron foundry in 1980; Chrysler did the same with its Windsor engine plant and its seat-spring plant; by 1982, GM had dropped its 1980 plans to double the automatic transaxle output at its Windsor plant and transferred its wiring harness assembly and other items from its Canadian plants to US and Mexican facilities (Ward’s Communications 1981: 166–7, 1983: 125, 128). Canada also lost its competitive position in major sectors of the US auto parts market. By 1980, Canada’s share of US auto parts imports had dropped to less than 35 percent, from almost 70 percent in the early 1970s. Some of those sectors included glass, wiring sets, interior seats, bumpers, hubcaps and wheel covers, brake parts, fans and blowers (see Van Ameringen 1985: f.n. 60, 281–2). By 1985, Canada ceased to be the principal exporter of engines and engine components to the United States (Winham 1984: 487–8). Meanwhile, Mexico was producing more engines and Brazil was producing more engines, transaxles, and transmissions than Canada (Fuss and Waverman 1990: 278). The US Big Three’s sourcing strategies thus posed a dilemma for the Canadian government: although those strategies meant sales losses for Canadian parts manufacturers, had the government sought to halt them it would have hurt the Canadian assembly sector as much as the US vehicle assemblers. This was so simply because the US auto makers’ sourcing operations sought to improve

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the production cost of their Canadian-built vehicles, at least in the short run. Those strategies were also encouraged by the existing institutional trade regime for the automobile industry. The Auto Pact trap A number of analysts concluded in the early 1980s that the Auto Pact was an ineffective policy instrument to cope with the Canadian industry problems (Winham 1984: 480; see also McMillan 1987: III-46; and, for a different perspective, Van Ameringen 1985: 283–6). The Auto Pact’s safeguards could not protect the Canadian industry from a general downturn in North American vehicle production or from more competitive producers because those safeguards were designed under two assumptions: a continuous growth of vehicle sales and a dominant position of US vehicle manufacturers in the North American market. The tariff that backed up the production–sales ratio requirement could not be, as in the past, an effective government instrument to influence the auto makers’ behavior. Applying tariff sanctions on vehicle manufacturers failing to comply with the production–sales ratio in the early 1980s could have driven Ford or Chrysler out of business (Perry 1982: 15; Winham 1984: 489), hurting the Canadian automobile industry as much as the auto makers themselves. Canada’s ability to change the existing trade regime was limited for a number of other reasons. To begin with, the Auto Pact was an international agreement, which implied that any changes required bilateral negotiations with the US government. The Canadian government could not have opted to renegotiate the Auto Pact because of the US government’s traditional opposition to the Auto Pact’s safeguards. As explained in Chapter 3, these safeguards were seen in Canada as key instruments in guaranteeing an equal share for Canada in the North American automotive industry. The potential for a tougher stance on the part of the United States became greater as the government of Ronald Reagan embraced a strong defence of free markets as a means of restoring economic growth and even made public pronouncements against the Auto Pact’s safeguards.5 The different ideological approaches of the governments that were in power in Canada and the United States at the time also increased the potential for bilateral tensions over the Auto Pact and reduced further Canada’s margin for action. The Canadian Liberal Party, which won the 1980 election, undertook some “economic nationalist” policy measures, such as the nationalization of oil and gas and the establishment of the Foreign Investment Revision Agency, both of which were seen as irritants in US–Canada relations. In this context, any Canadian government protective action toward the automotive industry, including higher local-content requirements or applying sanctions against US vehicle manufactures failing to comply with the Auto Pact’s safeguards, would have resulted in a direct conflict with the United States, which continued to be the largest market for Canadian products. The complexity of the situation clearly demonstrates the dynamics of triangular diplomacy. Other structural and ideological factors explained Canada’s reluctance to

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terminate unilaterally the Auto Pact. First, during the 1980s the agreement still regulated about 90 percent of Canada’s total automotive trade and output. Such an action would have affected automotive exports to the United States, which in 1982 represented 95 percent of Canada’s total automotive trade. Not wishing to provoke retaliatory measures against Canadian exports, the state has failed to consider policy options in the automotive sector which might be perceived by trading partners as overly protectionist. (Van Ameringen 1985: 284) Also, given the Canadian industry’s dependency on the duty-free importation of high-volume produced parts to reduce the otherwise high costs of production, reinstating tariffs would have contributed to a further deterioration of that industry’s competitiveness. The Canadian government’s long-standing commitment to a liberal trade regime also constrained the formulation of a new automotive policy. Terminating the Auto Pact would have ultimately prompted strong domestic opposition, particularly from consumers, who would have paid for the industry’s higher cost structure and inefficiency (Winham 1984: 489). Naturally, both the US vehicle assemblers and the Canadian automotive union would have also opposed such an action. From this perspective, Winham seemed to be right when stating that … under the Auto Pact, Canada has become dependent, both on its own protectionist policies and on the transnational automobile companies on which these policies impact. Although the resulting regime is not satisfactory, there are likely more risks than advantages for the government in changing the arrangements. (Winham 1983: 291)

Restructuring the North American automobile industry: challenging dismal views about the future Despite gloomy perspectives about future policy alternatives, the Canadian automobile industry performed remarkably well, better than its American counterpart. Canadian automotive production recovered rapidly as early as 1982, growing at rapid rates throughout the decade (see Table A2.2 in Appendix 2). As Figure 8.1 demonstrates, vehicle production, domestic and exports sales also expanded significantly. Automotive employment registered rapid rates of growth during that time and surpassed prerecession levels (see Table A2.3 in Appendix 2). Canada maintained a 14–15 percent annual share of total vehicle production in North America, accounted for 8 percent and 9.5 percent of total sales in the United States and Canada, and absorbed growing levels of North American employment that grew from 11 percent to 14.5 percent between 1981 and 1989 (OTA 1992: 24; Holmes 1993: 35). The value of Canadian automotive exports more than doubled during the

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decade, although automotive imports experienced with even faster rates of growth (Table A2.6 in Appendix 2), leading to negative trade balance that reached almost $1 billion in 1988. Canada’s automotive trade became more concentrated on the United States than in the past. Exports to the US market, of both vehicles and auto parts, more than doubled, while exports to other countries actually decreased (see Figure 8.3). After 1982, the value of automotive imports from countries other than the United States increased substantially, but the bulk of Canada’s imports still came from the United States, which represented 85 percent of the total value of Canada’s automotive import bill in 1988 (as shown in Figure 8.4). Many parts plants were closed but, despite concerns about the rapid increase in parts imports and deindustrialization in the auto parts sector, this sector attracted a considerable amount of new investment and its output grew at faster real rates than the vehicle assembly sector (see Table A2.9 in Appendix 2). During the 1980s, more than a dozen assembly plants were closed in the United States but none in Canada, and the Canadian automobile industry attracted unprecedented levels of investment, in the order of $9.5 billion between 1983 and 1988. For the first time since 1965, more than 60 percent of that investment was in the Canadian assembly sector, as shown in Table A2.9 in Appendix 2. The Japanese established vehicle assembly and parts production plants in Canada and the Big Three modernized their existing plants and rationalized further their North American operations. The bargaining approach: subsidies, “moral suasion” or comparative advantage The Canadian government’s ability to exploit heightened levels of industry competition played a major role in attracting the substantial auto investments registered in Canada throughout the decade. The Canadian government’s subsidies and flexible approach to the application of the Auto Pact’s safeguards, but most importantly the duty-remission programs offered to Asian auto makers, helped to raise levels of competition and efficiency in the Canadian auto industry. The fast US market expansion after 1983 was also a key factor, because that growth absorbed higher levels of automotive exports produced in Canada without the risk of sanctions on the part of the US government. As discussed in Chapter 5, in the 1970s subsidies had become a common practice to attract automotive investments. According to one estimate, between 1973 and 1983 the subsidies offered by the Canadian government to the auto industry amounted to Can$105 million (Rubenstein argued that these were even more substantial). One specific example was the loan made by the federal and Ontario governments to American Motors for opening a plant in Bramalea, Ontario. American Motors agreed to pay back 1 percent of the value of each vehicle produced at Bramalea, and if production fell below 158,000 vehicles in a year the company would pay an additional 1.5 percent of the value of each vehicle produced. Chrysler took over that plant in 1987 and honored AMC’s commitment to repay the loan. According to Rubenstein, in order to do so, Chrysler would

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have to sell approximately 4 million intermediate-sized cars; thus, if Bramalea was kept operating at full capacity, roughly 200,000 units per year, then the loans would be repaid in 20 years. In essence the Canadian financial support would amount to the equivalent of a twenty-year virtually interest-free loan of over one billion dollars, a saving of several billion dollars for Chrysler compared to the cost of borrowing the money at commercial interest rates. However, as low sales for the plant’s products have kept annual production well under 100,000 a substantial percentage of the loan will never be repaid. (Rubenstein 1992: 225) A second case of forgivable loans was GM’s joint venture plant with Suzuki, which received in total Can$97 million; and a third one was a Can$110 million 3-year interest-free loan from the national and Quebec governments to modernize GM’s Ste Therese assembly plant – a program that required Can$450 million. GM had threatened to close that plant in 1982 unless it received the loans. In exchange, GM agreed to keep the plant open for at least 7 years and to provide the other Can$230 million (Rubenstein 1992: 226; Thomas 1995: 17– 18). In order to retain or increase investments, the Canadian government also offered the flexibility to calculate each company’s production–sales ratios. As previously explained, the production–sales ratio continued to influence the vehicle assemblers’ decisions on how to distribute model production throughout their North American plants. According to one analysis, the Canadian industry executives were “unanimous” in their view that the Auto Pact’s safeguards and the letters of undertaking continued to influence production decisions by their companies and contributed high levels of production and employment in Canada (Arthur 1985: 40–1). The safeguard violations or even the threat of a safeguard violation allowed Canada to establish a “moral suasion” approach to its Automotive Policy … The easiest way to come into compliance with a safeguard was to produce more in Canada and so the vehicle companies committed to additional plants. In return the government allowed the safeguard to be met over a period of time rather than on a year-by-year basis. (DesRosiers 1993a: 3) The Canadian Government’s “moral suasion” bargaining approach had been previously successful. In 1980 Ford Canada was able to consolidate car and truck ratios, “to enable more efficient operations of the Oakville assembly plant,” and Chrysler was allowed to consolidate truck ratios of its Windsor truck plant with its passenger car plant when it started assembly in 1984–85 of its K-cars (Perry 1982: fn. 49, 153). The Canadian government’s consent to a more flexible approach to the Auto Pact’s safeguards determined Ford’s $39 million investment to produce its compact front-drive Tempo/Topaz at the Oakville plant. The

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investment was not really needed at the time, because Ford’s St Thomas assembly plant alone satisfied the company’s car assembly ratios. Thus the large Oakville car plant was a surplus (Perry 1982: 74). In addition, Ford’s investment was made despite the opposition of the US government and the UAW, which argued that Oakville’s export capacity of 175,000 units would further aggravate the deficit on vehicle trade that the United States maintained with Canada. Export promotion policies in the context of surplus capacity During the 1980s, the Canadian government faced a dilemma every time it used trade policy measures to promote Japanese investments: while seeking to attract the more efficient Japanese producers, the US vehicle assemblers opposed any policy that favored the Japanese. Those investments were seen as a threat to their dominant position in the North American industry and to the industry at large. Like its US counterpart, the Canadian government negotiated voluntary export restraints (VERs) with the Japanese government. Vehicle imports from Japan were limited to 174,000 units in the 1981 fiscal year and in 1985 to 18 percent of market demand in the following year.6 In negotiating the VERs, the Canadian government aimed to prevent Canada from being the “dumping ground” for Japanese exports facing restrictions in the United States (Wonnacott 1987a: 13). These policy measures brought mixed results. On the one hand, they helped US vehicle assemblers to rapidly recover their profits in the North American auto industry, thus contributing to increased automotive production and employment. On the other hand, they encouraged the Japanese to move into the higher price models – a segment of the market which was more profitable and which had been traditionally dominated by US auto producers – and contributed to price increases that “transferred huge sums of money from Canadian consumers to shareholders in Japanese auto companies, with little or no benefit in Canadian jobs created” (Hazledine and Willington 1987: 498; McMillan 1987: 15–17; Wonnacott 1987a: 13). Until 1987 trade outside the Auto Pact was regulated by a 15 percent acrossthe-board tariff on both vehicles and parts that dropped to 9.2 percent as a result of GATT’s Tokyo Round. By 1984, Honda, Nissan, and Toyota were already producing 330,000 vehicles in the United States (Wonnacott 1987b: 21–2), whereas none of these companies had opened one single assembly plant in Canada. The 1983 Canada Federal Task Force on the Automotive Industry recommended that … the Canadian government should extend the principles of the Auto Pact to overseas producers, requiring them to meet the Canadian vehicle production and the 60 percent Canadian value added provisions. This is, auto firms would have to produce in Canada to sell in Canada (except for firms selling less than 3,000 units per year, who could continue to import cars over the tariff). (as quoted in Wonnacott 1987b: 22)

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Indeed, as explained in Chapter 3, Canada implemented the Auto Pact on a multilateral basis, with which it was implicitly “prepared to extend Auto Pact status to any manufacturer assembling vehicles in Canada that met the Auto Pact requirements” (Molot 2000: 11). Rather than doing so, the Canadian government decided to reinstate duty-remission programs on imports by offshore vehicle manufacturers. Before 1984, that type of programs existed, providing exports went to countries other than the United States.7 Overall, those programs were not very successful in promoting export activity and benefited mainly European firms operating in Canada. Some projects that included exports to the United States were negotiated with Japanese vehicle producers in 1984. They revived the 1962–3 remission programs,8 in the words of Paul Wonnacott, “in an even more objectionable form” to the United States. In both cases, Canadian exports were promoted by duty remissions on imports into Canada. Whereas in the 1962–3 programs most of the Canadian imports came from the United States, in more recent ones most of the imports came from Japan, thus creating income and jobs in Japan and not in the United States (Wonnacott 1987b: 24–5). Concerns in the United States increased as higher levels of Japanese production in Canada were planned. In 1985, the United States had all 330,000 units produced by East Asian firms in North America; projections were that Canada would have a capacity of 450,000 units of such production by 1990 compared with about 1,700,000 in the United States. As the Canadian share of planned production is much larger than the Canadian share of sales, Canada is apparently planning to become a significant net exporter of East Asian vehicles to the United States. This in itself creates some danger of a US reaction. The danger is heightened by the way in which Canada has attracted the plants. (Wonnacott 1987b: 24) A case for US countervailing duties was very probable since those duty-remission programs tended “to suck in more imports from Japan and push subsidized exports to the United States” (Wonnacott 1988a: 104; for a different perspective, see MacDonald 1989: 14). Despite US opposition, those programs were successful in attracting Japanese investment to Canadian assembly operations. By 1987, Canada accounted for over 20 percent of all investment, employment, and output “to be generated by announced Asian built and owned North American assembly plants” (Holmes 1990: 168). Competition intensifies As explained in previous chapters, the US vehicle manufacturers did not have strong incentives to maximize plants’ economies of scale or invest in new assembly plants in Canada because of their concerns with maintaining the traditional industry’s oligopolic equilibrium. However, the threat of foreign competition forced them to seek efficiency maximization and prompted them to strive to further rationalization of production. In fact, while some US vehicle assemblers had announced investments in Canada after 1982–3, the majority

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of these projects started only after Asian assemblers committed to open production facilities in Canada. After Honda’s announcement in 1983 of $200 million to build a new assembly plant in Canada and Toyota’s construction in the same year of an aluminum wheel plant, Chrysler announced a Can$400 million package to convert its Windsor assembly plant from rear-drive mid-size cars to front-drive compact vans. In 1985, Toyota announced a Can$400 million investment in a production complex, which would assemble the subcompact Corolla in Canada. The same year that Hyundai invested Can$100 million in a components plant and announced plans for Can$300 million to open an assembly plant in Bromont, Quebec, GM and Suzuki announced their joint venture – Canadian–American Motors, Inc. (CAMI) – to increase GM’s small-car production capability in Canada. GM also announced a Can$1.2 billion investment in new plants and equipment in its assembly and manufacturing complexes in Oshawa. Almost half of that amount was to be used to transform Oshawa’s light-truck assembly into a high-technology factory (Ward’s Communications 1984: 126–7, 1985: 129). GM’s major investments show that the return to “a more national alignment of assembly and parts manufacturing” resulted from the need to reduce vulnerability from outside competition (Holmes 1990: 170). Canada’s labor cost advantage Certainly, none of the new automotive investments would have taken place had it not been for Canada’s competitive advantage in vehicle assembly: its comparatively lower labor costs and its highly productive labor force. Canada’s traditional labor cost advantage improved in the 1980s because of the Canadian Liberal government’s explicit policy of allowing a depreciation of the Canadian dollar (between 1982 and 1987, the Canadian dollar value in US dollars ranged between US$0.81 and US$0.72). Holmes (1993: 36) estimated that, in the mid-1980s, the US vehicle assemblers were saving about $7.5 per hour in their Canadian assembly operations compared with those in the United States. In other words, the hourly payroll cost in real terms in Canada was approximately 25 percent lower than in the United States (Holmes 1990: 166). In GM’s view, that labor cost difference was in the order of $8 per hour, a determining factor in locating its joint venture assembly plant with Suzuki in Canada (Thomas 1995: 16–17). The government-sponsored universal medical insurance program made Canada’s labor cost advantage relative to the United States even larger. According to one estimate, the Big Three per capita expenditures on health care coverage for employees and retirees quadrupled during the 1970s in the United States from $0.6 billion to $2.4 billion and more than doubled again during the 1980s to roughly $5 billion … By 1989, auto makers paid almost 50 percent more per capita on health care in the United States than in Canada, amounting to savings of $300 to $500 per vehicle. (Rubenstein 1992: 227)9

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Ford reported that its health insurance expenses for 1990 alone were $65 per vehicle produced in Canada, compared with $300 in its US plants (Symonds, as quoted in OTA 1992: 141). These factors contributed to keep vehicle investments and production in Canada growing, despite the Canadian auto workers’ adversarial approach to their bargaining with the US vehicle assemblers. Since 1979, Canadian autoworkers have shown a tougher stand in collective bargaining strategies with US vehicle assemblers than their US counterparts (Holmes 1993: 37). Before 1982, theUAW had a uniform bargaining approach in Canada and the United States, which “created a fair degree of certainty as to longer term labor environment for the industry” (Grey et al. 1985: 59). In spite of a high unemployment rate of 12.5 percent in Canada, the 1982 labor contract negotiations (more specifically, the GM–Ford packages), for the first time in history, gave UAW-represented autoworkers in Canada more benefits than those given to US union members. While the latter agreed to a payment and cost of living allowance (COLA) freeze for 2 years, Canadian workers continued to receive COLA payments and a 28 cents hourly base pay increase effective in March 1984 (Ward’s Communications 1983: 124). The different US and Canadian political approaches also influenced the structure of North American labor relations. The Canadian Liberal government adopted policies that, although not explicitly pro-union, were more willing than the Reagan government to support labor demands, as shown in the negotiations with Chrysler in 1980. From the outset, Reagan opposed direct government intervention to rescue Chrysler from bankruptcy, but the president finally granted it a loan with the condition that Chrysler secured loans from other countries as well as further concessions from the autoworkers. The UAW’s bargaining position was eroded as a result. As Yates (1993: 219) has argued, by accepting concessions toward Chrysler, the UAW “opened the door for further concessions and eventually found itself confronted with mounting membership discontent.” By contrast, the Canadian labor union, which was fully involved in the loan negotiations between Chrysler and the Canadian government, demanded job guarantees in exchange for the loan. Without the Canadian government’s support the autoworkers could not have successfully resisted conceding to Chrysler and the other vehicle producers (Yates 1993: 217–19). In the 1984 round of labor contract negotiations, a new “pattern” contract in the United States was established, changing “the traditional rules for wage formation in the industry” and leading to a split in the UAW that gave birth to the Canadian Autoworkers Union (CAW). Since the major source of divergence between the two unions was over “the nature of the union–management relationship,” the CAW maintained a more adversarial approach, particularly with regard to the introduction of “the team concept and other forms of cooperative industrial relations practices” (Holmes 1993: 37).

Ford Canada’s striking performance with a minimum investment strategy The fact that Ford’s North American operations were so integrated by the late 1970s had negative consequences for the Canadian subsidiary, as it performed

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poorly in comparison with other foreign operations during the worst years of the industry crisis. GM fared better than Ford. While GM’s sales in the Canadian market fell by 8 percent between 1979 and 1980, Ford’s sales dropped sharply, by 25 percent. By 1982, Ford’s sales had reached a historic record low of 113,366 units, a 46 percent fall from 1979. During the 1979–82 period, Ford’s sales and production were dropping in virtually every market where the company had operations, but in 1982 those in Canada registered the lowest levels compared with those in Great Britain, Germany, and even Spain (see Figures 8.6 and 8.7). In value terms, between 1978 and 1982 Ford’s sales in Canada were about half the company’s sales in Latin America ($9 billion compared with $18 billion). Also, between 1979 and 1983 Ford lost money in Canada, while it earned net profits in Latin America (see Table A2.22 in Appendix 2). Ford Canada’s pattern of investment reflected the parent company’s longterm strategy of conservative spending. Between 1982 and 1988, Ford capital expenditures represented about 12 percent of the Canadian industry’s total investments during those years, compared with about 32 percent for the period 1980–2 (based on data from Tables A2.9 and 2.24 in Appendix 2). Both Chrysler and GM undertook much larger investments than Ford; Chrysler made major investments to convert its assembly plants and in 1987 bought AMC (even AMC had opened a new Can$764 million assembly plant in Brampton, Ontario); and GM not only invested heavily in the modernization of its Canadian facilities but also opened a new assembly plant. The bulk of Ford’s capital investments were used to retool its Canadian assembly plants in order to introduce new products.10 The company’s levels of investment in Canada were low also compared with other Ford foreign operations. Those in Latin America received 20 percent more of the company’s capital expenditures than the Canadian subsidiary in 1982–6 period. Levels of investment, however, did not seem to have determined Ford’s production and sales performance in Canada, at least until 1988. During the

Figure 8.6 Ford’s sales in selected countries, 1979–89 (units). Source: Table A2.20 in Appendix 2.

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Figure 8.7 Ford’s production in selected countries, 1979–89 (units). Source: Table A2.12 in Appendix 2.

1980s, Ford Canada registered a boost in production, exports and domestic sales. In 1982, Ford Canada’s vehicle production started to recover, reaching in 1988 record high levels of 665,000 units, as shown in Figure 8.8, largely owing to substantial increases in vehicle exports. As in the past, Ford Canada’s export activity was relatively more dynamic than GM’s11 (compare Figures 8.8 and 8.9). As Figure 8.10 shows, Ford’s sales also registered a substantial growth, recovering to pre-1982 levels. Also, compared with other non-US operations between 1982 and 1988, Ford Canada exhibited very good performance in terms of production, sales, and net income (as indicated by Figures 8.6 and 8.7). In contrast with the 1979–81 period, for the next 7 years Ford Canada produced more vehicles than all Ford’s operations in Latin America. In 1988, Ford was building twice as many vehicles in Canada than in Latin America and more vehicles than it produced in Germany and the United Kingdom between 1984 and 1987. Ford’s sales in Canada were rapidly growing for most of the decade, while those in Latin American markets were depressed, registering losses year after year. Between 1983 and 1987, the accumulated net income of Ford’s operations in Canada represented about 40 percent of all Ford’s European operations combined, as shown in Table A2.22 in Appendix 2. As in the United States, Ford’s appropriate strategy of emphasizing quality, improved labor and supplier relations, and costs reductions was a success in Canada. It also helped Ford’s ability to offer the right type of products and the right product mix in the Canadian marketplace. Ford did produce in its Canadian plants some of its best-selling products in North America, such as the worldcars Escort/Lynx (at St Thomas, since 1980) and the Tempo/Topaz (at Oakville in 1983). Ford also produced all its full-sized cars at Oakville for the 1982 model year in order to satisfy a resurgence of a strong and steady US demand for large cars (Ward’s Communications 1983: 128).

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Figure 8.8 Vehicle production in Canada by company, 1979–89 (units). Source: Table A2.12 in Appendix 2.

Figure 8.9 Vehicle exports in Canada by company, 1979–89 (units). Source: Table A2.14 in Appendix 2.

As previously noted, Ford’s and Chrysler’s weaker financial positions compared with GM had put limits on their model diversification strategy. GM still produced in its Canadian plants the widest range of lines and models of all US vehicle assemblers operating in Canada,12 and built all its subcompacts there. Their smaller financial capability forced Ford and Chrysler to reduce the number of models/lines that they produced in their plants. Chrysler Canada focused on two sizes and five models of vans, which represented 80 percent of its total Canadian vehicle production, and produced only one mid-size car, the Eagle Premier (Bramalea), and the Jeep (Brampton). In 1986, Ford Canada registered the lowest level of diversification in lines/models of any other Canadian producer: the Ford Tempo and Mercury Topaz (Oakville), the Crown Victoria/Mercury Marquis (St Thomas), and the pick-up F-series (Oakville Truck plant). Also, in order to complement their offer in Canada, Chrysler and Ford increased their

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Figure 8.10 Vehicle sales in Canada by company, 1979–89 (units). Source: Table A2.13 in Appendix 2.

sourcing of subcompacts from third countries. In 1986, Chrysler started importing its Colt subcompacts from Mitsubishi Motors Corp., and in 1987 Ford imported the Mercury Tracer from Taiwan (Ward’s Communications 1987: 156– 7). The Auto Pact rules facilitated Ford’s and Chrysler’s moves toward a greater specialization of their Canadian operations, because it permitted the importation of duty-free small cars that were produced at competitive costs in other countries. In 1986, Ford announced a contract to import, annually, 30,000 front-drive Tracer subcompacts – a version of Mazda’s 323 series – from Ford Lio Ho Motors Limited of Taiwan (Ward’s Communications 1986: 141). Provided that Ford complied with the Auto Pact’s production–sales ratio, Ford could import duty free into Canada the Mexican-built Mercury Tracer, which was produced at a cost advantage in Mexico, and auto parts, such as four-cylinder engines, also produced in Mexico, for the Canadian-built Tempo/Topaz.

The Canada–US Free Trade Agreement: the age of rising constraints The 1980s ended with the implementation of the Canada–US Free Trade Agreement (CUSFTA) (January 1, 1989). The agreement removed remaining tariffs within 10 years of its implementation and Canada’s prohibition on importing used cars within 5 years. With this, the Canadian and US automotive industries moved toward further integration into a North American system of production. But the agreement also granted the US Big Three both privileged access to the North American market and protection vis-à-vis non-regional competitors. The CUSFTA negotiations took place in a competitive context where the traditional stakes and the triangular diplomacy dynamics of the North American auto industry actors had been fundamentally altered by the establishment of Asian-owned production plants (the so-called transplants) in North America. As explained in Chapter 6, the 1980s was a decade when the auto industry became highly politicized, with strong protectionist demands in the United States

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against imports, particularly of Asian automotive products, and policies undertaken by other countries that jeopardized US jobs and investments. In this context, the US government argued that Canada could not justify maintaining either the Auto Pact’s safeguards or the duty-drawback and dutyremission programs. They were unnecessary because during the 1980s the disparity in relative efficiencies of the Canadian and the US auto industries that previously existed had disappeared. The duty-drawback and duty-remission programs were even more objectionable for the United States as they granted the transplants unrestricted access to the US market while controlling their access to Canada based on performance requirements. As in the 1960s, US assembly firms were in favor of maintaining the Auto Pact’s safeguards. But, in this round of triangular diplomacy, they were on the same side of the negotiating table as the US government, demanding the removal of all duty-remission programs, the denial of Auto Pact status to other auto makers, as well as the establishment of strict rules of origin to protect regional production. Once again, as had happened during the 1960s, the Canadian government’s trade-off for greater integration and more protection for US auto makers from foreign competition was more auto investments and better access to the US market. With the CUSFTA, Canada gave up the right to extend Auto Pact status to other vehicle manufacturers, even if they did meet Auto Pact requirements. A 50 percent North American content requirement was set as a rule of origin for vehicle manufacturers to qualify for duty-free treatment in North America. In addition, Canada’s duty-drawback and duty-remission programs, which had attracted non-regional foreign investment in the auto industry during the 1980s, were either cancelled outright when the agreement came into effect or phased out over a number of years.13 With these measures, the US government at least partially achieved its long-sought objective of imposing a “bilateral” approach to automotive trade with Canada – as opposed to Canada’s multilateral approach – and limited the Canadian government’s ability to provide direct incentives for Japanese firms to produce in Canada for export to the US market. The agreement also created two types of vehicle manufacturers that were located in Canada, one of which qualified for Auto Pact status, Chrysler, Ford, General Motors, Volvo, and CAMI,14 which were allowed to continue importing into Canada duty-free vehicles and original equipment parts from third countries. The second type were those manufacturers that did not enjoy an Auto Pact status – Honda, Hyundai and Toyota, which after 1989 and with the termination of duty-drawbacks and -remission programs had to pay the full duty on imported motor vehicles and original equipment parts, regardless of their production–sales ratio and Canadian value-added level (MacDonald 1989: 15). The automotive regulations in CUSFTA affected the Asian transplants’ relative costs of assembly in Canada, thus potentially reducing incentives to expand their recently established Canadian operations. At the same time, the agreement provided the US Big Three with a privileged position that translated into substantial gains. For instance, in the late 1980s it was estimated that, by complying with the Auto Pact production–sales ratio, the Auto Pact members saved about $300 million in duties over a total $3 billion worth of parts imported

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from third countries (Wonnacott 1988a: 104). The CUSFTA provided additional flexibility to the Auto Pact members by offering them the option of importing US automotive products duty free, without having to comply with the Auto Pact’s production–sales ratio.15 By contrast, since at the end of the 1980s the transplants still remained highly dependent on imported parts, CUSFTA increased the relative cost of importing those parts into Canada – where the tariff was 9.2 percent – compared with them being imported into the United States – with a 2.5 percent tariff on auto parts. Non-Auto Pact firms could qualify for duty-free treatment in their trade between Canada and the United States, but they had to comply with CUSFTA’s rule of origin for automotive products. At the time of the negotiations, the US vehicle assemblers argued that the Auto Pact rule was too generous to the Asian transplants, and they called for a rule of origin that would be more difficult to meet than the Auto Pact’s Canadian value-added or the US content provision. Their goal was to force the Asian transplants to produce major automotive components in North America or to purchase them from North American suppliers if those companies wanted to have duty-free access to the North American automotive market. Although there was a debate regarding whether or not the CUSFTA rule of origin for automotive products was more demanding than that of the Auto Pact,16 by creating two types of assemblers the agreement clearly granted the US vehicle assemblers protection vis-à-vis non-North American producers and limited the Canadian government’s ability to implement independent policy measures that would provide incentives to non-regional producers to locate in Canada. As MacDonald has argued, the creation of an “Auto Pact club” denied offshore vehicle producers the right to import automotive products from third countries. [This] gives the Big Three a very great advantage, that much greater because the right would have had a disproportionately greater value for their competitors … The not-so-subtle discrimination becomes very clear; the intervention of the Canadian government in the automotive industry will be limited to what helps the Big Three. (MacDonald 1989: 17)

9

Export dynamism Reconciling the Mexican and the US Big Three’s interests

A fortunate confluence of events, framed in the three-level bargaining dynamic, led to the structural transformations undergone by the Mexican automobile industry, which a included strong export dynamism and the incipient increasing integration into a North American system of automotive production. Mexico’s enhanced resources at a time when the North American industry was going through a time of uncertainty and the fiscal incentives offered to US vehicle assemblers enabled the Mexican government to entice multinational auto makers to increase their investments in new, export-oriented plants. The oligopolistic competitive dynamics also forced Ford to follow GM’s strategies of complying with Mexico’s regulations, despite the parent company’s conservative spending strategy and reluctance to commit scarce resources to relatively marginal foreign operations. US government policies that fostered automotive production in maquiladora plants also altered the negotiating dynamic between the Mexican government and the US vehicle producers. The US auto makers learned about the low costs and the high quality of automotive production in Mexico, and the Mexican government learned about the benefits of rationalizing Mexican automotive production on a North American basis. In this context, Ford’s aggressive investment strategy in Mexico set a precedent for the integration of the Mexican operations into an efficient regional system of production, although not all the company’s operations were incorporated immediately in that rationalization strategy. Finally, in the context of heightened levels of industry competition, the US Big Three also sought strategies to defend their shares in the Mexican market. They obtained preferential treatment in different policy measures taken by the Mexican government, including Mexico’s membership of the General Agreement on Tariffs and Trade (GATT) and the 1989 Auto Decree.

Mexico’s successful bargaining strategy in a context of international constraints: 1977–81 In contrast with the US and the Canadian situation, during the 1977–81 period, the Mexican automotive industry grew at high annual rates, almost doubling the value of automotive output. Employment in the industry also reached record

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high levels of 136,000 jobs in 1981 (see Tables A3.1 and A3.2 in Appendix 3). Automotive exports also grew at impressively high rates, but they were still relatively small, especially if they were compared with the total value of automotive imports. Total automotive exports passed from about $80 million in 1976 to over $430 million in 1981 (the plants that GM and Chrysler established at the end of the 1970s required a period of maturation to start exporting their output). In compliance with the 1977 Auto Decree, Nissan, Chrysler, and VW also increased their vehicle exports, which in value terms increased by 500 percent, reaching in 1981 a total of 14,428 units and a value of $100 million (Ford and GM did not participate in this type of export). Automotive imports continued to grow at impressive rates. Between 1977 and 1981, their value multiplied by almost six times, from less than $600 million to over $3.3 billion (see Tables A3.5 and A3.7 in Appendix 3). Interestingly, although the Mexican government formally banned vehicle imports, they also showed a dramatic growth, increasing from less than $9 million to over $514 million between 1976 and 1981. Demands were made by dealers established in northern border states for the right to import both new and used cars, arguing that Mexican consumers in that region still bought cars from US dealers. Thus, the Mexican government established annual quotas for those imports (ECLAC 1995: 89). A decade later, these importations would become a politically explosive issue. By 1980, it was clear that the three largest producers would not comply with balancing their deficit, as required by the 1977 Auto Decree. One year later, the value of Mexico’s auto trade deficit was close to $3 billion, accounting for 65 percent of the country’s overall trade deficit. It was also the largest deficit in the industry’s history. The industry deficit revealed, again, the persistence of inefficiencies in the Mexican auto parts sector that impaired its ability to compete with imports. Basic inefficiencies stemmed from the large number of vehicle manufacturers, small economies of scale, and a fragmentation of the market. In 1977, seven auto makers manufactured fifteen lines with thirty-six models. By 1981, the situation was more serious, there were nineteen lines with forty-seven models, which meant 18,000 cars per line. Mexico’s policies of protecting the auto parts industry also imposed barriers to entry that bestowed market power upon the parts manufacturing firms. In the early 1980s, firms producing original equipment (OEM) for the five vehicle assemblers held 75 percent of the total market in Mexico. The largest single producer supplied 50 percent or more of the market in all but five of the thirty component groups in 1980. They could set the monopoly price and quantity in the aftermarket and negotiate a price above the competitive price in the original equipment manufacture (OEM).1 Usually, the price for these products in Mexico was 25 percent in excess of the international price (Bennett 1986: 30–51). Other factors that affected the industry’s deficit were the prevailing exchange rate and the fast growth rate of Mexican vehicle sales, particularly for luxury and sport cars,2 which required larger amounts of parts, particularly accessories, than more economic models. The increasing attractiveness of the Mexican

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market for vehicles was the result of the booming demand generated by the vast oil reserves discovered in the mid-1970s. The Mexican market for vehicles grew at an average annual growth of 16 percent between 1976 and 1981, reaching a total of 582,690 units in 1989 (see Figure 9.3). The overvaluation of the Mexican peso made the importation of auto parts more attractive than their exportation. In order to reduce automotive imports, the Mexican government passed the 1981 Cocoyoc resolution, which prohibited imports of all optional parts for luxury cars and sanctioned the multinational vehicle producers by reducing their production quotas.3 The prohibition to import optional parts for luxury cars hit the US subsidiaries specifically, since that measure impaired the companies’ profit-making strategies. Luxury parts had always been imported from the US operations, mainly because these usually expensive items, even in efficient production sites, were even more expensive to produce in Mexico.4 But the automotive trade deficit continued to grow in 1982, and a new resolution implemented in August 1982 imposed further restrictions on automobile production for the 1983 model year. In May 1982, the Mexican government reduced production quotas on all vehicle assemblers, except for Nissan.5 The Mexican peso was dramatically devalued, increasing from 23 pesos to the dollar in 1980 to 150 pesos to the dollar 3 years later, and the economy experienced a severe economic recession that lasted almost the entire 1980s decade. Domestic vehicle sales experienced a sharp decline – a 55 percent reduction between 1981 and 1983 and a total loss of 220,000 units (Figure 9.1). For the first time in 20 years, the automobile industry exhibited a significant drop in the value of production in real terms. Also, the industry’s employment contracted by 30 percent between 1981 and 1983. The auto industry’s share of total manufacturing production in Mexico dropped from over 7 percent in 1981 to 4.5 percent in 1983 (see Tables A3.1 and A3.2 in Appendix 3). Despite this negative context, during the 1980s, the industry trade patterns

Figure 9.1 Automotive imports and exports in Mexico, 1979–89 (millions of dollars). Source: Table A3.5 in Appendix 3.

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exhibited structural changes, with automotive exports registering a spectacular growth throughout the decade. Automotive exports multiplied by more than five times in value terms, from about $431 million in 1981 to over $3.8 billion in 1989, as shown in Figure 9.2.This export dynamism took place in three stages, each of which was characterized by the predominance of one set of products: first, the low-value-added parts, then engines, and finally vehicles (see Figure 9.3). The dollar value of auto parts, excluding engines, multiplied tenfold between 1976 and 1981, representing over two-thirds of total automotive exports in 1981. Although they continued to exhibit high real rates of growth throughout the decade, by 1989 they only represented about 23 percent of all automotive

Figure 9.2 Automotive Trade balance in Mexico, 1979–89 (millions of dollars). Source: Table A3.5 in Appendix 3.

Figure 9.3 Vehicle production, exports and sales in Mexico, 1979–89 (units). Source: Table A3.3 in Appendix 3.

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exports from Mexico (Table A3.6 in Appendix 3). After 1982, engine production for export markets expanded substantially, from $61 million in 1981 to almost $400 million in 1983, and then to over $1.3 billion in 1989. As a share of the total value of the industry exports, engines shifted from only 14 percent in 1981 to more than 50 percent in 1983. While in 1982, Mexico was exporting 320,000 engines, by 1986 it was exporting 1,386,000. During that year, installed capacity of engines for export had reached the 2.4 million units level. This boom in engine exports has been characterized as “one of the best examples of silent industrial integration between Mexico and the United States” (López-de-Salines 1991: 106). In addition, by the mid-1980s, all auto makers had invested in new assembly plants to produce vehicles for export markets. While in 1985 the value of engine exports was nine times the value of vehicles exported, by 1987 it was about the same. In 1993, the ratio of engine–vehicle exports was 3:1 (Ramírez 1993: 58). By 1989, the combined value of engine and car exports represented 75 percent of total automotive exports, compared with 30 percent in 1972 and 37 percent in 1981. The total number of vehicles exported from Mexico jumped from 20,000 to almost 200,000 between 1983 and 1989, representing 30 percent of Mexico’s total production of vehicles in the last year mentioned (see Figure 9.1) or $1.6 billion, over 40 percent of the total value of Mexican auto exports (see Table A3.7 in Appendix 3). By 1989, the value of automotive exports had reached an unprecedented $3.8 billion, resulting in equally unprecedented surpluses in the industry’s trade balance (Figure 9.4). Between 1983 and 1989, the value of automotive production registered a significant boost, expanding from less than 4.5 percent to almost 8 percent of Mexico’s manufacturing GDP (see Table A3.2 in Appendix 3). By 1985, the total

Figure 9.4 Vehicle and auto parts exports in Mexico by product, 1979–89 (thousands of dollars). Source: Table A3.6 in Appendix 3.

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value of automotive production had surpassed the peak value of 1981, with most of the growth stemming from a very significant boost in automotive exports. Similarly, for the first time since 1962, the value of imports dropped significantly from over $3.3 billion in 1981 to $682 million in 1983, reaching a record low of 8 percent as a proportion of the total value of Mexico’s imports, as shown in Figures 9.1 and 9.5. The drastic fall in domestic demand for vehicles and therefore of auto parts imports6 and the rapid expansion of exports solved the industry’s trade deficit. In 1983, for the first time, the industry registered a trade surplus, and in less than a decade, the industry’s trade balance passed from only $51 million in 1983 to $1.4 billion in 1989 (Figure 9.2). This surplus represented more than 50 percent of Mexico’s trade surplus. Mexico’s new power resources A good number of analysts agree with the suggestion that the 1977 Auto Decree was the real origin of the “modern automotive industry” and the cause of the industry’s new export dynamism that was exhibited in the 1980s (Moreno 1988: 22, 46; Dambois 1990: 46, 55; Samuels 1990: 133; Scheinman 1990a: 150; Shapiro 1993: 118–99). Between 1979 and 1983, five engine plants were established in Mexico, three in the north (General Motors, Chrysler, and Ford) and two in the central region (VW and Nissan). In 1983, those plants had a capacity of more than 1 million units, 85 percent of which was destined for export markets. Engaging vehicle assemblers to make these substantial investments – the bulk of which came from the US Big Three – was a major achievement for the Mexican government. As explained in Chapter 4, before 1982 vehicle assemblers operating in Mexico did not have incentives to comply with the government’s requirements for increased exports. The correction of inefficiency problems in the Mexican

Figure 9.5 Vehicle and auto parts imports in Mexico by product, 1979–89 (thousands of dollars). Source: Table A3.7 in Appendix 3.

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industry demanded more flexible regulations that did not challenge the rationale of economies of scale. If expected to comply with export requirements, vehicle assemblers demanded an effective trade-off between local-content and export levels. The Mexican government’s policy options toward the automobile industry were restricted to a gradual abandonment of import substitution measures, which would mean moving more in the direction of the auto makers’ interests. However, in the 1970s context, even if the strict Mexican requirements had been removed, multinational vehicle assemblers did not have a strong incentive to export from Mexico because they were mainly interested in selling in the small but profitable Mexican market. At the same time, the Mexican government, supported by Mexican auto parts suppliers, was not willing to abandon the goal of maintaining a nationally controlled and protected auto industry. This attitude was strengthened by the discovery of vast oil reserves. While it is probably true that without the 1977 Auto Decree none of the vehicle producers would have built new automotive capacity in Mexico, a fortunate combination of events explains both the government’s success in imposing the decree on foreign auto makers and the success of export promotion policies. The increasing attractiveness of the Mexican market due to the demand generated by the oil boom enhanced the Mexican government’s bargaining position vis-à-vis foreign producers (see Figure 9.6, which compares Mexico performance with other countries). Considering the large number of firms still

Figure 9.6 Motor vehicle production in selected countries, 1979–89 (units). Source: Table A3.4 in Appendix 3.

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operating in the Mexican automobile industry at that time, a threat to withdraw by any vehicle assembler would only benefit the Mexican government’s goal to improve the industry’s efficiency. Also, the growth in the Mexican market took place within an international context of sales slumps and increased competition from the Japanese auto firms, as well as the more stringent regulations on safety and fuel efficiency in the United States. US vehicle producers needed to look elsewhere in order to compensate for the drastic drop in sales which took place in the US market after the 1979 oil shock and for the competitive loss in the new industry’s dynamic throughout the world, to which reference was made in previous chapters. As in the past, the new investments made in Mexico to comply with the 1977 Auto Decree also resulted from the oligopolistic nature of the auto industry and the huge governmental incentives. Fiscal incentives were offered to enhance production and exports, and vehicle assemblers were allowed to import – duty free or at 25 percent of the tariff level for non-indispensable parts – any new and completely modern machinery and equipment, as well as raw materials and components that could not be produced locally (UNCTC 1983: 116). Between 1977 and 1981, direct subsidies to imports amounted to $1.2 billion (SEPAFIN 1982: 82). Only 3 percent of all subsidies were directed to the auto parts sector, via fiscal credits and subsidies on tariffs for imports of raw materials and parts not available through the Certificados de Promoción Fiscal, 1979 (Ramírez de la O 1983: 160); the remainder was assigned to vehicle assemblers. Vehicle assemblers were also able to import more components or vehicles into Mexico once their new engine facilities started to produce and export engines in high volume to support their home US and European assembly plants.

Ford Mexico: constraints and opportunities of the parent’s new global strategy As noted in Chapter 5, Ford opposed the 1977 Auto Decree. Some of the most important explanations of Ford’s reluctance to comply with the new decree stemmed from the strategies that the parent company designed to survive the industry crisis. To start with, and as already noted, Ford did not have the financial resources the GM or the financial support offered to Chrysler by the US government to meet the huge new investments in the export requirements that the 1977 Auto Decree (designed to correct the traditional industry’s trade deficit). Moreover, Ford had to borrow from its European operations in order to finance the deep restructuring program implemented throughout the 1980s and to develop new products. Not only did Ford’s Mexican subsidiary suffer from its parent company’s lack of both cash and products, but it also faced restrictions placed on them by US labor (Samuels 1990: 148, 191). As explained in Chapter 6, Ford’s survival strategy had put an emphasis on quality improvements, rationalization of its worldwide operations to cut costs, and a reluctance to open new plants. Improving relations with US labor and suppliers was also a priority goal in Ford’s survival strategy for the 1980s. As one Ford executive stated in 1979,

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… there was a corporate-wide reluctance to import auto parts into the United States from other countries … Because of labor pressures, it is almost impossible to source anything from outside the United States. It is usually cost-effective to produce in Mexico, but it has high risk in the US political labor costs in the US. (as quoted in Samuels 1990: 157) In addition, there were internal differences within the company’s divisions that limited Ford’s response to the 1977 Auto Decree. As Ford of Mexico was part of the Latin American Automotive Operations [which reported to the International Automotive Operations (IAO)], incentives for sourcing components for its US operation [part of the North American Operation (NAO)] were very low. At this time, Ford’s international division was making all the profits and paying for its US operations debt. Therefore, the international division had no interest in “further subsidising the unprofitable US operation.” Ford’s decision to open an engine plant in Mexico did create a conflict between the two divisions, IAO and NAO, and resulted in corporate paralysis in responding to Mexico’s demands” (Samuels 1990: 156–7). But Ford needed to comply with Mexican regulations in order to continue selling there. The Mexican market’s growth potential meant much needed profits for Ford, given the difficult financial situation of the parent company and the heightened levels of competition in the industry worldwide. Viewed within the perspective of US auto firms, Mexico was also “the world’s largest growth market not already dominated by Japanese firms” (Womack 1989a: 3). Also, and as had happened in the past, the changing nature of oligopolistic competition in the automobile industry enhanced Mexico’s position and finally led Ford to observe the decree. That type of competition was particularly advantageous for Mexico in the late 1970s, owing to the high competitive context that existed in the Mexican market (Figure 9.7). Ford would have also incurred an opportunity cost by risking the loss of its Mexican market share arising from reduced access to imports (Shapiro 1993: 119). Ford estimated that its earnings in Mexico would be raised by 37 cents per dollar exported, because increased exports gave them the right to additional imports into Mexico. This compares with a direct export subsidy in the form of tax reductions of 8 cents per dollar exported (Jenkins 1985: 70). As previously mentioned, GM was first to comply with the 1977 Auto Decree. The company undertook several investment projects for exports in Mexico. GM’s 1979 investment of $250 million to open an engine plant in Mexico, characterized as “the largest investment ever by GM in a single place at a single time” (Samuels 1990: 152–3), was a competitive decision: “the need to respond to the 1977 [Auto] Decree reinforced its decision to be a viable manufacturing subsidiary in an expanding market … GM management had already decided by 1977 to challenge Ford in its superior foreign operations” (Whiting 1992: 219).7 As explained in Chapter 4, from 1969 to 1977, GM’s share of the Mexican market had slipped from 21 percent to 12 percent, and while Ford’s share had also decreased it did so to a lesser extent than GM, from 24 percent to 18 percent. By the late 1970s,

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Figure 9.7 Mexican vehicle sales by company, 1979–89 (units). Source: Table A3.9 in Appendix 3.

GM had already started to formulate a new global sourcing strategy, particularly of parts and engines for its downsized products, and “Mexico was placing a bid for its selection as a major low-cost production site. Mexico could now provide GM with a potentially cheaper sourcing location for auto parts to be used in its downsized models.” Consequently, there was a convergence of interest between Mexico and GM. “Compliance to the Mexican government’s demands was reinforcing GM’s global competitive advantage” (Samuels 1990: 147). This time, GM’s higher degree of vertical integration, combined with its substantial financial resources, turned into a significant advantage over Ford. The competitive pressures faced by Ford in Mexico not only came from GM but from other auto makers as well. Since 1973, Volkswagen had already established itself as the leader in the Mexican market with a 30 percent share. In April 1979, Volkswagen announced a plan to invest 6 billion pesos for a new four-cylinder engine plant in Mexico, with 75 percent of its production for export. In August, Chrysler announced its plan to build a four-cylinder-engine plant, with a 400,000 annual engine capacity per year in Ramos Arizpe, 80 percent of which would be exported. Chrysler management had already decided that the Mexican subsidiary would integrate the K car and export engines. Without the 1977 Auto Decree, Chrysler’s “planned operation in Mexico would have been significantly smaller” (Samuels 1990: 154).8 Although total sales in Mexico represented a very small proportion of the company’s worldwide sales, Ford could not risk foregoing the booming Mexican market considering the highly competitive industry’s scenario, internationally and in Mexico. From 1978 on, Ford’s Latin American sales started to increase rapidly and accounted for an unprecedented 11 percent and 12 percent of the

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company’s world sales value in 1980 and 1981 respectively. These proportions represented more than double the Ford sales value in the Canadian market and almost half of those in European markets. In addition, while Brazil had been the largest market for Ford’s unit sales in Latin America, Mexico showed the highest growth rates in the region in 1978 and 1981 (Ford’s sales in Brazil were declining in those years, as shown in Figure 9.8). In fact, taken as a proportion of Ford’s worldwide sales, sales of Ford vehicles in Mexico doubled in 1981, compared with 1977, from 1.05 percent to 2.4 percent, while Brazil’s share increased only slightly from 2.5 to 2.9 percent. Mexico’s share of Ford’s total vehicle sales in the world peaked in 1981, almost reaching that of Brazil, a position that was not reached again until 1988. As to the net income of Ford’s operations, Latin America also shows slightly higher levels than Canada, peaking in 1980 (see Table A1.14 in Appendix 1). In June 1980, Ford committed $365 million to a four-cylinder-engine plant with an annual capacity of 500,000 engines, 90 percent of which would be exported mainly to the United States.9 Ford’s new Chihuahua engine plant was the only one opened by the company in North America between 1979 and 1988, which added to the other five that Ford operated in the United States and one in Canada (Harbour and Associates 1990: 117). During the 1970s, most of the four-cylinder engines for Ford’s North American assembly operations had been manufactured in Brazil (Dyer et al. 1987: 169), making it easier for the company to justify sourcing engines from Mexico. The Mexican investment did not threaten a closure of operations in the United States, which would have resulted in even stronger opposition from US labor. Nonetheless, Ford had maintained its leadership as exporter, accounting for

Figure 9.8 Ford’s sales in selected countries, 1979–89 (units). Source: Table A3.8 in Appendix 3.

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about one-third of all Mexican automotive exports between 1978 and 1981.10 More than 50 percent of Ford’s exports consisted of indirect exports of auto parts. Departing from its traditional pattern of operations, Ford established joint ventures with some of the largest Mexican suppliers, which required less of Ford’s scarce financial resources (Samuels 1990: 156–7; Unger 1990: 173–4). In 1981, Ford joined with Grupo Alfa to open Nemak, which was one of the largest suppliers of aluminum engine heads; in 1982, with Grupo Vitro and Grupo Visa to create Vitroflex and Carplastic, which produced glass11 and plastic boards respectively (Arjona 1990: 138–9; Berry et al. 1992: 17). Ford’s gains from these ventures included high-quality and low-cost products, additional subsidies, and compliance with the new Mexican government export requirements. Most of those exports were directed toward North America, thereby fostering integration of the US and the Mexican auto industries (López-de-Salines 1991: 98).

New investments in Mexico: serendipity or real cost advantages The dramatic devaluation of the peso in 198212 contributed notably to advancing the structural transformation toward an export strategy in the Mexican auto industry, because it improved the comparative advantage of Mexico as a lowcost site for automotive production and allowed firms to obtain higher profits from the augmentation of Mexican exports (Péres Nuñez 1990a: 122; see also Arjona 1990: 140). As J. Michael Losch, GM de Mexico’s general manager, stated in 1984, “I think the single strongest incentive they’ve offered any of us is when they moved to a realistic exchange rate in 1982 … Whereby, this became a relatively low-cost place to produce components and vehicles” (Ward’s Auto World 1984 March: 26). Vehicle producers had started to expand their sourcing of low-value-added auto parts from Mexico as a result of the 1976 peso devaluation and the 1977 Auto Decree provision permitting them to include up to 20 percent of the compensating exports through the value-added of maquiladoras (López-de-Salines 1991: 98).13 They invested in plants that produced those low-value-added auto parts, usually maquiladoras or in-bond assembly plants, most of which were located on the Mexican–US border.14 Maquiladora plants, which emerged with the Mexican Border Industrialization Program, introduced in 1965,15 processed or assembled imported components for re-export, mainly to the United States. Imported inputs (components or raw materials) entered Mexico duty free, as long as the finished products were exported. Usually they, were an “in bond” because the importer advanced a bond to guarantee that the finished products were exported. Maquiladoras were also exempted from Mexican duties on imported machinery and parts used in their export activities. Regulations in the United States that facilitated the importation of parts also encouraged the boom of maquiladora production and the Mexican export dynamism in other auto parts during the 1980s. The United States granted preferential treatment to Mexican exports through the generalized system of preferences (GSP), the foreign trade zones,16 and particularly US tariff legislation

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that taxed only the value-added of foreign products. Sections 806.3 and 807 of the US Tariff Code (today, 9802.00.60 and 99802.00.80 under the Harmonized Tariff System) required that duty be paid only on the value-added of a product during assembly in Mexico and on third-country components. The producer needs not to be Mexican or US, as long as the components imported into Mexico were made in the United States (Rubenstein 1992: 242). In the late 1970s, the maquiladoras were highly labor-intensive operations that used foreign capital and technology. Although there was mixed ownership, US firms prevailed. The US firms benefited from the proximity to the US market, which permitted substantial reductions in operation costs, and from low wage rates that were similar to Asian economies – in the 1980s, 43 cents per hour compared with $13.25 (Rubenstein 1992: 243). The first wave of maquiladoras engaged mainly in the production of hand-assembly operations or other parts that were expensive to make in the United States because mechanized processes were not justified. As Hufbauer and Schott have stated, the US–Mexico maquiladora program has worked for Mexico much as the US–Canada Auto Pact worked for Canada in two respects: “both allowed duty-free imports of components as an incentive for national production, and both served as foundation stones for wider free trade arrangements” (Hufbauer and Schott 1992: 191). In 1979, there were already thirty-eight maquiladoras involved in assembling automotive parts. GM was the first to announce substantial investments in an in-bond assembly plant, Conductores y Componentes Eléctricos de Juárez, S.A. de C.V., that would sell its total production of automotive rear-body wiring harnesses to its operations in the United States. GM became the assembler most involved in maquiladoras, whereas Ford and Chrysler were less involved because of their lower levels of vertical integration. As mentioned earlier in this chapter, Ford preferred to establish joint ventures with Mexican auto parts manufacturers. US government actions in the mid-1980s affected the Mexican auto industry’s export growth. A growing protectionist attitude in the US Congress toward Japanese automotive products was widened to include products imported from the newly industrialized countries (NICs). In 1986, for instance, the United States lifted tariff exemption status from $3.2 billion – out of $13.3 billion – of automobile and component imports from the major NICs, affecting several countries (Brazil, Taiwan, and the Republic of Korea) and Mexico in particular, e.g. the exportation of wiring harnesses, seats, and other parts valued at almost $1 billion (Hoffman and Kaplinsky 1988: 292). These and other similar measures in the United States hurt Mexican producers as much as the US auto makers that had increased their production/consumption of low-cost automotive parts. As a response to US protectionism, the Mexican government introduced in 1986 a new decree that offered export incentives to the automotive maquiladora plants changed their productive orientation.17 A “second-wave” of maquila activities increasingly used sophisticated technology and work organization. Instead of producing electrical systems, some of them moved to the production of more sophisticated parts, which implied more manufacturing and less

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assembly. A move that was encouraged mainly by GM and, to some extent, by Ford and Chrysler, which together owned 25 percent of 160 automotive maquilas (Arjona 1990: 139–40; Ramírez 1993: 60). In addition, the government introduced several export promotion programs which gave preference to the automotive industry, including a 100 percent reduction in the general duty on imports of machinery and tools, up to 100 percent reduction of the special tax on assembly, and up to 100 percent on indirect duty returns for components and vehicles that were exported.18 Although since the 1970s Mexico was clearly a competitive location for the production of low-value-added parts, it was less so regarding the production of high-value-added products, such as engines – the production of which was also thought to be the domain of advanced countries. Some analysts argued that Mexico did not have a clear cost advantage as a production site, although it did not have serious disadvantages either (Shapiro 1993: 120–6). Similarly, Cohen argued that, when production and freight costs were taken into account, the landed cost in Detroit of Mexican-produced engines was only marginally cheaper than producing them in the United States or purchasing them from Japan (Cohen, as quoted in Jenkins 1985: 68–9).19 Womack shared this view. … these plants were not built in the expectation they could save their owners large amounts of money. Otherwise, they would have been built without government pressure. Rather, they were built by assemblers who expected that Mexico would prove a profitable growth market in the 1980s and beyond but who faced exclusion from this market unless they could balance their trade. (Womack 1991: 43) From this perspective, without the Mexican 1977 Auto Decree, GM and Ford would have built the engines in the United States by just increasing capacity at existing facilities. However, it is hard to imagine these firms committing substantial investments to export plants if this implied losing money. A different perspective presented Mexico in the early 1980s as a clear source of low-cost production, particularly of engines, over the United States (Booz Allen and Hamilton 1987: 25–6). According to the Economist Intelligence Unit, in the 1980s an engine could be built for the United States market in Mexico with a net saving of $53 over one built in the United States and at $27 less than importing it from Japan (as quoted in Ward’s Auto World June 1986: 24; see also Arjona 1990: 127). Mexico had a comparative advantage, especially after the 1982 devaluation of the peso to the US dollar, in the production of aluminum and iron, as well as cost advantages in electricity and labor and transportation costs given the proximity to the US market.20 The fact that engines had been produced in Mexico since 1962 was an additional significant incentive, because vehicle assembly firms could build an export strategy based on a comparative advantage that they had already created in Mexico. The new engine investments in Mexico were also encouraged by the newly begun worldwide trend in the automobile industry, which was toward a higher concentration of production in

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specialized plants producing standardized parts and components for global consumption (Unger 1990: 157). As a report from the Office for the Study of Automotive Transportation has stated, at that time, “engines looked appropriate for Mexico.” [the Mexican government] initiatives alone would not have generated a successful program had not the US and European auto companies involved found them timely. These auto companies needed to tool production for new fuel-efficient engines. They had developed pockets of technical infrastructure in Mexico, and several knew of high-quality Mexican manufacturing companies outside the auto industry who could be partners in a new world-class engine joint venture. (OSAT 1992: 65) But the realization by auto makers that their Mexican operations could be cost competitive, particularly in high-technology parts, was not immediate. This situation changed as auto makers proved that quality engines (with quality as good as that in the United States) could be produced efficiently in low-cost sites, particularly in countries such as Mexico, where previous investments had developed some “technical infrastructure.” The learning experienced by the auto makers in their Mexican operations thus ended with the belief that highvalue-added products were the domains of advanced countries. The quality of the new technical infrastructure in developing countries underscores the impact of the new strategies pursued by auto makers in the 1980s. For instance, consistent with Ford’s strategy to follow the Japanese example in their bid for quality, Ford’s Chihuahua engine plant used the most advanced technology in engine manufacture and a skilled labor force, which received a fraction of US or Japanese wages.

Setting the stage for integrating Mexican automotive production on a regional basis The new regulations introduced with the 1983 Auto Decree were more flexible, showing for the first time a partial abandonment of import substitution goals. Learning on the part of the Mexican government was as important as it was to the multinational auto makers, since it had come to realize that the success of the export strategy required a regulatory framework that provided auto firms with the ability to exploit both Mexico’s comparative advantage and its international networks of production and marketing. Rationalization of the industry became a priority goal for the Mexican government. For the first time, there was also a concern for making the prices of Mexican automotive products competitive, by improving the industry’s efficiency. According to some estimates, in 1983 the consumer in Mexico was paying between 30 percent and 100 percent more than the international price. Export promotion continued to be a central government objective, as the decree required that producers maintained a positive trade balance. For the first time

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in 20 years, the Mexican government was willing to trade off high levels of local-content requirements for exports. As a measure to improve the industry’s efficiency, the decree reintroduced limits on the number of production lines and models, and increased local content from 50 percent to 60 percent for cars and to 80 percent and 90 percent for truck and buses respectively.21 However, an extra vehicle production line was permitted if it was fully committed to export markets with a sliding scale of local-content requirement (see Box 9.1). Thus, the new regulations removed some of the anti-export bias introduced in previous auto decrees, increasing the advantages of locating plants in Mexico and reducing the disadvantages that stemmed from the use of less efficient national parts producers. Through these measures vehicle assemblers were able to access inputs at international prices (López-de-Salines 1991: 106), which, in turn, facilitated the rationalization of production operations in Mexico. In the early 1980s, for instance, Ford’s strategy was based on a maximum national integration in luxury models destined for the domestic market, such as the Cougar. The cost of a very limited scale of production could be offset because, as the market was totally protected against finished vehicle imports, Ford could set a high enough price of around $25,000. Compensation for low national integration – 50 percent – in a compact car, such as the Topaz, was achieved with parts exports for that same production line. The company could also sustain a model with minimal integration, for example the Thunderbird (30 percent), by exporting engines (Péres Nuñez 1990a: 121). The 1983 Auto Decree provided vehicle assemblers with the flexibility needed to produce quality vehicles in Mexico for export markets (on this point, see also UNCTC 1992: 61–3). As Booz-Allen and Hamilton (1987: 91–3) have suggested:

Box 9.1 1983 Auto Decree September, “Decree for Rationalization of the Automotive Industry in Mexico” •

By 1984, each vehicle assembler was authorized to produce only three lines with seven models, and two lines with five models in 1985 and 1986. By 1987, each assembler was permitted only one production line and five models.

•

A second production line was permitted only for export purposes and was subject to a sliding scale of local-content requirement: if 80 percent of the production was exported, local-content requirement was 30 percent; if 56 percent of production was exported, the content requirement would rise to 56 percent.

•

Both assemblers and auto parts producers had to maintain a positive trade balance.

•

Increase the degree of national integration by 10 percent for car production and 20 percent for buses. By 1987, this was to be 60 percent in cars and 80 percent and 90 percent in trucks and buses

•

Production of eight-cylinders engines was forbidden.

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“vehicles with 40 or 50 percent integration were fairly competitive in international terms, and vehicles with 30 percent integration were totally competitive.” Thus, lower levels of national integration in Mexican vehicles produced exclusively for export markets strengthen [the firms’] capacity to penetrate foreign markets by being able to optimise cheap production factors in Mexico, while avoiding the higher cost that would be inherent in greater integration if they incorporated the remaining 50 percent of the national auto parts, which are priced at least 20 percent higher than those in the United States. (Booz-Allen, as quoted in Péres Nuñez 1990a: 121) For instance, like the other established vehicle assemblers in Mexico, Ford opened a new plant, with a 130,000-unit capacity, for the exclusive production of one additional line for export – the subcompact Mercury Tracer. Ford was the first of the Big Three to start production of this type of vehicle in Mexico (UNCTC 1992: 62).22 The flexibility offered by the new decree for sourcing foreign parts encouraged this $500 million investment because Ford was able to import 65 percent of the value of parts from Japan, 32 percent from Mexico, and the rest from the United States (Morales 1994: 132). Initially, that flexibility and the devaluation of the peso made the Mexican-assembled vehicles cost competitive in export markets. As a result, from 1985 to 1989, Ford increased its vehicle exports to the United States by 142 percent. New perspectives for Mexican production as seen by MNEs The wave of new investments in Mexico and the auto industry export dynamism during the decade were also a reflection of the significant changes in the US Big Three’s strategies. The attractiveness of the growing Mexican market for automotive products had been the Mexican government’s bargaining chip in forcing auto companies to comply with export requirements. This incentive disappeared with the severe downturn of the Mexican market in the early 1980s. With the 1982 economic crisis in Mexico, the automotive industry registered staggering losses of US$1.5 billion. These losses and the provisions of the 1983 Auto Decree restricted the marketing strategies of US vehicle producers; by 1987, each firm was permitted to produce only one line, including up to five models, and the production of eight-cylinder engines was prohibited. This led Ford and GM to seriously consider pulling out of the Mexican market altogether (Shapiro 1993: 122). Aware that a stagnant market could compromise further investments, and in order to redress the vehicle sales slump, the Mexican government passed a fiscal measure that generated growth in the sales of compact cars in 1984–5 and in luxury cars in 1985. They also removed price controls in the same year.23 But even as late as 1989 domestic sales still represented only 75 percent of the 1981 peak level (between 1985 and 1987, sales dropped by 42 percent; in 1989, they doubled compared with 1987). Thus, the Mexican experience in the 1980s

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seems to contradict the rule of thumb that a large and growing internal market was a necessary condition for successful expansion in automotive production (Jenkins 1985: 75). This was possible only due to the changes in the US Big Three’s preferred strategies. From the foreign auto makers’ perspective, three factors explained the new wave of investments in Mexico and the export expansion, despite the economic recession. The first related to the sunk costs of investments made in the late 1970s and early 1980s, which had been based on optimistic projections of market growth. As Shapiro has argued, “once initial investments were made, firms took these sunk costs seriously … these investments increased entry costs for new entrants or for those firms that might consider re-entry after leaving the market …” (Shapiro 1993a: 127). This was so, regardless of the local market performance. A second factor was that, by helping to gain time, the drastic fall in the domestic market was decisive in the export strategy maturing, and allowed for a learning experience regarding the competitiveness of Mexican products in export markets (Péres Nuñez 1990a: 122). The third and most meaningful factor accounting for new export investments in the Mexican automotive industry related to the vehicle assemblers’ rationalization strategies, their changing perception of Mexico’s role in their global systems of production, and the new international competitive environment within the industry that shaped their long-term calculations of future investments.

Mexico’s advantage in Ford’s new game of global competition While Ford’s strategies of financial conservatism and restricted outsourcing inhibited the Mexican subsidiary from complying with the new Mexican auto regulations in the late 1970s, by the mid-1980s Ford was undertaking an aggressive investment program in Mexico to produce not only engines but also vehicles for the export markets. Against the theory of comparative advantage and rather than the traditional labor-intensive operations that could profit from low wages, Ford opened a highly automated assembly plant in Hermosillo, Sonora. Besides Ford learning about the possibilities of producing quality automotive products in Mexico at a comparative cost advantage, other relevant factors brought about new opportunities for exporting vehicles that were built in Mexico: the parent company’s efficiency-seeking strategy; its competitive disadvantage in the small-car segment of the market and the competitors’ moves in this market-segment; the new more flexible regulations in Mexico and the maquiladora program; and the re-evaluation of the yen vis-à-vis the dollar. Competitive issues also influenced Ford’s decision to invest in what has become one of the most advanced assembly plants in the world. On the one hand, the competitive dynamic within Mexico made it imperative that Ford increased its vehicle production for export markets. Although an export leader in Mexico between 1978 and 1983, Ford was falling behind in the export race of both vehicles and engines from Mexico (Ward’s Auto World March 1984: 8). GM

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was a leader in engine exports, with 500,000 engines being exported in 1984. While Chrysler and GM had the export leadership from 1982 on, Ford’s exports did not increase significantly until 1984, just after its Chihuahua plant was up and running. In 1981–2, VW and Nissan were the major exporters of finished vehicles, while GM only started to export vehicles in 1983. As Figure 9.9 illustrates, in the mid-1980s Chrysler’s and GM’s exports of vehicles increased substantially. GM started to build El Caballero and El Camino cars for export only at its Ramos Arizpe plant, and, in 1986, Chrysler maintained its leadership position in exports from Mexico with its new K cars. In 1984, Chrysler’s and GM’s exports were second only to PEMEX; Ford occupied sixth place, VW seventh and Nissan thirteenth (Moreno 1988: 32). Ford only began exporting finished cars in 1987, when the Hermosillo plant started operations. On the other hand, Ford’s new investments in Mexico had the objective of improving its competitive position in the United States and world markets. Ford’s Hermosillo plant was a competitive response to the joint production venture between GM and Toyota at the NUMMI plant in California that produced small cars. It should be recalled from Chapter 7 that Ford’s association with Mazda was a response to the former’s disadvantage in the production of small cars at a competitive cost. Since the mid-1980s, Ford started to source small cars outside the United States, mainly from Asian countries through its co-production arrangements with Mazda. But growing political concerns in the United States regarding increased imports from those countries24 led Ford to consider Mexico as an alternative site for its new plant. Other countries considered for this investment were the United States, Taiwan, Canada, and Portugal. Ford’s decision to locate in Hermosillo was also based on its geographic proximity to the US market (Hermosillo is only 200 miles away from Tucson,

Figure 9.9 Mexican vehicle exports by company, 1979–89 (units). Source: Table A3.12 in Appendix 3.

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Arizona). The profitability of the cars produced in Mexico would be improved as a result of reduced costs of transportation. Additional incentives for the company to locate such a plant in Mexico were, first, low wages – during the 1983–9 period, real wages had been reduced by 60 percent compared with both central Mexico and other countries ($3–5 per day and $1–2 per hour respectively). According to an index created by Laing and Rohn (1983), in 1982 Mexican productivity and wages per hour combined to create a relative cost for labor in Mexico of 0.22, compared with 0.24 in Brazil, 0.27 in Japan, and 1.00 in the United States. The second incentive was the quality of the labor force. William Scollard, Vice-President of Manufacturing at Ford’s North American Operations, stated in the late 1980s: We built a brand new plant near Mexico City and hired all new people with no manufacturing experience, most of whom were recent high-school graduates. We gave them extensive training, including sending many to Japan and Spain, and today, they do outstanding work. When you hear somebody knocking the quality of work in Mexico, like anywhere else, the blame should be put on the Mexican management, not the Mexican people. (as quoted in Shook 1990: 106) According to Krafcik (1992), the combination of high quality and low cost of the Mexican labor force is impossible to beat in the world. His study showed that, in 1988, the time of vehicle assembly in Hermosillo was 31 hours, compared with 48 hours in Brazil and 33.5 hours in South East Asia. European plants exporting to the United States and Canada showed 105 defects per 100 vehicles assembled, compared with 94.7 in South East Asia, 92.5 in Brazil, and 64.4 in Mexico (Krafcik 1988: 140–1). The third incentive is the flexibility offered by the lack of unionization at Hermosillo (Micheli 1990a: 199–200). By locating a greenfield plant in “a predominantly agricultural region far away from Mexico City,” Ford reduced its compensation costs substantially (García and Hills 1999: 145). In addition, weak labor unions in Mexico were seen as a positive factor that favored the US Big Three’s rationalization strategies. The Confederación de Trabajadores de México (CTM), the main Mexican labor confederation, facilitated the restructuring of the automobile industry in Mexico, since it offered labor peace and contracts that favored management in the organization of production (Morris 1995: 16). Beginning in the 1980s, the balance of power was modified, so that the companies unilaterally imposed industry modernization within the framework of trade liberalization and regional integration (Bensusán et al. 1997: 12). Automotive production restructuring went hand in hand with union defeat, through decentralization of collective contracts, and the entrance of new companies into low unionization zones in northern Mexico, which in the best scenarios had protective and corporative unions (Carrillo 1998: 221). Weak unions also increased Mexico’s appeal, particularly for vehicle assembly operations, because that enabled the implementation of flexible methods of production. As Middlebrook (1991: 290–1) contended, the “availability of flexible

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contract conditions in Mexico gives [auto] firms an additional negotiating advantage in bargaining with automobile workers in industrialized countries.” In fact, had the UAW not opposed the automation plans at Ford’s Freemont plant, there is a good possibility that the Hermosillo investment would have been spent on increasing capacity in a US site (Ramírez and González-Aréchiga 1993: 80). Fourth, Ford’s Hermosillo plant received substantial incentives from both the Mexican federal government and the local government of Sonora, such as improvements in the infrastructure at the location site chosen and in water and energy supplies, and finishing the highway between Nogales and the port of Guaymas, which was the place where components from Japan were received. Also, the federal government offered a $110 million credit, payable in 7 years, that accounted for half of the initial investment in machinery and equipment (Carrillo 1990: 79; CEPAL 1992: 132). These incentives were not exclusive to Ford. Although the 1983 Auto Decree eliminated direct subsidies to auto firms, which represented a major departure from previous practices, the Mexican government increased its fiscal incentives to those firms in 1985 and 1986, particularly through the creation of export promotion programs. Equally important were subsidies through swaps of Mexican foreign debt that facilitated direct foreign investment, both in assembly plants and maquiladoras (CEPAL 1992: 133). As in the past, Ford’s strategies in Mexico had a key impact on the overall industry performance. By investing in the modernization of its Mexican assembly and engine operations and specializing in small and mid-size cars for export markets, Ford moved first and faster than GM and Chrysler toward the rationalization of its Mexican operations on a North American basis. With this, Mexico became an integral part of Ford’s regional and global strategy. One goal of Ford’s new strategy was to assemble completed vehicles using advanced production techniques (as explained in Chapter 7). The traditional practice of establishing plants in Mexico with obsolete technology no longer applied. The new Hermosillo vehicle assembly plant was, by the late 1980s, the only facility in North America to combine stamping, manufacturing, and assembly. Mazda provided the basic design and major components. Ford applied there what it had learned from Mazda, and the company was able to experiment with lean production in Mexico. The plant was linked with Detroit’s Lincoln Mercury Division and with Mazda’s plant in Japan through computers and telecommunications, making it fully integrated with decision-making centers (Micheli 1990: 200–1; Morales 1994: 132). It was a great success in terms of productivity and quality: Mexican workers embraced lean production with the same speed as American workers at the Japanese transplants in North American and at Ford’s own US and Canadian plants. However, the plant failed to meet its costs targets, because it was assembling its cars entirely from parts shipped from Japan. As the yen strengthened, Hermosillo, a plant envisioned by Mazda

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For Womack, a more rational strategy, which was also consistent with the concept of lean production, was to manufacture a large fraction of the parts (engine, transmission, etc.) for the car at Hermosillo and serve the entire North American regional market, including Mexico. While this was not fully implemented, Ford helped to create a network of suppliers for its Hermosillo and Chihuahua plants, which have the largest number of independent suppliers to the US Big Three. This was consistent with the company’s relatively low level of vertical integration and with its traditional practice of encouraging joint ventures between Mexican and foreign parts suppliers. Legacies of an import substitution strategy and the new MNEs strategies A major consequence resulting from the 1983 Auto Decree was higher concentration in assembly because higher local-content requirements forced VAM (Vehículos Automotores de México) and Renault to exit the Mexican market.25 However, the decree’s goal to increase efficiency by raising vehicle production per line to 50,000 was not achieved. In 1987, the average scale of production per line was just 14,800 units, compared with 11,000 in 1983 and 13,000 in 1981, but if export sales were excluded the average scale dropped to 9,000 units per line, except for Nissan and Ford–Mazda, which in 1987 reached the minimum scale set by the decree (Péres Nuñez 1990a: 122–3). In addition, increased levels of local content required by the 1983 Auto Decree “represented an increase in costs in the order of 8 to 25 percent for the already overpriced vehicles” during the recession (López-de-Salines 1991: 110). The new local-content requirement was met in 1984 and 1985, but not in coming years. As a consequence of this and the inefficiencies found in the assembly sector, particularly in production for the domestic market, scale economies were not achieved in the auto parts sector either. The forty largest producers accounted for two-thirds of auto parts production and only a few were able to compete internationally (López-de-Salines 1991a: 100). Another consequence of that decree was the emergence of a dual structure in the automobile industry. On the one hand, the old plants located in central Mexico continued to produce relatively large and obsolete models for the domestic market. But, some improvements were made in a few plants. For instance, Ford’s Cuautitlán plant, which was one of Mexico’s most costly assembly plants, introduced flexible production techniques and produced multiple models, part of which were also oriented to export markets. As it happened in other brownfield plants in the United States and Canada, workers at Cuautitlán resisted the introduction of the new production methods. In 1987, a 100-day stoppage at the plant resulted from Ford’s drive to lower costs at the plant. Ford

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bought out the existing work contract (paying them a severance amount of 4 month’s wage) and rehired 80 percent of the original workers. Those who were rehired began at zero seniority. The contract buy-out resulted in an immediate payroll cost reduction of 40 percent. The CTM’s national leaders acquiesced to these events and pressed the local union to sign a new contract that dismantled some of the previous restrictions on management action. As a result, [Cuautitlán] achieved a boost in efficiency due to a greater degree of shopfloor flexibility: the “Escalafón” system of job classifications, for example, was reduced from seventeen broad job categories to seven, permitting management greater discretion in the assignment of workers. (García and Hills 1999: 147) At the end of the 1980s, the plant was “very reminiscent of the automotive industry in Canada pre-auto pact” (International Business Consultants of Canada 1991: 43; ECLAC 1995: 23). On the other hand, new plants, established mostly in the northern region, used modern and capital-intensive technology to assemble cars for export markets. Paradoxically, and as Péres Nuñez (1990a: 118) remarked, although at the end of the 1980s there still persisted some very labor-intensive production methods in Mexico, “the number of assembly functions carried out by robots, automatic presses in the stamping processes, and machine-tools controlled by ‘transfer systems’ have increased markedly.” Also, a new social organization of production emerged (Moreno 1988: 35–6; Dambois 1990: 52–4; Micheli 1990a: 154). For instance, the union role in shop-floor issues at Ford’s Hermosillo plant was effectively limited, by design, at the time the plant was planned. The new state-of-the-art plants established in central and northern Mexico preceded a more formal integration of the Mexican automobile industry into a North American system of automotive production.

Setting the basis for North American integration Like Canada, Mexico ended the 1980s with new regulations that fostered the integration of the Mexican auto industry into a North American system of production and offered a privileged market position for the US Big Three. In 1989, the Mexican government issued two decrees: the Decree for the Development and Modernization of the Automotive Industry, which regulated the automobile and the auto parts industry, and the Decree for the Development and Modernization of the Transportation Vehicles Manufacturing Industry that covered heavy-duty tucks and buses. These decrees marked the Mexican government’s abandonment of the import-substitution goals of previous decrees; they deregulated the industry and promoted the industry’s efficiency through its rationalization and exposure to international competition (see Box 9.2 for details).

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Box 9.2 1989 Auto Decree December, “Decree to Promote the Automotive Industry” •

Each manufacturer could import vehicles not exceeding 15 percent of the number of vehicles sold by that manufacturer in Mexico during the 1991 and 1992 model years. This figure increased to 20 percent for the 1993 and 1994 model years. In order to be eligible for those imports, each manufacturer had to maintain a positive trade balance.

•

For every peso/dollar value of imported new cars, the manufacturer had to export 2.5 pesos/dollar value for the 1991 model year, 2.0 pesos/dollar for the 1992 and 1993 model years, and 1.75 pesos/dollar for the 1994 model year.

•

Thirty-six percent of value-added in vehicles had to consist of components produced by the Mexican auto parts industry.

The new guidelines set by those decrees partly resulted from the structural reforms that the Mexican government undertook during the 1980s in order to liberalize the Mexican economy. The changes underwent by the auto industry in the 1980s showed that the multinational auto firms were not only interested in seeking market access but also in reducing costs and improving efficiency. Under this new industry context, the success of an export strategy required a regulatory framework that allowed the auto companies to exploit both Mexico’s comparative advantage and their own international networks of production and marketing. This meant ending with such traditional obstacles as production quotas and other restrictions on manufacturing, marketing, and trade that inhibited vehicle assemblers from achieving efficiency in their Mexican automotive production operations. The decree that regulated the automobile and auto parts industry, henceforth the 1989 Auto Decree, permitted for the first time since 1962 the importation of finished vehicles, although they were limited to a quota (which could not exceed 15 percent of vehicle sales) and to the vehicle assemblers’ compliance with a positive trade balance (see Box 9.2). In addition, in order to improve economies of scale, restrictions were removed regarding the number of lines that each firm could assemble. Local-content requirements were reduced, and assembly firms were given the flexibility to decide what parts to buy and where to buy them, which was a major departure from traditional Mexican practices. In addition, vehicle assemblers were allowed to comply with the value-added requirement by purchasing parts from either Mexican parts manufacturers (firms that were at least 60 percent Mexican owned) or Mexican suppliers (firms that were majority foreign owned but not by assembly firms). But the decree still included meaningful protective measures and performance requirements. While reducing local-content requirements, the traditional method of net cost of production was replaced with a value-added provision, set at 36 percent. According to the new local-content measurement mechanism, assembly plant labor and the assemblers’ in-plant materials did not count toward

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the content requirement, only purchased material. Since parts constitute, on average, 70 percent of the cost of a vehicle, the new requirement meant that half the parts must be purchased from Mexican suppliers (APMA 1990: 98). This represented about 10 percent less than the level required in the previous Auto Decree. As already noted, in order to import a limited number of vehicles into Mexico, vehicle manufacturers had to maintain a positive trade balance. A comparison with the Auto Pact safeguards illustrates how tight the requirements of the 1989 Auto Decree still were. For instance, the Mexican positive trade balance requirement that made a producer eligible for imports was tighter than Canada’s production–sales ratios . According to Hufbauer and Schott, the decree only gave credit to vehicles exported from Mexico, whereas the Auto Pact credited Canadian vehicle manufacturers with all production, including automobiles sold in the Canadian market (APMA 1990: 97, as quoted in Hufbauer and Schott 1992: 218). Similarly, the Mexican value-added was more difficult to meet than the Canadian value-added demanded in the Auto Pact. While in the latter all costs were considered to be domestic except for imported components, which counted as foreign, under the Mexican Auto Decree only the domestic content of parts supplied by Mexican suppliers (from either group of suppliers) and those exported by Mexican suppliers through vehicle assemblers counted as domestic (Johnson 1993: fn. 17, 95). Maquiladoras were excluded from national value-added calculations. In the Canadian case, the ownership of parts producers and their value-added levels were irrelevant to determining whether the parts supplied to an assembler were to be included in the assembler’s Canadian value-added (Johnson 1993: 95–6). Vehicle assemblers in Mexico welcomed the liberalization measures introduced by the government, but they also demanded a scheme of protection vis-à-vis non-established auto firms. Again, increased levels of competition in the world industry magnified the importance of protecting single national markets for auto makers. Although still relatively small in the late 1980s, Mexico was a promising market, with high growth potential that was not dominated by the Japanese auto makers. The US Big Three were not interested in opening up the Mexican market, particularly for vehicles, to new competitors and lobbied the Mexican government to adopt a gradual scheme of liberalization. They justified their opposition to a rapid liberalization of the industry arguing, first, that the Mexican market was one of the few with growth potential where the Japanese competition was limited to one company; and, second, that they had to defend the substantial investments made in the last decade which were based on a different regime for the auto industry (see Jenkins 1992: 184; Olea 1993). Some of the pressures exerted by the vehicle assemblers paid off, as by 1989 vehicle assembly was one of the few industrial activities that remained protected in spite of Mexico’s membership of GATT (1987). The Mexican government negotiated an 8-year exemption from tariff reduction in the automobile industry (El Financiero, several issues, March and September 1989). Meanwhile, the Mexican auto parts suppliers also wanted continued protection, by means of high local-content and trade balance requirements, majority Mexican ownership for parts producers, and high tariffs. In 1988, the Mexican government removed

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import permits for auto parts, except for engines, and reduced tariffs to a general level of 15 percent. Tariffs on vehicles remained at 20 percent. The Mexican government’s liberalizing reforms for the automobile industry and the whole economy emerged in a context of domestic economic recession and a growing protectionist attitude in the US Congress that was expressed in the adoption of unilateral policies that affected Mexican exports. Those reforms culminated in the proposal to negotiate the North American Free Trade Agreement that would guarantee access of Mexican products to the US market.

10 A North American system of production

The rationalization and export dynamism experienced by the Canadian and the Mexican auto industries in the 1980s was followed by important regulatory changes that boosted even further the industry modernization. These regulatory changes permitted the US vehicle assemblers to implement fully their new efficiency-seeking strategies, which came to complement their traditional market-seeking strategies. By facilitating the cross-border exchange of automotive products, those regulations permitted automotive producers to rationalize their operations on a North American basis, exploit economies of scale and scope as well as national competitiveness, and therefore reduce production costs. But given the heightened levels of industry competition, the US Big Three also sought defensive strategies to guarantee that their Japanese competitors did not use Mexico or Canada as a production platform to export to the United States. They obtained preferential treatment in the North American Free Trade Agreement (NAFTA). In this, they received US government support. But, in the triangular diplomacy dynamics, the Canadian and the Mexican governments each undertook unilateral policy measures to counterbalance the biases created by the CUSFTA and the NAFTA against non-regional producers.

The North American Free Trade Agreement and the auto industry At the time of the NAFTA negotiations, 95 percent of Canada–US automotive trade was already duty free and it had been so for almost three decades. Since the CUSFTA had also removed the remaining restrictions on free trade in automotive products between Canada and the United States. NAFTA negotiations regarding the auto industry focused on guaranteeing access to the Mexican market, which was the most protected and regulated in North America. Whereas before the implementation of NAFTA a large proportion of Mexican automotive products already entered Canada and the United States duty free, through the Auto Pact, Canada’s General Preferential Tariff (GPT) or the US Generalized System of Preference (GSP), Mexico maintained the highest auto tariffs on a most-favored-nation basis of the three countries – with the exception of US tariff on light trucks, which was 25 percent. Mexican tariffs on vehicles

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were 20 percent and 15 percent for auto parts; those imposed by the United States were 2.5 percent and 3.2 percent respectively; and Canada’s tariff was 9.2 percent (or zero for most auto parts). In addition, Mexico imposed performance requirements on vehicle assemblers that had production operations in the country. Thus, Annex 300-A of NAFTA focused mainly on the liberalization of the Mexican 1989 Auto Decree and the 1990 Auto Decree for Heavy Trucks and Buses. It also included rules of origin for granting automotive products dutyfree movement in the North American region, eliminated both trade tariffs and restrictions to trade of used cars, and modified the US Corporate Average Fuel Efficiency standards. NAFTA also permitted the continuation of the Auto Pact, as modified by the CUSFTA. The negotiations Reaching agreement on the new rules for the North American auto industry was an intricate process, because of the highly politicized and competitive environment that since the late 1970s prevailed in the automotive sector, the strategic value of this sector in the three North American economies, and the participation in the negotiations of very powerful groups with vested and opposing interests. The US Big Three auto makers had an advantageous negotiating position given that they had production and sales operations in the three North American countries, and their automotive output and sales represented a substantial proportion of all industrial activities in the three countries. By contrast, Volkswagen and Nissan did not have production operations in the three countries of the region, although they held a leadership position in the Mexican vehicle market. Toyota and Honda had production operations in both Canada and the United States, and Honda had a plant for the production of motorcycles in Mexico. During the NAFTA negotiations, US vehicle assemblers reproduced similar positions to those that were expressed regarding the 1989 Auto Decree and the CUSFTA. They favored trade and investment liberalization on a regional basis, in order to facilitate further rationalization of their production operations in North America, but they also wanted to defend their production operations and the North American market from non-regional competition. Thus, while demanding the elimination of the Canadian duty-remission programs and the Mexican local-content and export-performance requirements, the US Big Three opposed a complete and immediate liberalization of the Mexican auto industry as well as the removal of the Auto Pact. Their position was justified by the fact that these actions would have permitted non-regional firms, particularly Toyota, to transform Mexico and Canada into production and export platforms of vehicles to the United States. The US Big Three wanted to ensure that nonregional producers committed substantial resources before they were granted unrestricted access to the North American automotive market. It is interesting to note that while the US Big Three agreed with the UAW and CAW in their protectionist demands vis-à-vis nor regional producers, the

A North American system of production 189 North American unions were active opponents to NAFTA, because they believed that it would translate into a major movement of plants and jobs from the United States and Canada to Mexico, so that North American producers could take advantage of low labor costs in Mexico. Together with the Volkswagen and Nissan subsidiaries in Mexico, the US Big Three demanded a gradual liberalization of the Mexican Auto Decrees that would protect their investments made in Mexico during the 1980s. They wanted a period of time to defend their profits in the Mexican market in order to compensate for the additional costs that they had incurred as a result of localcontent and trade balance requirements imposed by previous Mexican Auto Decrees. As explained below, US vehicle assemblers also demanded the adoption of strict North American rules of origin. Similar to its position in the CUSFTA negotiations, the US Big Three proposed establishing different Mexican requirements for two groups of assembly firms. The first group, which would be formed by the US Big Three, Nissan and Volkswagen, would receive the accelerated benefits of a gradual disappearance of the Mexican Auto Decree requirements, and a second group, assembly firms that established production operations in Mexico after January 1991 (MercedesBenz, Honda, Hyundai, Toyota, etc.), that would benefit from the liberalization of the Mexican market after the transition period for the first group was over. This would force the second group to match the substantial investments that the first group had undertaken during the previous decade. They also proposed the immediate elimination of Mexican tariffs on automotive products, but for the second group they recommended the retention of tariffs for 5 years and a phase out over 10 years (Hufbauer and Schott 1992: 232). The US Big Three did not favor changing the status of Mexican production to domestic production for CAFE purposes (Inside US Trade September 23, 1991: S-5), and they also opposed the removal of the Mexican ban on imported vehicles. Ford and General Motors favored the retention of duty drawbacks in the maquiladoras, while US parts companies and the UAW were demanding their elimination. Canada also wanted to have its own duty-drawback program extended. At the time of the NAFTA negotiations, the Canadian government’s position was also influenced by non-US auto makers who had built up their production operations in Canada (Inside US Trade July 31, 1992: 9). The negotiations on rules of origin for the automobile industry became complicated, partly as a result of their technical complexity and partly as a result of the disputes that emerged at the very time of the NAFTA negotiations between Canada and the United States regarding the implementation of the CUSFTA’s rule of origin. The perception in the United States was that the rollup method used in the CUSFTA allowed the transplants in Canada to export vehicles duty free to the US market without actually meeting the 50 percent content requirement. In other words, the transplants were receiving duty-free treatment while still importing major auto parts, such as engines and transmissions, from non-North American sources. According to that method, if the producer acquired a material that was an originating one,1 a North American credit was granted for the entire price of the material, and the value of imported

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submaterials was “rolled up” into that price; if the material was non-originating, its entire price was counted as non-North American, and any North American value-added that it contained was “rolled down” (Johnson 1993: 103). The Automotive Parts Manufacturers’ Association (APMA) provided the following example: a part shipped from the United States to Canada, with a $49 thirdcountry value and a $51 US content, enters duty free into Canada. Then, it is combined with another part that has $80 worth of third-country content. The $180 total value of the component re-enters the US duty free, although only 27 percent of its value is North American (APMA 1991: 111). The Canadian government, for its part, complained against the arbitrary manner in which US customs was applying the rule of origin. The denial by US customs of duty-free treatment to vehicle exports of the Canadian subsidiary of Honda to the United States was the most controversial case. The US customs argued that only the costs of assembly operations regarding major engine assemblies counted as North American, while the cost of other processing operations that were related to engines produced in Ohio did not count. According to US customs, the Honda vehicles had only a 46 percent content level, whereas Honda claimed a 69 percent North American content (North American Report on Free Trade March 9, 1992: 5). While the US Big Three demanded an end to the “roll-up, roll-down” method for calculating regional content used in the CUSFTA, they were split regarding the content level for the rule of origin. Ford and Chrysler were pressing for higher rules of origin, in excess of 70 percent (Johnson 1993: fn. 42, 109), although GM preferred to maintain the 50 percent content for its own operations because a higher requirement would negatively affect CAMI (GM’s joint venture with Suzuki). Volkswagen, Nissan, Toyota, and Honda also opposed a higher regional content requirement. Auto parts producers in the United States and Canada demanded a 75 percent rule of origin, the Mexican producers demanded more protection for their products in the Mexican market; and the UAW and the CAW proposed even higher levels of 80 percent (Inside US Trade October 18, 1991: 1). Canadian and US auto parts manufacturers also asked for tracing (or to trace back in the production chain to determine the foreign content of a vehicle), which was seen as a means of protection against roll-up practices. But, as the UAW, they opposed the “net cost” method and company-wide averaging, because it would allow for greater global sourcing (Inside US Trade June 5, 1992: 8). In their view, only a combination of high content levels and tracing would ensure that non-regional producers included major North American-made parts and components in their automobiles in order to have access to the North American market. Meanwhile, the US Big Three suggested the company-wide rather than the model-by-model average for calculating regional content. “A company-wide average would permit the companies to combine their established US and Canadian production models, which have high local content, with their newer models which have relatively high import content (Financial Times October 25, 1991: 6, as quoted in Hufbauer and Schott 1992: fn. 33, 231). While the US government supported the union and the parts producers’

A North American system of production 191 demand for a higher content requirement, the Canadian government opposed it because it feared that stricter rules of origin would divert investment and production from Canada to the United States. The Mexican government adopted a similar view in favor of lower content levels, but as in the Canadian case auto parts producers were pushing for higher content levels (Inside US Trade November 8, 1991: 7). For the Mexican government, the chief objective in the NAFTA negotiations was to continue the liberalization program that, as with the 1989 Auto Decree, could contribute to the modernization of the Mexican automobile industry. That liberalization would also enable vehicle assemblers and other automotive producers to exploit the comparative and competitive advantages of Mexico’s cheaper but qualified labor. It was expected that the industry’s internationalization would result in more exports, more investment, and more competition, as well as a rationalized system of production and lower prices that would benefit consumers, thus helping to strengthen the domestic market. However, the liberal ideology that prevailed in the Mexican negotiating team was not always reflected in its position during the NAFTA negotiations, as it echoed the demands of both vehicle and parts producers located in Mexico. The total and immediate liberalization of the automotive industry in Mexico would have jeopardized the possibility of attracting new investments. From the vehicle assemblers’ perspective, that option questioned the future legitimacy of the Mexican government to guarantee a responsible regime that would protect the substantial investments that they had undertaken based on the previous regulatory regime. In addition, the total and immediate liberalization of the auto parts sector also put at risk the survival of many established producers in Mexico who needed time to adjust to the new industry’s reality. Annex 300-A NAFTA thus represented a compromise of these diverse and opposing interests and positions: on the one hand, it removed a series of obstacles for the liberalization of intra-regional trade, but on the other hand it contained rules that protected the North American market from non-regional competitors. By permitting the continuation of the Auto Pact, NAFTA perpetuated the two-tier system that had been created in Canada since CUSFTA, and introduced other minor modifications to the previous agreement such as the postponement of the elimination of duty drawbacks on exports to the United States until January 1, 1996. With NAFTA, US tariffs on light trucks were immediately reduced to 10 percent (see Table 10.1) and Mexican tariffs will disappear by 2004. NAFTA guarantees total free trade in the Mexican auto industry by 2018, and a substantial liberalization of the industry by 2004. While the Mexican Auto Decree will disappear in 2004, its requirements will be gradually removed. For instance, rather than including the entire amount of imported parts and components in a trade balance, a vehicle assembler operating in Mexico should include only a percentage, which is progressively reduced until it disappears in 2004 (see Table

50 50 50 50 50 20

Regional content Passenger vehicles Light trucks Medium and heavy trucks Principal components Transmissions and motors National sales of maquiladoras

Source: SECOFI.

20 14 50 50 50 50 50 55

10 10

80.0

34

36

100.0

20

1994

50 50 50 50 50 50 60

9 8

77.2

34

20

1995

Application year

30

Other sides Passenger vehicles duty Auto parts average duty

Trade balance Assemblers

National value-added Auto parts National supplier Assemblers

Requisite

Automotive decree

51 50 50 50 50 50 65

8 6.30

74.4

34

20

1996

53 50 50 50 50 50 70

7 4.50

71

34

20

1997

Table 10.1 Rules of Annex 300-A of NAFTA that apply to Mexico (percent)

54 56 56 55 55 56 75

6 2.60

69

34

20

1998

55 56 56 55 55 56 80

5 2

66

33

20

1999

57 56 56 55 55 56 85

4 1.60

63

32

20

2000

58 56 56 55 55 56 100

3 1

60.5

31

20

2001

60 63 63 60 60 62.50 100

2 0.50

57.7

30

20

2002

0

0.0

0

0

2004

61 62 63 63 63 63 60 60 60 60 63.50 62.50 100 100

1 0

55.0

29

20

2003

A North American system of production 193 10.1). Similarly, the national value-added requirement will be phased out over a 10-year period, whereas that for auto parts suppliers was reduced from 30 percent to 20 percent. Maquiladoras were permitted to qualify as national suppliers, but still cannot be owned by vehicle assemblers; and they were also allowed to sell in the Mexican market a growing proportion of their production. Also, with NAFTA, the method for calculating Mexican value-added became more stringent than the one established in the 1989 Auto Decree, thus affording some protection for the Mexican auto parts industry in the form of more flexible import rules.2 While the Mexican government achieved the objective of not having a two-tier regime in NAFTA for the liberalization of the 1989 Auto Decree, vehicle assemblers that had established production operations in Mexico before 1991 had preferential treatment. They continued enjoying protection in Mexico, first, by placing conditions until 2004 on access to the Mexican vehicle market by vehicle assemblers that set up production operations in the country; second, by extending to 10 years (also to 2004) the phasing-out period for the Mexican performance requirements. For some analysts, this gave the US Big Three sufficient time to adjust and be prepared for the new competition by the time NAFTA rules were fully implemented. These measures would force non-regional producers to invest substantially in Mexico in order to have access to the domestic and the North American market from Mexico. In addition, the provision that, after January 1, 2001, materials imported from third countries have to pay duties when maquiladora products are exported to the United States or Canada is having a substantial effect on maquiladoras owned by non-North American producers. NAFTA also met the US Big Three’s recommendation that the Mexican prohibition on imports of used cars was maintained in order to protect the Mexican new vehicle market. Canadian restrictions on the importation of Mexican used cars and Mexican restrictions on Canadian and US used cars will be phased out over a 10-year period, starting in 2009. The NAFTA rules of origin also gave preferential treatment to US vehicle assemblers. Rules of origin are 62.5 percent for autos, light trucks, engines, and transmissions, and 60 percent for other vehicles and parts. The net cost and tracing method for calculating the rule of origin (counting the foreign content value of a list of sixty-nine specified parts – from engines to mirrors – and then subtracting it from the net cost of the vehicle) resolved the problems related to “roll-up” and made the rule acceptable to those who were demanding a higher rule of origin (Hufbauer and Schott 1993: 40–3). For established manufacturers, the rule of origin starts at 50 percent and gradually rises to 62.5 percent over an 8-year period. New firms have a 5-year period of grace to meet the rule. The Canadian government achieved introducing clearer rules of origin regarding production costs than those contained in CUSFTA. While the NAFTA rules of origin seemed stricter than those contained in CUSFTA, at least the period of grace was granted to both established and non-established producers. Finally, the US vehicle assemblers also attained special treatment in CAFE regulations. According to these rules, a vehicle is considered to be domestic or imported depending on its meeting a 75 percent local-content test. For calculating CAFE, each assembler has a domestic and an imported fleet.

194

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Canadian production was considered domestic, and Mexican production was imported. NAFTA required that Mexican value-added was counted as domestic, but the rule is not obligatory until 2004 for assembly firms producing before 1991 in any North American country. After 1997 and until 2004, producers may chose which rule to apply, thus providing them with sufficient time to adjust their sourcing practices. For assemblers establishing in Mexico after 1991 and assemblers not operating in North America, the new CAFE rule applied when NAFTA came into force (Johnson 1993: 119–20).

The North American industry after NAFTA Making an accurate analysis of the impact of NAFTA on the North American auto-industry is difficult for several reasons. First, in the case of Mexico, the industry’s full liberalization will not be achieved until 2018 (although substantial liberalization will be achieved by 2004). Second, separating the effects of NAFTA from factors such as business cycles and other general macroeconomic conditions, technological changes, environmental and safety regulations, and the restructuring process that started in the late 1970s seems an impossible task. Furthermore, not only was NAFTA negotiated and implemented only a few years after CUSFTA and the 1989 Mexican Auto Decree, but CUSFTA and the Mexican Auto Decree coincided with an economic recession in Canada and the United States while NAFTA overlapped with a booming US market. Taking these limitations into consideration, the following pages present a summary of the auto industry’s behavior in Mexico and Canada for the 1989–97 period. When possible, an attempt is made to discuss the specific impact of either the 1989 Auto Decree or the two free-trade agreements. Using Ford as a case study, the rest of the chapter attempts to evaluate the reciprocal effects of policy measures that liberalized intra-regional trade and the global strategies of the multinational vehicle assemblers. Tables 10.2 and 10.3 present a summary of the auto industry’s behavior in both Canada and Mexico from the late 1980s until 1997. As it operated under a free-trade regime for almost 30 years, the Canadian auto industry did not seem to be particularly affected by CUSFTA and NAFTA. At the time, the 1989 Auto Decree did not seem to have created fundamental changes in the Mexican auto industry. It rather reinforced industry trends that had been set in earlier years, emphasizing those aspects of previous regulations that had encouraged and facilitated the industry’s export success. The sustained and rapid pace of growth of Mexico’s automotive production and trade during the 1989–97 period, and particularly between 1993 and 1997 when Mexico was trying to recover from the financial crisis of December 1994, suggests that the liberalization of the Mexican automotive regulations had a positive impact on the industry. One should also emphasize the fact that Mexico was the most protected and regulated automotive market in North America. Thus, by enabling the expansion of the Mexican automotive trade, NAFTA acted as a cushion against the impact of the 1994 financial crisis. While Mexican vehicle sales fell by more than 70 percent between 1994 and 1995, vehicle

87,940 51,699 36,241

3,805 1,567 2,238

Total industry Motor vehicles Auto parts

2,373 177 2,196

1989

(c) Imports (millions of US dollars)

Total industry Motor vehicles Auto parts

1989

(b) Exports (millions of US dollars)

Total industry Motor vehicles Auto parts

9,468 524 8,944

1993

8,900 4,922 3,928

1993

133,729 93,965 39,764

At 1993 constant prices 1989 1993

(a) GDP (thousands of pesos)

13,024 2,209 10,815

1997

20,782 13,278 6,896

1997

26,081 12,238 11,834

298.0 196.0 307.0

Percentage 1989–93

134.0 214.0 67.5

Percentage 1989–93

30,566 14,294 14,038

At 1980 constant prices 1993 1997

Table 10.2 The Mexican automobile industry’s performance, 1989–97

38.0 322.0 21.0

1993–97

133.5 182.0 73.0

1993–97

52.0 81.7 36.8

Percentage 1989–93

449.0 1148.0 393.0

1989–97

446.0 747.0 208.0

1989–97

17.2 216.0 19.0

1993–7

9.0 0.6 8.4

1989

16.5 6.8 9.7

1989

7.8

1989

13.0

19.0 12.7 6.3

12.0 2.0 10.0 Continued overleaf

15.0 1.0 14.0

Percent total imports 1993 1997

17.0 9.4 7.7

Percent total exports 1993 1997

12.0

Percent manufacturing 1993 1997

443,000 68,665 184,288 162,581

446,900 65,700 175,200 126,473

1993

7,273 3,750 3,523

8,118 3,884 4,234

1994–8 15,391 7,634 7,757

1990–7

460,800 60,800 163,200 167,114

1997 0.9 –4.3 –5.0 –22.2

Percentage 1991–93 3.0 –7.5 –7.0 32.0

1939–97

Source: INEGI, La Industria Automotriz en México (several years); SECOFI, Dirección de Industrias.

Total industry Motor vehicles Auto parts

1990–3

(e) Investment (millions of US dollars)

Total industry Motor vehicles Auto parts Maquiladoras

1989

Table 10.2 continued (d) Employment (number of direct workers)

4.0 –11.5 –11.5 2.8

1989–97 10.5 1.6 4.1 2.7

11.0 1.6 3.6 4.1

Percent manfacturing employment 1993 1997

10,251.50 4,016.40 6,235.10 NA

29,766.86 19,489.84 10,278.00

Total industry Motor vehicles Auto parts

30,705.93 12,686.43 18,017.87

1988

(c) Imports (millions of US dollars)

Total industry Motor vehicles Auto parts

1988

(b) Exports (millions of US dollars)

Total industry Motor vehicles Auto parts Trucks

30,897.67 12,778.30 18,120.16

1993

37,565.89 27,811.63 9,654.26

1993

133,729.00 93,965.00 39,764.00 NA

At 1986 constant prices 1988 1993

(a) GDP (millions of Canadian dollars)

47,778.00 18,204.00 29,638.00

1997

50,500.80 36,885.00 13,883.00

1997

11,784.00 5,381.00 5,931.00 472.00 10.7 4.3 6.5

34.4 32.6 43.8

0.6 0.7 0.6

54.6 42.4 63.6

Percent change 1988–93 1993–7

26.3 42.3 -6.0

12.6 5.9 6.7

22.5 14.9 7.7

55.6 43.5 64.5

23.9 9.9 14.2

As percente of total imports 1988–97 1988

69.7 89.3 35.1

As percent of total exports 1988–97 1988

11.4 4.5 6.9

As percent of manufacturing GDP 1988 1993 1997

Percent change 1988–93 1993–7

15,357.00 6,407.00 8,198.00 752.00

At 1992 constant prices 1993 1997

Table10.3 The Canadian automobile industry’s performance, 1988–97

20.0 7.6 12.4

1997

20.2 14.8 5.5

1997

Continued overleaf

18.3 7.6 10.8

1993

22.2 16.4 5.8

1993

162.30 68.00 94.30

137.20 61.50 75.70

1993

10,536.00 6,718.87 3,817.04

100 64 36

Percent

Source: Harbour and Associates (several years).

Total industry Motor vehicles Auto parts

1989–93

(e) Investment (millions of Canadian dollars)

Total industry Motor vehicles Auto parts

1988

Table 10.3 continued (d) Number of employees

18,604.00 8,676.00 9,928.00

1993–7

159.00 67.00 92.00

1997

100.00 46.64 53.36

Percent 29,140.00 15,395.00 13,745.00

1989–97 100.00 52.83 47.16

Percent

A North American system of production 199 production only dropped by 15 percent over the same period. Vehicle production showed a rapid recovery in the following years, reaching 1,414,000 units, a historic record level that represented 8.4 percent of total North American vehicle production (compared with 4.7 in 1989 and 2.8 percent in 1985). This was also reflected in the industry’s output, as shown in Table 10.2. Although employment in the assembly and the auto parts sector contracted between 1989 and 1997, the impressive growth in the maquiladora employment between 1993 and 1997 actually led to a modest 4 percent growth in the industry’s employment over the same period. A similar situation unfolded in the Canadian case. As already noted, the year when CUSFTA was implemented coincided with the start of a cyclical downturn and a deep recession in the North American automobile industry. Between 1989 and 1993, the industry’s output barely increased – measured in constant prices – and employment actually dropped about 15 percent (or 18,000 jobs), most of which took place as a result of the rationalization in the auto parts sector (see Table 10.3). Canadian vehicle sales also dropped between 1988 and 1995, falling from an all-time record high of 1,400,000 units to 1,140,000. Between 1988 and 1992, fifty-four automotive parts firms closed their Canadian operations, most of which was the result of consolidation with US facilities.3 But, as in the Mexican case, vehicle production continued to rise owing to an important expansion in vehicle exports in 1988–97 (see Figures 10.1–3). The substantial investments made by vehicle assemblers in the Mexican auto industry between 1990 and 1993 ($7.3 billion in total) were driven both by the rationalization strategies which expected to reduce drastically production costs and by prospects of significant growth in the Mexican demand for automobiles. By offering a framework of clear rules for the Mexican auto industry’s liberalization, NAFTA provided automotive producers with the certainty necessary for designing and implementing long-term decisions regarding their Mexican operations. As shown in Table 10.2, investments in the Mexican auto industry amounted to over $8 billion during the 1994–97 period, divided almost equally between the assembly and the auto parts sectors. Canada also attracted significant investments to expand its automotive output. Total capital expenditures in vehicles assembly and auto parts in the 1988–97 period totaled $23.5 billion. As a result, after the economic slump of 1990–2, for 5 years beginning in 1993, the Canadian automobile industry also grew at record levels. Nonetheless, Canada and Mexico were lagging behind the United States and other countries in terms of attracting automotive investments. According to one estimate, between July 1995 and June 1997, markets receiving the most automotive investment were the United States, Brazil, India, and China, with Canada and Mexico ranking ninth and tenth respectively (OAA 1999: 5). Mexican investments for 1994–8 represented only about 40 percent of those invested in the US auto industry for the 1993–6 period. These data should dispel the concerns expressed by US and Canadian labor unions regarding the potential massive movement of production plants and investment to Mexico. Furthermore, according to a report by the US trade representative,

200

A North American system of production

Figure 10.1 Vehicle production and exports in Mexico and Canada, 1960–97 (units). Source: Table A2.4 in Appendix 2 and Table A3.3 in Appendix 3.

Figure 10.2 North American vehicle production–sales ratio, 1960–97 (percent). Source: Table A2.4 in Appendix 2 and Table A3.3 in Appendix 3.

By lowering Mexican local content and trade balancing requirements during the period, NAFTA automotive provisions have stimulated investment in the US market that might otherwise have gone to Mexico. (OAA 1999: 5)

A North American system of production 201

Figure 10.3 Automotive exports as a share of total exports in Canada and Mexico, 1961– 97 (percent). Source: Table A2.7 in Appendix 2 and Table A3.6 in Appendix 3.

A more far-reaching effect of the liberalization policies was the progress made toward integrating the Mexican auto industry into the auto industries in the United States and, to lesser extent, in Canada. The consequent growth in crossborder industry integration was reflected in higher levels of intra-industry trade or two-way trade flows in vehicles between Mexico and the United States, on the one hand, and the United States and Canada, on the other hand. Total exports of Mexican-assembled vehicles, 95 percent of which went to the United States or Canada, increased by more than five times between 1989 and 1997, reaching a million units in 1997 with a value of close to $10 billion (see Figure 10.4). Despite the contraction in the Mexican market and because of NAFTA, US vehicle exports to Mexico continued to grow, as shown in Table 10.3.4 Although small, this trade has made Mexico the second most important international motor vehicle market for the United States. Vehicle exports from Canada to the United States also increased in a significant way and doubled in value between 1988 and 1997, with the United States maintaining a deficit. US vehicle exports to Canada dropped slightly, but they increased in US dollar values by about $1.3 billion. Thus, in 1997 Mexico and Canada’s share of total North American vehicle production reached unprecedented levels of 16.2 percent and 8.4 percent, respectively, but represented 8.4 and 2.9 percent of North American vehicle sales respectively. In 1985, those figures for production were 13.8 percent and 2.8 percent, and for sales 8.8 and 2.2 respectively (see Table A3.15 in Appendix 3). As a result of the industry’s rationalization process, since 1994 Mexico has exhibited vehicle specialization patterns that were similar to those found in Canada, with higher shares of mid-size cars, pick-up trucks, and other utility vehicles (although Canada also produces full-sized cars). However, while most products in Canada were at the time solely sourced for export to the US market

202

A North American system of production

Figure 10.4 Mexico’s vehicle production, exports, sales and imports, 1989–97 (units). Source: Table A3.3 in Appendix 3.

(with the exception of Honda Civic, Dodge Intrepid, Chrysler minivans, and Ford and GM pick-up trucks), only some products in Mexico were in that category. These were Ford Contour, Mercury Mystique, Nissan Sentra, and Volkswagen’s New Beetle (see Table A3.16 in Appendix 3). While intra-industry trade and specialization are most evident and most easily identified in vehicles and major components (Kumar and Holmes 1998: 146), they are more difficult to assess with regard to smaller auto parts (see Figure 10.5). Table A3.19 in Appendix 3 shows that trade flows in auto parts within North America have increased. Auto parts exports from the United States to both Mexico and Canada increased, even during periods when these countries faced an economic slump. The growth of US auto parts exports to Canada was particularly impressive, as they reached $26.3 billion in 1997, compared with $16.5 billion in 1988. The expansion of US imports of Canadian and especially Mexican auto parts was also dramatic, according to data from the Office of Automotive Affairs of the US Department of Commerce. In 1999, US automotive imports from Mexico reached $16.8 billion, which represented about 27 percent of US total automotive parts – compared with $7.5 billion and 19 percent in 1993. The figure for 1999 was roughly the same as that registered for Canada, which has been traditionally the most important automotive trading partner of the United States (see Table A3.19 in Appendix 3). Mexico has become the main supplier to the United States of axles and external parts for tractors, seat belts, wire harnesses, windshield wipers, and steering wheels, and other parts that are labor intensive and have low technological content. Many of these parts are assembled in maquiladora plants established mainly in northern Mexico. Maquiladoras are a symbol of specialization and cross-border integration as they allow US firms to take advantage of low labor costs in Mexico, using imports produced in their own

A North American system of production 203

Figure 10.5 Auto parts net balance in Mexico and Canada, 1971–97 (thousands of dollars). Source: Tables A2.7 and A2.8 in Appendix 2 and Tables A3.6 and a3.7 in Appendix 3.

country, and paying trade tariffs on Mexican value-added. Mexican official data, which significantly digress from those provided by US official statistical sources, show that automotive exports assembled in maquiladora plants registered a significant expansion in dollar values, from $2.4 billion in 1993 to $4.1 billion in 1997 – although they continued to account for about 60 percent of total auto parts exports from Mexico. It is important to underscore that this expansion would have taken place regardless of NAFTA, because of the peso devaluation and the booming US automotive demand. Specialization patterns are more complex, as Mexico has also become a key supplier of certain high-technology, capital-intensive parts, such as engines and engine parts, big stampings and transmissions for specific models that are assembled throughout North America. Like Canada and the United States, Mexico also imports engines and engine parts from these countries to supply specialized vehicle assembly plants. Between 1993 and 1997, for example, the dollar values of Mexican engine exports increased from $1.5 billion to $2.5 billion, and those of engine imports increased from $400 million to $2.5 billion. In 1996, Canada imported 1.2 million engines from the United States and over 160,000 from Mexico, and exported close to 900,000 engines to the United States and only a few hundred to Mexico (Kumar and Holmes 1998: 147). While concerns have been raised that “Mexico has replaced Canada as the continental industry’s least-cost production site – a competitive advantage enjoyed by Canada for close to 30 years under the Auto Pact” (Kumar and Holmes 1998: 115), the Canadian auto parts sector exhibited a dynamic growth since 1993, as shown in the sector’s GDP growth in Table 10.3. Although its share of Canadian and US automotive parts has remained the same at around 10 percent since 1985, “Canada’s share of OEM (Original Equipment) parts sales grew from 12.7 percent in 1986 to 17.6 percent in 1995” (APMA 1997: 14–15, as quoted in Kumar and Holmes 1998: 120). Indeed the potential loss of new investment in parts plants in the United States seems to be higher than in Mexico.

204

A North American system of production

The US Big Three’s integration strategies As explained in Chapter 9, in the mid-1980s, with their investments first in engines and maquiladora plants and then state-of-the-art vehicle assembly plants, the US Big Three had established a trend of specialization, intra-industry and intra-company trade. Those investments reflected the companies’ broader worldwide strategic choices for organizing production and marketing. In the aftermath of the 1989 Auto Decree and the prospects of NAFTA, the US Big Three started to capitalize on previous investments and earmarked other investments for modernizing older plants established in central Mexico, which had been used to serve primarily the domestic market. By being a more comprehensive agreement than the Auto Pact, CUSFTA removed obstacles, particularly uncertainty, that were previously faced by vehicle producers in order to achieve a full rationalization of their Canadian and US operations. Proof of the high levels of cross-border integration between Canada and the United States in automotive production were two facts: first, that most vehicles produced by the US Big Three in Canada in the late 1990s were solely sourced for North America, and second, that six of the twenty best-selling vehicles in the US market were produced in Canadian assembly plants (Ward’s Communications 1997: 117). US vehicle assemblers invested in the Mexican auto industry based on the expectation that the industry’s liberalization and a growing Mexican market demand would enable the implementation of their strategies of differentiating and rationalizing production on a North American basis. Between 1993 and 1996, the Big Three increased their operating capacity in the United States by 490,000 units (to a total of 11 million vehicles), compared with 240,000 units in Mexico, which in total reached 838,000 units in 1996 (OAA 2000: 5). A depressed Mexican market frustrated the expectations for growth, and in consequence Mexican vehicle assembly plants exhibited lower capacity utilization levels (or the proportion of vehicles produced each year relative to the plant’s designed capability to produce them) than plants in the United States.5 Exceptions were plants that produced light trucks and utility vehicles, exports of which were encouraged by the favorable US tariff rate stipulated in the NAFTA (see Table A3.18 in Appendix 3).6 By 1998, exports of Mexican-built light trucks represented about one-third of all vehicles exported to the United States and Canada, compared with 8 percent in 1993 (OAA 1999: 2). These exports helped to fill the overwhelming US demand for those vehicles and to limit retail price increases in the United States. As already noted, Ford Hermosillo (1987) was the first state-of-the-art vehicle assembly plant that was established in northern Mexico. In 1995, Chrysler also opened a new modern truck plant in Saltillo and GM replaced its old Mexico City plant, which operated with obsolete technology, with a new plant in Silao, Guanajuato, that is dedicated to production of utility vehicles. The construction of stamping facilities, adjacent to all of these modern vehicle assembly plants, represented a major change from past practices. Vehicle assemblers did not locate stamping plants in Mexico mainly for two reasons. First, stamping presses are very expensive and thus require high production volumes to be cost-effective.

A North American system of production 205 The high cost of the stamping presses did not justify locating them in the lowvolume Mexican market. Second, quality is essential for stamping parts, because they represent the exterior of a car. The poor quality and high cost of certain key inputs, such as steel, in Mexico deterred auto makers from locating that type of plant there (particularly large stampings). The industry’s trade liberalization removed these two obstacles. While not all vehicle assembly plants are highly automated (for instance Chrysler’s plant in Saltillo has only six robots in body framing), they all implement broad lean-manufacturing techniques and have a high level of worker involvement in continuous improvement. The US Big Three also continued their modernization projects in Canada. In 1990, Ford allocated $2.4 billion to start the production of a new minivan and to modernize its engine plants. In 1994, Chrysler started a complete renovation of its Bramalea, Ontario, car plant that included an expanded body shop and paint operation in order to start production of the new 1996 model small vans in 1996. The US Big Three also continued to expand their component operations in Canada. The overall production–sales value ratios achieved by the Auto Pact companies registered record high levels in the 1990s (between 200 and 250 percent), and CVA levels fluctuated sharply on a yearly basis, but maintained an average of 76 percent (see Tables A2.10 and A2.11 in Appendix 2). The rationalization strategies of the US Big Three guaranteed the profitability of the vehicle assemblers’ Mexican operations. By focusing on the production of only a limited number of vehicles for both the Mexican and the North American markets, the Mexican plants contributed to enhancing economies of scale and quality and to reducing the costs associated with producing only for the smallvehicle market in Mexico. The domestic market was then supplemented with vehicles more efficiently produced elsewhere. Furthermore, what was not sold in Mexico could be exported, thus increasing economies of scale and reducing production costs. NAFTA, and the booming US vehicle demand after 1993, provided the US Big Three with greater flexibility to implement fully their integration approach. They coped better than their competitors with the Mexican financial crisis of December 1994, because they were able to export more cars and import more high-profit and efficiently produced vehicles (see Figures 10.6 and 10.7 for proportion imports, exports, sales, and production of the US Big Three). Indeed, despite the drastic fall in domestic vehicle sales, in 1995 Chrysler actually reported a profit, and Ford and GM broke about even; they also managed to gain domestic market share, and accounted for about 90 percent of imported cars and trucks, which represented about 15 percent of the Mexican vehicle market. Furthermore, the drastic decline of the small-car segment translated into big financial losses for Volkswagen and Nissan, which were leaders in that segment. The combined losses of these companies was about a half billion dollars (Ward’s Communications 1996: 107). Non-regional producers (Volkswagen and Nissan in Mexico and Toyota and Honda in Canada) were at a relative disadvantage vis-à-vis the US Big Three for two main inter-related reasons. They did not count in vehicle production operations in the three countries, as the Big Three did when NAFTA was

206

A North American system of production

Figure 10.6 The US Big Three’s production and export shares in Mexico and Canada, 1960–97 (percent). Source: Tables A2.12 and A2.14 in Appendix 2 and Tables A3.10 and A3.12 in Appendix 3.

Figure 10.7 The US Big Three’s sales and import shares in Mexico and Canada, 1960–97 (percent). Source: Tables A2.13 and A2.15 in Appendix 2 and Table A3.9 in Appendix 3.

implemented, and their suppliers were located outside of the region. Those companies could not take advantage, at least immediately, of NAFTA to rationalize their North American operations. Since 1988, when the company closed its US production operations, Volkswagen of Mexico became the only subsidiary that produced vehicles in North America. Although Nissan has a

A North American system of production 207 vehicle assembly plant in Smyrna, Tennessee, and two more in Mexico (Aguascalientes and Cuernavaca), it does not have one in Canada. Toyota has plants both in Canada and the United States, but not in Mexico. After investing in a new vehicle assembly plant in Mexico that came on-line in late 1995, Honda now has production operations in the three countries, but it does not export to the United States and Canada from Mexico. In the late 1980s, in response to the new Mexican regulations, Volkswagen and Nissan also made significant investments of $1 billion and $1.5 billion respectively (ECLAC 1995: 50; see also Ward’s Communications 1994). These investments were a response to the competitive moves of US vehicle assemblers. Volkswagen modernized its Puebla complex and earmarked another $1 billion for the development of the New Beetle, which is produced in Mexico for world markets; Nissan opened a new modern vehicle assembly plant in Aguascalientes (1993) and then earmarked about $800 in a 4-year project that began in 1994 for transferring production of the Sentra from the United States to Mexico. In Canada, Toyota also expanded its Canadian vehicle capacity to start production of the Camry Solara; and Honda doubled capacity at its Alliston, Ontario, plant to start building the Odyssey mid-size van (Ward’s Communications 1999: 134). Investments made by new entrants in Mexico responded to the NAFTA requirement that vehicle assemblers had to set up production operations in order to have access to the Mexican market or to the US or Canadian markets from Mexico. This was the case for Honda, Mercedes-Benz, and BMW, which set up low-volume plants to assemble luxury vehicles with completely-knockeddown (CKD) kits in El Salto Jalisco (1995), Toluca (1995), and Santiago Tianguistengo (1994), respectively, and for a number of heavy truck, trailer and bus producers.7 Also, two companies shut down their plants in Canada – Hyundai (1993), which closed partly because of NAFTA’s stricter rules of origin, and Volvo (1998), which had a partial knocked down assembly and had Auto Pact status. Non-regional vehicle assemblers that were established in North America also sought the rationalization of their vehicle operations, but the geographic distance raised the cost of that strategy. In Mexico, for instance, Volkswagen imported cars from Germany and Brazil and Nissan imported cars from Japan. Asian producers also faced political barriers to trade, mainly because of the Canadian and US labor unions’ opposition to imports coming from Asian countries and the Mexican maquiladoras. While Toyota and Honda have reduced the number of vehicle imports into Canada and the United States over the past decade or so, they continued importing auto parts from outside of the region. In addition, and as explained above, CUSFTA and NAFTA put non-regional vehicle assemblers in a disadvantageous position vis-à-vis the US Big Three because they had to pay the MFN tariff on the vehicles and parts that they imported from third countries to either Canada or Mexico. The US Big Three, which held Auto Pact status, continued importing duty-free vehicles and original equipment parts into Canada from any country in the world, while Toyota and Honda had to pay Canadian MFN tariffs (even if their CVA and production– sales ratios were growing and becoming equal to those of the Auto Pact

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manufacturers). Their Canadian operations were also at a disadvantage vis-àvis their US operations, owing to Canada’s MFN tariff rates on original equipment parts being higher than those in the United States (in 1996, 8 percent versus 2. 5 percent, and many parts were imported duty free into the United States because they entered through foreign trade zones). In order to correct these inequalities, in December 1993 the Canadian government reduced duties on selected imported auto parts and then in December 1995 removed all duties paid on imported auto parts. This policy measure was associated with Toyota’s decision in 1993 to establish an engine facility in Canada, and Honda’s expansion of its assembly capacity at Alliston for the production of a new van in 1996 (Harbour and Associates 1996: 5; Ward’s Communications 1997: 118; Industry Canada 1998: 28). The non-Auto Pact manufacturers also demanded equal treatment vis-à-vis the US Big Three for duties on imported vehicles. The former depended on imports from Japan to offer a full range of models to North American consumers, but in 1999 they had to pay a 6.1 percent tariff on those imports into Canada (the tariff was 7.3 percent in 1997 and 6.7 in 1998). Meanwhile, the Auto Pact companies could import vehicles duty free from third countries, including Mexico. In this way, the US Big Three saved about $250 per vehicle imported and maximized efficiency in their North American production capacity. Some analysts have argued that the Auto Pact benefits for the US companies were really small since the number of vehicles that the US Big Three imported during the 1990s from third countries was fairly small (Ford imported Jaguars and GM Saabs). One should point out, however, that the Auto Pact’s importance for the US Big Three lay in the cost it added to business for Toyota and Honda. In 2000, the Japanese and European vehicle assemblers were able to challenge successfully, at the World Trade Organization, Canada’s policy of maintaining the MFN tariff levels on vehicles that Toyota and Honda were importing into Canada. The US Big Three, the Canadian Auto Workers and the Auto Parts Manufacturer’s Association backed such a policy. Mexico also undertook actions aimed at compensating non-regional producers for their relative disadvantage vis-à-vis US producers in North America. One such action was the ban, until 1993, on importing subcompact cars into Mexico, which aimed to protect the substantial investments that had been made by Volkswagen and Nissan in the late 1980s. In 1996, Volkswagen received a special concession to pay a 9 percent preferential tariff on the importation of vehicles into Mexico in exchange for a $1 billion investment to turn its Puebla assembly plant into the sole world source of the New Beetle. This policy measure was challenged by other vehicle assemblers, including Nissan and Mercedes-Benz, which did not receive the same preferential treatment. In addition, the Mexican government negotiated free-trade agreements with the European Union and other countries, as well as an automotive agreement with Brazil that granted concessions in the reduction of the MFN tariff for vehicles.8 While all vehicle assemblers benefited from these agreements, the immediate beneficiary was Volkswagen, as those agreements made it cost-effective to rationalize its operations on a global basis: the company imported the Pointer from Brazil,

A North American system of production 209 and some luxury products, such as the Audi A4 and A6 and the Passat, as well as key auto parts from Germany. Finally, the Mexican government designed programs to allow the importation of auto parts at a preferential rate, from 0 percent to 3 percent for a list of parts that entered Mexico duty free through the maquiladora program before January 1, 2001. After this date, the modifications introduced by NAFTA to the maquiladora regime have forced producers to pay duties (on average 13 percent) on imported inputs from non-regional sources, if the final assembly product was sold in the United States or Canada.

Ford’s North American strategy As explained in Chapter 6, when it opened the Hermosillo vehicle assembly plant, Ford moved before any other vehicle assembler in integrating its Mexican operations into the company’s regional and global strategy. The plant made a key contribution to complement Ford’s offer in the US subcompact market segment, as it supplied about 40 percent of Ford’s sales of the Escort in the United States (see Table 10.4). In response to the 1989 Auto Decree, Ford invested $350 million to improve its export operations in Hermosillo and to start producing the new Tracer model, which with the Escort were at the time the only two models that Ford exported from Mexico to the US and Canadian markets. New capacity increased from 130,000 to 170,000 cars per year, or forty vehicles per hour; the number of robots increased from ninety-four to 120; and the number of workers increased from 1,000 to 2,300 (Micheli 1990: 200–1; Morales 1994: 132). In 1990, Ford announced a major investment in an upgrading program that focused on Ford’s engine assembly operation in Chihuahua for production of its most modern engine, the Zetec, which was also produced in Cleveland, Ohio. The plant was closed for 2.5 years for upgrading and reached an output of 450,000 engines per year in 1995. After NAFTA took effect, Ford continued with the modernization program of its Mexican operations. The agreement forced Ford to bring its Cuautitlán plant, which had been designed mainly to serve the domestic market, into the company’s global strategy. Starting in 1995, significant investments were made in automation and overall modernization of Cuautitlán, so that it could produce the Ford Contour and the Mercury Mystique – Ford’s global cars – which would be destined for the Mexican and the US and Canadian markets. The cars used the newest Ford engine Zetec, with other major components, such as transaxles, major body panels, and steering components from the United States (El Financiero, January 10, 1993: 2; Ward’s Communications 1993). With these investments, Ford’s Mexican operations shifted from operating on a stand-alone basis to becoming an integral part of the company’s “globalcar” strategy. Using the Canadian subsidiary as a model, Ford Mexico became a sales and marketing company that also handled local issues, such as labor, finance, and industrial relations. By 1995, manufacturing in Mexico was supervised by Ford Automotive Operations. Other functions, including purchasing, engineering, and computer systems, also shifted from Mexico to Ford’s headquarters.

213,010

71,061

494,829 723,903 695,630

Windstar

F-series

Ford GM Chrysler 13.25 16.82 8.32

11.21

–

– –

Source: author’s calculations based on Ward’s Communications (1994, 1998).

100,316 110,442

Canada Grand Marquis Crown Victoria

5.79 3.81 14.36

Others (Cougar, Ghia, Grand Marquis, Thunderbird, Topaz) 28,651 Ford 216,326 GM 163,981 Chrysler 243,151

149,281 149,281 73,356 161,738

5.41

34,339

15.64

28.52 –

F-series

89,031 60,250

Prodn/ US prodn (%)

4,055

89,031 60,250

Exports

Contour Mystique

Mexico Escort Tracer

Prodn

1994

12.78 14.48 31.56

11.52

171.89

103.81 107.18

3.86 1.47 7.34

26.42 105.21

Exports/ US sales (%)

630,829 304,161 423,169

109,526

292,687

118,453 110,163

253,071 300,900 335,766

73,400

41,978 4,658

129,407 3,628

Prodn

1997

192,729 209,462 284,757

40,672

22,700 5,814

119,915 3,628

Exports

17.93 7.11 24.81

15.74

–

– –

7.19 4.90 19.69

1.10

30.79 10.71

54.15 9.43

16.35 6.42 18.37

15.42

142.53

108.14 102.12

5.00 4.42 12.36

5.73

15.03 14.17

42.24 8.32

Prodn/ Exports/ US prodn (%) US sales (%)

Table 10.4 Ford’s production and exports in Mexico and Canada, by line or model (as a percentage of US production and sales)

A North American system of production 211 Ford’s strategy in Mexico is the most extreme example of an integration strategy of the Mexican operations into a North American system of automotive production. Following the strategy that was implemented in Canada after 1965, since 1994 Ford Mexico has focused on producing a very limited number of lines and models (Escort and Tracer, Contour and Mystique, and F-series) and imported the rest of its products from the United States and Canada in order to meet Mexican demand. Ford ceased assembly of luxury cars such as the Cougar and Thunderbird in Mexico (they were consolidated in Lorrain, Ohio; the Grand Marquis was moved to its plant in St Thomas, Ontario), and entered the lower end of the Mexican market by selling its Escort Tracer, a number of which began to be imported from the Ford plant in Wayne, Michigan, in 1994. Through imports, by 1997 Ford was offering all the models in Mexico that it sold in the US market. Also, the company became the largest importer of finished vehicles, over one-third of all vehicles imported each year into Mexico, including Fiestas, Escorts, Thunderbird/Cougars, Lincoln Mark VIIIs and town cars, pick-ups, Ranger and Explorer, as well as Jaguars (compare Figures 10.8 and 10.9). After CUSFTA, Ford followed a similar strategy in Canada, limiting even further the number of vehicles that had been produced there: the Windstar at the Oakville plant, the F-series at the Ontario truck plant, and the Grand Marquis and the Crown Victoria at the St Thomas plant. During the 1989–93 period, Ford started a major investment program to expand, modernize, and introduce new products into its Canadian plant facilities. Between 1990 and 1994, Ford allocated a $2.4 billion investment in Canada to produce a new minivan (Windstar) at Ford’s Oakville assembly plant, to include paint facilities at the Ontario truck plant, to retool St Thomas for the production of the new 1992 Ford Crown Victoria and Mercury Grand Marquis, and to overhaul the Windsor Engine Plant Two for production of a new family of modular engines beginning in 1995. Besides expanding its engine and aluminum plants at Essex and Windsor, in 1994 Ford opened an aluminum engine casting plant in Windsor to produce V6 engines for the Mystique, the Contour, and the Mondeo; the new 3.4-liter aluminum V8 for the 1997 Ford Taurus; and the 4.6-liter V8 for the 1995 Lincoln Continental (Automotive News May 2, 1994). Ford’s investments during that period exceeded not only those of all other automobile companies established in Canada, but also all of the other vehicle assemblers combined (Ford of Canada’s Annual Report 1994). Since the mid-1980s, Ford’s vehicle exports production in Canada and Mexico expanded considerably (see Figure 10.10). Between 1991 and 1997, on average, the proportion of vehicles that Ford exported from Mexico in relation to the company’s output was 77 percent, which compares with 89 percent for Ford Canada. Ford’s production–sales ratios in Mexico also increased substantially, passing from 1:1 in the mid-1980s to more than 2:1, surpassing levels registered by the Ford subsidiary in Canada and those achieved by GM in Mexico (Figure 10.11). As explained in Chapter 7, these data indicate Ford’s transition from a market-seeking to an efficiency-seeking strategy in Mexico. Other factors besides NAFTA influenced Ford’s location and sourcing decisions. One such factors was the competitiveness of the automotive industries

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A North American system of production

Figure 10.8 Ford’s operations in Mexico, 1952–97 (units). Source: Tables A3.9, A3.10, and A3.12 in Appendix 3.

Figure 10.9 Ford’s operations in Canada, 1957–97 (units). Source: Tables A2.12, A2.13, A2.14, and A2.15 in Appendix 2.

in Canada and Mexico. Besides their unlimited access and geographic proximity to the largest vehicle market in the world, the combination of a high-quality work force and low labor costs also endow Mexico and Canada with a key competitive advantage in automotive production vis-à-vis the United States. Exchange rate considerations were also a key factor. In relation to the US dollar, the Canadian dollar registered a relatively low value for most of the 1990s. The Canadian work force is highly skilled and Canadian plants are often more

A North American system of production 213

Figure 10.10 Ford’s production–sales ratio in Mexico and Canada, 1974–96 (percent). Source: Table A3.13 in Appendix 3.

Figure 10.11 GM’s production–sales ratio in Mexico and Canada, 1974–97 (percent). Source: Table A3.14 in Appendix 3.

productive than their US and Mexican counterparts (Industry Canada 1998: 5). Overall, in the late 1990s Canada had a 30 percent advantage over the United States in direct labor costs per hour, and a 5 percent productivity advantage (Industry Canada 1997: 8). Labor costs of the US Big Three assembly plants in Canada were about 25 percent cheaper than those in the United States, and 40 percent of that advantage was due to the government-funded health-care system.9 From the vehicle assemblers’ perspective, this cost advantage and the quality of labor compensates for the high level of unionization that exists in Canada, particularly in the vehicle assembly sector, and the Canadian Auto Workers (CAW) strong and progressive stance.10 An auto industry that was forced

214

A North American system of production

to become lean in the late 1980s and early 1990s was also an additional incentive for attracting more investments. Largely because of the recurrent economic crisis and devaluations of the peso vis-à-vis the US dollar as well as the deep industrial restructuring, Mexican salaries fell continuously since the 1970s. According to one estimate, the remuneration (wages plus benefits) for workers in the auto sector in the United States was $26.56 per hour in 1994, the latest year for which data are publicly available, and in Mexico it was $4.05. Those salaries do not reflect productivity improvements, which have also derived from the transformation that the auto industry has experienced since the 1980s. As explained in Chapter 9, the flexibility provided by weak labor unions in Mexico has also been seen as a positive factor for vehicle assemblers that have faced reluctance on the part of North American unions to change work rules. Nonetheless, the fact that Ford Mexico’s vehicle output was similar to that of Brazil in the 1990s, despite these labor conditions and NAFTA, proves that Ford’s investments in Mexico were also based on the expectation of a rapid growth in the domestic vehicle market – and were not driven only by the need to reduce costs.11 Following the logic of triangular diplomacy, US regulations also affected Ford’s sourcing decisions in North America. In 1991, when Ford was close to noncompliance with the federal standards set by the US Corporate Average Fuel Economy Act, the company shifted production of its Grand Marquis and Crown Victoria to Canada. At the time, 25 percent of the parts contained in those cars were from non-US or Canadian sources, so that they could qualify as foreign cars and did not affect the fuel economy of Ford’s passenger fleet. Similarly, rather than sourcing 75 percent of the parts for the vehicles assembled at Hermosillo from Japan, as it used to do, in 1990 Ford shifted to US suppliers, largely because of CAFE, which stated this percentage as the minimum national (US or Canadian) content requirement to qualify as a domestic car. Approximately 15 percent of the parts came from Japan and only 5 percent from Mexico. In 1994, by shifting production of the rear axle used in the cars from Mexico to the United States, the Crown Victoria and Grand Marquis returned as domestic models. Ford made this move in order to comply with the new US auto labeling law that required auto makers to disclose domestic (US or Canadian) content information on vehicle stickers. The company also argued that the improvement achieved in the fuel economy of its passenger car fleet allowed that change. While Mexico and Canada made important contributions to Ford’s global strategy, either by means of lower production costs or assisting Ford in complying with US regulations, the company’s performance in those countries during the 1990s was poor. To start with, Ford made several mistakes regarding its product strategy. For instance, the combined capacity utilization of its two Mexican vehicle assembly plants averaged, between 1993 and 1998, 50 percent primarily as a result of the low demand that existed in the US market for the models that were produced there (Table A3.18 in Appendix 3). As explained in Chapter 7, the global cars (Contour and Mystique) were a market failure. Nonetheless, Ford’s US plants where those models were assembled exceeded 70 percent

A North American system of production 215 capacity utilization, which suggests that Ford’s plants in Mexico were also expected to fill a growing domestic demand. Indeed, according to company sources, the large proportion of production that was oriented to export markets (about 70 percent) was inadequate to promote future auto investments in Mexico, as the expectation was that the ratio of domestic and export sales should be 60:40. In addition, Ford failed to introduce more popular products in Mexico. Unlike GM, Ford did not introduce a small car in Mexico until 1998, when Ford imported the Fiesta from England. The small market segment, which constitutes more than a half of the Mexican vehicle market, had been traditionally dominated by Volkswagen and Nissan until 1994, when GM introduced the Chevy Joy and Swing models (variations of the Spanish-built Opel Corsa). Thanks, in large part, to that strategic move, by 1996 GM became the sales leader in Mexico, with over 25 percent share of the market compared with only 18 percent in 1994 (see Figure 10.12). The loss of Ford’s leadership in exports in both Canada and Mexico was also related to the company’s failure to invest in building products that could meet the competition in the marketplace. For instance, in the 1980s both Chrysler and GM had begun producing vans in Canada, a segment that registered the fastest rates of growth, while Ford did not start production of the Windstar until 1994. While GM’s and Chrysler’s new vehicle assembly plants in Mexico were producing sports utility vehicles for export markets, Ford decided not to produce these products – which were in high demand – in Mexico until 1996, when the subsidiary started to build and export F-250 and F-350 trucks. At that time, Chrysler’s and GM’s truck plants in Mexico were running at a combined capacity utilization rate of 120 percent (see Table A3.18 in Appendix 3). Ford’s loss of competitiveness and strategic mistakes in Mexico and Canada partly derived from a centralized decision-making process that was exacerbated

Figure 10.12 Ford’s and GM’s production and sales in Mexico, 1960–97 (units). Source: Tables A3.9 and A3.10 in Appendix 3.

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by Ford 2000. As explained in Chapter 7, Jac Nasser’s reforms to Ford 2000 aimed at creating a local presence in places where Ford operated plants. Ford is attempting to rationalise production information through its reorganization of reporting relationships while managing the adaptation of lean production methods through local, decentralised labor relations policies. The strategy is Ford’s pragmatic implementation of “think global, act local.” (García and Hills 1999: 153) As explained in Chapter 9, the Mexican subsidiary was in charge of Ford’s industrial and labor relations in Mexico. Ford applied a global approach to manufacturing, production, and quality control, but a multidomestic approach to support functions, such as government and labor relations and finance. Ford’s labor relations in its two Mexican plants were managed distinctively, although NAFTA created pressures to centralize industrial relations from Dearborn. Ford’s greenfield plant in Hermosillo reported directly to the United States, and not to the Mexican subsidiary, as Cuautitlán did. Hermosillo was managed with lean production methods and, while there were strikes in that plant, the workers– management relations were less conflicting than those that traditionally existed in Cuautitlán (García and Hills 1999: 147). Union–management negotiations at Cuautitlán were influenced by the 1987 labor conflict episode described in Chapter 9. In 1990, there was another labor conflict at this plant, largely in response to the modifications that Ford tried to introduce in the production system in 1987–8. The labor union at Cuautitlán launched a campaign to democratize the larger union representing all Ford plants and to resist the lean production system. The clash of interests within the union and with the plant management ended in violence, the death of a worker, and Ford’s firing of 1,600 employees. Quality circles, which were introduced in 1990, had all but disappeared by 1992 and production quality suffered. (García and Hills 1999: 149) This adverse labor context obstructed the modernization of Cuautitlán, which is among the worst in the North American automotive industry and is substantially behind competitors at DaimlerChrysler’s Saltillo and Toluca and GM’s Ramos Arizpe and Silao plants (Harbour and Associates 1999: 45). Ford’s labor strategy in Cuautitlán contrasts with the company’s cautious labor strategy in the United States and Canada and with its overall emphasis on productivity and quality. Some analysts questioned whether Ford’s tolerance of Cuautitlán’s poor performance, instead of insisting on productivity and quality maximization, was a sign that Ford put the plant in a “holding pattern until an opportune time to close it permanently” (García and Hills 1999: 152). But in 1998, and given the low demand that existed in the United States for the global cars, Ford decided

A North American system of production 217 that, beginning in 2000, Cuautitlán would become the sole producer of the Contour and Mystique in order to free its Kansas City plant for the production of its first sport wagon. Ford also designated its Cuautitlán plant as the sole producer of the F-250 and F-350 SuperCab pick-ups. Reversing the centralization process of Ford 2000, the company returned to the subsidiaries marketing and parts purchasing functions in order to recover the sensibility required to negotiate in more favorable terms with local suppliers and to exploit fully the competitive advantages offered by foreign locations. This was a strategic move considering, first, the industry trends toward modular assembly, in which vehicle assemblers are turning a larger proportion of the production process to parts manufacturers, and, second, Ford’s limited outsourcing and poorly developed relations with suppliers, which translated into competitive losses vis-à-vis Chrysler and GM. GM’s investments in the Mexican auto parts sector have become key to maintaining its competitive position. GM’s Delphi Automotive Systems in total owns fifty-three plants in Mexico, many of which are maquiladoras that produce parts from wiring harnesses and batteries to fuel injection, engine and energy systems (The Wall Street Journal June 24, 1998: A15).12 Ford has more limited investments in the Mexican maquiladoras, and owns over ten parts plants in the country. As part of a worldwide effort to decentralize, Ford reopened its Mexican purchasing department and also opened one in Oakville, Canada, where purchases traditionally had been handled through headquarters. These actions were aimed at improving Ford’s ability to exploit the competitive advantages of having operations in low-production cost sites, such as Canada and Mexico. However, relying more on outside suppliers does imply risks, particularly those of jeopardizing labor and management cooperation in the United States. As explained in Chapter 6, the transfer of production to Mexico became the focus of several strikes by the UAW and the CAW that affected GM’s and Chrysler’s North American operations. One such strikes paralyzed GM’s North American operations for almost 2 months and cost the company about $2.8 billion. While for Ford regional cross-border integration offered more certainty, owing to both the opportunities that international trade agreements offer to maximize efficiency and the limitations that they place on foreign governments, it does not however eliminate the risks of operating beyond its home market

11 Conclusion

This book has proved the simplicity of commonly held views about the negative effects of MNEs’ global strategies on the State, and has shown the difficulty of capturing the complexity and dynamism of MNEs–States relations. While the Ford Motor Co. case study cannot serve as the basis for broad generalizations about MNEs’ strategies and their impact on different countries, it does suggest a number of propositions and hypotheses that warrant further empirical study. The Ford case also provides important insights about the factors that shape MNEs’ strategies, particularly global integration strategies.

Ford’s strategies An actor’s success or basic survival depends, first and foremost, upon its ability to comply with the rules of the game. Ford’s range of strategic options were influenced, first, by its ability to comply with the rules of competition, i.e. those rules that were determined by mass production. The company’s strategic choices were also influenced by its position or capabilities relative to the other competitors. The distribution of relative capabilities among the Big Three and other auto makers set the limits for Ford’s attempts to follow strategic actions that were independent of its competitors’ moves. Being a “price taker” meant that Ford’s actual strategic choices, particularly regarding product and price, were set by GM, owing to the dominant position of the latter. Ford’s strategic choices for profit maximization were actually interdependent with the collective behavior of other industry competitors. In addition, an actor’s specific traits, such as organizational/institutional structure, previous strategies/policies, and ideology/culture determine its capability to respond to exogenous factors. These factors explained Ford’s ability to design distinct strategies relative to GM, such as its lower level of vertical integration, its leadership in seeking market niches, and its broader network of international operations. Their importance (particularly its organizational structure) was revealed by Ford’s loss of its leadership position to GM and its decline in the industry during the 1930s and 1940s, and also by its success in the 1980s. Strategies are also shaped by exogenous factors and other contextual variables, such as cataclysmic events which modify the actors’ preferences, as

Conclusion

219

well as endogenous factors that relate to the competitive advantages (for example technological expertise) of specific actors. One individual actor can alter the rules of competition and the industry’s structure if its strategies of technological capability and innovation prove successful in responding to new market conditions, broadly defined. This was the case for Ford in the early decades of last century, for GM in the 1930s, and for the Japanese auto makers in the 1970s. Once one firm is able to introduce more successful strategies in the industry, new rules of competition, a new distribution of power, and a new pattern of behavior emerge. Another regular pattern of behavior is isomorphism or imitation of successful practices on the part of some actors (or attempts to gain “imitation advantages”). This was evident in Ford’s behavior, first in the 1950s, when the company imitated GM’s successful marketing and managerial strategies, then in the 1980s, when the company’s success was based on the imitation of the Japanese strategy of best-practice production. Following the rules of mass production, Ford’s international strategies sought to expand sales and reach high production volumes, but the high risks of doing business abroad impelled a cautious strategy of establishing only a few pockets of manufacturing operations, mainly in industrialized countries. Sovereign risks explained Ford’s insistence on locating simple assembly operations or sales offices in foreign locations and maintaining 100 percent ownership as a condition to establish abroad. Ford also implemented a multidomestic (but regionally differentiated) and centralized strategy for managing its subsidiaries in foreign countries. These were generally self-standing and self-contained businesses, which conformed to local practices, particularly where market imperfections (restrictive government policies or other factors that generated transaction costs) were high. In the 1960s, changes in governmental policies and regulations in Canada and Europe encouraged Ford’s move toward the rationalization of its operations in those regions. Ford’s lower levels of vertical integration, compared with GM, allowed Ford to exercise a leadership position in responding to foreign government demands to purchase locally produced parts and/or exporting them to other countries. These strategies and its long-term experience of operating abroad were translated into a leadership position in terms of sales, production, and exports in a number of national markets. Overall, increased sales volume, knowledge/ learning economies, and other locational and internalization advantages gave the company a certain level of independence from GM’s strategic moves and expanded its strategic options that were otherwise restricted in the United States. Global strategies Using a broad measure that indicates the relative importance of foreign operations for an MNE’s overall worldwide network, this case study demonstrated that Ford Motor Co., the most transnational of the US Big Three auto makers, continued to locate the bulk of its production and R&D operations in the United States. Its home country also remained the most important market for Ford

220

Conclusion

vehicles and, except for the 1979–82 recession in the auto industry, and the most important source of revenue and net income. In addition, the bulk of Ford’s expenditures in R&D, design and engineering (or those undertaken on the company’s behalf) are incurred in the United States. This appears to be consistent with the behavior of other large MNEs (UNWIR 1995 149; Doremus et al. 1998), and corresponds too with the results of two recent studies, which demonstrated that the economic activities (production, sales, assets, R&D, finance, and management) performed in the home countries (not in foreign countries) of the largest MNEs are central to the economic well-being of these enterprises (Hirst and Thompson 1996: 95–6; Ruigrok and Van Tulder 1995: 156–9). If the meaning of a global integration strategy is the geographic dispersion of each activity in the value-chain of production, Ford does not have one in place. But if it means the dispersion of some activities in the value-chain of production, the results are mixed. Through collaborative agreements with other companies (most notably Mazda, but also other Asina, European and even some US auto makers), Ford did disperse some activities, such as R&D, design and engineering. Strategic alliances represented a marked change from previous practices that maintained full ownership of their operations, so as to protect know-how and other ownership advantages, and from the US anti-trust laws that prohibited large firms from entering into such associations. But more than globalization, those alliances suggest the “triadization” of operations, i.e. alliances established among leading firms in each major economic region – Japan, North America, and Europe, also known as the triad (Ohmae 1985). Some of Ford’s alliances – notably with Volkswagen in South America, or granting Mazda responsibility for the development of the small car – had been difficult to maintain for a long period of time, but many other collaborative projects still remain in place, and some are within strategic areas. Some of these inter-firm arrangements have culminated in the surge of mergers and acquisitions. Today, and even if its US operations still represent the bulk of Ford’s total operations, its foreign operations continue to contribute to the company’s strong performance and leadership in the industry. Historically and compared with its rivals, Ford has tended to locate higher proportions of its production outside of the United States, although foreign production of its vehicles has not increased as a proportion of total worldwide production – except during the most severe years of the 1979–82 recession. Its international operations were a source of strength that allowed Ford to maintain its position as the second largest auto maker in the world and to respond to GM’s competitive moves. In the worst years of the 1970s’ industry recession, those operations provided the cash that saved the company from bankruptcy. Considering the inefficiency and high cost of the company’s operations in the United States, as well as the poor quality of its products, some of its subsidiaries abroad contributed to maintaining the parent company’s competitiveness. Given their good performance, Ford’s international operations gave the company time to focus on improving its operations at home and developing new products necessary to survive in a highly competitive and volatile marketplace.

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It was, however, paradoxical that Ford did not fully utilize the advantage of having an extensive network of operations abroad, one that was superior to that of its competitors. The company’s long-term strategy of adopting the industry’s new best practice of production and political considerations in its home market restricted its ability to do so. The new rules of production and competition (the system of flexible or lean production) implied improving the quality of products and management relations with suppliers and labor, a significant change from the practices that prevailed under the system of mass production. Ford’s long-term strategy – and particularly its emphasis on improving its relations with US labor – required substantial and comprehensive changes in the company’s operations that prevented it from relying on the sourcing of parts and vehicles from foreign suppliers to the extent that GM or Chrysler did. Surprisingly, this constraint also became the source of Ford’s success in the market place; and labor peace at Ford translated into an enhanced competitive position for the company and the maximization of profits. Contrary to popular views about MNEs’ behavior in an era of globalization, the information presented in this book showed that Ford was far from being the kind of organization that easily moved production operations from one country to another and that had the flexibility to introduce changes to its operations abroad rapidly. As the failure of the “world-car” or “global-car” projects suggested, Ford’s complex organization required time and substantial resources to restructure the design and management of its operations. Ford did not shift the location of its vehicle production significantly, nor did it serve world markets from one location or substantially increase its manufacturing operations in lowcost production sites. During the 1980s, the company did make progress in the integration of its production operations on a regional – mainly North America and Europe – rather than on a global basis. That progress represented a change of degree rather than of direction, because its regional integration strategies had been in place since the 1960s. In this respect, the most evident and important change was the integration of its Mexican subsidiary into Ford’s North American system of production. Ford also achieved some inter-regional co-ordination, although this was limited to a few activities, such as R&D, design and engineering between the parent company and one subsidiary (Ford Europe) for the development of different vehicles, and then among different assembly plants for the production of global cars. Some factors that prevented Ford from introducing major changes in its production operations can be explained by the high risk and costly nature of automotive production. Like other auto makers, Ford tended historically to open only a limited number of production operations in foreign countries, normally in those that had reached some level of industrialization and thus offered relatively large markets for vehicles. Sovereign risks there were not high. Their investments to produce in less-developed countries, particularly in the 1960s, were defensive strategies aimed at either gaining first-mover advantages or protecting potential growth markets from increased competition in the industry worldwide. Ford’s rationalization strategies ran parallel to the profound changes in the

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rules and patterns of competition in the automobile industry that were triggered by the Japanese auto makers’ rise as world leaders in vehicle production. Changing industry rules of production and competition in the late 1970s meant, among other things, that Ford’s profitability and survival depended on their ability to increase revenues not only by expanding sales, as in the past, but also by reducing production and improving efficiency and quality. Companies needed to assure access to growing and/or large markets that could also guarantee low production costs. As the industry circumstances changed, the relative value of the competitive advantage of those companies’ operations outside of the United States increased. In the effort to restructure its US operations and its struggle for survival during the 1980s, Ford’s international operations came to play a pivotal role. Contrary to predictions made by the New International Division of Labor approach, only a limited number of less-developed countries with low labor costs were included in the transnational production networks of US auto makers. Low labor costs seemed to have been an important determinant for attracting automotive investments, but only when they were combined with other factors. As Ford’s experience in Mexico during the 1980s showed, these other factors included a favorable labor climate with non-adversarial and weak unions; basic physical and technical infrastructure that allowed for manufacturing scale and technology; geographic proximity to major markets that were a source of efficiently produced parts and components; domestic or international regulations that allowed for two-way trade; and a competitive exchange rate. The existence of high exit barriers in the automobile industry made it very expensive and difficult for Ford to relocate manufacturing operations. Ford seemed to have taken the “sunk costs” of previous investments in manufacturing operations – physical facilities, technical infrastructure, and human resources – very seriously. In fact, since the end of the Second World War, there were only three occasions (India, France, South Africa) when Ford closed manufacturing operations abroad. Institutional factors, such as organized labor (and the company’s strategy of improving its relations with labor), also frustrated Ford’s limited attempts to rationalize its operations (closing more plants, downsizing the labor force further, or increasing the movement of parts and components between various locations) on a worldwide basis. The failure of Ford’s world-car strategy demonstrated that economic considerations, such as transportation and co-ordination costs, would more than offset the perceived gains from higher economies of scale achieved through integration of production operations on a global basis. In addition, different national/regional consumer tastes and the existence of shortened product lifecycles required proximity of assemblers to the marketplace, thus frustrating efforts to standardize products and/or integrate production on a global basis. All of this helps to explain why Ford’s global-car projects failed. Ford’s globalcar strategy reflected the company’s recognition that its ability to create crossborder integrated operations, whether at the regional or the global level, also depended upon its position in different countries and its ability to cope with the opportunities and constraints posed by the host government. Uncertainty and risks associated with political or economic disruptions in different locations are

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important deterrents to the pursuit of a globally integrated system of production. From the company perspective, and contrary to popular views, global integration is more, not less, vulnerable to such disruptions. It is therefore clear that the new industry rules were pushing auto makers’ choices in different directions: changes in vehicle demand since the 1970s encouraged product standardization in one group of national markets and/or one segment of the market. But structural factors also increased diversification in other directions: demands for globalization or global integration/co-ordination of MNEs’ operations were driven by new information and manufacturing technology, economies of scale, high costs of R&D, and trade and investment liberalization policies; meanwhile new forms of production organization, market fragmentation and “new protectionist” practices in developed economies made all-in-one-place manufacturing and R&D the most efficient arrangement. Regionalization appears to have been, at least in the case of Ford, the most appropriate response to these opposing forces. It should be mentioned, however, that the company’s previous regional organization structure might also reflect a certain degree of organizational inertia. Independently of the requirements placed by the new system of production and the new market dynamics, the key strategic intentions or long-term goals of competitors were relevant considerations that had an important impact on Ford’s strategies. The Japanese auto makers’ intention to dominate major markets for vehicles in the world, as well as GM’s and Chrysler’s competitive moves, did influence Ford’s adoption of a global perspective. Heightened levels of competition have also meant, for auto firms, the quest to establish a stronger presence in major markets for vehicles. Visible market presence has always been important for exploiting price asymmetries that derive from the competitive structure in different country markets and for having access to additional financial resources. But it often implies the maintenance of local production operations and accounts for the relative immobility of large MNEs, as opposed to the high mobility that is usually assumed. Governmental concerns with large trade imbalances in strategic industries are also relevant factors that account for that behavior. Those concerns are not new nor have they changed despite the gradual and significant reduction on tariffs of auto parts and vehicles in the world since the Second World War. Indeed, while developing countries were lowering tariff barriers, developed ones were introducing new forms of protection or “strategic trade” policy measures, such as voluntary export restraints as well as a number of new performance evaluation requirements and/or incentive compensations for auto firms. It is also important to emphasize that the combination of heightened levels of competition and increased investments devoted to the creation of regional systems of production have prompted US vehicle assemblers to adopt an almost schizophrenic attitude toward trade policy. On the one hand, they have pressured governments of countries where they have manufacturing operations to introduce and implement clear rules of trade liberalization on a regional basis, so as to guarantee export markets and access to low-cost/high-quality sources of production. On the other hand, and as a result of their increased investments and heightened levels of competition, they have also demanded protection for

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regional markets against non-regional producers. As the discussion of the Auto Pact showed in the Canadian case, this is not a new practice in the era of globalization. According to available information on changes in management and organization, Ford seemed to be well positioned to build a global and flexible structure that allowed for a better strategic response to changing conditions in markets around the world. Among other considerations, and compared with other auto makers, Ford’s management had more experience working with foreign subsidiaries. However, Ford’s efforts to move toward a global management structure, as expressed in Ford 2000, faced significant obstacles to the point that the company reversed centralization efforts. More recent management changes point toward greater decentralization of management, a tighter co-ordination among subsidiaries within each region, and inter-regional or global co-ordination/collaboration, but only for a limited number of activities. Ford’s limited approach to global integration is a pragmatic one that recognizes both the benefits of integration and the numerous real and potential obstacles that national borders present to such a project. In sum, Ford’s rationalization strategies of the 1980s implied higher levels of cross-border interdependence and production of its operations at a regional, and not at a global, level. But this has not meant that Ford has become more mobile in terms of relocating high-value-added production to foreign locations. National borders, culture, institutions, economic and physical conditions continue to matter in the strategic planning and decisions of major multinational enterprises. Ford’s strategies of the 1980s did represent a change, in various aspects, from previous practices and had different consequences for the subsidiaries and the countries where Ford operated. The specific impact of Ford’s strategies depended upon the characteristics of the company’s local operations, the relationship that the company had established with suppliers, labor and the governments of host countries, and the framework of relations between the host and the company’s own home country.

Triangular diplomacy dynamics Even if Ford had not integrated its operations globally, the cases of the Canadian and the Mexican automobile industries are still relevant for explaining the implications of MNEs’ cross-border integration activities. We have shown that the US Big Three’s decisions of what, where, and how to produce did affect the range of policy options available to the Canadian and the Mexican governments in terms of their ability to develop an automotive industry. Because of their dominant and unchallenged position in the world industry, at least until the 1970s, and in the Mexican and Canadian markets, the Big Three were in a position to make national policies a success or a failure. MNE to State Generally, and as already explained, the US Big Three exhibited a reluctance to establish operations abroad and a strong preference to access expanded

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markets through exports. Their stance reflected the high risk and costly nature of automotive investments, the existence of a tight oligopolistic structure, and the political uncertainties associated with investing in foreign countries. Those firms competed on the basis of product differentiation and marketing, which were more suited to large markets, especially the United States – the only national market where such a strategy did not imply substantial diseconomies. However, the drive to increase sales in the face of tariffs and other trade barriers, as well as the growing levels of competition since the 1960s, increased the Big Three’s opportunity costs of not establishing production operations abroad. As the competition increased, and existing markets for vehicles became saturated, one strategic priority for auto makers was to defend their position in the markets where they already operated and to gain access to new markets with growth potential. At times, one firm – often Ford, as demonstrated here – played a key role in determining the range of policy options for the Canadian and Mexican automobile industries. In the early years, and like other auto makers, Ford preferred to export from its US operations rather than opening production plants in foreign countries. Not surprisingly, the thrust of Ford’s production operations abroad focused on the most promising markets in Canada, Great Britain, and Germany; therefore, the opportunities for developing countries to attract investments for automotive production simply did not exist. But, after undertaking a profound reorganization of its worldwide operations in the 1950s, Ford was able to exploit more fully its competitive advantages and expand its presence into other countries. While imitating GM’s strategy of 100 percent ownership of foreign subsidiaries, Ford also set an independent strategic course: based on its lower level of vertical integration, compared with GM, it created a networked organization that emphasized purchases of parts produced by independent suppliers in foreign countries. This strategy enabled Ford to exercise a leadership position in responding to foreign governments’ demands for purchasing locally produced parts and/or exporting them to other countries, thereby establishing a pattern of behavior that had to be followed by its main competitors. This, in turn, gave foreign governments the opportunity to attract investments. Were it not for Ford’s new competitive strategies, it would have been quite difficult for the Mexican government to encourage automotive investments in the country. Similarly, Ford’s export orientation contributed largely to Canada’s export success with the Auto Pact. As demonstrated in this study, the outcome of MNEs–State relations in the automobile industry itself cannot be explained without taking into account factors that are specific to each national context. One such factor was the preexisting structural conditions in Mexico and Canada, particularly the small size of each country’s market for vehicles (although the Canadian market has always been much larger than the Mexican one). Other factors included their proximity to the immense US market, which put both countries at a perennial competitive disadvantage in terms of attracting investment for automotive manufacturing, and seemed permanently to shape national consumers’ preference for US-style cars. Given that the industry’s growth required higher efficiency levels, which could only be achieved through high sales volumes, there

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was a natural push toward the expansion of markets, both domestic and foreign. This also required the removal of restrictions to practices such as vertical integration. These economic realities surrounding the dynamics of growth favored the MNEs in the auto industry and hampered government goals (from home and host countries) of achieving a trade balance in the industry by way of local-content or other performance requirements. At the same time, however, the existence of a highly concentrated oligopolistic structure in the industry provided strong incentives for auto makers to defend collective profits, to the detriment of achieving maximum efficiency in the industry. Government ideology concerning the development of a domestic automobile industry was another relevant variable which, in combination with the MNEs’ strategies, also shaped policy outcomes. Despite facing similar exogenous conditions and structural factors, the Mexican and Canadian governments followed distinctly different paths in developing a local automobile industry, largely because of ideological considerations. While Mexico first launched its auto policies in the 1960s, the Canadian automobile industry had already matured. These different levels of development clearly influenced the pursuit of different policy approaches. Canada accepted that the development of its automotive capability required that incentives be offered to foreign firms and, most clearly, to the US auto makers, given their dominant position in the world industry and their geographic proximity. This would, on the one hand, make it attractive to establish their operations in Canada and, on the other hand, not thwart their methods of production (based on economies of scale and vertical integration so as to achieve certain levels of efficiency). The governmental objective of encouraging the development of an efficient industry that met the consumer interest in low prices for cars could have been achieved through free trade, but this was not a policy option because it was perceived as a threat to the possibility of developing a national automotive capability. Canada followed a pragmatic approach of combining some protective measures (a tariff and then preferential access) with a duty-free system that applied to virtually all automotive policies from the 1920s to the late 1980s. These policies reflected the government’s concern over getting a fair share of production and for developing Canadian auto parts production. Yet, in comparison with protectionism in other countries, Canada did not place significant restrictions on the auto makers practice of vertical integration and provided them with institutional frameworks that guaranteed access to export markets – first those of the British Empire, then the United States – thus allowing production without substantial efficiency costs. By facilitating expansion of export markets for vehicles, the vicinity to the US mass market became valuable to Canada, but it was also a constraint to the development of a stronger Canadian auto parts industry. The basic convergence between the Canadian government and the US Big Three auto makers, however, ultimately succeeded in the development of an increasingly efficient automotive industry. By contrast, Mexico’s nationalistic approach and its intent on developing a Mexican-controlled automobile industry imposed severe restrictions on auto

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makers in the areas of ownership and vertical integration. Given the small size of the Mexican market and the lack of efficient Mexican auto makers, this nationalistic approach further decreased the already narrow range of policy options for the Mexican government to develop an efficient automobile industry. The heightened levels of competition in the industry, and the oligopolistic dynamics of such competition, served to exaggerate the potential value of the Mexican market, and encouraged the acceptance of exacting regulations on the part of the foreign auto makers. Paradoxically, by attracting the interest of different auto makers in the Mexican market, these same dynamics of competition constrained the Mexican government’s ability to restrict entry to a large number of auto makers. This inhibited the latter from achieving economies of scale and led to the loss of control of the industry by Mexican auto producers – despite the introduction of production quotas aimed at protecting the Mexicanowned assembly firms. The industry’s inefficiency, which resulted from an overcrowded market, was exacerbated by the US auto makers’ strategies of model proliferation. Certainly, these strategies were facilitated by local-content requirements that allowed for the importation of body stampings. By making it economic for the auto makers to import such auto parts, the geographic proximity to the United States also became a constraint on governmental goals (geographic distance made it very expensive to ship those bulky parts to Brazil and inefficient to produce them there). Similarly, the US auto makers’ strategies of multiple suppliers for parts and components, and the Mexican government’s restrictions on their practices of vertical integration, impaired the development of an efficient auto parts sector. All of this contributed to growing trade deficits, which reflected the inefficiency of the nascent Mexican automobile industry and the Mexican government’s failure to achieve its goal of advancing in its import substitution strategy and fostering growth. Mexico’s approach to the industry’s development proved less successful than Canada’s, at least until the 1970s. The government’s goals of maintaining its independence from foreign capital and protection of Mexican-owned firms were given priority over the interests of the majority of consumers. This reflected the broader development strategy of import substitution, geared toward luxury goods and directed to a relatively small, high-income social group. Those nationalistic goals, which created a divergence of interest between the Mexican government and the auto makers, explains Mexico’s failed strategy. However, foreign auto makers were able to find an equilibrium in order to maximize profits, and therefore turned the Mexican situation to their own advantage. By introducing a number of regulations that were often contradictory and financially exacting for the auto makers, the US government also helped to alter the traditional dynamics of competition in the industry and to reduce the Big Three’s strategic options for competing with the European and Japanese auto makers. Had US government policies on emission controls, fuel efficiency,and safety standards been designed in co-ordination with the Big Three, the latter would have been able to cope better with the industry’s new conditions in the 1970s. But that pattern of behavior was alien to US government

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officials at the time, and to the rules that had governed interaction with the auto makers for decades. From this perspective, the relationship between the US government and the Big Three was an “institutional” limitation to the latter’s ability to design strategies that could succeed in the marketplace. MNE to MNE Competitive elements in the bargaining between firms may also alter negotiating outcomes. The strategy of protecting collective profits, a characteristic of the oligopolistic dynamics that has traditionally prevailed in the industry, also set the policy options for achieving efficiency. Both national cases exhibited the tendency of auto makers to reach an oligopolistic equilibrium that met collective expectations for securing profits and minimizing risk. The high profits guaranteed by a protected, although overcrowded, market did not provide any incentives for auto makers to seek efficiency maximization in the Mexican case. Similarly, the Big Three’s failure to rationalize fully their Canadian operations demonstrated the risk-adverse behavior of oligopolistic firms, not only in contexts of high political uncertainty but also in light of the normal risks that the existence of national borders imply. While stability can be a valuable goal, the strive for oligopolistic equilibrium entails the risk of inhibiting actors from identifying fundamental changes in the rules of the game. The existence, for decades, of a stable system of mass production, where oligopolists recognized their interdependence in profit maximization and competition was based on product differentiation rather than technological innovations and suited the collective and individual interests of the Big Three. Their behavior guaranteed high levels of profits, but the system was ineffective to protect the Big Three’s interests when external conditions changed. During the 1970s, the US auto makers opted for traditional patterns of behavior rather than adopting strategies that could be more successful in the industry’s new competitive environment of the 1970s. In a context of uncertainty, when the depth of change taking place in the industry could not be clearly identified, “price takers” such as Ford and Chrysler faced the dilemma of either falling back on past rules (which meant following GM’s strategic moves) or setting an independent course that, while more appropriate for the new situation, would endanger the existing equilibrium of power in the industry. Exogenous changes and new institutional factors in the marketplace compounded the “normal” limitations on the strategic options of “price takers.” Rather than investing in the development of a new small/compact car, Ford followed a strategy of downsizing that, according to the prevailing rules set under the system of mass production, was seen as an appropriate way to preserve its market share, finance the development of new products that could meet the changing competitive requirements in the industry, and allow for the maximization of its own and the Big Three’s collective profits in the short term. A different strategy would have run the risk of altering the oligopolistic equilibrium that, for decades, had guaranteed high levels of profit maximization. This in turn limited Ford’s ability to respond to foreign government demands.

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Ford’s range of strategic choices was traditionally limited by the collective behavior of the US Big Three and, particularly, by GM’s strategies. After the 1980s the situation became more complex: although it was not dependent on GM’s strategies, Ford’s choices were affected by the competitive moves of all relevant industry actors not only in the United States but in the rest of the world. While the industry’s oligopolistic dynamics still operates – particularly with the wave of mergers and acquisitions – Ford, like GM and Chrysler, has become concerned with protecting regional markets against foreign competition as a means to protecting its collective gains. This in turn altered the options of the Canadian and the Mexican governments to attract investments in the auto industry State to State The dynamics of state-to-state negotiations in a triangular diplomacy were also confirmed in the Mexican case. In the early years, the US government and the US auto makers formed an alliance to pressure the Mexican government to grant market access to the Big Three. During the 1960s and 1970s, the Mexican government was able to play the Big Three off against each other, thus frustrating the US government’s attempts to intervene in favor of those firms. Also, the US government’s unilateral actions in the 1980s, particularly the removal of preferential status for Mexican automotive products aimed at correcting the industry’s trade deficit, hurt all of the Big Three’s outsourcing operations as much as they did Mexico. As in the Canadian case, those US government actions prompted the Mexican government to undertake further industry and trade liberalization, as well as the negotiation of bilateral rules that would guarantee access to the US market. In the 1960s, by intervening to control access to automotive imports into the US market, the US government, more than the US auto makers themselves, limited the range of independent or unilateral policy options available to Canada for further developing a more efficient automobile industry. A similar situation occurred in the case of Mexico, as this country became a platform for the production of automotive products. The US government placed the most important constraints on the Canadian government’s policy options toward the automobile industry. During periods of crisis in the industry, and given that total bilateral free trade in the automobile industry was not an option, the Canadian government offered extra benefits. For example, through sales tax reductions, subsidies and grants for investments; the flexible application of the Auto Pact’s safeguards; the maintenance of an exchange rate that made exports competitive; or, through preferential treatment in the form of a duty-remission program. Canada’s unilateral policies, which tended to create bilateral trade imbalances in its own favor, provoked the US government to threaten the imposition of countervailing duties (as happened in the 1960s, and again in the 1980s) or anti-dumping measures against the Big Three’s subsidiaries in Canada. These measures provoked not only tensions in the bilateral relationship but also a cautious approach on the part of the US

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auto makers with regard to increasing their investment and output in the Canadian automobile industry. After each period of contention between the US and the Canadian government over automotive policies, the US vehicle assemblers have enjoyed further benefits. As happened with the Auto Pact, with the CUSFTA the Canadian government accepted greater integration of the national automobile industry into a North American system of production, removed its unilateral programs (duty drawback and duty remission) and maintained the US Big Three’s preferential access to the Canadian market. It is interesting to note that, contrary to the traditional triangular diplomacy game that characterized Canada–US automotive relations, the US government and the US Big Three rallied against duty-remission programs offered to Japanese auto makers by the Canadian government. Although these programs implied the risk of hurting the Big Three’s operations in Canada, the threat of increased competition proved to be a powerful negotiating tool for the Canadian government to reverse the Big Three’s pattern of disinvestment in the 1970s. By increasing competition from offshore producers, the Canadian government was able to remove the Big Three’s oligopolistic trap that had inhibited them, in the past, from increasing levels of rationalization and efficiency in their Canadian operations. In the 1980s, the Canadian automobile industry received substantial investments for the modernization and establishment of new assembly and auto parts plants. Learning and fortune The rationalization strategies of the Big Three on a regional basis represented both opportunities and risks to Canada and Mexico. Appropriate government intervention, learning, and fortune were factors that contributed to minimize risks and enhance opportunities. Considering that the Canadian auto industry was mature and more dependent on assembly than production, the Big Three’s strategies represented the risk of disinvestment. It was the Canadian government’s bargaining skills, the subsidies offered to automakers, its flexible approach in the application of industry regulations, and the exploitation of competitive dynamics in the industry that allowed Canada to take advantage of the new opportunities in the industry. Different factors were at play in the Mexican case. A severely depressed Mexican market in the 1980s made the exit option a viable and credible one for established auto makers there. But a fortunate turn of events contributed to the success of export promotion policies and thus to a wider range of policy options: the sunk costs of previous investments, particularly in plants for engine production, were encouraged by growing demand owing to the Mexican oil boom; an international context of sales slumps and increased competition; the devaluation of the peso in 1982, which dramatically improved Mexico’s competitive advantage in automotive production; and, finally, the Big Three’s new strategies that emphasized the need to reduce costs and improve efficiency. Another relevant factor was the learning experienced by auto makers concerning the possibilities for producing quality automotive products at a

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comparative cost advantage. The learning process on the part of the Mexican government was similar as it came to realize that a successful approach to development required a regulatory framework which allowed auto makers to exploit both Mexico’s comparative advantage and its international networks of production and marketing.

Regional integration and power distribution In the introductory chapter it was argued that for some analysts cross-border integration signaled a change in the balance of power between MNEs and States in favor of the former. The analysis in this book has shown that the US auto makers did benefit from expanding production and exports thanks to their Canadian and Mexican operations. Investments in Canada and Mexico allowed for higher quality and more efficient production at competitive costs, thus contributing to the Big Three’s struggle for survival during the competitive 1980s. At the same time, their rationalization strategies did not signify a relocation of production outside of North America. On the contrary, Canada and Mexico benefited from increased output, exports, and investments from the US Big Three. By contrast, and at least in the short term, the Big Three’s rationalization strategies implied relocation of production or closing of operations in the United States (and elsewhere in the world, especially Asia); actions that nonetheless translated in long-term benefits for the United States in terms of gaining a more efficient and competitive industry. But, does the regional integration of the automobile industry on a North American basis signify a shift in the balance of power between MNEs and States? The answer depends upon one’s views about the meaning of “power.” As Raymond Vernon cautioned more than two decades ago, generalizations as to MNEs–States relations tend to be dangerous. In fact, as this book has demonstrated, such relations depend on a given context and tend to be firm specific. The Mexican and Canadian cases, which share similar structural conditions, showed that the relationship between the government of each of these countries and the US Big Three auto makers (and even with each individual firm) was distinct and changed in its own way over time. The finding makes it difficult to accept a priori, as some analysts do, that the independent options for States have been reduced, because this assumes that at some previous point all States had more independence vis-à-vis MNEs. We showed for instance that Ford’s focused on its US operations and its centralization efforts through Ford 2000 ended with poor market performance in both Mexico and Canada. The decentralization efforts of Ford’s new management were directed toward finding a balance between an efficiency-seeking and a market-seeking strategy. Strange has argued that States have witnessed a decline in their control over production, which is increasingly more oriented toward world markets, and have therefore been forced to bargain with MNEs. However, this statement is difficult to support based on the information developed here. It has been shown that the governments of Canada and Mexico always had to bargain with the multinational auto makers, even when they attempted unilaterally to introduce regulations

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to control automotive production. Indeed, in the case of Canada and especially of Mexico, automotive production in the 1980s was increasingly directed toward export rather than domestic markets. But it is difficult to argue that such production was previously controlled by governments, unless one measures that control in terms of government regulations over the industry. This book has demonstrated that understanding government power as the ability to impose regulations/requirements on MNEs is not a useful measure of the power relationship between governments and MNEs, for at least three reasons. First, based on the case study presented here, regulations, themselves, reflect bargaining outcomes between MNEs and States, not State power (authority) per se. On the other hand, different regulations (local-content or export requirements) have a different relative value for those actors’ competitive position and goals – a value that is dynamic and which changes over time. For instance, while in the late 1960s Ford welcomed the Mexican government’s export promotion requirements in lieu of local content, Volkswagen preferred the latter. But in the late 1970s, Ford opposed the tougher export requirements of the Mexican government. Similarly one could argue that, even during the NAFTA era, the governments of those countries still have an armory of policy measures that could shape industry outcomes. Second, the introduction of additional regulations may be nothing more than a reflection of the failure of previous policies to achieve government goals. A prime example would be Mexico’s Auto Decrees between 1962 and 1981, each of which placed more demanding performance requirements on MNEs. As each previous Auto Decree failed to influence the auto makers’ behavior and solve the industry’s problems, the inadvertent consequences were inefficiency and growing trade deficits. On occasion, often during periods of industry recession or market downturns, the governments of Canada and Mexico found themselves unable to punish auto makers for not complying fully with national regulations, largely because of high levels of interdependence between the industry’s and the MNEs’ performance. Examples of this dilemma were the auto makers’ failure to comply with Mexico’s export requirements during the 1970s or with the Auto Pact safeguards in 1980. Also, at times, regulations have unintended effects that do not match government expectations. The Big Three’s failure to rationalize fully their Canadian operations on a continental basis after the Auto Pact’s implementation is a case in point. Third, and most importantly, Canada’s and Mexico’s increased levels of automotive production during the 1980s signified additional wealth, which would not have been created without a strong orientation toward exports. The newly generated wealth implied benefits for MNEs, but also for each country where the expansion of auto production was taking place. In addition, and in light of Ford’s strategies in the 1980s, it appears that the auto makers’ control of production for export does not necessarily mean that the locus of decision has shifted from national to global authorities. Although MNEs tend to have a “global” perspective, they are clearly still embedded in national contexts. In the end, MNEs cannot totally disregard government policies or other factors which affect their local operations. Just like their governmental counterparts,

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MNEs must make constant trade-offs between local demands and global imperatives. Measuring relative power between MNEs and governments against levels of success or failure to achieve each actor’s goals seems a more appropriate way – although one that does not allow for generalizations – to evaluate power shifts in between the two. For instance, measured against the original goal of developing a strong and locally controlled automobile industry and of achieving relative independence from foreign capital (particularly US capital), the Mexican government strategy was not successful. This and the constant failure to reduce the industry’s trade deficits and to increase its level of efficiency could be interpreted as a shift in the detriment of Mexico’s power. By contrast, measured against the goal of promoting exports to obtain badly needed foreign exchange during the 1980s, the Mexican government was very successful. But can we surmise from this that power shifted to the Mexican government, or to the auto makers? This approach still leaves unexplained the interesting and important question about changes in each actor’s preferred goals and/or strategies. The relevance of goals as benchmarks for measuring power suggests the need to look at both governments and firms as complex actors that pursue distinct and often contradictory objectives. Governments seeking to influence firms, or vice versa, must take this into consideration. A final issue related to the problem of measuring the balance of power between MNEs and States is the difficulty of registering shifts in that balance when there is a basic convergence of interest, which still does not preclude conflicts over the distribution of gains. One could hardly argue that a more efficient and competitive auto industry in Canada and Mexico, as well as a place for those countries in the efficiency-seeking strategies of the US Big Three, means a shift in the balance of power from those governments to the multinational auto makers. In fact, MNEs and States are not fundamentally and necessarily incompatible with each other, nor are they engaged in a zero-sum game. Furthermore, the power of MNEs to shape events in the international system is firm specific, because each of those MNEs has distinct capabilities that are manifested in different power positions across national markets and in the international market. Measuring the balance of power between MNEs and States is further complicated because of their complex organization, which often demands reconciling divergent interests within their own organizations or with other important groups, such as labor and suppliers. The NAFTA negotiations for the automobile industry illustrate this point well. It is interesting to note that the US Big Three subsidiaries in Mexico, concerned with holding their positions in the Mexican market, did not favor a fast liberalization of the Mexican auto industry, and demanded rules that forced new entrants into the Mexican market to establish Mexican operations in order to meet the Mexican trade-balancing requirements. Although seeking greater industry liberalization, the US Big Three – particularly Ford and GM – favored the retention of the maquiladora system in Mexico as well as duty drawbacks in Canada, both of which were opposed by US labor and US parts suppliers, but

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supported by the governments of Mexico and Canada. Similarly, while Canadian and US auto parts suppliers were in favor of a fast liberalization of the Mexican industry, they also demanded protection for their products against manufacturers not established in the region. Mexican auto parts suppliers, as expected, demanded protection from non-Mexican producers. The complex set of the interdependencies and potential alliances among industry groups leads to the old political question of who the State represents. It also suggests that the interrelationships among different industry groups make it very difficult to distinguish the interests of one group from the others. This notwithstanding, the argument can still be made that, once full integration of the North American automobile industry is achieved, the multinational auto makers will see their power to determine the who-gets-what issues in such industry enhanced. But even if MNEs have gained more influence to shape outcomes in the world or regional economies and in individual countries, this should not imply that they are threatening the predominant importance of the State in the world system. Samuel Huntington’s remarks, made more than 20 years ago, help to clarify this point further: If [the nation-state grants] access to private, governmental, and international transnational organizations in such a way as to further its own objectives, it is far from surrendering its sovereignty. [The] widespread penetration of its society by transnational organizations … does not necessarily mean an impairment of the sovereignty of the national government … (Huntington 1973: 210–11) Governments are not passive actors, nor do they simply react to MNEs’ strategies, they actively participate in the competitive game for world resources and, thus, reciprocally influence MNEs’ strategies. The policy measures undertaken by the governments of Canada and Mexico toward non-regional producers, in order to compensate them for the biases created by regional free-trade agreements, clearly demonstrated this point. The integration of the North American automobile industry is the outcome of the interactions between the Big Three’s strategies and government policies to face the new competition in the world. An important lesson to both firms and governments, at least to those in the North American automobile industry, is that an integrated system of production implies increased interdependence in the auto makers’ quest to achieve overall competitiveness. That interdependence does not mean, however, that borders have disappeared and that MNEs have gained more power over States. The auto makers take seriously the existence of national borders and the political risks associated with those borders. They continue to be influenced by the actions of national governments and macroeconomic, political, and social conditions in each country. With their actions and reactions to each other, MNEs and governments mutually influence and constrain each other.

Notes

1 Introduction 1 The number of manufacturing affiliates multiplied from 3,500 in the early 1960s to about 270,000 in 1995 (UNWIR 1994: 130–1, 1995: 7). MNEs have also become truly “multinational,” not only in the scope of their operations but also in terms of their national origin. About 90 percent of MNEs are headquartered in developed economies, and approximately two-fifths of foreign affiliates are located in developing countries (Strange 1996: 50; UNWIR 1996: 7). 2 In 1993, sales of foreign affiliates reached $6 trillion and exports reached $4.7 trillion (UNWIR 1994: 131). 3 These figures include intra-firm transactions in services (UNWIR 1993: 164–5). Over the past 50 years, the composition of intra-firm trade has also changed, with that in natural resource commodities gradually declining in favor of that in medium- and high-technology manufacturing industries that have undergone rationalization on a worldwide scale (UNWIR 1996: 143). 4 It represents about 20 and 12 percent of manufacturing GDP in Canada and Mexico, respectively. 5 Automotive trade represents over 20 percent of each country’s total exports. 6 This study was undertaken before the merger of DaimlerChrysler in 1998. Thus, references to the US Big Three throughout the book refer to GM, Ford and Chrysler. 7 Canada, an industrialized, small and open economy; Mexico, a newly industrialized economy, with Latin America’s second largest population. 2 Ford Motor Company’s multidomestic strategy 1 Ford designed machines and tools to produce a single part, for virtually every part and every production process, “in some cases to an absurd degree” (Womack et al. 1990: 37). 2 By the 1960s, fixed capital, raw materials, and components accounted for 70–80 percent of the total production costs of a vehicle, and labor for the remaining 20–30 percent (Dyer et al. 1987: 15). 3 Although they have changed over time, since the 1970s minimum-scale economies at the plant level have stabilized at 220,000 vehicles per year on two-shift operations. 4 In 1922, for instance, Henry Ford estimated that 85 percent of his factory workers required less than 2 weeks of training, and 43 percent required less than one day (Dyer et al. 1987: 35). 5 These practices are also known as Taylorist methods of labor control (see Dyer et al. 1987: 25; Hoffman and Kaplinsky 1988: 330; also Langlois and Robertson 1989: 367; Womack et al. 1990: 26–38). These practices “assume that workers find work painful, and that some coercion/compensation incentive structure will motivate workers to an acceptable level.” This is one reason why in the early days Ford offered wages

236

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7

8 9 10 11 12 13 14

15

16 17 18 19

20 21

22

Notes

well above those offered by its competitors (Quinn 1988: 27; see also Hoffman and Kaplinksy 1988: 48–54). These disruptions emerged from labor strikes in parts plants or failures in the delivery and specifications of parts. According to White (1971), decisions to integrate production for plastics, upholstery, and electronic components were made, at least partly, as a consequence of the repeated strikes in suppliers’ plants in the 1946–8 period (White 1971: 83). For instance, metal parts, which until the late 1970s accounted for 80 percent of the weight of a car, often had to go through at least three manufacturing processes: stamping, casting, and machining. Each of these processes dictated different levels of scale economies (White 1971: 19–20; Clark and Fujimoto 1991: 10–11; see also Behrman 1972: 140–3). Quantities refer to US dollars throughout the text, except when stated otherwise. For instance, in 1908, 6,000 Model Ts were produced, by 1914, 300,000, and in 1923 1.9 million (Hoffman and Kaplinsky 1988: 74). Between 1908 and 1927, a total of 15 million were produced (Bloomfield 1978: 291). Cars are durable products, making demand for these products income sensitive. If the value of inputs is excluded, then the percentage of in-house production declines to 50 percent at GM, 40 percent at Ford, and 33 percent at Chrysler (Rubenstein 1992: 168). Besides the Big Three, the survivors were Studebaker, Packard, Nash, Hudson, KaiserFrazer, and Crosley (White 1971: 10). In the 1950s, approximately 80 percent of all world-car registrations took place in the United States and Canada, and until the mid-1960s the United States still accounted for half of the world’s total vehicle production. Although it is difficult to know how auto makers set the level of profits, according to one estimate GM’s annual rate of return (net profits after taxes, divided by net worth) averaged 20 percent until the early 1970s (White 1971: 274). The other auto makers’ payoff was considerably lower, but they had little flexibility to follow an independent price strategy. Ford purchased Lincoln in 1922 and Mercury was introduced in 1938. Ford assigned responsibility for the production, design, and purchasing of the medium-priced Mercury and luxury Lincoln to a new division that was separate from the low-priced Ford model (Rubenstein 1992: 94). GM and Chrysler recognized the UAW in 1937, and Ford in 1941 (Dyer et al. 1987: 38). For details on the emergence of the UAW and the 1930s to 1940s period, see Rubenstein (1992: 234–8) and Dyer et al. (1987: 183–210). For instance, between 1948 and 1981, hourly wages in the auto industry rose by more than 300 percent (MacDonald 1963 as quoted in Dyer et al. 1987: 41, 185; and Whitman 1981: 9). Pattern bargaining consisted of the selection by the UAW of one of the companies as its primary target. After a 3-year expiration of national contracts with the Big Three, and once agreement was reached with that first company, the union negotiated similar terms with the others (Dyer et al. 1987: 23–4, 42). Under the ‘new deal’ programs, such as the National Recovery Administration, the government set guidelines for big manufacturers to stabilize production, prices, and employment. “During the 1950s and 1960s, the prevailing opinion was that market power, per se, is harmful. In the 1970s … just the opposite was upheld – namely that the artificial barriers and exclusionary behavior, previously argued as inhibiting competition, in fact created efficiency through scale economies” (Morales 1994: 64). In 1941, the company dropped to third position after GM and Chrysler, without recovering to second place until 1952 (White 1971: 270; Bloomfield 1978: 290, 29, 5–6).

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23 The Mustang, “a small, affordable, sporty two-door coupe,” introduced the intermediate category and was followed by Chrysler’s Barracuda, Chevrolet’s Camaro, and Pontiac’s Firebird (White 1971: 206; Clark and Fujimoto 1991: 45). 24 Chrysler began transnational activity much later, and American Motors was the least transnational of the US auto makers, although in 1980 it still produced 15 percent of its output overseas (UNCTC 1983: 42). 25 Ford’s production operations consisted of Canada (1908), England (1912), Ireland (1919), Australia (1925), Germany (1931), Brazil (1959), Argentina (1959), and Mexico (1964). Ford closed its production operations in France in 1955, and in Japan in 1940 (Wilkins and Hill 1964: Appendix 2, 434–5; see also Bloomfield 1978: 293). 26 The company bought auto parts from local suppliers if their price and quality was right, and if the supplier could guarantee both sufficient quantities and a reliable delivery system of the parts. 27 In the mid-1930s, nominal tariffs on automobile imports were 70 percent in Japan (1937), 45–70 percent in France (1932), 40 percent in Germany (1937), 101–11 percent in Italy (1937) and 33.3 percent in the United Kingdom (1924–50) (Hoffman and Kaplinsky 1988: 82). 28 Ford’s products in Europe, particularly those made by Ford England, were entirely different from those made in the United States. They included the Popular, Anglia, Consul, Capri, Zephyr, and Zodiac (Wilkins and Hill 1964: 411). The Ford Anglia and the Ford Prefect, introduced in 1953, were the first Ford cars totally designed in a foreign country (Wilkins and Hill 1964: 384–5). 29 The only exception was Ford’s 15.2 percent ownership of stock in Simca (a French company). However, Ford did not participate in the company’s management; it was a portfolio investment rather than a joint venture. The insistence of the Spanish and Indian governments that Ford established a joint venture with local firms was the major reason why Ford had decided, in 1954, to close its operations in those countries (Wilkins and Hill 1964: 402, 426). 30 There was specialization in engineering and design: Ford Germany was responsible for bodies and exterior designs and Ford England for mechanical parts and interior designs. The Capri, for instance, had been jointly designed and produced in Great Britain and Germany since 1969 (Bloomfield 1978: 32). 31 A common product range of only three basic car lines and a van line were developed between 1969 and 1974 to cover most market segments, but with few basic models. 32 Production was shared by 60 percent Ford England/40 percent Ford Germany for power trains and 60 percent Ford Germany/40 percent Ford England for body construction and vehicle assembly (Harvard Business School 1979: 9). 33 According to one study, over forty-five countries used trade restrictions or domestic content requirements to induce automotive investment or protect local industries (US Congressional Budget Office 1980: 38, as quoted in Quinn 1988: f.n. 8, 16). Interestingly, although local manufacturing was also demanded in India, Malaya, Spain, and Australia, Ford’s decision to open manufacturing plants was limited to Australia and the three largest Latin American countries. 34 By the early 1970s, the large majority of assembly firms operating in that region were foreign owned, although supplier companies were both locally and foreign owned. 3 Ford of Canada: confluence of interest in a liberal approach to automotive development 1 Smaller producers were not established until later: in 1925 Chrysler Corporation of Canada and in 1946 the Nash Motor Company, which ceased operations in 1957 but reopened in 1961 as American Motors. 2 This tariff, which was the first Canadian tariff for the auto industry, was introduced with the National Policy of 1879 and was maintained until the mid-1920s (see Table A2.1 in Appendix 2).

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3 By 1914, Ford had established plants also in the United Kingdom and France and 15 years later it was assembling cars in more than twenty countries. It also had several regional plants in the United States. 4 Access to the British Empire markets, however, was not peculiar to Ford since GM got similar rights. 5 After December 1, 1907, Ford Canada was to have a joint participation with the parent company in the British market (Nevins and Hill 1952: 358). 6 While in 1910–13 Ford Canada’s total output represented one-tenth of that of the parent company, the subsidiary’s exports were two or three times those of the parent (Wilkins and Hill 1964: 115, 301). 7 Indeed, in the original agreement between Ford and the Canadian subsidiary, the former agreed to furnish the latter “without cost, all its Canadian patents; to supply all plans, drawings, and specifications for making its various types of cars” (Nevins and Hill 1952: 358). 8 The prices of cars in Canada were higher than those in the United States by a range of 10–17.5 percent (Beige 1970: 18, 21; Reisman 1978: 6–8). 9 A Tariff Board study concluded that, in 1934, Canadians paid about $14 million more for the purchase of vehicles than if they had been able to import them duty free, but that “the domestic auto industry operations directly generated between $40 million and $47 million annually through payments for wages, materials, services, freight, taxes and other disbursements. 10 At the same time, the Canadian government introduced an import ban on used vehicles, and allowed vehicles from the United Kingdom to be imported duty free into Canada. 11 Ford also opposed Canada’s tariff reductions in 1926, based on the argument that it had to continue paying the prevailing tariff, which was between 27.5 and 35 percent, on the auto parts that it imported from the parent company. Since Ford Canada depended on the parent company for parts supplies, the Canadian tariff reductions on motor vehicles actually made Canadian costs of vehicle manufacturing relatively higher than in the United States. Ford’s position regarding the Canadian tariff may also be a reflection of both the difficulties that the company was facing at the time and its need to defend the Canadian subsidiary’s interest. Indeed, in the 1930s Ford of Canada slid to third position in the Canadian vehicle market. 12 The intermediate tariff of 17.5 percent for vehicles – which was half the value of the general tariff – became the Most-Favored-Nation (MFN) tariff (Bladen 1961: 6; Wilkins and Hill 1964: 19; Beige 1970: 16). 13 In 1926, a similar but more limited program was established: it offered a rebate of 25 percent of the tariff on certain parts if 50 percent of the factory cost of producing a complete vehicle. It was also accompanied by reductions in the general tariff on automotive products from 35 to 20 percent. 14 Although the regulation stipulated Commonwealth content, it was de facto Canadian content because the only source of imported parts for Canadian production was the United States (Bladen 1961: 8). 15 The levels of local content were 40 percent of the factory cost if production was less than 10,000 units; 50 percent if production was between 10,000 and 20,000 units; and 60 percent if it exceeded 20,000 units. In all cases, parts were duty free under the British preferential tariff (Bladen 1961: 9). 16 Nonetheless, Reisman argued that the difficult conditions that prevailed in the Canadian auto industry during the 1930s made it difficult to assess the Canadian content effect on those decisions. 17 Between 1950 and 1954, Ford Canada’s production decreased from 141,478 to 111,701 units. 18 In response to the Indian government’s insistence that Ford manufacture locally, Ford decided to liquidate its Indian subsidiary in May 1954. 19 European producers’ acceptance of sterling pounds became another advantage for

Notes

20

21

22 23 24 25

26 27 28

29

30 31 32

33 34 35

239

them in the markets where Ford Canada had traditionally sold its products (Wilkins and Hill 1964: 357, 398–9). No directives went from Detroit to Windsor, and Ford Canada’s personnel, unlike the European and Latin American managers, “never received general letters in sales, accounting, traffic and service.” Canadian directors “consulted frequently with Detroit officials, followed American policies in all important respects, but also used [their] own judgment” (Wilkins and Hill 1964: 115–16). A similar situation unfolded in the 1930s, when Ford’s loss of leadership in the production of vehicles in Canada was associated with the slide of Canada from third to fifth place in the list of the largest vehicle producers in the world (Reisman 1978: 5; Wilkins and Hill 1964: 301). Whereas in 1953 the combined production of the United Kingdom, France, Germany, and Italy was four times larger than the production in Canada, by 1960 that figure was fifteen times higher (Beige 1970: 12–13). Between 1953 and 1960, sales of vehicles in the Canadian market jumped from 479,000 to 553,000. During the 1950s, Germany and France replaced the United States and Canada as the first and second, respectively, major vehicle exporters in the world. In 1959, imports of European and US cars represented about 80 and 18 percent, respectively, of Canada’s total vehicle imports. In that same year, the US Big Three accounted for 37 percent of all vehicle imports into Canada and for 54 percent of all US-built vehicle imports; Ford and GM accounted for half of Canada’s total vehicle imports from the United Kingdom – 17.4 percent and 41.5 percent respectively; and Chrysler alone, for 41 percent of Canada’s vehicle imports from France (based on figures provided by Bladen 1961: 102–4). Indeed, almost 40 percent of all vehicle imports into Canada came from the United Kingdom (data based on Bladen 1961: 102–4). As already noted, the similar consumer tastes in Canada and the United States was a contributory factor. GM was producing twenty nameplates, eight different chassis types, and five body styles; Ford, eleven nameplates, five chassis types and four body styles; Chrysler, fourteen nameplates, four chassis types and four body styles (Fuss and Waverman 1990: 172). GM operated a large forge and gray iron and malleable iron foundries, produced six- and eight-cylinder engines, as well as stampings and other components such as transmissions, differentials, brake assemblies and a variety of electrical equipment (Bladen 1961: 23). The UAW’s support was based on the idea that the basic problem of the industry was low volume of production and maintaining high tariffs was not a solution (Reisman 1978: 25). The Bladen Commission was created by the Canadian government in 1961 to find solutions to the industry crisis (Bladen 1961: 51–2). These protectionist demands included proposals for a duty of 17.5 percent on automobiles imported from the United Kingdom; raising the duty on those cars imported from Most-Favored-Nation countries to 25 percent; and increasing the excise tax to 15 percent “with provision for partial or complete exemption as certain Canadian content requirements were met” (Bladen 1961: 41–2). Between 1962 and 1965, the industry’s total capital expenditures amounted to about $500 million, split almost equally between the assembly and the parts supply sector, as shown in Table A2.9 in Appendix 2. US regulations stated that if the Canadian remission programs were found to be a “bounty or grant” they would be followed by the application of countervailing duties. To qualify as a manufacturer, a company had to have produced vehicles of a particular class (bus, truck, or automobiles) in the base year (August 1, 1963, to July 31, 1964), and to have produced vehicles in that class during that same year in which vehicles

240

36

37

38

39

40

41 42 43

44

45 46 47

Notes

and/or original equipment parts were imported. Later, entrants who met the necessary conditions were designated as manufacturers by Orders-in-Council (Reisman 1978: 28). Other “institutional barriers” referred to the perception that Canada had “generally inferior labor relations and higher manufacturing wages” than those in the United States (Perry 1982: 59) and a “prejudice of US consumers for vehicles not ‘Made in the United States’.” (Reisman 1978: 163). As quoted in Beige (1970: 47–8), this amount was divided by each company as follows: General Motors $121 million Ford $74 million Chrysler $33 million American Motors $11.2 million Others $20.6 million According to one econometric study, by 1971 real gross national product (GNP) in Canada was over 5 percent higher than it would have been without the agreement; total employment in the Canadian economy increased by 4 percent; the general rate of inflation did not change and the retail price for automobiles dropped; there was a strong favorable effect on the current account of the balance of payments; real gross capital stock in the Canadian economy marginally increased by 1.3 percent (Wilton, as quoted in McMillan 1987: III-20–1). Fuss and Waverman contended that “the Auto Pact led to a 52 percent increase in Canadian production capacity by 1970 over what it would otherwise have been, although this advantage declined to 24 percent by 1975. In the United States, production capacity was 4 percent less in 1970 than it would have been without the Auto Pact; this disadvantage declined to 2 percent by 1975” (Fuss and Waverman 1990: f.n. 35, 203). In 1968, for instance, vehicle imports from the United States accounted for more than 40 percent of the Canadian vehicle market, compared with less than 3 percent in 1964; and close to 60 percent of all vehicles produced in Canada in 1968 were exported to the United States, compared with less than 7 percent in 1964 (Beige 1970: 4–5). By 1978, final assembly was approximately 30 percent of total Canadian automotive production compared with 20 percent in the United States (Winham 1984: 482). According to Emerson, on certain models this differential was higher, between 5 and 10 percent (Emerson 1975: 74). The agreement was less successful in increasing the industry’s employment in its first years of implementation. However, over the long term, employment growth in the industry was much larger in Canada than in the United States. Between 1964 and 1985, it increased from 70,600 to 130,000 workers. Employment in assembly, which tends to be low skilled, was responsible for 44 percent of Canada’s automotive employment between 1964 and 1978 (Winham 1984: 483–6; McMillan 1987: III-22– 3). In Canada some opposition came from the Progressive Conservative Party and the Auto Parts Manufacturing Association; in the US Congress, where there was a cold reception to the agreement, but especially the letters of undertaking, some “influential senators from states where there was a significant concentration of independent US parts producers” opposed it (Reisman 1978: 34–5). An estimate of the direct benefits received by the US vehicle assemblers was in the amount of US$500 million in 1965 dollars (MacDonald 1989: 11). Emerson argued that, in the absence of the production–sales ratio, “producers would be inclined to expand capacity in the US rather than in Canada” (Emerson 1975: 76). The safeguards did provide the Canadian government with an important tool to bargain with Chrysler. By lifting the requirement that Chrysler pay Can$250 million in import duties for non-compliance with the regulation, the Canadian government

Notes

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49

50

51

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got a commitment from Chrysler to build the van plant in Windsor to compensate for the loss of production (McMillan 1987: III-15; DesRosiers 1993b: 3). This argument is based on the idea that in the post-1965 period there was a fast growth of income and population in Canada. They contended that “much of the output expansion that actually occurred … would have occurred anyway through growth of the domestic Canadian market.” For a detailed description of the counterfactual case on which this statement is based, see Fuss and Waverman (1990: 192–6). Evidence from individual firms’ behavior challenges this argument. Data for production and sales growth of Ford and GM during the 1965–8 and 1968–71 periods demonstrate that most of these auto makers’ vehicle increased output stemmed from a significant growth in their Canadian vehicle exports to the United States and not to Canadian vehicle sales. Ford did modernize some of its engine production. With a capital investment of over US$50 million, in 1965 Ford converted its chassis/transmission Windsor facility into a second engine plant, introducing the latest automated metal working machinery (Thomas 1995: 14). Its engine plant in Windsor was producing seven different engine blocks with 186 variations of engines, compared with only eight types made from one engine block in its Cleveland plant (Holmes 1983: 259). After modernization, the plant was producing only one engine block and only eight varieties of engine. More than half of this plant production was exported to the United States, whereas previously the plant was producing a wide variety of engines to be included in cars assembled in Canada. Half of the existing capital equipment was removed from the plant, scrapped, and replaced by fewer new pieces of automated equipment. Employment in the foundry and engine plant only increased from 2,025 to 2,679, but production doubled and productivity increased by over 40 percent (Holmes 1983: 265). By 1968, like GM, Ford was producing about 445,000 units per year in two assembly plants. Measured on a line basis, in 1973 Ford was producing 185,000 of its intermediate cars (Torino/Meteor), 112,000 of its subcompact car (Pinto), and about 120,000 of its compact car (Maverick). Whereas in 1961, Ford Falcon sold 482,000 units in the US market, by 1967 Falcon sales were only 110,000 units (White 1971: 44–5).

4 Ford of Mexico: confronting a nationalistic approach to industrialization 1 At this time, GM had overtaken Ford in the US market and was rivaling its sales leadership around the world (Wilkins and Hill 1964: 245; see also Chapter 2). 2 It must be mentioned, however, that the objective of maintaining Mexican-owned firms in the vehicle assembly sector had been pursued even before the NAFIN proposal, as demonstrated by the production quotas and restrictions to vertical integration for vehicle assemblers contained in previous regulations toward the industry. 3 Chrysler’s acceptance in countries such as Mexico and India was a reflection of its willingness to hold a minority interest (Baranson 1969: 21). 4 As Baranson (1969: 19) argued, substantial portions of an international firm’s earnings came from the sale of components and parts to original equipment manufacturers and to the replacement market. 5 Estimates on employment in the auto industry are conflicting. Scheinman argues that, between 1962 and 1966, auto employment surged from 8,000 to 30,000, whereas Dambois calculates that from 1962 to 1966 employment in the industry increased from 9,021 to 22,387 (Dambois 1990: 38; Scheinman 1990a: 150). 6 While just two (Ford and GM) of the nine vehicle assembly firms that had survived the 1962 requirements were wholly foreign owned, by 1970 five out of seven of the

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7 8 9 10 11

12 13

14 15

16

Notes

vehicle assemblers operating in Mexico were completely foreign. The Mexican government controlled the two remaining Mexican-owned firms. GM and Chrysler were close behind at 22 percent each, VW with 17 percent and Vehículos Automotrices Mexicanos (VAM) and Nissan with about 8 percent each. About 15 percent higher – although they were lower than in Argentina and Chile, which were 45 percent and more than 110 percent respectively (see Behrman 1972: 137; Bennett and Sharpe 1985b: 147; Dambois 1990: 55–7). The number of firms selling vehicles in Mexico had increased substantially from five before the Second World War to nineteen by 1958. An additional incentive was easy access to local sources of credit for transnational auto makers in Mexico, as in other Latin American countries, because of the good position of these firms from a risk assessment point of view (UNCTC 1983: 109). Bennett elaborates on this view: “the Mexican state had potential power and alternative courses of action that it did not employ [due to] organizational constraints. With a complex entity like the state … internal constraints may stem from a lack of the organizational co-ordination necessary to wield its potential power to full effectiveness” (Bennett 1986: 218). Renault had a license agreement with DINA, the State-owned firm, and Volkswagen had a similar arrangement with Promexa, a wholly Mexican-owned firm Bennett and Sharpe also argued that the Japanese were bluffing when negotiating Nissan’s entrance into the Mexican market, because that country could not have easily replaced Mexico as a source of cotton. They contend that the Mexican government could have negotiated a better bargain with the Japanese, but it is not clear how Mexico could have prevented Nissan from entering the domestic market. By 1964, there were only three majority Mexican-owned assembly firms, two of which were under the Mexican government’s control. Local-content levels were 100 percent in Brazil by 1961 and 90 percent in Argentina by 1963. However, in contrast to the Mexican situation, there were no rules against assembly companies owning suppliers in those countries, thus 100 percent ownership by foreign companies was widespread. In neither Brazil nor Argentina were there limitations on backward integration by vehicle assemblers (Behrman 1972: 123–4, 130). According to Edelberg, assembly firms held relatively larger inventories than their parent companies, because “deliveries of parts were frequently late, reject rates were high, and parts suppliers were often unable to deliver adequate quantities” (as quoted in Bennett 1986: 8).

5 The 1970s: an era of structural constraints and narrowed strategic options 1 Between 1955 and 1959, European imports increased their share of the US smallcar market segment, from less than 1 percent to more than 10 percent, dropping to 5 percent in 1963 and climbing steadily back to 10.5 percent in 1968 (White 1971: 187; Morales 1994: 146–7). During those years, European auto makers also increased their share of worldwide vehicle production (Womack et al. 1990: 44–5). 2 Within a decade, US auto makers had expanded their offerings from only a fullsized model to four basic sizes: full-size (5.4 meters), intermediate (5 meters), compact (4.7 meters) and subcompact (under 4.3 meters) (Rubenstein 1992: 134, 147). 3 Problems with the 1971–6 model year Pintos ranged from the explosion of gas tanks to faulty fan blades, to automatic transmissions that allegedly jumped into reverse from park while the engine was running (Ward’s Communications 1980: 221). GM faced a similar situation with its Chevrolet Vega (Rubenstein 1992: 234). 4 After its approval in 1965, several amendments were introduced to the Clean Air Act. In 1975, for instance, auto makers were required to introduce catalytic converters

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and exhaust emission controls. 5 The schedule set by CAFE was 18 m.p.g. in 1978; 19 m.p.g., 1979; 20 m.p.g., 1980; 22 m.p.g., 1981; 24 m.p.g., 1982; 26 m.p.g., 1983; and 27 m.p.g., 1984. A fine of up to $5 per car per 0.1 m.p.g. averaged over total sales would be imposed on firms failing to comply with this schedule (Quinn 1988: 95–6; Shook 1990: 6–7). 6 A common product range of only three basic car lines and a van line were developed between 1969 and 1974 to cover most market segments, but with few basic models. 7 Production was shared by 60 percent Ford England/40 percent Ford Germany for power trains and 60 percent Ford Germany/40 percent Ford England for body construction and vehicle assembly (Harvard Business School 1979: 9). 8 The British unions had made Ford into a test case to challenge the Labour government’s wage guidelines. Ford’s willingness to compromise with the unions implied that it was opposing the government’s wage control program. The government threatened Ford with various sanctions and reduced public orders of its vehicles (Ward’s Communications 1979: 219; Doz 1986: 177; Doz and Prahalad 1987: 107). The strike affected, gradually, all Ford operations in Europe and reduced worldwide scheduled production by 183,000 cars, trucks, and tractors (Ford Motor Company, Annual Report 1978: 15). 9 Between 1968 and 1973, Ford exported between 65 percent and 75 percent of its Canadian vehicle production; compared with Chrysler’s 77–85 percent, and GM’s 4–55 percent (see Tables A2.12 and A2.14 in Appendix 2). 10 Given that the air pollution problem was less severe in Canada than in the United States, the Canadian government decided not to follow the US requirements, stated in the Clean Air Act (1970), that emissions from automobiles sold in the United States be reduced by 90 percent below 1965 levels by 1981. Canada maintained the level that had been achieved in 1975, which was 70 percent below that prevailing in 1965. Similarly, Canada did not adopt the US requirement that 1974 models had to include installation of ignition-interlock systems under which seat belts had to be buckled up before the engine would start, nor the US requirement that all cars sold domestically came with passive restraints – air bags of automatic lap and shoulder restraints (beginning in 1982 model for larger vehicles and 1984 for smaller vehicles). Regarding fuel economy requirements, Canada and the United States adopted common targets (Reisman 1978: 136–7). 11 According to Perry, the situation prevailed even after the Canadian dollar depreciation in 1977–8 (Perry 1982: 58). 12 For a discussion of subsidies and grants offered by local governments in the United States, see Yanarella and Green (1990). 13 This was joint subsidy made by the federal and the Ontario governments. Ottawa provided US$40 million and the Ontario government US$28 million (Thomas 1995: 15). For a detailed discussion, see Leyton-Brown (1978: 170). 14 GM made this investment to double production capacity of automatic transmissions at its Windsor plant; to expand its Windsor trim plant for production of plastic components – which was equivalent to US$130 million Canadian value-added (Reisman: 92); to expand its Oshawa battery plant; and to open a new coach plant in Ville St. Eustache, Quebec (Ward’s Communications 1977: 176, 1978: 186). 15 Another policy option suggested by Behrman (1972: 146–8) was the Latin American integration of automotive production. However, that option was foreclosed as transnational auto firms consolidated their positions in each Latin American country. 16 Since 1962, Chrysler had held 33 percent equity in Fábricas AutoMex, which increased to 45 percent in 1968. 17 Since 1963, Ford had operated an assembly tooling plant, with 90 percent of its production for export. 18 In 1975, Chrysler was the leading exporter from Mexico, followed by Volkswagen and then Ford. GM and Nissan came in last. 19 Bennett and Sharpe quote unpublished data provided by the Mexican Ministry of Commerce and Industry (Secretaría de Industria y Comercio; SIC).

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20 In 1972, GM’s exports from Mexico were valued at $14 million, which was half of Ford’s (Samuels 1990: 146). 21 Vehicle sales in the United States dropped 12 percent in 1974 and another 20 percent in 1975. In Mexico, vehicle sales actually increased by 23 percent and 2 percent in those same years, rising from 265,568 in 1973 to 353,686 in 1975. 22 Seat and Renault had been the only two producers in Spain. 23 This might also explain a significant increase in vehicle exports from Mexico in 1974 and 1975, which represented about one-third of the total value of automotive exports. 24 It is noteworthy that by the early 1970s deficiencies in the model of import substitution were clearly emerging and the automobile industry was no exception (CEPAL 1992: 55). 25 This was the first currency devaluation since 1954. 26 Minimum local content for passenger cars was set at 50 percent, but progressively higher local-content levels were recommended: 55 percent for 1978, 65 percent for 1979, 70 percent for 1980, and 75 percent for 1981 (local-content requirements for trucks were much higher). Also the method for measuring local content was changed; whereas, previously, labor, energy, and inputs were included, after 1977 the formula for measuring was: value of imported material for producing each model/total value of parts of a “typical” vehicle. The value of parts had to be quoted in the currency of each subsidiary’s parent company and then converted into pesos, according to the existing exchange rate, in order to avoid slides in local content due to the peso devaluation. This new measurement tried to avoid inclusion of price increases on labor, energy, and inputs as local-content considerations (SPP and SEPAFIN 1982: 85–9). 27 Also, through this decree, the Inter-Ministerial Commission for the Automobile Industry was created. Some of the functions of this commission were approval of a new line of production, the entrance of a new firm, or the issuing of a technological license (Bennett 1986: 28). 6 Ford’s survival strategy 1 For a challenging view on the existing dichotomy between mass production and lean production, see Williams et al. (1994). 2 This progressive fragmentation of vehicle markets has started since the 1960s (see OECD 1992: 138; Morales 1994: 14). In 1991, for instance, there were more than 650 car and truck models offered in the US market alone, compared with 530 models a decade earlier and about 500 in 1970 (Ford Motor Company’s Annual Report 1991: 8). 3 For instance, in the mid-1980s, a Japanese plant could offer as many as 100,000 variations of automobiles, in models, engine types, specifications, and accessory options. 4 For instance, between 1970 and 1980 Toyota reduced its set-up time in stamping from 40–150 minutes to 5–15 minutes; in forging, from 100–200 minutes to 10 minutes; and in casting, from 60 minutes to 4 minutes (Hoffman and Kaplinsky 1988: 124). 5 Also, in classic Fordist firms the R&D departments had concentrated on minor incremental changes in production and processes, today they have become more concerned with fundamental innovations (Hoffman and Kaplinsky 1988: 53). 6 One example of new manufacturing technology is modular construction, which requires assembling a car from inside-out, the introduction of new materials technology, such as plastics, the use of electronic components, particularly microprocessor-based power-train control systems (Hoffman and Kaplinsky 1988: 187). 7 CAD/CAE “allow graphic representation and electronic drawing, and generates engineering data and programs for modelling products”; CAM combines “CNC,

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machine tools with the monitoring and control of production process, especially the flow of material”; AGVs are “unmanned electronically driven for transport of work parts and material”; AS/RS are “electronically controlled handling and storing devices”; FMS combines “robots, CNC, machine tools, AGVs, AS/RSs and central computer control which co-ordinates all steps of production”; and CIM is a system that “integrates all design and manufacturing capabilities and other business data into a single system” (Alcorta 1994: 758). In the early 1990s, a major facelift was estimated at $625 million; a minor facelift at $350 million; a model introduction on an existing platform at $825 million; and a new vehicle platform at about $2 billion (OSAT 1992: 101–2). Alcorta also argues that “by adding production lines, introducing modifications that allowed a degree of product differentiation,” mass producers “were able to introduce a degree of product differentiation and variety.” Furthermore, under the Japanese system of production, many of the new products “are the result of minor modifications or varieties of old ones” (Alcorta 1994: 760). In fact, more than two decades earlier, White had argued that GM’s marketing revolution introduced “flexibility of assembly line techniques [that] allowed a proliferation of models and styles that supplemented the model change strategy and also served to reduce the risks of being caught with a small number of unpopular models” (White 1971: 273). This is a system of industrial finance that consists of a number of keiretsu or groups of companies, whose purpose is to make cash resources available to its members and help them raise investment funds. Twenty or so major companies form each keiretsu; those companies are not legally united, but instead have “cross-locking equity structures” (“each company owns a portion of every other company’s equity in a circular pattern”) and share a “sense of reciprocal obligation” (Womack et al. 1990: 194). For instance, the auto makers’ move to modular sourcing (instead of buying a number of parts or components, the auto maker buys a built-up system from first-tier suppliers) has implied the need for first-tier suppliers to “have a high degree of technical sophistication, including good design and manufacturing engineering capability, management skills and electronic communication capability” (OSAT 1992: 112). The dollar was overvalued relative to the yen in the 1984–6 period, at Y225 per dollar, but then the yen re-evaluated to Y128 per dollar in 1988 and Y130 per dollar in 1992. According to one view, the change in currency exchange rates lessened the North American industry’s cost disadvantage and “perhaps even [provided US vehicle assemblers] a cost advantage under comparable competitive conditions. However, the conditions of the North American and Japanese industries are not comparable: low North American capacity utilization rates and low pass-through rates by the Japanese industry have effectively countered these exchange rate movements, and the North American industry may well continue to face an effective cost disadvantage” (OSAT 1992: 81). GM was increasing its market share largely as a result of the small Cadillac and the Seville, which the company had downsized since the mid-1970s (Keller 1989: 56). Ford’s Avon Lake minivan plant was its only new assembly plant opened in the United States since the 1950s (Rubenstein 1992: 291). While between 1979 and 1982 Ford’s operations in North America lost $5 billion, the company earnings outside North America were about $3 billion (or two-thirds of Ford’s total capital expenditures in those years). In the 1970s, GM had highly concentrated overseas fixed assets: almost half of them were in Germany, while an additional 35 percent was located in Brazil, Great Britain, and Australia (Whitman 1981: 14). In fact, between 1978 and 1997, the US Big Three auto makers’ share of the US passenger car market eroded considerably, declining from 85 percent to 61 percent. Since they maintained a dominant position in the US truck market, their combined

246

19

20

21

22 23 24

25

26

27 28

29

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market share for 1997 was 82 percent (OSAT 1992: 26; Ward’s Communications 1998: 102). Ford’s quality care program (1985) established predelivery and delivery procedures with its dealers as well as a lifetime service guarantee to customers with no recharge for repairs (Harvard Business School 1988: 5). Also, in 1990, the company introduced its service bay diagnostic system to help “service technicians quickly and accurately identify even hard-to-find drive ability problems,” with the objective “to increase customer satisfaction significantly by improving a dealership’s ability to fix a vehicle right the first time” (Ford Motor Company’s, Annual Report, 1990: 9). This was a complete reversal from the company’s situation in the 1970s. While industry surveys in 1980 had shown that Ford was viewed “as the worst offender of the Big Three” in quality issues, as early as 1982 many customer surveys indicated a 59 percent average improvement during the previous 2 years. In 1985, “Consumer’s Digest voted Ford the top US car maker with fewer defects than either GM or Chrysler” (Dyer et al. 1987: 165). By 1994, six of the top ten selling vehicles (cars and light vehicles) were Ford (Ward’s Communications 1995: 14). In order to develop a new engine and transmission for those lines, the company invested $1.2 billion in new tools and facilities. Ford also invested to retool its fifteen stamping lines, at a cost range of $50–200 million each, and introduced, in the mid1980s, ten FMS lines for its US and European drive-train plants (Hoffman and Kaplinsky 1988: 197). With the introduction of the Thunderbird/Cougar, Ford demonstrated further differences from GM’s style (Harbour and Associates 1990: 39). The other two companies either started or reinvigorated programs that were in place, quality of work-life at GM and product quality improvement at Chrysler (Harbour and Associates 1990: 16). By 1984, eighty-six of Ford’s ninety-one plants in the United States and 20,000– 34,000 hourly employees – 20–35 percent of Ford’s US workforce – were directly involved in EI, compared with sixty-eight plants and 10,000 workers in 1982 (Dyer et al. 1987: 167; Hertzenberg 1991: 267). One distinctive characteristic of these programs was that they involved primarily blue-collar workers and their direct supervisors, with a very limited participation by UAW officials. These meetings did not get involved in bargaining issues, including contractual disputes and grievance handling. For some, this was one factor that made EI committees at Ford more successful than similar programs at Chrysler and GM. GM’s programs, for instance, focused on changing the organizational linkages with the UAW and not on how the shop floor operated (Harbour and Associates 1992: 253–4). Ford did require extra capacity to fill demand in all market segments, but it did not make sense for Ford to open new assembly plants because, first, each assembly plant usually specialized in only one line of products, and, second, the company did not have the financial resources to open new plants (Keller 1989: 204–14). Ford sought to break bottlenecks in the production process by either increasing capacity at every plant or using overtime and selective plant expansions where required. In 1992, “after disclosing that it had been losing $1,600 on every vehicle made in 1991, GM announced the closure of 12 facilities, affecting more than 16,000 workers and the prospect of closing another nine plants” (Morales 1994: 74). In the 1982 labor contract, GM had promised to restrict its outsourcing operations and to build a new, small car in the United States, but it refused to renew that pledge in the 1984 labor contract. GM also promised to build one small car in the United States, but the Saturn Corporation did not start production until 1990. GM’s 1982 plans were to outsource 50 percent of the bottom 25 percent of its fleet and to supply one-half of the parts in those cars from foreign sources (Dyer et al. 1987: 150). GM co-production agreements with Isuzu Motors and Suzuki included the design and production of the Isuzu Spectrums and Suzuki Sprints that would be

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32

33 34

35 36 37

38 39 40

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marketed under a Chevrolet nameplate after 1984. In its agreement with Toyota, GM planned to co-produce 250,000 subcompacts at its Fremont, California, assembly plant. The cars were designed in Japan and engines and transaxles were also manufactured in Japan. GM’s agreement with the Daewoo Corporation of Korea created a joint venture to produce a GM-designed car in Korea that was imported to the United States from 1987. The company was losing as much as $300–900 per vehicle produced in the United States (Dyer et al. 1987: 165). In 1981, Honda started the construction of a new plant in Ohio to produce 150,000 Accords, with plans for increasing it to 500,000 in 1990. In 1984, Nissan announced plans to start in 1985 the production of 100,000 Sentras at a new plant in Tennessee. Toyota also started a new joint venture with GM (NUMMI), and Mitsubishi and Mazda established joint plants with Chrysler and Ford respectively. Ford closed an aluminum die-casting plant in Sheffield, Alabama; a forging plant in Canton, Ohio, and a radiator and a heater plant in Green Island, New York; the company also closed its in-house wiring harness operations (Ford Motor Company’s Annual Report 1990: 17; Harbour and Associates 1990: 49–50, 165; Womack et al. 1990: 158). For instance, Ford had the capacity to make 500,000 transaxles a year at its Batavia, Ohio, plant, but bought them from Mazda (in Japan), which produced them at significantly lower costs and saved Ford millions of dollars in retooling new facilities. DPO was a “$15 billion miniconglomerate” that operated in more than thirty countries and four continents. DPO’s non-automotive businesses included aerospace businesses, tractor production, glass and steel production, and even television sets, VCRs and other consumer electronic products (Ford Motor Company’s Annual Report, 1987: 14). In the late 1980s, Ford’s component manufacturing operations employed close to 35,000 hourly and salary workers, representing a 27 percent reduction from the 1979 level (Harbour and Associates 1990: 225). Chrysler was incorporated with the 1988 adjustment. The pact with GM also included some tougher restrictions aimed at preventing the shifting of parts work to outside suppliers. In return, GM gained the ability to drop below the 95 percent level when it makes productivity improvements. GM also gained flexibility to transfer workers more freely between plants and retained its ability to sell some unprofitable factories. By 1988, nearly half of 2,100 suppliers of Ford’s North American Automotive Operations had already earned Q-1 (Ford Motor Company’s Annual Report, 1988; Shook 1990: 99–100). For instance, in order to help them comply with its own requirement that by 1990 all of its suppliers had to use statistical process control, Ford invested in training its suppliers to use such a process (Hoffman and Kaplinsky 1988: 233–5). Between 1979 and 1990, Ford cut in half its 4,000 component suppliers (Shook 1990: 99; Rubenstein 1992: 171).

7 Ford’s global strategy 1 For instance, in 1997 alone, Ford saved about $3 billion by reducing the number of platforms and drive-train configurations (Ward’s Communications 1998: 150). 2 The Premier Automotive Group has separate global strategic business units: Jaguar, Aston Martin, Volvo, and Lincoln and Mercury. There are also four business units that continue to focus on Ford’s automotive service brands: Ford Credit; Hertz; Customer Service; and a new global enterprise responsible for e-business initiatives. 3 Brazil concentrated on tractors and Australia on specialty cars. 4 There were some success stories, such as the 1991 Ford Tempo and the Mercury Topaz and the Ford Sierra, which were jointly designed by Ford of Europe and Ford North America.

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5 Nissan designed and engineered the Villager minivans, supplied the power trains and all major stampings, provided technical assistance to help Ford develop the assembly process, and even designed and built the plant’s new body shop (Ford Motor Company’s Annual Report 1991: 3, 9; Ward’s Communications 1992: 17). 6 Ford annually procures more than 100,000 separate parts worth $40 billion (Business Wire: May 9, 1995). 7 Individual projects before Ford 2000 demanded four prototypes; now, the number has dropped to two. 8 Autolatina, opened in 1986, included production facilities in Brazil and Argentina, and was envisioned under the rationale that those markets were too small to support either company individually. The project was facilitated by government regulations, particularly in Brazil, that encouraged production of small cars through lower duties and taxes. 9 Vehicle sales volumes in that region have been predicted to reach 33 million units in 2005 and 51 million units in 2015, thus becoming the region that may be producing the largest volume of vehicles in the twenty-first century (Ward’s Communications 1997: 55). 10 In April 1981, the US government negotiated a VER, limiting Japanese imports to 1.76 million units, a drop of 7.7 percent on the 1980s totals. They were maintained until 1983, when the import quota was raised to 1.876 million, and then relaxed to 1.94 million for the year beginning in 1984. The quota was raised again in 1987, and then it was removed in 1999. Japan negotiated similar agreements with Canada and other European countries, the United Kingdom (1975), France (1977), Germany (1979), Belgium and Spain (1981), and Sweden (1983) (Hoffman and Kaplinsky 1988: 86–8). 8 Successful bargaining in a situation of increasing interdependence 1 During the early 1980s, the general perception was that Canada’s cost disadvantage in automotive production compared with that of the Japanese was larger than that of the United States. Some analyses indicated that, in the early 1980s, the Japanese had a cost advantage of about $1,650 per vehicle built over their US competitors compared with $1,882 over Canadian-built vehicles (Abernathy, as quoted in Perry 1982: 32–3; Fuss and Waverman 1990: 220). 2 Chrysler purchased Renault’s stock in AMC for $1.1 billion, thus acquiring AMC’s Jeep division (Ingrassia and White 1994: 86–7). 3 As explained in Chapter 6, this took place notwithstanding the 1982 Ford and GM labor contracts that put limits on further outsourcing of parts and plant consolidations; by the mid-1980s, all vehicle assemblers incurred costs in that practice. See also Perry (1982: 36). 4 Ford imported four-cylinder engines from its Mexican plant, opened in 1983, as well as Mexican-built transmissions. 5 For instance, Reagan in his annual report to the US Congress stated: “Although the letters were exchanged between the companies and the Canadian Government they were signed with the tacit approval of the United States Government. This approval was withdrawn in 1970 after the passing of the July 31, 1968 deadline” (Eighteenth Annual Report of the President to the Congress on the Operation of the Automotive Products Trade 1983). 6 In 1981, the US government negotiated a voluntary export restraint agreement to reduce imports from Japan by 7.7 percent during the fiscal year – or 1.7 million units. A new agreement was negotiated in April 1984 to set that limit at 2.3 million units. 7 In the mid-1970s, the Canadian government had established Export Remission Orders allowing non-Auto Pact vehicle importers to obtain some credit (reductions in duties payable) in exchange for purchasing or manufacturing automotive parts

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11

12

13

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in Canada, or in exchange for CVA in exports of vehicles, until they could meet the production–sales and CVA ratios of the Auto Pact (Wonnacott 1987b: 25; MacDonald 1989: 13). There were three types of programs, namely duty-remission orders which allowed a company “to import an amount of its products duty-free, based on the Canadian value-added in the products it exported, with the amounts related to their progress toward ‘Auto Pact’ status”; standard export remission orders, which allowed a company to import products based on part of their exports of parts from Canada; and the general export drawback program, remission of the duty paid on the importation into Canada of materials and components that were then used to produce goods for export (MacDonald 1989: 13). One has to mention, however, that this figure could be overestimated considering that firms operating in Canada have to pay a premium for higher taxes in Canada. Some of Ford’s capital expenditures over this period were used to expand parts and component operations: a $11.4 million expansion (1983) of Ford’s Essex Aluminum Center and to reactivate its Windsor engine plant 1 to produce V8 engines; a $100 million investment in 1985, to produce a new transverse version of the 3.8-liter V6 engine; a $30 million investment for tooling the Niagara Glass Plant to produce a new electrically heated quick defrost windshield and rear window for the 1986 Taurus/ Sable cars; and $60 million to upgrade production technology at the Markham, Ontario, electronics plant (Ward’s Communications 1986: 141). Between 1981 and 1988, GM’s vehicle exports from Canada increased by 43 percent, but its production decreased by 8.4 percent; Chrysler performed better than Ford. Its vehicle production multiplied by 2.3 times during the same period, most of which was exported to the United States (see Tables A2.12 and A2.14 in Appendix 2). GM had three cars in the small-car segment (Chevrolet Spring, Geo Metro, and Suzuki Swift); two lines of cars in the mid-size segment with two W-cars, Chevrolet Lumina and Buick Regal (Oshawa), and two A-cars, Chevrolet Celebrity and Oldsmobile Cutlass Ciera (Ste. Therese); two full-size vans (Scarborough); and one full-size truck (GMC C/K series). General export drawbacks that allowed the importation of parts into Canada duty free were cancelled on January 1, 1994; duty remission orders allowing automotive importers to earn credits for imported vehicles by exporting parts were to be terminated on January 1, 1998. Production-based duty-remission programs were removed on January 1, 1996 (MacDonald 1989, 15). CAMI was a joint venture formed between GM and Suzuki, which established a manufacturing operation in Canada in 1986. The Auto Pact status for CAMI was granted although it started production operations in Canada in April 1989. Some analysts expressed concern that the Auto Pact had been gutted (or made ineffective) by the CUSFTA. First, the elimination of remaining tariffs reduced the incentives for complying with the Auto Pact safeguards. Second, DesRosiers argued that the FTA undermined the “powerful political levers” that the all-or-nothing penalty structure of the Auto Pact’s production–sales ratio gave Canada to attract auto investments. In the past, vehicle assemblers had to operate close to a 2:1 production–sales ratio in order to avoid non-compliance, as explained in Chapter 3. Under CUSFTA, they could operate at a 1:1 production–sales ratio to meet the Auto Pact requirements and if they had to import additional units to meet demand in Canada they could simply import them duty free by complying with CUFSTA’s rule of origin (DesRosiers 1993b: 2). According to this view, under the CUSFTA, qualified vehicle producers may close assembly plants in Canada, whereas under the Auto Pact that was almost impossible (see also Mackenzie 1988: 129). However, the savings from duty-free importation through the Auto Pact was seen by others as a powerful incentive to continue observing the Auto Pact, particularly considering the trend toward internationalization of automotive production (Wonnacott 1988a; Johnson 1993).

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16 Johnson has argued convincingly that it is difficult to prove that the CUSFTA rule of origin was indeed more demanding than that in the Auto Pact. As explained in Chapter 3, the rules for granting duty-free access were applied differently in Canada and the United States. For the latter, North American (bilateral) origin was what mattered; for the former, performance requirements for vehicle manufacturers mattered in Canada. Under the Auto Pact, everything except the landed value of imported parts counted toward content that could not exceed 50 percent of the duty value of the finished vehicle entering the United States. But the rule applied to each vehicle with no averaging, and it required tracing of parts to the point that they were imported into Canada and the United States. CUSFTA did not require tracing and permitted averaging. Also the roll-up method used in the CUSFTA permitted that non-regional manufacturers acquired duty-free status without actually complying with the 50 percent regional content required by the rule of origin (see Chapter 10 for further discussion of this issue). CUSFTA’s rule of origin counted only direct costs of manufacturing or factory cost (i.e. labor, materials and direct processing costs, thus excluding advertising and overhead, which were considered in the Auto Pact CVA) toward North American (Canadian and US) value (Hufbauer and Schott 1992: 26; Molot 2000: 12). 9 Export dynamism: reconciling the Mexican and the US Big Three’s interests 1 Assembly firms negotiated prices with OEMs, but they refused to negotiate quantities, forcing the parts firms to bear the risk of excess capacity. Parts producers installed and maintained a capacity that caused excess demand for domestic production to prevail in the OEM sector. The net result was that output and employment were lower in the parts industry, and the level of imports of parts was higher than might have been the case under a different public policy. Obviously, the vehicle assemblers were not against this situation (Bennet 1986: 61). 2 Sales of luxury and sports cars expanded substantially during this period to 26 percent compared with a 4 percent expansion for small, popular cars. 3 Ford and Chrysler suffered production reductions of 25.7 percent and 7.3 percent, respectively, whereas VW, Nissan, and GM received quota increases of 17.5 percent, 3.7 percent, and 5.3 percent respectively (Samuels 1990: 159). 4 GM opposed that resolution mainly because of resistance from parent-division suppliers in the United States. By contrast, and in reaction to the 1977 Auto Decree, Ford and Chrysler were first to respond to the Cocoyoc resolution, by establishing new product plans with fewer luxury parts. Ford had put emphasis on its sports car production during the years of the Mexican oil boom, but since 1981 focused on the “compact” market and stopped its Mustang production (Moreno 1988: 31). 5 Ford’s deficit was larger than that of Chrysler, followed by both General Motors and Volkswagen. The reduction in production quotas was as follows: Chrysler (38 percent), GM (28 percent), Ford (27 percent), and VW (25 percent). Nissan was the only subsidiary to meet the trade balance requirement, and thus suffered no reduction. (Samuels 1990: 162). 6 The domestic demand accounted for one-fifth of the reduction in the trade deficit in the industry. Péres Nuñez quotes a 27 percent participation of reduction in auto parts imports and 73 percent of the increase in automotive exports in the total decrease experienced by the industry’s trade deficit after 1982 (Péres Nuñez 1990a: 122) 7 In fact, in 1976 GM had decided to move Mexico from its overseas operations to its North American Assembly Division, showing that the company had chosen Mexico as “a prime candidate for a share of the investments needed to downsize the company’s US models” (Bennett and Sharpe 1985b: 222). 8 Like Ford, Nissan announced increased investments 3 years after the 1977 Decree.

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10 11 12 13 14 15

16

17 18

19

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They committed $300 million to build two four-cylinder-engine plants, with an annual capacity of 300,000 engines, of which 67 percent would be exported to both the US and Japan. In March 1979, Ford had already announced an increase in its domestic and export capacity in Mexico. However, compared with GM’s and VW’s investment commitments, which represented more than 80 percent of the new investments valued at $48 billion pesos in July 1980, Ford’s investment was very small – $1 billion pesos (Samuels 1990: 133). Ford’s share of the total value of exports in Mexico was 30 percent in 1978, 27 percent in 1979, and 28 percent of the total value of exports from Mexico in those years. This plant is one of four Ford glass plants in North America (Harbour and Associates 1990: 120). While the exchange rate was 150 to the dollar in 1983, in 1989 it was 2,475 to the dollar (US Federal Reserve Statistics, as quoted in Hufbauer and Schott 1992: f.n. 11, 217). For a broader discussion of these assembly operations and their impact on international trade, see Grunwald and Flamm (1985). In 1972, maquiladoras were authorized to locate outside of the border zone. For a detailed account of these plants’ activities during the 1980s, see Carrillo (1990b: 67–114) and Berry et al. (1992: 25–31). For their location and organizational changes in relationship to the United States, Rubenstein (1992: 243–45), and for other implications see Morales (1994: 134–5). Foreign trade zone legislation permits a firm to defer payment of “duty owed on foreign parts brought to a US assembly plant until the finished vehicle is then exported,” but most of the imported parts are included in vehicles sold inside the United States. Those vehicles have to pay a tariff, but paying this tariff is usually cheaper than paying a higher tariff on components (Rubenstein 1992: 217–18). A 1983 decree authorized that maquiladoras sold up to 20 percent of their production in the domestic market, but by 1988 only fifteen of such plants were authorized to sell their output in the Mexican market (Hufbauer and Schott 1992: 100). Some of the export promotion programs included the Programa de Fomento a la Industria y al Comercio Exterior (PRONAFICE), Programa Integral a las Exportaciones (PROFIEX), and ALTEX, or high exporting companies (1986), of which the five terminal firms “made almost half of all its imports” between 1987 and 1988 (López-de-Salines 1991: 105). Jenkins contends that Mexico’s advantage lay in the benefits provided by the Mexican government to transnational auto makers. The different perspectives could be explained by the impact of the devaluation of the peso in 1982, since Cohen’s study does not make reference to the base year of calculation and it was published in that year. For a detailed analysis of the Mexican automotive production competitiveness compared with other countries, see also Booz-Allen and Hamilton (1987: 75–87). Arjona has argued that fuel and labor costs in Mexico were lower than in the United States by 30 and 95 percent respectively; transportation costs from Mexico to the United States account for only 2 percent of the value of the product (Arjona 1990: 198). For a detailed discussion of this point, see Unger (1992: 158–61) The 1977 Auto Decree had eliminated these limits on the number of lines and models and, as a consequence, seven auto makers were offering nineteen lines and fortyseven models in 1981, compared with fifteen lines and thirty-six models in 1977 (ECLAC 1995: 56). GM introduced the Century line, Chrysler the Phantom, and Volkswagen the Jetta and Golf (ECLAC 1995: 49). In 1984, an accelerated depreciation rate was introduced for fiscal purposes – 75 percent and 50 percent for the following year – for all new capital goods bought in 1984 and 1985. This measure favored Mexican firms that used it to renew their fleets of trucks and automobiles (Moreno 1988: 26–7).

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24 A new voluntary export restraint agreement between the US and the Japanese governments was established in April 1984. 25 However, Renault maintained an engine plant in Gómez Palacios, Durango. The level of local content for passenger cars increased from 55.4 percent in 1978 to 55.6 in 1979, to 60.65 in 1980, and to 62.23 in 1981 (SEPAFIN 1982: 89). 10 A North American system of production 1 In the calculation, the value of originating inputs or materials included only those acquired by the producer, not by suppliers. 2 According to the new rules, the value-added is the higher of the assembler’s Mexican production for sale in Mexico plus its trade balance (VANt) and the assembler’s reference value for the year that the calculation is being made. The reference value is the lower of the assembler’s current year domestic sales, and the average of its sale for the 1991 and 1992 model years plus a fixed percentage of the excess of sales in the current year over that average amount (65 percent for 1994–7, 60 percent for 1998–2000, and 50 percent for 2001–3). The trade balance is not included in the reference value. However, the sales include imported vehicles and not just those produced domestically, so that the reference value could be higher than VANt. If this occurs, the assembler will require a higher level of domestic Mexican valueadded to satisfy the content requirement than would be the case if VANt is used. 3 It is estimated that only 35 percent of Canadian-based independent production is accounted for by Canadian-owned companies, the rest are foreign owned, primarily US branch plant operations (Canadian Independent Automotive Component Committee 1994, 8). 4 Illegal importation of vehicles, mainly from pick-up trucks 5 years old or more, from the United States became a political issue in Mexico, as they represented about 20 percent of the 14 million vehicles that are sold in Mexico. This meant large losses for vehicle assemblers established in Mexico. Illegal imports were encouraged by three main factors: the huge gap in vehicle prices that exists between Mexico and the United States, which are largely a reflection of these markets’ different size; the existence of a long and porous border; and a Mexican decree that allowed in the late 1980s the importation of those vehicles to the border region. 5 In 1993, the capacity utilization rate in Mexico averaged 74 percent, and 83 percent in the United States; in 1998, those figures were 80 percent and 92 percent respectively (ITA 1999: 8). 6 The exception was Ford’s Cuautitlán truck plant, which registered very low utilization capacity levels. 7 Navistar located a heavy-truck plant in Escobedo, Nuevo León, in 1996, and set up another one in 1998. Volvo also established a heavy-truck and bus assembly plant, and Freightliner started to assembly five models of its Class 6 and 8 trucks in the Mercedes-Benz plant (Automotive News February 26 and October 21, 1996). 8 With the European Union, Mexico negotiated and signed in July 2000 a comprehensive free-trade agreement, and in March of the same year an automotive agreement with Brazil. The Mexican government used the same approach in those cases. Given the relatively low volume of vehicle trade between Mexico and the European Union, on the one hand, and Brazil, on the other hand, it negotiated a preferential tariff that would apply to a quota. In the case of the European Union, that quota was 14 percent of the Mexican market, with a preferential tariff that gradually drops from 20 percent to 5 percent in 2004 and to zero in 2007, and in the case of Brazil a quota of 40,000 vehicles with an 8 percent tariff. 9 These figures are based on a Canadian dollar worth 73 US cents (Industry Canada 1998: 3). 10 Except for those of Honda and Toyota, the fourteen Canadian plants are unionized and represented by the CAW, which is “a strong and progressive union, noted for its

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hard and innovative bargaining and its ‘social unionism’ philosophy with a clearly articulated agenda for workplace change and macroeconomic and social reforms” (Kumar and Holmes 1998: 103). 11 Unfortunately, it is not possible to compare this with other countries, such as Brazil and Argentina, because of a change in the way data are presented in the company’s annual reports. 12 GM’s parts operations in Mexico are so extensive that the company has become the largest single employer in Mexico (with over 85,000 employees) after PEMEX, the Mexican State-owned oil company. The company’s purchases from local suppliers of about $2.6 billion pesos represent less than 4 percent of GM’s worldwide purchases (Automotive News 10 December 1997: 12).

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275

Appendix 1

7,277,686 7,781,287 8,082,554 7,664,681 5,903,459 6,667,412 6,150,108 7,637,965 8,070,647 9,077,049 8,391,068 7,497,063 7,743,418 7,611,447 7,144,556 6,664,228 6,865,828 7,658,135 8,394,147 8,295,678 7,526,000 8,346,196

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

5,230,396 6,375,148 6,392,691 5,710,703 4,168,545 4,111,942 4,004,433 4,727,592 5,348,906 5,450,526 5,758,721 5,892,267 6,226,823 6,046,514 5,535,285 5,270,771 5,744,294 6,182,896 6,772,594 6,538,260 6,588,000 6,802,310

Ford

2,104,855 2,037,951 1,869,848 1,429,082 882,639 1,112,242 1,040,904 1,339,127 1,884,882 1,936,583 1,900,971 2,187,706 2,337,580 2,208,629 1,813,293 1,674,837 1,982,676 2,517,817 2,763,645 2,794,152 2,978,000 3,019,892

Chrysler 2,159,779 2,219,544 2,376,110 2,530,565 2,529,218 2,211,514 2,079,246 2,087,801 2,135,346 2,385,349 2,767,621 2,475,347 2,875,337 2,880,892 3,012,932 3,088,433 3,285,696 2,332,255 2,465,581 2,555,723 3,788,000 3,144,766

VW 3,237,978 3,406,034 3,459,165 3,659,455 3,541,467 1,892,593 2,105,358 2,255,524 1,982,871 1,879,054 1,935,579 2,053,444 2,101,107 2,204,915 1,988,407 2,004,038 2,264,331 1,753,376 1,880,795 1,768,292 1,802,000 1,919,312

Renault 2,487,851 2,720,758 2,929,157 2,996,225 3,293,344 3,224,488 3,147,262 3,274,835 3,482,727 3,718,522 3,737,309 3,729,719 4,084,264 4,278,190 4,671,308 4,511,210 4,487,891 4,517,011 4,564,961 4,464,773 4,858,000 4,834,486

Toyota

Source: World Motor Vehicle Data, several issues.

Note Total world motor vehicle production equals the sum of the companies’ production presented in this table.

GM

Year

Table A1.1 World motor vehicle production by company, 1976–97 (units)

2,572,111 2,595,264 2,727,848 2,704,544 3,117,806 2,700,461 2,512,309 2,586,295 2,727,568 2,808,085 2,594,766 2,658,255 2,699,750 3,003,461 3,065,289 3,025,759 2,898,185 2,867,515 2,701,959 2,843,346 2,775,000 2,846,521

Nissan 560,075 664,931 742,682 801,869 965,902 1,008,927 1,021,578 1,087,775 989,036 1,265,648 1,474,557 1,580,872 1,709,828 1,811,962 1,925,097 1,908,764 1,762,197 1,705,531 1,725,298 1,763,298 2,072,000 2,269,360

Honda

25,630,731 27,800,917 28,580,055 27,497,124 24,402,380 22,929,579 22,061,198 24,996,914 26,621,983 28,520,816 28,560,592 28,074,673 29,778,107 30,046,010 29,156,167 28,148,040 29,291,098 29,534,536 31,268,980 31,023,522 32,387,000 33,182,843

Total

278

Appendix 1

Table A1.2 World motor vehicle sales by company, 1969–97 (units) Year

GM

Ford

Chrysler

Total

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

7,159,526 5,308,493 7,779,225 7,790,525 8,684,000 6,690,000 6,629,151 8,568,000 9,068,000 9,482,000 8,993,000 7,101,000 6,762,000 6,244,000 7,800,000 8,256,000 9,305,000 8,576,000 7,766,000 8,108,000 7,907,000 7,454,000 7,404,000 7,685,000 7,785,000 8,328,000 8,320,000 8,381,000 8,565,000

4,944,080 4,861,570 5,024,000 5,698,000 5,972,875 5,368,000 4,690,000 5,422,000 6,550,000 6,552,000 5,806,130 4,328,450 4,400,000 4,323,700 5,002,000 5,667,000 5,634,348 5,984,081 6,115,288 6,517,186 6,337,000 5,805,000 5,345,000 5,764,000 5,963,000 6,639,000 6,606,000 6,653,000 6,943,000

2,446,605 2,459,336 2,662,517 3,028,212 3,402,413 2,762,842 2,475,597 3,130,307 3,068,692 2,211,535 1,796,465 1,224,923 1,283,000 1,181,726 1,493,961 2,034,348 2,157,373 2,198,415 2,450,860 2,566,920 2,381,000 1,984,000 1,866,000 2,175,000 2,476,000 2,762,103 2,674,000 2,959,000 2,886,981

14,550,211 12,629,399 15,465,742 16,516,737 18,059,288 14,820,842 13,794,748 17,120,307 18,686,692 18,245,535 16,595,595 12,654,373 12,445,000 11,749,426 14,295,961 15,957,348 17,096,721 16,758,496 16,332,148 17,192,106 16,625,000 15,243,000 14,615,000 15,624,000 16,224,000 17,729,103 17,600,000 17,993,000 18,394,981

Source: Ward’s Automotive Yearbook, several issues.

Appendix 1

279

Table A1.3 Net income of the Big Three, 1969–97 (millions of US dollars) Year

GM

Ford

Chrysler

Total

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1,710.70 609.07 1,935.71 2,162.81 2,398.00 950.00 1,253.00 2,902.80 3,337.50 3,508.00 2,893.00 –763.00 333.00 963.00 3,730.20 4,517.00 3,999.00 2,945.00 3,550.90 4,856.30 4,224.00 –1,986.00 –4,453.00 –23,489.00 2,466.00 4,901.00 6,881.00 4,963.00 6,698.00

546.50 515.70 657.00 870.00 906.50 360.90 322.70 983.10 1,672.80 1,588.90 1,169.30 –1,543.30 –1,060.00 –657.80 1,867.00 2,906.80 2,515.40 3,285.10 4,625.20 5,300.20 3,835.00 860.00 –2,258.00 –7,385.00 2,529.00 5,308.00 4,139.00 4,446.00 6,920.00

98.97 –7.60 83.66 220.46 255.45 –52.09 –259.50 422.60 163.20 –204.60 –1,097.30 –1,709.70 –475.60 170.10 700.90 2,400.00 1,635.20 1,403.60 1,290.00 1,140.00 323.00 68.00 –795.00 723.00 –2,551.00 3,713.00 2,025.00 3,529.00 2,805.00

2,356.17 1,117.17 2,676.37 3,253.27 3,559.95 1,258.81 1,316.20 4,308.50 5,173.50 4,892.30 2,965.00 –4,016.00 –1,202.60 475.30 6,298.10 9,823.80 8,149.60 7,633.70 9,466.10 11,296.50 8,382.00 –1,058.00 –7,506.00 –30,151.00 2,444.00 13,922.00 13,045.00 12,938.00 16,423.00

Source: Ward’s Automotive Yearbook, several issues.

280

Appendix 1

Table A1.4 Worldwide payrolls of the Big Three, 1969–97 (millions of US dollars) Year

GM

Ford

Chrysler

Total

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

6,928.28 6,259.84 8,015.07 8,668.22 10,309.00 9,771.00 10,028.00 12,908.50 15,270.80 17,195.50 18,851.00 17,799.00 1,957.00 17,043.00 19,605.00 22,505.00 25,639.00 28,146.00 27,145.00 27,548.60 28,684.00 29,251.00 29,641.00 30,340.00 29,806.00 31,737.00 33,634.00 29,800.00 30,400.00

3,523.80 3,700.00 4,066.60 4,905.50 5,769.20 5,892.60 5,629.18 6,600.00 8,300.00 12,500.00 10,169.10 9,500.00 9,325.00 8,863.00 9,125.20 9,800.00 10,175.10 11,289.70 11,669.60 13,010.40 13,327.00 14,014.00 12,810.00 13,800.00 13,800.00 15,853.00 16,572.00 17,609.00 17,187.00

1,813.30 1,783.97 2,006.23 2,436.38 3,133.78 2,913.20 2,739.60 3,553.10 4,115.80 3,284.70 2,900.00 2,353.00 2,083.00 1,795.60 2,400.00 3,386.20 3,843.30 4,137.40 4,362.80 5,162.10 4,949.00 4,140.00 3,968.00 4,748.00 5,262.00 6,184.00 6,821.00 6,830.00 6,702.00

12,265.38 11,743.81 14,087.90 16,010.10 19,211.98 18,576.80 18,396.78 23,061.60 27,686.60 32,980.20 31,920.10 29,652.00 13,365.00 27,701.60 31,130.20 35,691.20 39,657.40 43,573.10 43,177.40 45,721.10 46,960.00 47,405.00 46,419.00 48,888.00 48,868.00 53,774.00 57,027.00 54,239.00 54,289.00

Source: Ward’s Automotive Yearbook, several issues.

North America

Millions of US dollars 1977 12,601 1978 14,606 1979 15,084 1980 14,164 1981 13,202 1982 12,961 1983 14,966 1984 19,863 1985 22,063 1986 21,764 1987 22,395 1988 25,773 1989 27,779 1990 26,079 1991 29,500b 1992 34,494b 1993 39,666b 1994 45,889b 1995 45,841b 1996 48,064b 1997 52,301b

Year

5,409 5,949 7,607 7,691 8,003 7,765 7,736 6,539 9,107 10,712 14,696 13,869 15,401 19,553 19,860 16,390 13,452 16,880 15,137 15,121 16,306

Europe

Table A1.5 Ford’s assets at 31 December, 1977–97

1,376 1,566 1,755 2,374 2,354 2,505 2,147 2,173 2,131 2,501 1,865 a a a a a a a a a a

Latin America 1,286 1,516 1,722 2,000 2,372 2,506 2,103 2,095 1,820 2,224 3,247 5,803 5,287 10,858 11,256 14,398 18,248 16,798 14,214 16,473 16,472

Other countries 10,933 12,907 13,354 12,547 11,533 11,410 13,229 17,648 19,396 18,855 18,700 22,120 25,245 23,207 26,865 34,494 39,666 45,889 45,841 48,064 52,301

US 9,739 10,730 12,814 13,682 14,398 14,327 13,723 13,022 15,725 18,346 23,503 23,325 23,222 33,283 33,751 30,788 31,700 33,678 29,351 31,594 32,778

Outside US 20,672 23,637 26,168 26,229 25,931 25,737 26,952 30,670 35,121 37,201 42,203 45,445 48,467 56,490 60,616 65,282 71,366 79,567 75,192 79,658 85,079

Total

60.96 57.64 50.36 62.82 56.71 48.67 55.58 57.67 60.97 60.34 61.47

Percent 1977 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

26.17 29.07 30.17 25.93 30.52 32.76 18.85 21.21 20.13 18.98 19.17

Europe 6.66 6.71 9.73 6.07 a a a a a a a

Latin America 6.22 6.58 9.74 5.18 12.77 18.57 25.57 21.11 18.90 20.68 19.36

Other countries 52.89 51.03 44.33 55.23 48.67 44.32 55.58 57.67 60.97 60.34 61.47

US 47.11 48.97 55.67 44.77 51.33 55.68 44.42 42.33 39.03 39.66 38.53

Outside US 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

Source: Ford Motor Co., Annual Reports, several years.

Notes Latin America includes Mexico, Brazil, and Argentina; North America includes Canada and the USA unless otherwise stated; other countries includes mainly South Africa and Russia. a Included in other countries. b Canada included in other countries.

North America

Year

Table A1.5 Continued

North America

Millions of US dollars 1975 212 1976 351 1977 870 1978 1,206 1979 2,529 1980 1,812 1981 1,230 1982 1,543 1983 1,256 1984 2,569 1985 2,733 1986 2,140 1987 2,350 1988 3,066 1989 4,411 1990 4,177 1991 3,042 1992 3,018 1993 4,289 1994 5,429b 1995 5,296b 1996 4,493b 1997 4,494b

Year

325 160 152 269 728 718 653 837 789 641 620 720 853 1,362 1,915 2,713 1,979 1,857 1,376 1,393 1,892 1,905 2,411

Europe 47 33 41 58 103 175 276 455 205 213 256 295 124 a a a a a a a a a a

Latin America

Table A1.6 Ford’s worldwide capital expenditures by region, 1975–97

30 7 27 39 80 64 68 133 83 92 128 198 285 284 369 273 702 822 1,049 1,488 1,488 1,811 1,237

Other countries 212 351 784 1,135 2,347 1,417 1,039 1,470 1,096 2,442 2,553 1,966 2,108 2,862 4,121 3,787 3,042 3,018 4,289 5,429 5,296 4,493 4,494

US 402 200 306 437 1,093 1,352 1,188 1,498 1,237 1,073 1,184 1,387 1,504 1,850 2,574 3,376 2,681 2,679 2,425 2,881 3,380 3,716 3,648

Outside US

614 551 1,090 1,572 3,440 2,769 2,227 2,968 2,333 3,515 3,737 3,353 3,612 4,712 6,695 7,163 5,723 5,697 6,714 8,310 8,676 8,209 8,142

Total

34.53 63.70 73.52 51.99 73.13 65.07 53.15 63.88 65.33 61.04 54.73 55.20

Percent 1975 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

52.93 29.04 21.16 28.20 16.59 28.90 34.58 20.49 16.76 21.81 23.21 29.61

Europe

Source: Ford Motor Co., Annual Reports, several years.

Notes a Included in other countries. b Canada included in other countries.

North America

Year

Table A1.6 Continued

7.65 5.99 2.99 15.33 6.85 a a a a a a a

Latin America 4.89 1.27 2.33 4.48 3.43 6.03 12.27 15.62 17.91 17.15 22.06 15.19

Other countries 34.53 63.70 68.23 49.53 68.32 60.74 53.15 63.88 65.33 61.04 54.73 54.89

US 65.47 36.30 31.77 50.47 31.68 39.26 46.85 36.12 34.67 38.96 45.27 45.11

Outside US 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

North America

3,665,325 3,728,784 4,478,112 4,334,247 4,419,925 2,765,776 1,111,627 2,292,376 2,233,070 2,907,854 3,552,328 3,510,693 3,826,093 3,899,357 3,982,209 3,761,833 3,279,092 2,856,972 3,325,990 3,822,510 4,215,369 3,933,128 4,001,727 4,076,192

Year

Units 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1,041,539 1,093,295 1,355,354 1,647,367 1,346,124 1,184,718 1,023,311 1,415,495 1,417,857 1,476,741 1,428,161 1,493,641 1,546,918 1,674,321 1,796,463 1,858,912 1,784,244 1,779,462 1,691,097 1,457,259 1,668,044 1,746,191 1,817,377 1,788,183

Europe

Table A1.7 Ford’s production by region, 1974–97

284,994 264,228 252,032 237,494 274,677 253,339 266,700 313,116 283,496 266,022 278,863 292,878 263,234 197,589 336,252 284,262 336,711 426,993 503,616 463,800 476,838 428,278 751,268 552,934

Latin America 120,673 119,784 123,232 148,934 143,000 114,050 85,100 90,955 92,707 76,975 89,554 153,314 122,800 121,000 111,899 141,507 135,238 207,344 223,591 221,303 114,870 109,579 102,873 106,668

Other countries 3,091,971 3,250,238 3,941,959 3,744,880 3,790,440 2,360,034 929,627 1,937,572 1,817,480 2,479,158 2,958,550 2,853,577 3,160,516 3,312,391 3,329,096 3,173,307 2,762,428 2,428,238 2,829,990 3,349,179 3,720,540 3,399,685 3,464,645 3,445,363

US 2,020,560 1,955,853 2,266,771 2,623,162 2,393,286 1,957,849 1,598,629 2,174,370 2,209,650 2,248,434 2,390,356 2,596,949 2,598,529 2,579,876 2,897,727 2,873,207 2,772,857 2,842,533 2,914,304 2,615,693 3013411a 3130794 a 3178408 a 3356947 a

Outside US

5,112,531 5,206,091 6,208,730 6,368,042 6,183,726 4,317,883 2,528,256 4,111,942 4,027,130 4,727,592 5,348,906 5,450,526 5,759,045 5,892,267 6,226,823 6,046,514 5,535,285 5,270,771 5,744,294 5,964,872 6,733,951 6,530,479 6,643,053 6,802,310

Total

71.69 72.13 64.05 55.45 64.41 63.95 54.20 64.08 65.10 63.26 59.97 62.48

Percent 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

20.37 21.83 27.44 35.21 27.40 28.85 33.76 24.43 25.76 28.09 27.23 27.41

Europe 5.57 4.06 5.87 7.04 5.37 5.40 8.10 7.78 7.36 6.89 11.26 8.48

Latin America 2.36 1.98 2.64 2.30 2.81 1.80 3.93 3.71 1.77 1.76 1.54 1.64

Other countries 60.48 63.49 54.66 89.66 52.35 53.46 46.07 56.15 55.25 52.06 52.15 50.65

US

Sources: Ford Motor Co., Annual Reports, several years; Ward’s Automotive Yearbook, several issues; Word Motor Vehicle Report.

Note a Since 1994, South Africa and other non-specified countries have been included in ‘outside US’ production operations.

North America

Year

Table A1.7 Continued

39.52 36.51 45.34 10.34 47.65 46.54 53.93 43.85 44.75 47.94 47.85 49.35

Outside US

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

North America

5,245,657 5,244,082 7,946,840 7,479,477 7,730,555 6,557,158 5,594,583 5,383,761 4,632,008 5,906,443 6,495,506 7,268,954 6,547,353 5,708,030 5,870,013 5,564,943 5,013,959 4,552,175 4,607,182 4,906,191 5,441,037 5,432,185 4,912,430 5,278,290

Year

Units 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

842,699 847,581 1,117,193 1,131,324 1,207,919 1,071,405 1,109,357 952,563 1,147,308 1,379,334 1,219,564 1,429,355 1,446,730 1,450,810 1,473,748 1,614,487 1,713,712 1,651,310 1,767,078 1,411,048 1,749,372 1,791,495 1,875,800 1,864,666

Europe 222,486 210,234 218,768 189,049 244,160 233,468 229,081 222,775 224,694 240,478 243,172 278,506 305,657 262,223 326,840 351,485 339,420 389,149 413,735 467,251 454,111 549,018 726,845 825,278

Latin America

Table A1.8 General Motors’ production by region, 1974–97

138,000 134,255 131,929 116,447 132,000 128,993 137,545 125,985 146,098 111,710 112,405 101,047 76,000 76,000 72,817 80,532 77,465 71,594 77,833 99,440 97,870 107,338 108,007 87,662

Other countries 4,600,376 4,649,358 7,234,204 6,700,835 6,875,555 5,751,615 4,910,850 4,627,674 4,070,085 5,104,237 5,675,048 6,425,505 5,827,983 5,129,333 5,147,300 4,818,186 4,222,533 3,720,547 3,823,009 4,158,720 4,560,639 4,360,352 4,049,259 4,295,626

US 1,848,466 1,786,794 2,180,526 2,215,462 2,439,079 2,239,409 2,159,716 2,057,410 2,080,023 2,533,728 2,395,599 2,652,357 2,547,757 2,367,730 2,596,118 2,793,261 2,922,023 2,943,681 3,042,819 2,725,210 3,523,641a 3,935,326 a 4,149,154 a 4,050,543 a

Outside US

6,448,842 6,436,152 9,414,730 8,916,297 9,314,634 7,991,024 7,070,566 6,685,084 6,150,108 7,637,965 8,070,647 9,077,862 8,375,740 7,497,063 7,743,418 7,611,447 7,144,556 6,664,228 6,865,828 6,883,930 8,084,280 8,295,678 8,198,413 8,346,169

Total

81.34 84.41 82.06 75.32 80.07 75.81 68.31 71.27 70.28 68.94 64.44 65.52

Percent 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

13.07 11.87 13.41 18.66 15.75 19.03 24.78 20.50 22.59 22.73 24.61 23.15

Europe 3.45 2.32 2.92 3.65 3.07 4.22 5.84 6.79 5.87 6.97 9.53 10.24

Latin America 2.14 1.40 1.61 2.38 1.11 0.94 1.07 1.44 1.26 1.36 1.42 1.09

Other countries 71.34 76.84 71.98 66.18 70.78 66.47 55.83 60.41 56.41 52.56 49.39 51.47

US

Source: Ward’s Automotive Yearbook, several issues.

Note a Since 1994, South Africa and other non-specified countries have been included in ‘outside US’ production operations.

North America

Year

Table A1.8 Continued

28.66 23.16 28.02 33.82 29.22 33.53 44.17 39.59 43.59 47.44 50.61 48.53

Outside US

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

98.27 122.92 125.93 99.23 98.38 76.32 45.89 97.36 98.68 101.02 100.11 99.88 99.85 97.36 93.70 93.02 92.55 92.16 93.24 94.62 93.70 92.61 96.31 94.03

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

98.60 98.94 100.61 93.20 88.09 70.15 73.50 100.39 97.73 100.10 99.85 102.47 98.91 101.17 99.86 98.93 98.25 94.30 98.21 97.61 97.60 102.18 99.86 99.34

Europe

Source: Ford Motor Co., Annual Reports, several years.

North America

Year 99.59 98.62 100.60 102.75 98.22 73.64 74.68 102.22 98.32 98.68 103.46 101.43 104.46 90.22 136.13 105.67 138.00 155.27 172.47 159.38 153.82 152.41 234.04 120.73

Latin America

Table A1.9 Ford’s production to sales ratio by region, 1974–97 (percent)

64.69 69.92 81.71 95.73 88.42 69.76 54.15 38.32 34.90 24.77 26.62 53.02 40.66 38.54 30.57 34.02 32.20 57.44 62.28 61.47 34.29 29.70 28.82 30.13

Other countries 92.91 121.41 122.62 94.31 92.67 73.12 43.23 92.19 87.63 93.00 90.02 89.15 90.02 90.60 85.34 85.35 84.07 85.47 84.98 88.51 88.21 85.14 88.91 85.79

US 104.63 102.90 108.47 102.81 100.91 75.51 73.39 98.55 100.73 99.11 104.02 110.52 103.61 100.03 102.10 97.00 98.92 101.70 111.66 108.99 114.36 119.82 115.33 114.53

Outside US

97.22 113.73 117.05 97.63 95.69 74.19 58.41 95.44 94.37 95.81 95.78 98.20 95.68 94.50 92.40 90.52 90.91 93.52 96.71 96.46 98.26 98.86 99.85 97.92

Total

98.27 122.92 125.93 99.23 98.38 76.32 45.89 97.36 98.68 101.02 100.11 99.88 99.85 97.36 93.70 93.02 92.55 92.16 93.24 94.62 93.70 92.61 96.31 94.03

Year

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

100.93 99.75 101.43 100.22 97.67 99.86 100.66 100.38 102.25 91.60 97.36 100.39 102.02 249.24 208.61 145.12 194.81 192.26 204.40 230.52 247.80 712.35 321.40 233.31

Mexico 98.31 122.50 125.62 99.24 98.37 76.79 47.78 97.50 98.82 100.86 100.07 99.89 100.35 98.95 95.05 94.31 95.20 95.23 96.34 96.71 96.78 97.24 99.88 97.08

North America including Mexico 92.91 121.41 122.62 94.31 92.67 73.12 43.23 92.19 87.63 93.00 90.02 89.15 90.02 90.60 85.34 85.35 84.07 85.47 84.98 88.51 88.21 85.14 88.91 85.79

United States

Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

North America

Table A1.10 Ford’s production to sales ratio in North America, 1974–97 (percent)

104.63 102.90 108.47 102.81 100.91 75.51 73.39 98.55 100.73 99.11 104.02 110.52 103.61 100.03 102.10 97.00 98.92 101.70 111.66 108.99 114.36 119.82 115.33 114.53

Outside US 97.22 113.73 117.05 97.63 95.69 74.19 58.41 95.44 94.37 95.81 95.78 98.20 95.68 94.50 92.40 90.52 90.91 93.52 96.71 96.46 98.26 98.86 99.85 97.92

Total

Europe

4,734 5,847 7,621 8,433 11,050 10,209 9,882 9,541 9,516 8,423 8,745 12,481 15,731 19,644 19,848 23,736 21,012 21,579 18,507 22,623 26,132 27,006 24,424

Millions of US dollars 1975 19,858 1976 19,858 1977 26,719 1978 29,829 1979 26,790 1980 20,284 1981 21,569 1982 21,823 1983 30,328 1984 39,233 1985 39,680 1986 45,948 1987 51,630 1988 57,282 1989 57,182 1990 52,477 1991 40,627b 1992 51,918 b 1993 61,559 b 1994 73,759 b 1995 73,870 b 1996 76,048 b 1997 81,313 b

Year

North America 1,790 1,783 2,104 2,754 3,723 4,521 4,122 3,307 2,226 2,187 2,402 2,401 1,782 a a a a a a a a a a

Latin America 1,356 1,352 1,397 1,768 1,951 2,072 2,674 2,396 2,385 2,523 1,947 1,886 2,500 5,262 5,849 5,631 10,412 10,910 11,502 10,755 10,494 14,969 17,198

Other Countries

Table A1.11 Ford’s worldwide sales to unaffiliated customers by region, 1975–97

19,858 18,199 24,769 27,799 24,408 18,429 19,739 20,541 28,375 36,788 36,779 42,790 47,688 52,992 52,850 48,761 40,627 51,918 61,559 73,759 73,870 76,048 81,313

US 7,880 10,641 13,072 14,985 19,106 18,657 18,508 16,526 16,080 15,578 15,995 19,926 23,955 29,201 30,029 33,083 31,424 32,489 30,009 33,378 36,626 41,975 41,622

Outside US

27,738 28,840 37,841 42,784 43,514 37,086 38,247 37,067 44,455 52,366 52,774 62,716 71,643 82,193 82,879 81,844 72,051 84,407 91,568 107,137 110,496 118,023 122,935

Total

71.59 61.57 58.87 75.19 65.59 56.39 67.23 68.85 66.85 64.43 66.14

Percent 1975 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

17.07 25.39 25.74 16.57 22.49 29.16 20.21 21.12 23.65 22.88 19.87

Latin Europe

Source: Ford Motor Co., Annual Reports, several years.

Notes a Included in other countries. b Canada included in other countries.

America

North Year

Table A1.11 Continued

6.45 8.56 8.92 4.55 a a a a a a a

Other America 4.89 4.48 6.46 3.69 11.92 14.45 12.56 10.04 9.50 12.68 13.99

Countries 71.59 56.09 55.42 69.69 64.47 56.39 67.23 68.85 66.83 64.43 66.14

US 28.41 43.91 44.58 30.31 35.53 43.61 32.77 31.15 33.17 35.57 33.86

Outside US

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

North America

3,350,961 3,848,066 4,101,628 3,729,921 3,033,470 3,556,020 4,367,950 4,492,562 3,624,074 2,422,208 2,354,473 2,262,844 2,878,545 3,548,446 3,514,908 3,832,000 4,005,000 4,250,000 4,044,000 3,543,000 3,100,000 3,567,000 4,040,000 4,499,000 4,247,000 4,155,000 4,335,000

Year

Units 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1,271,905 1,365,376 1,343,790 1,056,314 1,105,054 1,347,095 1,767,629 1,528,128 1,688,738 1,392,252 1,410,018 1,450,762 1,475,287 1,430,274 1,457,669 1,564,000 1,655,000 1,799,000 1,879,000 1,816,000 1,887,000 1,722,000 1,493,000 1,709,000 1,709,000 1,820,000 1,800,000

Europe

Table A1.12 Ford’s factory sales by region, 1971–97a

179,412 211,691 250,354 286,157 267,937 250,523 231,148 279,646 344,003 357,134 306,329 288,352 269,586 269,540 288,760 252,000 219,000 247,000 269,000 244,000 275,000 292,000 291,000 310,000 281,000 321,000 458,000

Latin America 130,654 167,915 173,256 186,541 171,311 150,816 155,574 161,729 163,489 157,156 237,368 265,628 310,813 336,391 289,163 302,000 314,000 366,000 416,000 420,000 361,000 359,000 360,000 335,000 369,000 357,000 354,000

Other countries 3,106,409 3,563,264 3,771,704 3,327,862 2,677,073 3,214,775 3,970,767 4,090,322 3,227,477 2,150,626 2,101,822 2,074,003 2,665,711 3,286,599 3,200,785 3,511,000 3,656,000 3,901,000 3,718,000 3,286,000 2,841,000 3,330,000 3,784,000 4,218,000 3,993,000 3,897,000 4,016,000

US 1,826,523 2,029,784 2,097,324 1,931,071 1,900,699 2,089,679 2,551,534 2,371,743 2,592,827 2,178,124 2,206,366 2,193,583 2,268,520 2,298,052 2,349,715 2,508,000 2,579,000 2,838,000 2,962,000 2,803,000 2,795,000 2,610,000 2,400,000 2,635,000 2,613,000 2,756,000 2,931,000

Outside US

4,932,932 5,593,048 5,869,028 5,258,933 4,577,772 5,304,454 6,522,301 6,462,065 5,820,304 4,328,750 4,308,188 4,267,586 4,934,231 5,584,651 5,550,500 6,019,000 6,235,000 6,739,000 6,680,000 6,089,000 5,636,000 5,940,000 6,184,000 6,853,000 6,606,000 6,653,000 6,947,000

Total

67.93 69.89 67.04 62.27 53.02 63.33 63.79 55.13 65.33 65.65 64.29 62.45 62.40

Percent 1971 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

25.78 22.90 25.40 29.01 33.99 26.26 27.00 33.56 24.14 24.94 25.87 27.36 25.91

Europe 3.64 4.27 4.72 5.91 6.76 5.20 3.71 4.89 4.71 4.52 4.25 4.82 6.59

Latin America 2.65 2.95 2.84 2.81 6.22 5.21 5.49 6.42 5.82 4.89 5.59 5.37 5.10

Other countries 62.97 64.26 60.61 55.45 48.60 57.67 57.89 50.41 60.45 61.55 60.45 58.58 57.81

US 37.03 35.74 39.39 44.55 51.40 42.33 42.11 49.59 39.55 38.45 39.55 41.42 42.19

Outside US

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

Source: Ford Motor Co., Annual Reports, several years.

Note a Vehicle unit sales are reported worldwide on a “where sold” basis and include sales of all Ford-badged units, as well as units manufactured by Ford and sold to other manufacturers. Before 1986, factory unit sales were reported in North America on a “where sold” basis and overseas on a “where produced” basis. Also, Ford-badged unit sales of some unconsolidated subsidiaries (primarily Autolatina-Brazil and Argentina) were not previously reported.

North America

Year

Table A1.12 Continued

7.9 5.68 –1.38 –14.96 –10.98 –9.81 11.31 13.63 9.68 8.90 12.69 10.39 4.63 0.19 –7.51 –1.17 3.74 6.54 3.75 4.61 3.17

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

11.26 9.77 16.02 4.20 3.61 5.81 3.63 2.25 3.58 4.86 6.73 10.52 7.73 0.74 –2.41 –3.95 –3.03 0.76 2.12 1.77 2.03

Europe 5.74 5.94 7.52 8.26 –3.70 0.40 –8.99 –5.06 –2.67 2.64 –5.09 a a a a a a a a a a

Latin America 1.32 6.33 1.51 2.85 7.80 6.07 4.09 7.73 6.04 3.37 –1.97 8.13 13.24 –0.94 –4.37 –3.35 –0.74 4.66 0.31 1.86 1.33

Other countries

Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Note a All other includes Latin America data since 1986, and Canada’s since 1991.

North America

Year

Table A1.13 Ford’s net income to assets ratio, 1977–97 (percent)

8.85 6.35 –1.49 –16.08 –10.39 –9.80 11.46 13.55 10.25 9.48 14.56 11.18 4.35 –0.07 –8.24 –1.17 3.74 6.54 3.75 4.61 3.17

US 7.51 7.27 10.68 3.47 0.94 3.21 2.56 3.96 3.35 4.42 4.04 9.15 8.94 0.33 –2.87 –3.67 –1.71 2.71 1.24 1.82 1.68

Outside US 8.22 6.76 4.47 –5.88 –4.10 –2.56 6.93 9.48 7.16 6.98 8.70 10.14 6.55 0.16 –5.25 –2.35 1.32 4.92 2.77 3.50 2.59

Total

67 546 994 829 –208 –2,119 –1,450 –1,271 1,693 2,708 2,136 1,936 2,842 2,678 1,285 50 –2,215 –405 1,482 3,002b 1,718b 2,216b 1,656b

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

81 305 609 581 1,219 323 289 451 281 147 326 521 989 1,459 1,190 145 –478 –647 –407 128 321 268 331

Europe

Source: Ford Motor Co., Annual Reports, several years.

Notes a Included in other countries. b Canada included in other countries.

North America

Year 57 71 79 93 132 196 –87 10 –193 –110 –57 66 –95 a a a a a a a a a a

Latin America

Table A1.14 Ford’s net income by region, 1975–98 (millions of US dollars)

23 61 17 96 26 57 185 152 86 162 110 75 –64 472 700 –102 –492 –482 –135 783 44 307 219

Other countries 67 546 968 819 –199 –2,018 –1,198 –1,118 1,516 2,391 1,988 1,788 2,723 2,474 1,099 –17 –2,215 –405 1,482 3,002 1,718 2,216 1,656

US 161 437 731 780 1,368 475 135 460 351 516 527 810 949 2,135 2,076 110 –970 –1,129 –542 911 365 575 550

Outside US 228 983 1,699 1,599 1,169 –1,543 –1,063 –658 1,867 2,907 2,515 2,598 3,672 4,609 3,175 93 –3,185 –1,534 940 3,913 2,083 2,791 2,206

Total

North America

Millions of US dollars 1977 5,930 1978 6,581 1979 6,364 1980 5,670 1981 6,103 1982 6,881 1983 8,522 1984 11,827 1985 11,919 1986 13,868 1987 15,671 1988 16,569 1989 16,219 1990 15,060 1991 12,883c 1992 6,978c 1993 8,721c 1994 11206c 1995 10,438c 1996 11,232c 1997 14,893c

Year

977 1,080 1,388 1,204 738 458 373 660 821 1,128 1,471 1,781 1,384 1,999 1,852 1,717 1,698 2,303 2,765 2,900 3,602

Europe

Table A1.15 Ford’s intercompany sales, 1977–98a

216 203 203 159 171 156 314 577 705 b b b b b b b b b b b b

Latin America

15 17 22 15 25 8 36 67 81 996 1,390 1,672 1,453 2,509 2,622 10,120 9,791 11,217 12,060 14,812 15,500

Other countries

2,993 3,220 3,783 3,453 3,743 3,733 4,732 6,041 6,747 7,244 7,614 8,822 8,602 8,141 7,340 6,978 8,721 11,206 10,438 11,232 14,893

US

4,145 4,661 4,194 3,595 3,294 3,770 4,513 7,090 6,779 8,748 10,918 11,200 10,454 11,427 10,017 11,837 11,489 13,520 14,825 17,712 19,102

Outside US

7,138 7,881 7,977 7,048 7,037 7,503 9,245 13,131 13,526 15,992 18,532 20,022 19,056 19,568 17,357 18,815 20,210 24,726 25,263 28,944 33,995

Total

83.08 79.78 91.71 88.12 82.75 74.22 45.32 41.32 38.81 43.81

Percent 1977 1979 1982 1985 1988 1991 1994 1995 1996 1997

13.69 17.40 6.10 6.07 8.90 10.67 9.31 10.94 10.02 10.60

Europe

3.03 2.54 2.08 5.21 c c c c c c

Latin America

0.2 0.28 0.11 0.60 8.35 15.11 45.37 47.74 51.17 45.59

Other countries

41.93 47.42 49.75 49.88 44.06 42.29 45.32 41.32 38.81 43.81

US

58.07 52.58 50.25 50.12 55.94 57.71 54.68 58.68 61.19 56.19

Outside US

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

Source: Ford Motor Co., Annual Reports, several years.

Notes a Intercompany sales among geographic areas consist primarily of vehicles, parts, and components manufactured by consolidated subsidiaries and sold to other consolidated subsidiaries. Transfer prices between these companies are established through negotiations between the affected parties. b Included in other countries. c Canada included in other countries.

North America

Year

Table A1.15 Continued

22.19 22.06 23.76 27.95 28.30 31.53 28.10 30.15 30.04 30.18 30.16 28.93 28.36 28.70 31.7b 13.4b 14.17b 13.19b 12.38b 12.87b 15.48b

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

12.82 12.81 12.56 11.79 7.47 4.80 3.92 7.84 9.39 9.04 9.35 9.07 6.97 8.42 8.81 7.96 9.17 9.24 9.57 9.70 12.85

Europe 10.27 7.37 5.45 3.52 4.15 4.72 14.11 26.38 29.35 a a a a a a a a a a a a

Latin America 1.07 0.96 1.13 0.72 0.93 0.33 1.51 2.66 4.16 23.23 32.46 31.77 24.84 44.56 25.18 92.76 85.12 51.05 53.47 49.74 47.40

Other countries

Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Notes a Included in other countries. b Canada included in other countries.

North America

Year

Table A1.16 Ford’s intercompany sales to total sales ratio, 1977–98 (percent)

12.08 11.58 15.50 18.74 18.96 18.17 16.68 16.42 18.34 16.93 15.76 16.65 16.28 16.70 18.07 13.44 14.17 13.19 12.38 12.87 15.48

US 31.71 31.10 21.95 19.27 17.80 22.80 29.31 45.51 48.63 43.90 37.65 38.35 34.81 34.54 31.88 36.43 38.26 37.22 38.81 39.01 43.59

Outside US 18.86 18.42 18.33 19.00 18.40 20.24 21.25 25.08 27.52 25.50 23.08 24.36 22.99 23.91 24.09 22.29 22.06 23.08 22.86 24.52 30.10

Total

6,546.30 5,584.33 6,117.06 6,639.64 7,392.23 8,374.18 9,160.86 9,644.06 10,535.88 11,056.39 11,289.06 11,990.61 12,891.39 13,478.12 14,139.96 14,811.46 14,300.25b 15,590.99b 16,268.23b 17,486.72b 18,499.87b 19,514.50b 20,247.26b

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

4,283.95 4,340.45 4,311.43 5,518.52 6,543.35 7,332.72 7,008.42 6,576.54 6,450.27 5,889.08 5,999.30 7,980.18 9,505.14 10,919.40 10,563.07 13,070.48 11,135.14 12,531.36 12,395.85 13,237.57 15,290.81 14,838.46 13,568.89

Europe 6,680.67 7,117.11 9,102.39 9,848.17 10,822.58 12,659.11 13,456.12 11,468.62 8,257.11 8,113.82 8,318.33 9,527.78 8,136.99 a a a a a a a a a a

Latin America 7,915.43 8,964.57 8,979.65 10,931.87 11,933.52 13,184.35 11,265.21 9,020.13 7,673.42 7,500.20 6,733.23 6,245.03 7,961.78 8,584.01 8,538.69 8,480.42 11,633.52 12,286.04 12,681.37 11,614.47 11,608.41 15,992.52 15,206.01

Other countries

Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Notes a Included in other countries. b Canada included in other countries.

North America

Year

Table A1.17 Ford’s average sales value by region, 1975–97 (dollar value per vehicle)

7,417.80 5,661.05 6,237.84 6,796.29 7,562.56 8,569.13 9,391.38 9,904.04 10,644.44 11,193.33 11,490.62 12,187.41 13,043.76 13,584.21 14,214.63 14,839.01 14,300.25 15,590.99 16,268.23 17,486.72 18,499.87 19,514.50 20,247.26

US 4,145.84 5,092.17 5,123.19 6,318.14 7,368.79 8,565.63 8,388.45 7,533.79 7,088.32 6,778.78 6,807.21 7,944.98 9,288.48 10,289.29 10,138.08 11,802.71 11,242.93 12,447.89 12,503.75 12,667.17 14,016.84 15,230.41 14,200.61

Outside US

6,059.28 5,436.94 5,801.79 6,620.79 7,476.24 8,567.37 8,877.75 8,685.71 9,009.51 9,376.77 9,507.97 10,419.67 11,490.46 12,196.62 12,407.04 13,441.29 12,784.07 14,209.93 14,807.24 15,633.59 16,726.61 17,739.82 17,696.13

Total

6,546.30 5,584.33 6,117.06 6,639.64 7,392.23 8,374.18 9,160.86 9,644.06 10,535.88 11,056.39 11,289.06 11,990.61 12,891.39 13,478.12 14,139.96 14,811.46 14,300.25 15,590.99 16,268.23 17,486.72 18,499.87 19,514.50 20,247.26

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Notes a Included in other countries.

North America

Year

4,283.95 4,340.45 4,311.43 5,518.52 6,543.35 7,332.72 7,008.42 6,576.54 6,450.27 5,889.08 5,999.30 7,980.18 9,505.14 10,919.40 10,563.07 13,070.48 11,135.14 12,531.36 12,395.85 13,237.57 15,290.81 14,838.46 13,568.89

Europe 6,680.67 7,117.11 9,102.39 9,848.17 10,822.58 12,659.11 13,456.12 11,468.62 8,257.11 8,113.82 8,318.33 9,527.78 8,136.99 a a a a a a a a a a

Latin America 7,915.43 8,964.57 8,979.65 10,931.87 11,933.52 13,184.35 11,265.21 9,020.13 7,673.42 7,500.20 6,733.23 6,245.03 7,961.78 8,584.01 8,538.69 8,480.42 11,633.52 12,286.04 12,681.37 11,614.47 11,608.41 15,992.52 15,206.01

Other countries

Table A1.18 Ford’s average sales value by region, 1975–97 (dollar value per vehicle)

7,417.80 5,661.05 6,237.84 6,796.29 7,562.56 8,569.13 9,391.38 9,904.04 10,644.44 11,193.33 11,490.62 12,187.41 13,043.76 13,584.21 14,214.63 14,839.01 14,300.25 15,590.99 16,268.23 17,486.72 18,499.87 19,514.50 20,247.26

US 4,145.84 5,092.17 5,123.19 6,318.14 7,368.79 8,565.63 8,388.45 7,533.79 7,088.32 6,778.78 6,807.21 7,944.98 9,288.48 10,289.29 10,138.08 11,802.71 11,242.93 12,447.89 12,503.75 12,667.17 14,016.84 15,230.41 14,200.61

Outside US

6,059.28 5,436.94 5,801.79 6,620.79 7,476.24 8,567.37 8,877.75 8,685.71 9,009.51 9,376.77 9,507.97 10,419.67 11,490.46 12,196.62 12,407.04 13,441.29 12,784.07 14,209.93 14,807.24 15,633.59 16,726.61 17,739.82 17,696.13

Total

Appendix 2

Appendix 2

303

Table A2.1 Automotive output in Canada, 1961–97 (a) Real average annual growth Period

Automotive output (%)

Terminal sector (%)

1961–65 1965–73 1973–79 1979–82 1982–88 1988–93 1993–97

31.47 23.71 2.99 –7.13 19.82 0.57 6.20

38.29 25.14 2.19 –11.28 17.23 0.61 13.41

Auto parts sector (%) 25.92 22.27 3.87 –2.96 21.71 0.54 1.54

(b) Millions of Canadian dollars, at constant pricesa Year

Automotive output (A)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

771.90 1,338.30 1,743.50 2,667.40 5,050.40 5,957.40 4,683.20 10,251.50 10,542.80 13,157.00 14,129.00 14,173.00 15,357.00

Terminal sector (B) 346.10 649.40 876.20 1,424.20 2,638.10 2,985.10 1,975.10 4,016.40 4,138.70 6,359.00 6,717.00 6,609.00 7,159.00

Auto parts sector (C) 425.80 688.90 867.30 1,243.20 2,412.30 2,972.30 2,708.10 6,235.10 6,404.10 6,798.00 7,412.00 7,564.00 8,198.00

(c) Ratios Year

(A)/Manufacturing GDP (%)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

2.48 3.29 3.89 5.13 7.44 7.57 6.90 10.72 11.43 12.14 12.42 12.33 12.59

(B)/Total automotive output (%) 44.84 48.52 50.26 53.39 52.24 50.11 42.17 39.18 39.26 48.33 47.54 46.63 46.62

(C)/Total automotive output (%) 55.16 51.48 49.74 46.61 47.76 49.89 57.83 60.82 60.74 51.67 52.46 53.37 53.38

Note a From 1961 through 1993, at 1986 factor cost prices; and from 1994 through 1998, at 1992 factor prices. Source: Author’s own calculations based on Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

304

Appendix 2

Table A2.2 Auto industry employment in Canada, 1961–97 (a) Average annual growth

Period

Automotive industry (%)

Terminal industry (%)

1961–65 1965–73 1973–79 1979–82 1982–88 1988–93 1993–97

17.12 4.80 1.34 –6.76 10.74 –3.09 3.97

20.27 3.95 2.06 –7.96 5.43 –1.91 2.24

Auto parts industry (%) 13.82 5.85 0.55 –5.32 16.49 –3.94 5.38

(b) Thousands of employees Year

Automotive industry (A)

Terminal industry (B)

Auto parts industry (C)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

49.14 70.50 82.80 86.80 114.60 123.80 98.70 162.30 137.20 152.00 167.00 167.00 159.00

25.18 38.70 45.60 46.40 60.00 67.40 51.30 68.00 61.50 70.30 66.00 65.00 67.00

23.96 31.80 37.20 40.40 54.60 56.40 47.40 94.30 75.70 81.70 101.00 102.00 92.00

Year

(B)/Automotive industry (%)

(C)/Automotive industry (%)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

51.25 54.89 55.07 53.46 52.36 54.44 51.98 41.90 44.83 46.25 39.52 38.92 42.14

48.75 45.11 44.93 46.54 47.64 45.56 48.02 58.10 55.17 53.75 60.48 61.08 57.86

(c) Ratios

Source: Author’s own calculations based on Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

Appendix 2

305

Table A2.3 Vehicle sales, production, exports, and imports in Canada, 1960–97 (a) Average annual growth Period

Production (%)

Sales (%)

Exports (%)

Imports (%)

1960–65 1965–73 1973–79 1979–82 1982–88 1988–93 1993–97

23.14 10.77 0.42 –8.06 10.00 2.72 3.61

11.77 5.95 2.31 –11.35 11.61 –4.78 4.92

80.34 123.90 –0.91 –0.17 8.47 2.98 4.44

–4.07 53.28 3.46 –8.57 15.36 –4.48 –1.44

Year

Production

Sales

Exports

Imports

1960 1964 1965 1966 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

395,855 669,549 853,931 827,431 1,178,176 1,589,499 1,629,855 1,235,668 1,976,896 2,246,202 2,324,511 2,407,000 2,397,000 2,571,000

523,188 725,879 830,995 896,119 889,453 1,226,698 1,396,402 920,902 1,562,670 1,188,992 1,257,403 1,165,587 1,202,301 1,423,134

20,620 51,909 103,447 297,866 832,973 1,128,800 1,067,206 1,061,864 1,601,771 1,840,554 2,064,700 2,117,600 2,027,390 2,167,382

182,560 97,341 145,380 206,941 502,861 765,000 923,591 686,032 1,318,478 1,023,330 977,837 794,500 973,200 964,415

Year

Production/ sales (%)

Exports/ production (%)

Imports/ sales (%)

Exports – imports (%)

1960 1964 1965 1966 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

75.66 92.24 102.76 92.33 132.46 129.58 116.72 134.18 126.51 188.92 184.87 206.51 199.37 180.66

5.21 7.75 12.11 36.00 70.70 71.02 65.48 85.93 81.02 81.94 88.82 87.98 84.58 84.30

34.89 13.41 17.49 23.09 56.54 62.36 66.14 74.50 84.37 86.07 77.77 68.16 80.94 67.77

–161,940 –45,432 –41,933 90,925 330,112 363,800 143,615 375,832 283,293 817,224 1,086,863 1,323,100 1,054,190 1,202,967

(b) Units

(c) Ratios

Sources: Author’s own calculations based on World Motor Vehicle Data, several issues; DesRosiers Automotive Yearbook; and Ward’s Automotive Yearbook, several years.

1,159,504 1,346,765 1,430,084 1,548,307 1,525,582 1,385,137 1,527,852 1,691,084 1,741,966 1,586,238 1,323,999 1,289,231 1,276,040 1,525,260 1,829,384 1,933,381 1,854,125 1,635,014 1,949,458 2,001,680 1,920,565 1,888,293 1,963,391 2,246,703 2,321,811 2,417,176 2,397,166 2,577,998

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

536,000 532,400 695,200 822,000 837,400 814,200 866,200 1,130,000 1,144,000 1,123,000 1,182,000 988,000 1,070,000 1,300,000 1,309,000 1,418,000 1,533,000 1,704,400 1,900,000 2,050,000 2,053,000 2,082,000 2,123,000 1,767,640 2,142,262 2,333,787 2,412,308 2,562,077

Spain 2,750,086 2,782,605 3,054,762 3,260,516 3,116,349 2,861,305 3,402,715 3,507,881 3,507,930 3,613,458 3,378,433 3,019,370 3,148,807 3,335,862 3,062,152 3,016,106 3,194,615 3,493,210 3,698,465 3,919,776 3,768,993 3,610,635 3,767,800 3,155,717 3,558,438 3,474,705 3,590,587 3,829,729

France

Sources: World Motor Vehicle Data, several issues; Ward’s Yearbook, several years.

Canada

Year

Table A2.4 Motor vehicle production in selected countries, 1970–97 (units)

28,800 23,000 18,650 26,300 30,300 37,300 49,550 85,200 159,000 204,400 125,000 133,000 163,400 221,000 265,400 378,200 602,000 980,000 1,084,655 1,130,000 1,322,000 1,500,000 1,730,000 2,050,058 2,311,663 2,392,060 2,354,490 2,409,998

5,022,880

South Korea

3,842,247 3,982,722 3,815,982 3,949,065 3,099,777 3,186,208 3,868,089 4,104,216 4,186,364 4,249,725 3,878,553 3,897,007 4,062,665 4,154,439 4,045,462 4,445,920 4,596,963 4,634,074 4,625,314 4,851,647 4,976,552 5,034,450 5,193,942 4,031,800 4,356,138 4,667,351 4,842,909

Germany

10,975,727

5,289,157 5,810,774 6,294,438 7,082,757 6,551,840 6,941,591 7,841,447 8,514,522 9,269,153 9,635,546 11,042,884 11,179,962 10,821,794 11,111,659 11,464,920 12,271,095 12,259,817 12,249,174 12,699,807 13,025,735 13,486,796 13,245,432 12,499,284 11,227,545 10,554,119 10,063,312 10,345,786

Japan

Appendix 2

307

Table A2.5 Canadian automotive imports and exports, 1961–97 (a) Average annual growth Period

Automotive exports (%)

1961–65 1965–73 1973–79 1979–82 1982–88 1988–93 1993–97

146.50 192.39 15.25 10.62 18.73 5.24 8.61

Automotive imports (%) 26.50 61.69 18.79 –2.37 24.13 0.12 13.66

Automotive trade balance (%) 13.89 1.15 43.40 –50.39 –27.30 –162.02 –14.79

(b) Millions of US dollarsa Year

Automotive exports (A)

Automotive imports (B)

Automotive trade balance (C)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

49.36 173.31 338.59 2,459.61 5,550.00 10,628.52 14,014.59 29,766.86 37,565.89 44,240.34 45,609.93 47,341.92 50,500.80

519.25 775.72 1,069.57 2,895.08 6,348.00 13,504.70 12,542.95 30,705.93 30,897.67 39,580.74 40,158.48 41,680.27 47,777.76

–469.89 –602.41 –730.98 –435.47 –798.00 –2,876.17 1,471.64 –939.07 6,668.22 4,659.60 5,451.46 5,661.66 2,723.04

Year

(A)/Total exports (%)

(B)/Total imports (%)

(A)/(B)

1961 1964 1965 1968 1973 1979 1982 1988 1993 1994 1995 1996 1997

0.69 1.86 3.41 16.39 18.64 16.58 17.89 23.00 23.27 26.23 23.91 23.07 23.27

(c) Ratios

7.06 8.75 10.64 20.53 22.65 21.58 18.74 24.17 18.76 25.76 24.30 23.89 23.89

9.51 22.34 31.66 84.96 87.43 78.70 111.73 96.94 121.58 111.77 113.57 113.58 105.70

Note a Conversion from Canadian dollars to US dollars based on exchange rate taken from Canadian Economic Observer. Statistics Canada, Cat. No.11-210, 1993/1994. Sources: Author’s own calculations based on DesRosiers Automotive Yearbook, 1995; and Canadian Statistics, several issues.

308

Appendix 2

Table A2.6 Canadian automotive exports with the US and with other countries, 1961–97

Auto parts

With countries other than the US Vehicles Auto parts

Average annual growth 1961–65 8.88%a 1965–73 445.65% 1973–79 14.54% 1979–82 19.08% 1982–88 18.94% 1988–93 8.40% 1993–97 8.18%

358.71% 192.83% 13.34% 2.22% 21.96% –2.20% 10.22%

95.40% 8.21% 46.36% –8.39% –5.16% 27.93% 1.36%

16.11% 35.24% 35.67% 3.51% 1.94% 30.66% 19.24%

Millions of US dollarsb 1961 0.00 1964 24.10 1965 83.49 1968 1,565.46 1973 3,060.00 1979 5,729.29 1982 9,008.10 1988 19,243.70 1993 27,321.71 1994 43,229.00 1995 33,545.00 1996 33,676.00 1997 36,263.00

8.88 73.22 136.36 703.81 2,240.00 4,033.30 4,301.46 9,969.13 8,874.42 13,193.00 10,632.00 11,235.00 12,503.00

15.79 43.56 76.07 92.85 126.00 476.52 356.56 246.14 589.92 870.00 1,013.00 701.00 622.00

19.74 24.10 32.47 53.85 124.00 389.41 348.46 307.88 779.84 1,024.00 1,458.00 1,146.00 1,380.00

Percent of total automotive exports 1961 0.00 1964 14.61 1965 25.42 1968 64.80 1973 55.14 1979 53.90 1982 64.28 1988 64.65 1993 72.73 1994 74.13 1995 71.91 1996 72.02 1997 71.43

20.00 44.38 41.53 29.13 40.36 37.95 30.69 33.49 23.62 22.62 22.79 24.03 24.63

35.56 26.40 23.16 3.84 2.27 4.48 2.54 0.83 1.57 1.49 2.17 1.50 1.23

44.44 14.61 9.89 2.23 2.23 3.66 2.49 1.03 2.08 1.76 3.13 2.45 2.72

Period/year

With US Vehicles

Notes a This figure corresponds to the 1962–65 period. b Conversion from Canadian dollars to US dollars based on exchange rate taken from Canadian Economic Observer. Statistics Canada, Cat. No. 11-210, 1993/1994. Sources: Author’s own calculations based on DesRosiers Automotive Yearbook, 1995; and Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, 1998.

Appendix 2

309

Table A2.7 Canadian automotive imports with the US and with other countries, 1961–97

Period/year

With US Vehicles

Average annual growth 1961–65 31.25% 1965–73 152.53% 1973–79 22.29% 1979–82 –12.53% 1982–88 35.40% 1988–93 –0.15% 1993–97 1.80% Millions of US dollarsa 1961 70.09 1964 62.09 1965 157.70 1968 1,014.86 1973 2,082.00 1979 4,866.78 1982 3,037.28 1988 9,489.03 1993 9,420.16 1994 11,617.22 1995 8,163.53 1996 8,333.93 1997 10,096.56 Percent of total automotive exports 1961 17.15 1964 9.07 1965 16.38 1968 37.15 1973 32.80 1979 36.04 1982 24.22 1988 30.90 1993 30.49 1994 35.59 1995 25.31 1996 25.62 1997 29.31

Auto parts 36.21% 44.75% 18.02% 1.89% 17.87% –1.24% 5.55%

With countries other than the US Vehicles Auto parts – – 10.78% 28.15% 29.87% 1.01% –2.59%

–1.50% 214.08% 13.33% –5.77% 46.68% 14.76% –2.05%

322.80 607.04 790.35 1,688.02 3,620.00 7,532.88 7,960.29 16,496.34 15,475.97 17,546.68 16,764.81 17,059.31 18,911.52

0.00 0.00 0.00 0.00 377.00 620.84 1,145.06 3,197.40 3,358.14 1,658.65 3,654.43 3,133.75 3,010.32

15.79 15.76 14.84 28.78 269.00 484.20 400.32 1,521.53 2,644.19 1,821.27 3,669.53 4,000.93 2,427.84

78.99 88.63 82.08 61.79 57.03 55.78 63.46 53.73 50.09 53.75 51.98 52.45 54.90

0.00 0.00 0.00 0.00 5.94 4.60 9.13 10.41 10.87 5.08 11.33 9.63 8.74

3.86 2.30 1.54 1.05 4.24 3.59 3.19 4.96 8.56 5.58 11.38 12.30 7.05

Note a Conversion from Canadian dollars to US dollars based on exchange rate taken from Canadian Economic Observer. Statistics Canada, Cat. N0.11-210, 1993/1994. Sources: Author’s own calculations based on DesRosiers Automotive Yearbook, 1995; and Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

310

Appendix 2

Table A2.8 Capital expenditures in the Canadian automotive industry, 1961–97 (a) In the terminal sector (millions of US dollarsa)

Period/ year

New capital expenditures (A)

Repair capital expenditures (B)

Total all capital expenditures

% of auto industry total capital expenditures

1962–64 1965 1966–68 1969–73 1974–79 1980–82 1983–88 1989–93 1994–97

89.54 83.77 158.18 161.28 508.60 508.87 5,151.12 5,834.69 NA

44.95 21.43 48.44 100.55 204.08 123.12 830.16 884.18 NA

134.49 105.20 206.62 261.83 712.68 631.99 5,981.28 6,718.87 NA

48.30 46.72 38.99 26.71 32.69 26.20 63.31 63.77 NA

(b) In the auto parts sector (millions of US dollarsa)

Period/ year

New capital expenditures (C)

Repair capital expenditures (D)

Total all capital expenditures

% of auto industry total capital expenditures

1962–64 1965 1966–68 1969–73 1974–79 1980–82 1983–88 1989–93 1994–97

95.17 98.89 244.72 452.91 830.21 1,376.64 1,913.30 2,223.03 NA

48.77 21.06 78.60 265.38 637.34 403.93 1,553.10 1,594.01 NA

143.94 119.95 323.32 718.29 1,467.55 1,780.57 3,466.40 3,817.04 NA

51.70 53.28 61.01 73.29 67.31 73.80 36.69 36.23 NA

(c) Ratios

Year

(A)/Total new capital exp. (%)

(B)/Total repair capital exp. (%)

(C)/Total new (D)/Total repair capital exp. (%) capital exp. (%)

1961 1965 1973 1979 1982 1988 1993 1994 1995 1996 1997

73.99 45.86 35.44 25.19 51.86 74.73 74.26 33.53 36.74 60.37 NA

62.62 50.44 23.50 23.33 26.02 38.74 31.32 NA NA NA NA

26.01 54.14 64.56 74.81 48.14 25.27 25.74 66.47 63.26 39.63 NA

37.38 49.56 76.50 76.67 73.98 61.26 68.68 NA NA NA NA

Notes a Conversion from Canadian dollars to US Dollars based on exchange rate taken from Canadian Economic Observer. Statistics Canada, Cat. No. 11-210, 1993/1994. NA, not available. Source: Author’s own calculations based on DesRosiers Automotive Yearbook, 1995; and Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

Appendix 2

311

a

Table A2.9 Overall net production to net sales value ratios achieved by Auto Pact companiesb in Canada, 1965–96

Year

Passenger vehicles (%) (required ratio: 95-100)

Commercial vehicles (%) Buses (%) (required ratio: 75-100) (required ratio: 85-100)

1965 1971 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996

100 149 121 122 130 202 174 153 153 197 201 244 249

94 142 115 113 127 238 192 133 133 285 199 210 205

99 120 97 98 183 213 324 189 189 242 359 277 266

Notes a Net production to net sales value ratio of the total value of Canadian vehicle production to the total net sales value of vehicle sales for all Auto Pact companies. b Based on eighteen major manufacturers. Source: Author’s own calculations based on Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

Table A2.10 Actual Canadian value added as a percentage of cost of sales compared with CVA commitments of all Auto Pact producers, 1965–96 (millions of Canadian dollars)

Year

Total achieved CVA as % of cost of sales

Total CVA as a % of cost of sales committed by all Auto Pact producers

1965 1968 1971 1973 1976 1979 1981 1982 1988 1991 1993 1994 1995 1996

65 72 95 79 67 64 62 91 72 85 85 67 72 70

58 71 69 64 61 58 58 59 71 78 86 68 68 68

Source: Author’s own calculation based on Statistical Review of the Canadian Automotive Industry, Ottawa: Industry, Science and Technology Canada, several issues.

312

Appendix 2

Table A2.11 Canadian vehicle production by company, 1960–97 Year

GMa

Units 1960 1964 1965 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

209,225 293,586 419,723 385,803 424,304 291,024 580,399 712,636 847,193 561,923 843,774 734,714 697,034 747,471 894,134 1,091,343 876,471 994,744

Percent 1960 1964 1965 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

Ford

55.22 45.94 51.15 41.83 36.82 25.02 37.11 43.74 54.60 45.98 44.12 37.67 40.15 36.21 38.51 45.34 36.56 38.70

113,333 190,379 212,932 296,152 445,101 565,855 613,452 534,153 500,839 374,806 657,116 664,675 428,753 473,331 494,829 533,443 537,082 630,829 29.91 29.79 25.95 32.11 38.62 48.64 39.23 32.79 32.28 30.67 34.36 34.08 24.70 22.93 21.31 22.16 22.40 24.54

Chrysler

AMC

Other producersb

56,345 117,796 153,186 202,812 235,724 249,080 283,292 329,604 194,958 244,751 390,120 493,813 406,866 643,371 695,630 538,097 705,446 627,157

0 35,129 31,347 33,094 41,726 48,126 74,290 43,191 0 30,341 11,311 0 0 0 0 0 0 0

0 2,206 3,353 4,351 5,670 9,163 12,378 9,487 8,766 10,165 10,078 57,202 203,280 199,929 237,081 244,272 278,368 317,623

14.87 18.43 18.67 21.99 20.45 21.41 18.12 20.23 12.56 20.03 20.40 25.32 23.44 31.17 29.96 22.35 29.43 24.40

0.00 5.50 3.82 3.59 3.62 4.14 4.75 2.65 0.00 2.48 0.59 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.35 0.41 0.47 0.49 0.79 0.79 0.58 0.56 0.83 0.53 2.93 11.71 9.69 10.21 10.15 11.61 12.36

Notes a Includes CAMI after 1989. b Includes Honda, Hyundai, Toyota &Volvo. Hyundai stopped production in 1994. For trucks, Navistar stopped production in 1994. Source: Author’s own calculations based on Ward’s Automotive Yearbook, several years.

Appendix 2

313

Table A2.12 Canadian vehicle sales by company, 1960–97 Year Units 1960a 1964a 1965a 1968a 1971 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997 Percent 1960a 1964 a 1965 a 1968 a 1971 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

GMa 200,698 291,807 340,084 325,056 313,198 445,925 519,434 648,826 327,264 397,669 574,667 436,656 378,055 409,708 384,267 380,223 450,464 38.36 40.20 40.92 36.55 33.31 36.35 40.22 46.46 35.54 25.98 36.77 33.62 31.80 33.39 33.71 32.44 32.45

Ford

Chrysler

99,746 180,653 193,188 233,005 220,464 308,571 294,574 341,296 168,258 194,795 358,015 249,419 253,469 273,185 262,655 275,432 315,842

54,733 112,108 132,872 162,839 157,531 223,594 266,414 202,446 134,879 183,220 273,656 208,821 226,673 247,752 225,122 239,514 256,162

19.07 24.89 23.25 26.20 23.45 25.15 22.81 24.44 18.27 12.73 22.91 19.20 21.32 22.26 23.04 23.50 22.76

10.46 15.44 15.99 18.31 16.75 18.23 20.63 14.50 14.65 11.97 17.51 16.08 19.06 20.19 19.75 20.44 18.46

Other producersb

AMC 11,132 31,802 31,117 21,867 17,756 31,162 34,951 31,336 15,406 15,429 0 0 0 0 0 0 0

156,879 109,509 133,734 146,686 231,383 217,446 176,090 172,498 275,095 739,297 356,332 403,894 330,795 296,355 267,956 276,831 365,532

2.13 4.38 3.74 2.46 1.89 2.54 2.71 2.24 1.67 1.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Notes a The figures for these years are sales registrations, taken from Beige (1970: 62–3). b Includes Honda, Hyundai, Toyota, Nissan, Volkswagen, Mazda, and Volvo. Source: Author’s own calculations based on Ward’s Automotive Yearbook, several years.

29.99 15.09 16.09 16.49 24.61 17.73 13.63 12.35 29.87 48.31 22.80 31.10 27.82 24.15 23.50 23.62 26.34

314

Appendix 2

Table A2.13 Canadian vehicle exports to the united states by company, 1967–97 Year Units 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997 Percent 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

GM

102,872 142,982 154,180 298,472 390,932 405,487 456,183 647,357 580,261 611,970 681,679 656,575 1,179,883 791,848 904,534 24.25 22.86 18.37 27.70 36.39 43.57 44.13 41.60 36.74 38.82 35.98 31.80 48.32 39.74 40.88

Ford

Chrysler

172,151 289,934 415,748 465,700 364,041 323,149 318,510 544,551 557,864 371,439 417,586 452,866 533,151 462,432 501,455

119,578 153,763 216,256 234,415 278,108 137,590 222,780 342,462 424,086 276,032 549,651 581,151 540,493 570,783 519,417

40.59 46.35 49.53 43.21 33.88 34.72 30.81 35.00 35.32 23.56 22.04 21.93 21.84 23.21 22.66

28.19 24.58 25.76 21.75 25.88 14.78 21.55 22.01 26.85 17.51 29.01 28.15 22.14 28.65 23.48

Other producersa

AMC

26,592 33,453 41,820 62,200 32,266 0 27,744 10,605 0 0 0 0 0 0 0

2,975 5,380 11,400 16,880 9,064 64,391 8,488 11,075 17,352 316,999 245,774 374,108 188,190 167295 287104

6.27 5.35 4.98 5.77 3.00 0.00 2.68 0.68 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Note a Includes Jeep, Navistar, and others. Source: Author’s own calculations based on Ward’s Automotive Yearbook, several years.

0.70 0.86 1.36 1.57 0.84 6.92 0.82 0.71 1.10 20.11 12.97 18.12 7.71 8.40 12.98

Appendix 2

315

Table A2.14 Canadian vehicle imports by company, 1967–97 Year

GM

Units 1966 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

26,737 76,058 96,812 91,517 210,952 270,757 330,321 185,889 392,110 366,591 269,158 228,689 115,320 98,278 89,130 82,309

Percent 1966 1967 1968 1970 1973 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

Ford

13.02 21.61 22.06 20.56 26.68 32.11 37.69 28.96 33.00 31.11 27.96 27.59 15.29 18.98 14.10 11.70

Chrysler

59,110 96,661 128,864 78,268 178,679 170,300 221,739 86,782 202,745 228,006 183,903 178,706 150,533 85,114 70,230 113,828 28.78 27.46 29.36 17.58 22.60 20.20 25.30 13.52 17.06 19.35 19.11 21.56 19.97 16.44 11.11 16.18

42,714 86,949 90,487 110,918 176,310 216,315 149,342 94,059 191,003 202,741 142,661 124,534 134,730 108,250 100,305 105,662 20.80 24.70 20.62 24.91 22.30 25.66 17.04 14.66 16.08 17.21 14.82 15.02 17.87 20.91 15.87 15.02

Other producersa

AMC 6,984 15,419 12,936 12,094 16,410 18,553 23,657 10,609 11,764 0 0 0 0 0 0 0

69,816 76,928 109,819 152,392 208,335 167,235 151,286 264,481 390,574 380,991 366,822 297,063 353,397 226,022 372,467 401,556

3.40 4.38 2.95 2.72 2.08 2.20 2.70 1.65 0.99 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Note a Includes Jeep, Navistar, and others. Source: Author’s own calculations based on Ward’s Automotive Yearbook, several years.

34.00 21.85 25.02 34.23 26.35 19.83 17.26 41.21 32.87 32.33 38.11 35.83 46.87 43.66 58.92 57.09

316

Appendix 2

Table A2.15 Canadian vehicle production to sales ratio, 1964–97

Year

GM (%)

Ford (%)

Chrysler (%)

AMC (%)

Other producersa (%)

1964b 1965 b 1968 b 1973 1975 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

100.61 123.42 130.53 130.16 137.19 137.19 130.57 171.70 212.18 127.85 159.63 197.71 218.24 284.01 230.51 220.83

105.38 110.22 191.03 198.80 181.33 181.33 146.75 222.76 337.34 185.66 171.90 186.74 181.13 203.10 195.00 199.73

105.07 115.29 144.76 126.70 123.72 123.72 96.30 181.46 212.92 180.45 194.84 283.83 280.78 239.02 294.53 244.83

110.46 100.74 190.82 238.40 123.58 123.58 0.00 196.94 73.31 NA NA NA NA NA NA NA

2.01 2.51 3.87 5.69 5.39 5.39 5.08 3.70 1.36 16.05 50.33 60.44 80.00 91.16 100.56 86.89

Notes a Includes Jeep, Navistar, and others. b Calculations based on registrations, taken from Beige (1970: 62–3). Source: Author’s own calculations based on Tables A2.12 and A2.13.

Table A2.16 Canadian vehicle trade balance by company, 1966–97 (units) Year

GM

1966 1968 1970 1973 1974 1975 1979 1980 1982 1985 1988 1991 1992 1993 1994 1995 1996 1997

–19,110 46,170 62,663 87,520 136,832 31,225 75,166 121,015 270,294 255,247 213,670 342,812 388,764 452,990 371,071 931,374 496,248 679,947

Ford 56,832 161,070 337,480 287,021 171,943 127,250 101,410 150,967 231,728 341,806 329,858 187,536 –24,619 238,880 222,712 331,716 262,150 308,794

Chrysler

AMC

41,560 63,276 105,338 58,105 –3,081 41,945 –11,752 –10,893 128,721 151,459 221,345 133,371 281,998 425,117 472,369 421,959 465,932 373,626

2,383 20,517 29,726 45,790 18,986 12,647 –23,657 –18,226 17,135 –1,159 – – – – – – – –

Source: Author’s own calculations based on Tables A2.14 and A2.15.

15.09 24.43 18.25 25.38 24.31 20.95 13.39 0.00

80,996 153,358 111,686 142,338 116,342 111,916 78,931 –

Units 1971 1972 1973 1974 1975 1976 1977 1978

Percent 1971 1972 1973 1974 1975 1976 1977

Pinto

Year

25.73 14.77 19.66 13.68 11.43 9.23 18.84 41.53

138,142 92,728 120,296 76,712 54,715 49,300 110,997 261,407

Maverick/ Fairmont/ Zephyr

8.23 24.17 27.65 12.33 1.83 1.72 1.90 0.71

44,164 151,702 169,219 69,154 8,736 9,168 11,184 4,440

Torino/ LTD II

0.26 0.20 0.18 – – – – 0.02

1,392 1,248 1,128 – – – – 144

Mustang/ Thunderbird

Table A2.17 Ford’s automotive production by selected models in Canada, 1971–78

5.51 4.77 3.64 0.90 0.46 5.42 – –

29,567 29,909 22,294 5,074 2,179 28,930 – –

Marquis

3.26 2.62 2.39 1.81 2.09 0.87 – –

17,484 16,467 14,625 10,167 9,978 4,632 – –

Meteor

26.89 26.73 27.48 28.49 32.13 30.49 36.06 40.08

144,397 167,782 168,153 159,797 153,763 162,848 212,510 252,313

Trucks

536,924 627,654 611,937 560,815 478,546 534,153 589,295 629,515

1971 1972 1973 1974 1975 1976 1977 1978

35.80 39.70 35.90 34.90 30.80 32.40 32.90 32.90

Share of Canadian passenger cars (%) 144,397 167,782 168,153 159,797 153,763 162,848 215,510 252,313

Production of trucks 52.11 52.89 47.70 42.50 39.68 32.53 35.33 38.46

Share of Canadian trucks (%)

Source: Author’s own calculations based on Ward’s Automotive Yearbook, several years.

Note In 1973 and 1974, Bobcat production was 1515 and 10,561 respectively.

Production of passenger cars

Year

Table A2.17 Continued

Appendix 2

319

Table A2.18 Ford’s production in selected countries, 1974–97 Year

Canada

Germany

UK

Spain

Total

Units 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

573,354 536,153 405,743 415,590 657,116 653,113 428,734 473,331 494,829 533,443 537,082 630,829

285,545 486,607 419,617 518,440 505,231 608,890 633,097 437,065 461,194 517,385 539,867 558,029

514,853 524,848 312,940 422,272 419,096 508,375 467,044 404,456 419,105 419,520 478,610 449,909

– 17,508 263,958 229,547 265,884 281,666 341,302 211,786 300,262 312,239 300,580 284,238

1,373,752 1,565,116 1,402,256 1,585,849 1,847,327 2,052,044 1,870,177 1,526,638 1,675,390 1,782,587 1,856,139 1,923,005

Percent 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

41.74 34.26 28.93 26.21 35.57 31.83 22.92 31.00 29.54 29.93 28.94 32.80

20.79 31.09 29.92 32.69 27.35 29.67 33.85 28.63 27.53 29.02 29.09 29.02

37.48 33.53 22.32 26.63 22.69 24.77 24.97 26.49 25.02 23.53 25.79 23.40

– 1.12 18.82 14.47 14.39 13.73 18.25 13.87 17.92 17.52 16.19 14.78

Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

320

Appendix 2

Table A2.19 Ford’s sales in selected countriesa (a) 1971–93 Year

Canada

Germany

UK

Units 1971 1974 1976 1979 1982 1985 1988 1991 1993

244,552 402,059 341,245 396,597 188,841 314,123 345,771 247,328 252,203

767,128 496,780 815,279 880,325 797,850 769,883 1,008,198 969,003 831,216

504,777 559,534 515,368 555,496 423,073 422,003 507,367 481,794 421,939

Percent of national market 1971 16.13 1974 27.57 1976 20.21 1979 19.02 1982 11.52 1985 17.73 1988 16.13 1991 12.13 1993 14.69

50.59 34.06 48.29 42.22 48.66 43.45 47.05 47.53 48.42

Spain – – 16,448 252,917 229,839 265,783 281,679 340,796 211,413

33.29 38.37 30.53 26.64 25.80 23.82 23.68 23.63 24.58

– – 0.97 12.13 14.02 15.00 13.14 16.71 12.31

(b) 1988–97 Year

Canada

Germany

UK

Spain

Units 1988 1991 1993 1994 1995 1996 1997

349,000 259,000 256,000 281,000 254,000 258,000 319,000

332,000 501,000 340,000 386,000 409,000 436,000 460,000

753,000 471,000 464,000 520,000 496,000 516,000 466,000

158,000 128,000 117,000 163,000 160,000 155,000 155,000

Percent of national market 1988 21.92 1991 19.06 1993 21.75 1994 20.81 1995 19.26 1996 18.90 1997 22.79

20.85 36.87 28.89 28.59 31.01 31.94 32.86

47.30 34.66 39.42 38.52 37.60 37.80 33.29

9.92 9.42 9.94 12.07 12.13 11.36 11.07

Note a Two sets of data are required because, before 1986, factory sales were reported in North America on a “where sold” basis and factory sales overseas on a “where produced” basis. After that year, all sales are reported on a “where sold” basis and include units that are manufactured by manufacturers other than Ford. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Appendix 2

321

Table A2.20 Ford’s production to sales ratio in selected countries Year

Canada (%)

1974–93 1974 1976 1979 1982 1985 1988 1991 1993

142.60 157.12 102.31 220.07 209.19 188.89 173.35 187.68

1988–97 1988 1991 1993 1994 1995 1996 1997

187.14 165.53 184.89 176.10 210.02 208.17 197.75

Germany (%)

UK (%)

Spain (%)

57.48 59.69 47.67 64.98 65.62 60.39 65.33 52.58

92.01 101.84 56.34 99.81 99.31 100.20 96.94 95.86

– 106.44 104.37 99.87 100.04 100.00 100.15 100.18

183.40 126.37 128.55 119.48 126.50 123.82 121.31

67.51 99.16 87.17 80.60 84.58 92.75 96.55

178.27 266.64 181.01 184.21 195.15 193.92 183.38

Source: Author’s own calculations based on Tables A2.19 and A2.20.

Table A2.21 Ford’s net income in North America, Europe, and Latin America, 1975–90 (millions of US dollars) Year

US

Canada

Latin America

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

67 546 968 819 –199 –2,018 –1,198 –1,118 1,516 2,391 1,988 1,788 2,723 2,474 1,099 –17

a a 26 10 –9 –101 –252 –153 177 317 148 148 119 204 186 67

57 71 79 93 132 196 –87 10 –193 –110 –57 66 –95 NA 360 –234

Europe 81 305 609 581 1,219 323 289 451 281 147 326 521 989 1,459 1,190 145

Note a Included in US. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

322

Appendix 2

Table A2.22 Ford’s sales value in North America, Europe, and Latin America, 1975–90 (millions of US dollars) Year

US

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

19,858 18,199 24,769 27,799 24,408 18,429 19,739 20,541 28,375 36,788 36,779 42,790 47,688 52,992 52,850 48,761

Canada a 1,659 1,950 2,030 2,382 1,855 1,830 1,282 1,953 2,445 2,901 3,158 3,942 4,290 4,332 3,716

Latin America 1,790 1,783 2,104 2,754 3,723 4,521 4,122 3,307 2,226 2,187 2,402 2,401 1,782 NA NA NA

Europe 4,734 5,847 7,621 8,433 11,050 10,209 9,882 9,541 9,516 8,423 8,745 12,481 15,731 19,644 19,848 23,736

Notes a Included in US. NA, not available. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Table 2.23 Ford’s capital expenditures in North America, Europe, and Latin America, 1975–90 (millions of US dollars) Year

US

Canada

Latin America

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

212 351 784 1,135 2,347 1,417 1,039 1,470 1,096 2,442 2,553 1,966 2,108 2,862 4,121 3,787

a a 86 71 182 395 191 73 160 127 180 174 242 204 290 390

47 33 41 58 103 175 276 455 205 213 256 295 124 NA NA NA

Europe 325 160 152 269 728 718 653 837 789 641 620 720 853 1,362 1,915 2,713

Notes a Included in US. NA, not available. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Appendix 2

323

Table A2.24 Canadian auto industry capital expenditures and Ford’s share of auto industry, 1977–90 (millions of US dollars)

Period

Total all capital expenditures in the auto industry (A)

Ford’s capital expenditures in Canada (B)

Ford’s share of Canadian capital expenditures (B)/(A) (%)

1975–79 1980–82 1983–88 1989–90

1876.14 2412.57 9447.69 3794.45

7,369.00 6,961.00 12,878.00 680.00

392.77 288.53 136.31 17.92

Note Data available for 1989 and 1990 only. Source: Author’s own calculations based on Tables A2.9 and A2.24.

324

Appendix 2

Table A2.25 Ford Canada and Ford US financial performance, 1977–93 (a) Assets and income (millions of US dollars) Assets

Net income

Year

US

Canada

US

Canada

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

10,933 12,907 13,354 12,547 11,533 11,410 13,229 17,648 19,396 18,855 18,700 22,120 25,245 23,207 26,865 34,494 39,666

1,668 1,699 1,730 1,617 1,669 1,551 1,737 2,215 2,667 2,909 3,695 3,653 2,534 2,872 – – –

968 819 –199 –2,018 –1,198 –1,118 1,516 2,391 1,988 1,788 2,723 2,474 1,099 –17 –2,215 –405 1,482

26 10 –9 –101 –252 –153 177 317 148 148 119 204 186 67 – – –

(b) Ratios Net income/assets (%)

Intercompany sales/ total sales (%)

Year

US

Canada

US

Canada

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

8.85 6.35 –1.49 –16.08 –10.39 –9.80 11.46 13.55 10.25 9.48 14.56 11.18 4.35 –0.07 –8.24 –1.17 3.74

1.56 0.59 –0.52 –6.25 –15.10 –9.86 10.19 14.31 5.55 5.09 3.22 5.58 7.34 2.33 – – –

15.07 17.69 15.27 12.42 15.34 20.26 23.97 29.41 23.78 19.69 20.43 20.62 18.04 15.36 13.89 14.31 21.47

NA 202.59 132.36 109.21 99.08 169.70 207.10 451.33 264.82 270.92 277.73 245.31 193.23 161.28 – – –

Notes Canadian data are not available for years since 1991. NA, not available. Source: Ford Motor Co., Annual Reports, several years.

Bramalea, 1987 Windsor, 1925 Windsor (Pillet Road), 1925 Saint Thomas, 1967 Oakville 1, 1953 Oakville 2 (Ontario Truck), 1965 Oshawa 1, 1955 Oshawa 2, 1957 Ste. Thérèse, 1965 Oshawa, 1965 Alliston, 1986 Cambridge, 1988 Ingersoll, 1989 Halifax

Plant Location Ontario Ontario Ontario Ontario Ontario Ontario Ontario Ontario Québec Ontario Ontario Ontario Ontario Nova Scotia

Region

Sources: Holmes and Pradeep (1997); Ward’s Automotive Yearbook (1996); Harbour and Associates (1992).

Honda Toyota Cami Volvo

GM

Ford

Chrysler

Auto maker

Table A2.26 Plants and installed capacity of the Canadian automobile assembly industry

Passenger cars Passenger cars Passenger cars Passenger cars Passenger cars Light trucks and trucks Passenger cars Passenger cars Passenger cars Passenger cars Passenger cars Passenger cars Passenger cars and trucks Passenger cars

Installed capacity Product 252,000 325,000 120,000 226,000 250,000 150,000 245,000 245,000 192,000 270,000 100,000 860,00 183,510 8,500

1995

Appendix 3

Appendix 3

327

Table A3.1 Automotive output in Mexico, 1962–97 (a) Real average annual growth Period

Automotive output (%) Terminal sector (%)

Auto parts sector (%)

1962–69 1969–72 1972–76 1976–81 1981–83 1983–89 1989–93 1993–97

32.58 14.73 9.43 17.71 –21.40 17.63 13.02 7.35

65.29 13.76 7.80 15.78 –12.96 10.44 2.43 10.88

20.62 15.53 10.74 19.13 –27.09 25.47 20.44 8.87

(b) Millions of pesos, at constant pricesa Year 1962 1969 1972 1976 1981 1983 1989 1993 1993a 1994 1995 1996 1997

Automotive output (A) Terminal sector (B) 6,082 19,953 28,768 39,621 74,702 42,734 87,940 133,729 84,477 92,050 81,073 103,855 109,310

Auto parts sector (C)

4,454 10,884 15,956 22,810 44,624 20,451 51,699 93,965 44,021 44,418 36,467 51,418 59,645

1,628 9,069 12,812 16,811 30,078 22,283 36,241 39,764 40,456 47,632 44,606 52,437 58,066

(B)/Mexican total automotive output (%)

(C)/Mexican total automotive output (%)

(c) Ratios Year 1962 1969 1972 1976 1981 1983 1989 1993 1993 1994 1995 1996 1997

(A)/Manufacturing GDP (%) 2.19 3.97 4.78 5.28 7.10 4.53 7.75 10.52 13.52 13.85 12.42 14.12 13.58

73.23 54.55 55.46 57.57 59.74 47.86 58.79 70.27 52.11 48.25 44.98 49.51 54.56

26.77 45.45 44.54 42.43 40.26 52.14 41.21 29.73 47.89 51.75 55.02 50.49 53.12

Note a At 1993 prices. Sources: Author’s own calculations based on: Instituto Nacional de Estadística, Geografía e Informática, (INEGI), Estadisticas Históricas de México, México, vols. I and II, May 1994; Nacional Financiera SNC, La Economía Mexicana en Cifras, Mexico, 1990.

328

Appendix 3

Table A3.2 Auto industry employment in Mexico, 1962–97 (a) Average annual growth Period

Automotive industry (%) Terminal industry (%)

Auto parts industry (%)

1962–69 1969–72 1972–76 1976–81 1981–83 1983–89 1989–93 1993–97

NA NA 8.70 9.25 –15.44 1.95 –0.48 9.95

NA NA 8.33 9.29 –14.63 1.15 –3.23 11.57

20.63 7.59 9.26 9.19 –16.67 3.24 3.49 8.16

(b) Numbers employed (thousands) Year

Automotive industry (A) Terminal industry (B)

Auto parts industry (C)

1962 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

38 NA 69 93 136 94 105 103 144 107 122 136

9a 22a 27 37 54 36 43 49 65 45 54 64

29a NA 42 56 82 58 62 54 79 62 68 72

Year

(A)/Mexican manufacturing employment (%)

(B)/Mexican auto industry employment (%)

(C)/Mexican auto industry employment (%)

1962 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

2.26 NA 3.77 4.55 5.35 4.07 4.21 4.43 4.59 3.27 4.76 5.01

23.68 NA 39.13 39.78 39.71 38.30 40.95 47.57 45.14 42.06 44.26 47.06

76.32 NA 60.87 60.22 60.29 61.70 59.05 52.43 54.86 57.94 55.74 52.94

(c) Ratios

Notes a From Bennet and Sharpe (1985b: 115). NA, not available. Sources: Author’s own calculations based on Nacional Financiera, SNC, La Economía Mexicana en Cifras, 1978 and 1986; INEGI La Industria Automotriz en México, México, 1993, 1995 and 1997; INEGI Censos Industriales, Mexico, 1996.

Appendix 3

329

Table A3.3 Vehicle production, exports and sales in Mexico, 1965–97 (a) Growth Period

Production

Average annual growth (%) 1965–69 14.85 1969–72 13.05 1972–76 10.36 1976–81 16.75 1981–83 –26.09 1983–89 20.77 1989–93 17.11 1993–97 12.23 Units 1965 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

103,584 165,126 229,791 324,979 597,118 285,485 641,275 1,080,144 1,112,700 935,017 1,219,424 1,608,761

Sales

Exports

15.26 12.62 10.24 16.33 –27.43 11.60 9.11 –4.94 102,508 165,093 227,579 320,807 582,690 263,029 446,076 608,661 598,087 184,937 333,920 488,441

NA 2201.01 22.15 49.17 27.82 128.21 35.38 27.12 0 33 2,212 4,172 14,428 22,456 195,199 471,483 567,107 781,082 975,408 982,952

Imports – – – – – – – – – – – – – – – 8,652 74,922 27,696 88,865 137,368

(b) Ratios Year 1965 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

Sales/production (%) Exports/production (%) 98.96 99.98 99.04 98.72 97.58 92.13 69.56 56.35 53.75 19.78 27.38 30.36

– 0.02 0.96 1.28 2.42 7.87 30.44 43.65 50.97 83.54 79.99 61.10

Source: Author’s own calculations based on Asociación Mexicana de la Industria Automotriz (AMIA), Informe Estadístico, several issues.

330

Appendix 3

Table A3.4 Motor vehicle production in selected countries, 1970–97 (vehicle units) Year

Argentina

Brazil

South Korea

Mexico

Spain

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

219,600 253,200 269,000 294,000 286,300 240,000 193,500 235,400 179,200 252,900 281,700 172,300 132,100 159,200 167,300 138,000 175,000 193,500 164,300 128,000 100,000 139,000 262,000 342,344 408,777 285,435 313,152 370,540

416,000 517,000 622,200 750,400 905,900 930,200 986,600 921,200 1,063,000 1,128,000 1,165,000 780,000 861,000 896,200 865,000 967,000 1,057,000 920,000 1,069,000 1,013,300 915,000 960,000 1,074,000 1,391,435 1,581,389 1,629,008 1,804,328 1,925,428

28,800 23,000 18,650 26,300 30,300 37,300 49,550 85,200 159,000 204,400 125,000 133,000 163,400 221,000 265,400 378,200 602,000 980,000 1,084,655 1,130,000 1,322,000 1,500,000 1,730,000 2,050,058 2,311,663 2,392,060 2,354,490 2,409,998

190,000 211,400 229,800 285,600 351,000 356,600 325,000 281,000 384,100 444,400 490,000 597,000 473,000 285,500 344,400 398,100 341,000 395,300 513,000 641,200 821,000 989,400 1,084,000 1,055,000 1,081,000 930,000 1,211,000 1,338,000

536,000 532,400 695,200 822,000 837,400 814,200 866,200 1,130,000 1,144,000 1,123,000 1,182,000 988,000 1,070,000 1,300,000 1,309,000 1,418,000 1,533,000 1,704,400 1,900,000 2,050,000 2,053,000 2,082,000 2,123,000 1,767,640 2,142,262 2,333,787 2,412,308 2,562,077

Source: AMIA, La Industria Automotriz de México en Cifras, Anuario, Mexico, several years, and Ward’s Yearbook, several years.

Appendix 3

331

Table A3.5 Mexican automotive imports and exports, 1965–97 (a) Average annual growth

Period

Automotive exports (%)

Automotive imports (%)

Automotive trade balance (%)

1965–69 1969–72 1972–76 1976–81 1981–83 1983–89 1989–93 1993–97

2975.00 105.00 15.61 86.77 34.85 69.85 33.49 33.37

7.39 6.68 29.08 93.78 –39.90 41.34 74.73 9.39

5.70 1.23 32.07 94.88 –50.87 450.98 –34.92 –366.65

Automotive imports (B)

Automotive trade

176.30 228.40 274.20 593.20 3,374.60 681.90 2,373.40 9,467.80 11,470.97 9,497.93 10,441.97 13,023.29

–176.20 –216.40 –224.40 –512.30 –2,942.70 51.00 1,431.00 –567.70 –674.92 5,737.11 9,198.60 7,758.12

(b) Millions of US dollars Year balance (C)

Automotive exports (A)

1965 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

0.10 12.00 49.80 80.90 431.90 732.90 3,804.40 8,900.10 10,796.05 15,235.04 19,640.57 20,781.41

(c) Ratios

Year

(A)/Mexican total exports (%)

(B)/Mexican (C)/Mexican total imports trade balance (%) (%)

(A)/(B) (%)

(C)/Mexican total imports (%)

1965 1969 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

0.01 0.89 2.99 2.21 2.22 3.28 16.66 17.17 17.75 19.07 22.04 20.74

11.30 11.48 9.25 8.88 14.10 7.97 9.33 14.48 20.66 16.09 17.19 17.32

0.06 5.25 18.16 13.64 12.80 107.48 160.29 94.00 94.12 160.40 188.09 159.57

–11.30 –10.88 –7.57 –7.67 –12.30 0.60 5.63 –0.87 –1.22 9.72 15.14 10.32

40.67 33.45 17.30 16.94 65.25 0.37 –55.13 4.19 –12.70 27.52 32.44 31.01

Source: Author’s own calculations based on INEGI, Estadísticas Históricas de México, Mexico, Vols. I and II, 1994. AMIA, La Industria Automotriz de México en Cifras, Anuario, Mexico, several years.

332

Appendix 3

Table A3.6 Mexican automotive exports by product, 1971–97 (a) Average annual growth Period

Vehicles (%)

Auto parts (%)

Engines (%)

Other auto partsa (%)

1971–72 1972–76 1976–81 1981–83 1983–89 1989–93 1993–97

531.65 –3.08 500.55 –6.70 284.35 53.53 45.53

34.15 17.43 66.17 47.37 41.05 16.88 17.95

77.49 105.38 2.47 271.54 40.92 –1.17 16.61

24.96 –9.04 222.75 –3.62 41.25 45.18 18.66

Other auto partsa (D)

(b) Thousands of US dollars Year

Vehicles (A)

Auto parts (B)

Engines (C)

1971 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

695 4,390 3,849 100,179 86,751 1,566,816 4,921,943 5,904,072 9,382,021 13,277,547 13,885,330

33,825 45,375 77,005 331,794 646,143 2,237,615 3,748,236 4,628,349 5,232,073 5,915,539 6,438,955

5,913 10,495 54,735 61,489 395,426 1,366,302 1,302,174 1,778,112 2,123,269 2,215,491 2,167,497

27,912 34,880 22,270 270,305 250,717 871,313 2,446,062 2,850,237 3,108,804 3,700,048 4,271,458

(c) Ratios

Year

(A)/Mexican total (B)/Mexican total (C)/Mexican total (D)/Mexican total auto exports (%) auto exports (%) auto exports (%) auto exports (%)

1971 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

2.01 8.82 4.76 23.19 11.84 41.18 56.77 42.27 48.34 59.33 59.12

97.99 91.18 95.24 76.81 88.16 58.82 43.23 33.14 26.96 26.43 27.41

17.13 21.09 67.70 14.23 53.95 35.91 15.02 12.73 10.94 9.90 9.23

80.86 70.09 27.54 62.57 34.21 22.90 28.21 20.41 16.02 16.53 18.19

Note a Other auto parts exports include chassis, coil, and leaf springs and general auto parts. Source: Author’s own calculations based on INEGI, La Industria Automotriz en México, Mexico, several issues.

Appendix 3

333

Table A3.7 Mexican automotive imports by product, 1971–97 (a) Average annual growth Period partsa (%)

Vehicles (%)

Auto parts (%)

Assembly material (%)

1971–72 1972–76 1976–81 1981–83 1983–89 1989–93 1993–97

–5.20 –11.18 1129.63 –47.38 80.46 57.49 79.88

14.86 31.61 77.89 –38.55 39.25 76.50 3.60

14.62 38.05 21.39 –40.32 64.80 144.50 –24.88

Other auto

15.56 12.76 353.68 –37.59 28.47 24.74 77.50

(b) Thousands of US dollars Year partsa (D)

Vehicles (A)

Auto parts (B)

Assembly material (C)

1971 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

17,087 16,199 8,958 514,920 26,989 157,280 518,976 1,422,385 484,102 977,801 2,177,123

224,646 258,028 584,250 2,859,668 654,913 2,197,322 8,921,536 9,360,701 8,588,761 8,851,159 10,207,413

167,733 192,260 484,906 1,003,525 194,304 949,793 6,439,689 6,733,137 3,649,463 19,076 31,955

Other auto

56,913 65,768 99,344 1,856,143 460,609 1,247,529 2,481,847 2,627,564 4,939,298 8,832,083 10,175,458

(c) Ratios

Year

(A)/Mexican total (B)/Mexican total (C)/Mexican total (D)/Mexican total auto imports (%) auto imports (%) auto imports (%) auto imports (%)

1971 1972 1976 1981 1983 1989 1993 1994 1995 1996 1997

7.07 5.91 1.51 15.26 3.96 6.68 5.50 37.09 14.59 14.63 28.39

92.93 94.09 98.49 84.74 96.04 93.32 94.50 244.09 258.82 132.40 133.11

69.39 70.11 81.74 29.74 28.49 40.34 68.21 175.58 109.97 0.29 0.42

23.54 23.98 16.75 55.00 67.55 52.98 26.29 68.52 148.84 132.12 132.69

Note a Other auto parts imports includes engines and parts, chassis, and spare parts. Source: Author’s own calculations based on INEGI, La Industria Automotriz en México, Mexico, several issues.

334

Appendix 3

Table A3.8 Ford’s sales in selected countries, 1971–97 (a) Units Year

Canada

Mexico

Brazil

Argentina

Spain

1971–93 1971 1973 1976 1979 1982 1985 1988 1991 1993

244,552 329,924 341,245 396,597 188,841 314,123 345,771 247,328 252,203

41,131 44,242 45,498 74,703 90,478 70,238 62,663 111,849 90,710

94,640 144,739 169,707 169,631 145,110 185,241 161,880 NA NA

43,641 61,373 35,318 99,669 52,764 33,281 30,120 NA NA

– – 16,448 252,917 229,839 265,783 281,679 340,796 211,413

1988–97 1988 1991 1993 1994 1995 1996 1997

349,000 259,000 256,000 281,000 254,000 258,000 319,000

63,000 112,000 91,000 92,000 32,000 67,000 97,000

154,000 137,000 151,000 164,000 201,000 190,000 214,000

30,000 26,000 49,000 54,000 48,000 64,000 147,000

158,000 128,000 117,000 163,000 160,000 155,000 155,000

(b) Proportion of Ford’s worldwide sales Year

Canada (%)

Mexico (%)

Brazil (%)

Argentina (%)

Spain (%)

1971–93 1971 1973 1976 1979 1982 1985 1988 1991 1993

5.09 5.62 6.43 6.83 4.43 5.68 5.37 4.63 4.23

0.83 0.75 0.86 1.29 2.12 1.27 0.97 2.09 1.52

1.92 1.05 0.67 1.72 1.24 0.60 0.47 NA NA

0.88 1.05 0.67 1.72 1.24 0.60 0.47 NA NA

0.00 0.00 0.31 4.35 5.39 4.81 4.37 6.38 3.55

1988–97 1988 1991 1993 1994 1995 1996 1997

5.18 4.25 4.14 4.71 4.25 4.31 5.32

0.93 1.84 1.47 1.54 0.53 1.10 1.59

2.29 2.25 2.44 0.48 0.59 0.56 0.63

0.45 0.43 0.79 0.85 0.75 1.00 2.31

2.34 2.10 1.89 2.73 2.68 2.60 2.60

Notes a Two sets of data are required because, before 1986, factory sales were reported in North America on a “where sold” basis and factory sales overseas on a “where produced” basis. After that year, all sales are reported on a “where sold” basis and include units manufactured by manufacturers other than Ford. NA, not available. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

Nissan

1,249 1,105 5,200 21,612 31,126 35,537 66,182 55,674 70,227 112,259 119,986 129,649 42,182 59,008 97,113

Year

Units 1962 1965 1969 1972 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

4,090 12,949 10,125 56,842 96,777 72,402 130,014 87,646 56,611 143,942 163,698 160,848 33,849 53,075 72,460

VW 13,183 21,207 16,112 43,551 55,909 69,279 111,235 51,015 33,972 87,591 90,742 92,640 33,312 68,150 98,116

Ford

Table A3.9 Mexican vehicles sales by company, 1962–97

11,215 27,859 16,478 40,102 63,101 77,695 114,611 54,742 39,999 91,267 89,829 97,930 32,835 53,179 70,866

Chrysler 15,489 16,620 14,102 32,233 37,311 50,991 60,143 48,099 40,904 92,437 103,167 116,187 41,081 96,245 140,955

GM 2,989 6,087 5,369 15,028 23,397 22,427 33,594 5,784 0 0 0 0 0 0 0

VAM 0 0 0 0 0 14,612 19,464 19,212 296 0 0 0 0 0 0

Renault

48,215 85,827 67,386 209,368 307,621 342,943 535,243 322,172 242,009 527,496 567,422 597,254 183,259 329,657 479,510

Total

2.59 1.29 7.72 10.32 10.12 10.36 12.36 17.28 29.02 21.28 21.15 21.71 23.02 17.90 20.25

Nissan

8.48 15.09 15.03 27.15 31.46 21.11 24.29 27.20 23.39 27.29 28.85 26.93 18.47 16.10 15.11

VW 27.34 24.71 23.91 20.80 18.17 20.20 20.78 15.83 14.04 16.61 15.99 15.51 18.18 20.67 20.46

Ford 23.26 32.46 24.45 19.15 20.51 22.66 21.41 16.99 16.53 17.30 15.83 16.40 17.92 16.13 14.78

Chrysler

Source: Author’s own calculations based on AMIA, Informe Estadístico, several issues.

Percent 1962 1965 1969 1972 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

Year

Table A3.9 Continued

32.12 19.36 20.93 15.40 12.13 14.87 11.24 14.93 16.90 17.52 18.18 19.45 22.42 29.20 29.40

GM 6.20 7.09 7.97 7.18 7.61 6.54 6.28 1.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00

VAM 0.00 0.00 0.00 0.00 0.00 4.26 3.64 5.96 0.12 0.00 0.00 0.00 0.00 0.00 0.00

Renault

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Total

1,249 1,105 12,635 22,212 32,409 45,157 76,502 46,539 85,432 137,568 184,031 193,591 106,794 135,637 172,763

3.38 1.91 11.45 10.81 10.14 11.58 13.27 13.05 21.91 17.82 17.81 17.65 11.48 11.22 12.95

Units 1962 1965 1969 1972 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

Percent 1962 1965 1969 1972 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

11.05 22.34 22.14 28.47 33.08 28.81 25.61 32.34 12.52 20.82 21.22 23.37 20.59 19.12 19.29

4,090 12,949 24,437 58,468 105,692 112,328 147,616 115,309 48,807 160,704 219,272 256,317 191,438 231,078 257,366

VW

35.63 36.58 31.80 21.04 17.46 17.36 19.38 13.93 21.72 22.09 20.24 22.07 24.45 17.67 18.54

13,183 21,207 35,110 43,209 55,772 67,663 111,695 49,666 84,671 170,494 209,177 242,083 227,354 213,513 247,363

Ford

0.00 0.00 0.00 18.63 20.41 20.16 20.24 18.61 26.17 21.63 22.13 22.22 22.11 29.89 26.67

0 0 0 38,267 65,204 78,591 116,681 66,360 102,050 166,960 228,618 243,701 205,575 361,212 355,914

Chrysler

Source: Author’s own calculations based on AMIA, Informe Estadístico, several issues.

Nissan

Year

Table A3.10 Mexican vehicle production by company, 1962–97

41.86 28.67 24.69 14.09 11.36 12.68 11.66 15.06 17.68 17.63 18.60 14.69 21.38 22.10 22.55

15,489 16,620 27,259 28,938 36,286 49,424 67,236 53,707 68,917 136,086 192,182 161,099 198,823 267,133 300,900

GM

8.08 10.50 9.92 6.96 7.56 5.93 5.96 1.58 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2,989 6,087 10,953 14,300 24,145 23,113 34,365 5,641 0 0 0 0 0 0 0

VAM

0.00 0.00 0.00 0.00 0.00 3.48 3.87 5.43 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0 0 0 0 0 13,572 22,296 19,351 0 0 0 0 0 0 0

Renault

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

37,000 57,968 110,394 205,394 319,508 389,848 576,391 356,573 389,877 771,812 1,033,280 1,096,791 929,984 1,208,573 1,334,306

Total

338

Appendix 3

Table A3.11 Ford’s production in selected countries, 1974–97 Year

Canada

Mexico

Argentina

Brazil

Units 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

573,354 536,153 405,743 415,590 657,116 653,113 428,734 473,331 494,829 533,443 537,082 630,829

55,170 46,147 53,332 88,675 74,364 128,753 222,523 209,359 227,977 227,951 215,340 226,309

53,938 33,954 61,294 50,390 29,441 31,197 53,458 41,314 NA NA NA NA

175,886 171,931 138,714 144,431 189,073 176,302 151,012 213,127 222,367 169,780 147,736 230,244

Percent 1974 1976 1979 1982 1985 1988 1991 1993 1994 1995 1996 1997

11.21 8.64 9.40 10.38 12.06 10.49 8.13 6.88 7.19 7.75 7.80 9.20

1.08 0.74 1.24 2.21 1.36 2.07 4.22 3.04 3.31 3.30 3.12 3.28

1.06 0.55 1.42 1.26 0.54 0.50 1.01 0.60 NA NA NA NA

3.44 2.77 3.21 3.61 3.47 2.83 2.87 3.10 3.23 2.57 2.15 3.34

NA, not available. Source: Author’s own calculations based on Ford Motor Co., Annual Reports, several years.

39.62 71.16 64.54 45.84 0.05 16.70 16.44 17.25 20.01 18.11 18.91

1,122 18,348 9,226 15,171 85 46,237 77,530 97,798 156,259 176,662 185,920

VW

0.00 0.00 0.00 0.00 31.75 32.00 24.86 31.26 27.37 18.43 21.07

0 0 0 0 51,773 88,604 117,216 177,288 213,763 179,788 207,108

Ford

6.07 6.92 4.25 20.41 38.52 27.35 29.35 28.46 23.18 33.36 30.38

172 1,785 607 6,755 62,811 75,724 138,372 161,374 181,032 325,408 298,607

Chrysler

Source: Author’s own calculations based on AMIA, Informe Estadístico, several issues.

54.31 21.92 30.57 7.73 9.88 9.14 10.12 10.61 8.45 9.33 8.49

1,538 5,652 4,370 2,560 16,107 25,301 47,702 60,165 66,022 90,957 83,501

Units 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

Percent 1975 1978 1981 1984 1987 1990 1993 1994 1995 1996 1997

Nissan

Year

Table A3.12 Mexican vehicle exports by company, 1975–97

0.00 0.00 0.00 23.86 19.79 14.81 19.23 12.43 21.00 20.77 21.14

0 0 0 7,897 32,272 40,993 90,663 70,482 164,006 202,593 207,816

GM

0.00 0.00 0.64 2.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0 0 92 716 0 0 0 0 0 0 0

Renault

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

2,832 25,785 14,295 33,099 163,048 276,859 471,483 567,107 781,082 975,408 982,952

Total

340

Appendix 3

Table A3.13 Ford’s production to sales ratio in selected countries, 1974–93 Year

Canada (%)

Mexico (%)

Brazil (%)

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

142.60 134.27 157.12 148.39 156.49 102.31 67.01 140.43 220.07 201.42 226.77 209.19 210.86 172.73 188.89 180.46 198.23 173.35 213.14 187.68

100.95 99.75 101.43 102.62 99.49 71.39 45.90 109.17 98.01 92.04 98.23 105.87 94.98 95.37 205.47 99.84 201.36 198.95 203.59 230.80

98.98 98.92 101.31 100.56 98.61 81.77 72.84 100.41 99.53 100.47 106.24 102.07 103.44 107.59 108.91 106.92 102.07 NA 110.23 NA

NA, not available.

Table A3.14 Ford’s production to sales ratio in selected countries, 1988–97 Year

Canada (%)

Mexico (%)

Brazil (%)

1988 1991 1993 1994 1995 1996 1997

187.14 165.53 184.89 176.10 210.02 208.17 197.75

204.37 198.68 230.06 247.80 712.35 321.40 233.31

114.48 110.23 141.14 135.59 84.47 77.76 107.59

Source: Author’s own calculations based on Tables A3.8 and A3.11.

Appendix 3

341

Table A3.15 General Motor’s production to sales ratio in selected countries, 1974–97 Year

Canada (%)

Mexico (%)

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

142.96 113.51 137.19 15.06 146.05 130.57 128.36 151.84 171.70 194.04 171.93 212.18 178.89 114.37 127.85 140.78 153.78 159.63 160.16 172.10 357.66 278.93 227.02 218.14

99.91 97.25 102.36 101.91 96.93 99.91 101.44 111.79 84.85 101.23 68.48 96.38 267.91 133.19 144.40 116.01 122.01 125.69 157.04 190.59 141.75 482.86 278.89 213.52

Source: Author’s own calculations based on AMIA, Informe Estadístico, several issues.

Center

Center

North North C-N

Mexico City, 1935

Toluca, 1965

Saltillo, 1981 Saltillo, 1981 Silao, 1992

GM

Center 60,000 120,000 33,225 North North

Cuautitlan, 1970s Engines (four, six cyl.) Engines VB Forge Chihuahua, 1983 Hermosillo, 1986

North

Saltillo, 1981

Ford

Center Center

Mexico City, 1938 Toluca, 1964

Chrysler

Region

Location

Manufacturer

Plant

Light trucks Spark plugs Engines (four, six, eight cyl.) Forge Passenger cars Engines (six cyl.) Light trucks Passenger cars

Light trucks NA NA NA Engines (four cyl.) Passenger cars

Light trucks Passenger cars Engines Condensers Automatic transmission Engines (four cyl.) Passenger cars

Product

71,300 5,520,000 118,750 33,500 87,500 451,200

44,640 90,000 NA NA 400,000 0

73,440 120,960 137,088 806,400 0 270,000 59,280

1983

60,480 5,520,000 142,538 33,500 103,156 451,200

60,480 5,520,000 142,538 33,500 120,000 451,200

400,000 expanding

400,000 130,000

73,440 150,000 90,000 806,400 60,480 270,000 61,900 49,700

1990

49,700

73,440 120,960 169,646 806,400 60,480 270,000 61,900

1988

Installed capacity (units/year)

Table A3.16 Plants and installed capacity of the automobile assembly industry in Mexico, 1983–91

Center Center

C-N

Mexico City Cd. Sahagun, 1984

Torreon

Renault/Jeep

NA C-N

Transaxes Aguascalientes, 1990

Center

C-N C-N

Lerma, 1978 Aguascalientes, 1982

Puebla, 1966

Center

Cuernavaca, 1966

VW

Nissan

Light trucks Passenger cars Engines (four cyl.) Engines (six cyl.)

Passenger cars Light trucks Engines (four cyl.) Gray iron forge Aluminum forge Magnesium forge

Passenger cars Light trucks Engines (four cyl.) Gray iron forge Engines (four cyl.) Aluminum forge 150,000 Passenger cars

17,500 40,000 40,000 40,000

168,000 24,000 540,000 64,800 21,600 14,400

78,000 48,000 84,000 30,000 0 NA 150,000 0

Closed Closed Closed 200,000

129,800 22,000 440,000 64,800 21,600 14,400

0

78,000 48,000 144,000 40,000 192,000 NA

0 0 0 300,000

200,000 22,000 440,000 64,800 21,600 14,400

Construction

100,000 48,000 144,000 40,000 192,000 NA

344

Appendix 3

Table A3.17 Announced investment plans, Mexico, 1990–91

Manufacturer Amount

Purpose

Ford

Expand Hermosillo from 130,000 to 170,000 units Double Chihuahua’s engine capacity

$840 million $700 million

GM

$50 million $400 million

Nissan

$1 billion (1990–94)

$1.5 billion (1991–94)

All units from its Hermosillo plant 500,000 engines/year

Increase in wire harnesses in the maquiladora segment in Toluca Maintain same level of assembly in Silao as in Mexico City plant Shift component manufacture from Japan to Mexico By 1994: 200,000 vehicles

VW

Resulting planned exports to US

Expand vehicle production to 300,000 units by 1991 and 450,000 units by 1993

Source: Data compiled from Berry et al. (1992).

1992: $120 million worth of components 1993: 32,000 Sentras 1995: 64,000 Sentras By 1993 up to 310,000 vehicles

846,000 1,193,000 1,632,000 1,280,000 1,930,000 1,940,000 1,958,000 2,303,000 2,581,000

830,995 774,241 1,396,482 1,190,882 1,530,410 1,483,559 1,227,841 1,250,373

Production 965 1970 1979 1981 1985 1989 1992 1994 1997

Sales 1965 1970 1979 1981 1985 1989 1992 1994

7.0 7.0 8.9 9.6 8.8 8.8 8.2 7.2 8.4

7.1 12.6 12.5 13.0 13.8 14.5 15.4 14.7 16.2

%

10,866,500 10,092,600 13,828,914 10,629,408 15,563,800 14,952,812 13,117,846 15,415,239 15,121,690

11,114,000 8,263,000 11,475,000 7,941,000 11,648,000 10,851,000 9,703,000 12,317,000 12,052,000

Units

US

92.1 91.3 88.4 85.8 89.0 88.6 87.1 89.2 88.8

92.9 87.4 87.5 80.9 83.3 80.9 76.1 78.4 75.5

%

Source: DesRosiers Automotive Yearbook (1995) and Ward’s Automotive Yearbook, several years.

1997

Units

Year

Canada

Table A3.18 Production and sales in North America, selected years

96,358 185,640 425,229 571,013 391,699 445,864 706,914 615,130

597,000 398,000 630,000 1,083,000 1,081,000 1,338,000

Units

Mexico

0.8 1.7 2.7 4.6 2.2 2.6 4.7 3.6 2.9

NA NA NA 6.1 2.8 4.7 8.5 6.9 8.4

%

11,793,853 11,052,481 15,650,625 12,391,303 17,485,909 16,882,235 15,052,601 17,280,742 15,121,690

11,960,000 9,456,000 13,107,000 9,818,000 13,976,000 13,421,000 12,744,000 15,701,000 15,971,000

Total

Company average in North America

Toluca

Chrysler Cars Bramalea

Trucks Cuautitlan Oakville Ontario Truck Company average in North America

Company average in North America

St Thomas

Hermosillo

Ford Cars Cuautitlan

Manufacturer

Concorde, Intrepid, LHS, 300M Cirrus, Neon, Sebring Convertible, Stratus (before 1995, Acclaim, Le Baron, Neon, New Yorker, and Spirit)

F-Series Windstar F-Series

Contour, Mystique (and Grand Marquis before 1995) Escort, Tracer (ZX since 1997) Crown Victoria and Grand Marquis

Product

150,400

255,680

60,160 282,000 195,520

225,600

150,400

109,040

Annual capacity

Table A3.19 Capacity utilization in Canada and Mexico, 1993–98

132,740

300,866

30,572 245,786 112,550

269,060

135,216

25,151

Production 1998

92

88

118

38 83 57 104

117 88

90

23

1998

84

89

80

97 104 56 106

101 84

85

41

1997

81

96

95

48 84 44 99

99 86

73

53

1996

79

53

75

12 87 56 97

92 85

93

64

1995

Production as percent of annual capacity

85

107

101

58 75 49 116

93 97

102

45

1994

77

103

101

101

89 86

78

76

1993

Nissan Cars Aguascalientes Cuernavaca

Company average in North America

Trucks Oshawa Silao

Company average in North America

St. Therese Ramos Arizpe

Oshawa 2

GM Cars Oshawa 1

Trucks Lago Alberto Saltillo Windsor Pillette Road Company average in North America

Sentra Sentra

Sierra/Silverado Pickup C35 Chassis Cab (started 01/95) Blazer, Suburban, Tahoe, Yukon

Lumina, Monte Carlo (before 1994, only Lumina) Century, Lumina Regal (before 1994, only Lumina and Rega) Camaro, Firebird Cavalier, Chevy, Sunfire (before 1995, also Century, Cutlass, Cierra)

Ram Charger, Ram Pickup Ram Pickup (started 3/95) Caravan, Voyager Ram Van, Ram Wagon

300,800 113,002

225,600 132,352

23,744 127,840

278,240

278,240

78,960 112,800 270,720 113,176

143,829

210,748 141,446

80,173 168,993

241,266

218,721

83,735

87,536 141,745

48

86

93 107

74

34 132

87

79

111 126 131 74 104

43

97

133 119

92

43 123

98

104

117 121 128 68 100

35 34

79

113 117

78

42 86

76

88

120 124 109 83 109

36 35

87

124 42

82

79 113

89

98

120 136 102 58 96

71 70

91

120 0

82

9 91

53

48

101 0 133 70 116

83

111 0

73

64 95

65

70

105 0 119 66 101

Beetle, Golf, Jetta

Civic, Acura EL, Odyssey) Accord, started 11/1995

Corolla Corolla, launched 9/1997 Solara, Corolla, ended 7/1997

Volkswagen Cars Puebla

Honda Cars Alliston Mexico

Toyota Cars Cambridge Cambridge N. Cambridge S.

Geo tracker, Pontiac Sunrunner, Suzuki Sidekick

Source: The Harbour Report, several years.

Cars Trucks

Geo Metro, Pontiac Firefly (produced only until 1994), Suzuki Swift

Pick-up, Vanette Van

Trucks Cuernavaca

Cami Canada

Product

Manufacturer

Table A3.19 Continued

74,069

142,845

91,008 135,360 48,880

169,000 30,080

391,040

61,430

Annual capacity

27,939

26,880

150,413 2,136

167,337 7,194

338,959

45,958

Production 1998

33

19

111 44

99 24

87

75

1998

48

50

93 62

110 10

66

71

1997

57

57

100

96 8

53

37

1996

71

82

96

107

49

39

1995

Production as percent of annual capacity

88

67

94

107

65

83

1994

1993

9,254 26,769 –17,515

North America Canada Vehicle exports Vehicle imports Vehicle balance

27,536 37,070 –9,534

52,824 101,298 –48,474

Total exports Total imports Total balance

Total exports Total imports Total balance

33,457 38,306 –4,849

Parts exports Parts imports Parts balance

18,282 10,301 7,981

19,367 62,992 –43,625

World Vehicle exports Vehicle imports Vehicle balance

Parts exports Parts imports Parts balance

1993

Country

31,430 42,257 –10,827

20,097 11,324 8,773

11,333 30,933 –19,600

58,807 117,528 –58,721

37,131 44,963 –7,832

21,676 72,565 –50,889

1994

33,273 44,521 –11,248

21,823 11,184 10,639

11,450 33,337 –21,887

63,077 123,092 –60,015

40,631 46,448 –5,817

22,446 76,644 –54,198

1995

34,423 46,315 –11,892

22,228 12,639 9,589

12,195 33,676 21,481

65,081 128,126 –63,045

41,119 48,421 –7,302

23,962 79,705 –55,743

1996

Table A3.20 US automotive trade, 1993–99 (millions of dollars)

38,793 49,650 –10,857

24,387 13,825 10,562

14,406 35,825 –21,419

72,236 138,376 –66,140

46,643 50,720 –4,077

25,593 87,656 –62,063

1997

39,165 52,230 –13,065

25,298 14,712 10,586

13,867 37,518 –23,651

71,269 149,004 –77,735

46,807 54,354 –7,547

24,462 94,650 –70,188

1998

44,594 63,301 –18,707

29,643 16,934 12,709

14,951 46,367 –31,416

73,725 177,216 –103,491

49,901 61,607 –11,706

23,824 115,609 –91,785

1999

52 37 20

55 27 –165

48 51 40

100 100 100

100 100 100

100 100 100

% World 1993

60 36 18

59 27 –109

63 40 34

100 100 100

100 100 100

100 100 100

% World 1999

7,317 7,354 –37

7,407 10,438 –3,031

Parts exports Parts imports Parts balance

Total exports Total imports Total balance

8,319 14,489 –6,170

7,663 9,702 –2,039

656 4,787 –4,131

1994

Source: US Bureau of the Census, several years.

90 3,084 –2,994

1993

Mexico Vehicle exports Vehicle imports Vehicle balance

Country

Table A3.20 Continued

7,120 18,330 –11,210

6,737 10,501 –3,764

383 7,829 –7,446

1995

8,331 22,950 –14,619

7,078 11,645 –4,567

1,253 11,305 –10,052

1996

11,560 25,424 –13,864

9,582 13,314 –3,732

1,978 12,110 –10,132

1997

11,865 27,670 –15,805

9,502 14,480 –4,987

2,363 13,190 –10,827

1998

11,818 32,554 –20,736

9,271 16,766 –7,945

2,547 15,788 –13,241

1999

14 10 6

22 19 1

0.5 5 7

% World 1993

16 18 20

19 27 64

11 14 14

% World 1999

Index

about this book: argument 1; proposition 1, 8 Aerostar 117 American Motors (AMC) 42, 98, 143 American Report on Free Trade 190 Anglia (Ford) 74 Annex 300-A 191–4 annual improvement factor (AIF) 110 Argentina 67, 68, 77, 128, 137, 139 Asia-Pacific Co-operation (APEC) Forum 138 Asian producers’ US assembly, exploitation of 112 assembly sector inefficiencies, Ford in Mexico 66–9 assessment of global strategy, difficulties in 118–20 Australia 139 Auto Decrees, Mexican see Mexico Auto Pact (US–Canadian) 147–8, 151–2, 159, 160 ‘Auto Pact Club’ 160 auto parts: inefficiencies in sector 69–71; relocation of production of 128–9 Autolatina 137 automated guided vehicles (AGV) 100 automated storage/retrieval (AS/RS) 100 automation as survival strategy 107 Automotive Engineering 129 Automotive Industries 121, 123, 124, 133, 134 Automotive News 211 Autmotive Parts Manufacturers’ Association (APMA) 190 Automotive Transportation, Office for the Study of (OSAT) 174 B2000 (Ford-Mazda) 122 bargaining strategies: export dynamism in Mexico 161–8; interdependence in Canada 149–51; Mexican government (1970s) 95–7

BMW 134, 207 Brazil 67–8, 77–8, 128, 137, 139, 171 British preferential trade system 31–2 bureaucratic disagreement in Mexico 87–8 CAFE Regulations 193–4, 214 Camry Solara (Toyota) 207 Canada: confluence of interest with Ford 30; dependence in US 79–80; Ford cautious behavior in 49–50; Ford Motor Co. in 22, 26; Ford operations, liberal development in 30–50; General Preferential Tariff (GPT) 187; indigenous industry, lack of 143–4; trade deficits in 78–9, 84; US Auto Agreement (1965) 139; US Free Trade Agreement (CUSFTA) 139, 158–60, 187–99 Canada, Ford in: British preferential trade system 31–2; cautious behavior 50; confluence of interest 30; content system 33–4; CVA agreements 39–40, 44; export promotion strategy 34–7; Ford leadership in Canada 30; high volume output, problems with 35–6; historical perspective 31–2; import substitution policies 31–4; integration, limited, into Ford production system 43–50; major investment decision (1978) 97; managed-trade aspect 39, 40–3, 49; parts sector and 43–4; policy options, limited for Canada 30; political controversy, Auto Pact as cause of 42– 3; production inefficiencies 48–9; production safeguards 39; production– sales ratio, Auto Pact provision 45; protectionism 36–7; rationalization 44–50; selective trade liberalization, Auto Pact in 49; strategic differences from GM 46; strategies, post NAFTA

352

Index

209–17; structural constraints 34–7; tariff barriers 33; trade patterns, US– Canada 40–3; triangular diplomacy 37–43; US attitudes to CVA agreements 40; US–Canadian Automotive Trade Agreement 37–43; US import strategies 35; US proximity, advantages of 32 Canadian–American Motors Inc. (CAMI) 153, 159–60, 190 Canadian Auto Workers Union (CAW) 190, 213, 217 capacity surpluses 151–2 Capri (Ford) 74, 76, 123 Carplastic (Ford-Grupo Visa) 171–2 cash flow management 135 centralized management at Ford 25–7 Certificados de Promoción Fiscal 168 Chevette (General Motors) 74, 111 Chicago Tribune 113 Chile 89 Chrysler Corporation: assembly and manufacturing in Canada 36; AutoMex, deal with 87–8, 90; brand names 21; component outsourcing 112, 114–15; Ford international operations compared 126; government bail-out for 98–9; in-house component supplies 18; move into Mexico 52; ownership objectives in Mexico 55; US Big Three, dominance as part of 12; see also US Big Three Civic (Honda) 202 co-operation: alliances and global strategy 138; basis for Ford in Mexico 60–4 Cocoyoc Resolution (1981) 163 collective bargaining 19–20, 154 Comet (Ford) 74 comparative advantage 149–51 competition: competitive advantage, Ford Canada loss of 79–81; competitive challenge, US Big Three in Canada 144–5; competitive strategies, US Big Three in Canada 143; competitive structure of Mexican industry 65–6; competitiveness, Canada and deterioration in 78–85; competitors, impact on strategies of Ford 223–4; global strategy and 134– 41; institutional factors and 19–21; intensification, US Big Three in Canada 152–3; Japanese production as measure of excellence 98; within Mexico, and Ford in 62; rules of 18– 19, 101–2

completely knocked down (CKD) kits 52, 54, 207 component operations, revamp of 112 computer-aided design/manufacturing (CAD/CAM) 100, 134 computer-integrated manufacturing (CIM) 100 computer numerical control (CNC) 100 Conductores y Componentes Eléctricos de Juárez, S.A. de C.V. 173 Confederación de Trabajadores de México (CTM) 180 constraints, structural (1970s): Auto Decree in Mexico (1972) 86–7; auto investment bidding 85; bargaining strength, Mexican government 95–7; barriers, institutional 76–8, 83–5; bureaucratic disagreement in Mexico 87–8; Canadian dependence in US 79–80; competitive advantage, Ford Canada loss of 79–81; competitiveness, Canada and deterioration in 78–85; contextual change in North America 73–8; contradictory policies in Mexico 87–8; emission controls 75, 76; Export Acuerdo in Mexico (1969) 86–7; Ford product strategy, failure of 81; government policy failures compared 92–5; government power, constraints on 88–92; import substitution, constraints in Mexico 85–95; institutional constraints 76–8; international constraints 88–92; minimum commitment strategy 81–3; MNEs, worldwide strategies of 88–92; oil shock, uncertainty and 73, 76; organizational inertia 77–5; problematical position of Ford 73, 76; product strategy at Ford 76–8; riskaverse behavior, US manufacturers 84; ‘sovereign risk’ 84, 97; trade deficits in Canada 78–9, 84; triangular diplomacy 83; US government as factor 83–5 consumer focus of global strategy 122 content requirements, NAFTA and 190–1 content system, Ford in Canada 33–4 contextual change in North America 73– 8 continuous improvement, plans for 105, 106 Contour/Mystique (Ford/Mercury) 122, 123, 132, 133, 201, 209, 211 Corvair (Chevrolet) 74 cost-competitiveness 172–5

Index cost of living allowance (COLA) 110, 154 Cougar (Ford) 117, 176, 211 Crown Victoria (Ford) 211 Cuautitlán, Ford performance at 215–16 CVA agreements 39–40, 44 Daewoo Motors 110 defect prevention 105 defensive investment, Ford in Mexico 61–4 Delphi Automotive Systems 217 demand changes, abrupt nature of 74, 75 Dependencia, Big business and: A Latin American view (Sunkel, O.) 3 design and development 122–4; see also research and development (R&D) Detroit News 114 devaluation in Mexico 163, 172 development costs 115, 116 development facilities, Ford dispersal of 116, 123 disagreements within: US Big Three 88 diversified product operations (DPO) 112 duties on imports 208 Eastern Europe 137 economies of scale 99 The Economist 133 Edsel (Ford) 21 EEC (European Economic Commission) 27, 93 emission controls 75, 76, 83 employee involvement 107 Energy Policy and Conservation Act (1975) 75 England 24–5, 26, 28 Escort (Ford) 74, 110, 111, 123, 132, 209, 211 ethnocentric management at Ford 25–7 European operations of Ford: integration strategy 78; rationalization of 27–8; research and development (R&D) 77 Explorer (Ford) 122, 211 Export Acuerdo in Mexico (1969) 86–7 export dynamism, US Big Three in Mexico: Auto Decree (1977) 162, 166– 8, 174; Auto Decree (1983) 176–7, 181, 182; Auto Decree (1989) 184–5; bargaining strategy 161–8; costcompetitiveness 172–5; devaluation 163, 172; dual structure, domestic vs. export production 182–3; Ford’s global competition perspective 178– 83; global competition, Mexican advantages for 178–83; global strategy, constraints and

353

opportunities 168–72; government incentives at Hermosillo 181; Hermosillo as competitive response 179; import substitution, legacies from 182–3; imports and deficit 162– 3; in-bond assembly plants (maquiladoras) 172–5; integration, setting the base for 183–6; integration, setting the stage for 175– 8; international constraints 161–8; investment, cost-competitiveness and 172–5; local content, trade-off for exports 176–7; power resources 166– 8; production, expansion of 165–6; production, new perspectives for 177– 8; protectionism 185–6; regional production, integration and 175–8; structural transformation for 161, 163–5; unionization at Hermosillo, flexibility through lack of 180–1; US, Hermosillo’s geographic proximity 180; US protectionism, responses to 173–4; see also Mexico; Mexico, Ford in exports: Canadian dynamic 149; leadership of Ford 215; policy of Ford 23–4; program of consistency in Mexico 89; promotion policies, US Big Three in Canada 151–2; promotion strategy, Ford in Canada 34–7; promotion strategy , Ford in Mexico 86–7 F-series (Ford) 209, 211 Fábricas Automex 52, 66, 87-8, 90 Fairlane (Ford) 22, 48 Falcon (Ford) 48, 74 Federal Task Force on the Automotive Industry 151–2 Fiat Motors 138 Fiesta (Ford) 75, 76, 77, 111, 123, 132, 211, 214 Financial Times 190 El Financiero 186, 209 flexibility: flexible manufacturing systems (FMS) 100; flexible production see Japan, production system of; flexible systems, US Big Three calls for 145; GM in mass production 17–18 Focus (Ford) 134 Ford, Henry 10, 14–15, 33 Ford, Henry II 26, 77, 95 Ford 2000 117, 118, 121, 123, 124, 216– 17, 224 Ford Automotive Operations (FAO) 113, 123

354

Index

Ford Corporate Design (FCD) 123 Ford Motor Co.: auto production, high risks in 221–2; in Canada 22, 26, 30– 50; Canadian operations, liberal development 30–50; centralized management 25–7; common development programs 124; competitors, impact on strategies of 223–4; Cuautitlán plant 215–16; demise as industry leader 16–17; dispersed development facilities 116, 123; in England 24–5, 26, 28; ethnocentric management 25–7; in Europe 26, 27–8; European integration strategy 78; European operations, rationalization of 27–8; European R & D 77; export policy of 23–4; Foreign International Division 26; foreign operations of 219–21; foreign ownership strategy, change in 26; in Germany 24–5, 26, 28; global competition perspective 178–83; global strategies 219–24; GM, strategic differences from 22–3; GM, strategic impact of 21–2; GM international operations compared 126; Hermosillo plant 178–82, 204, 209; imitation of GM strategies 19, 21–2, 26; integration, global strategy of 220–1; international collaborative projects 125; labor relations 221; labor strategy, GM compared 108–9, 110; in Latin America 22, 25, 26, 28– 9; Latin American operations, rationalization of 28–9; lawsuits, recalls and 74; leadership in Canada 30; management 224; market-seeking strategies 23–4; mass production, following rules of 219; Mazda and 111, 122, 123, 138, 181, 220; minimum investment strategy 155–8; multidomestic organization 24–5; multidomestic strategy 21–9; new industry rules 223; North American Strategy 209–17; overseas network of 22, 221; performance, striking nature of (1980–89) 155–8; product strategy, failure of 81; production outside US, expansion plans 127–8; production strategy 209–17; rationalization strategies 222, 224; relocation, exit barriers and 222; reorganization (2000) 122; research and development (R&D) 219–20; strategic options 218– 19; strategies of 21–9; ‘sunk’ costs

222; transnational networks 22; truck operations, health of 104; venerable nature of plant 103, 108; vertical integration 219; world car project 221; world car strategy 222–3; see also US Big Three Ford Quality Institute 115 foreign capital 53–5, 95 foreign direct investment (FDI) 4 Foreign International Division, Ford Motor Co. 26 Foreign Investment Revision Agency 147 foreign operations, Ford network of 104, 220–1 foreign ownership: Ford strategy change 26; restrictions in Mexico 69–71 Free Trade Agreement of the Southeast Asian Nations (ASEAN) 138 Free Trade of the Americas (FTAA) 138 Galaxie 500 (Ford) 48 General Agreement on Tariffs and Trade (GATT) 27, 151, 161, 186 General Motors (GM): cautious behavior in Canada 49–50; competition rules, alteration of 18; flexible system of mass production of 17–18; Ford international operations compared 126; Ford labor strategy compared 108–9, 110; Ford strategies and influence of 14; labor agreements with UAW 19–20; leader in compliance in Mexico 95; market leadership, succeeding Ford as 17; Mexican move, following Ford 52; Mexico, major investment decision (1978) 97; ownership demands, Mexico 55; parts production, relocation of 112; parts production in Canada 47–8; production cuts in Canada 43; strategic differences from Ford in Canada 46; strategic differences from Ford Motor Co. 22–3; strategic impact of Ford Motor Co. 21–2; style leader 19; technological investment 105; US Big Three, dominance as part of 12; vertical integration at 17–18; see also US Big Three Germany 24–5, 26, 28 Ghia Studios 123 global strategies: assessment of, difficulties in 118–20; auto parts, relocation of production of 128–9; cash flow management 135; China

Index 128, 129, 137, 138; co-operation alliances 138; competition, global 134–41; constraints and opportunities 168–72; consumer focus 122; design and development 122–4; Eastern Europe 137; Ford 2000 118, 121, 123, 124; Ford Motor Co., post NAFTA 219–24; global cars, positioning of 133; global competition, Mexican advantages for 178–83; global expertise of Ford 104; India 128, 137, 138; intercompany sales 140; international strength 118; joint ventures and 120; Latin America, changes in 128; Latin America, growth in 137; local partnership, establishment of 137–8; management 120–2; manufacturing operations, geographic dispersion of 127–8; matured markets, long-term growth in 135–7; new leadership 122; outsourcing auto parts 129; Poland 128; product development, efficiency in 123–4; production dispersal 124–34; regional integration of production 130–1; regional markets, protection of 138–40; South Africa 128, 138; strategic alliances and 120; strategic co-ordination 135; ‘sunk costs,’ serious regard for 127; Thailand 128, 137; vehicle program centers (VPCs) 123; Vietnam 128; world car projects 131–4 global strategy: long-term/short-term actions, combination of 118 government: constraints on power of 88– 92; direct incentives of 63; incentives at Hermosillo 181; intervention 20–1; policy failures compared 92–5 Graham-Paige of Canada 33 Grand Marquis (Ford) 211 Hermosillo plant 178–82, 179, 204, 209 high volume output, problems with 35–6 historical perspective, Ford in Canada 31–2 Honda Motors 85, 151, 153, 160, 190, 205–9 Hudson Motors of Canada 33, 34 Hyundai Motors 160 imports: and deficit in Mexico 162–3; proliferation in Mexico 52–3; substitution in Canada 31–4; substitution in Mexico 51–60, 86–95, 182–3

355

in-bond assembly plants (maquiladoras) 124, 172–5, 199, 202, 203, 207, 208 India 128, 137, 138, 139 Indonesia 139 Inside US Trade 189, 190, 191 institutional barriers to development 76– 8, 83–5 integration: Ford global strategy of 220– 1; limited, in Ford production system 43–50; of Mexican industry 201–2; setting base for 183–6; setting stage for 175–8; strategies, post NAFTA 204–9 inter-bureaucratic disagreements 65 inter-company sales 140 interdependence, US Big Three in Canada: Auto Pact, trap provided by 147–8; bargaining approach 149–51; Canada–US Free Trade Agreement 158–60; capacity surpluses 151–2; collective bargaining practices 154; comparative advantage 149–51; competitive challenge 144–5; competitive intensification 152–3; competitive strategies 143; constraints, CUSFTA and 158–60; export dynamic 149; export promotion policies 151–2; flexible production systems, calls for 145; Ford performance on minimum investment strategy 155–8; indigenous Canadian industry, lack of 143–4; Japan, rise of imports from 143; labor cost advantage 153–5; labor relations, US/ Canadian political approaches to 154– 5; minimum investment strategy of Ford 155–8; ‘moral suasion’ 149–51; oil shock, sales decline from 142–3; outsourcing practices 145–7; policy alternatives, gloominess of perspectives on 148–9; protectionism 142; relocation strategies 146; restructuring North American industry, challenge of 148–54; subsidization 149–51; supremacy, decline of 142–8; triangular diplomacy 142 interdependence, US Big Three internationally 18–19, 21, 75 inter-firm relations 101 international collaborative projects 125 international constraints: to export dynamism 161–8; structural 88–91 international strength in global strategy 118

356

Index

Intrepid (Dodge) 202 investment, cost-competitiveness and 172–5 Isuzu Motors 110 Jaguar 211 Japan: challenge to US Big Three 98– 103; competition for US Big Three 73–4; competitive response of US Big Three to 139; domination objectives of 223; lean production and mass production of 99; liberalization demands of 138; rise of imports from 143 Japan, production system of: advantages of 99–100; competitive rules, setting of new 101–2; distributional structure 102; economies of scale 99; inter-firm relations 101; market success of 98–9; measure of competitive excellence 98; performance gap, US/Japan 103; pyramidal organization 101; radical technological innovation 100; R&D costs 100; US Big Three strategies and 102–3; vertical co-ordination 100– 1 Jiangling Motors 137 job security, commitment to 113 Johnson Controls Inc. 116 joint ventures and global strategy 120 Joy (Chevrolet) 215 K-Cars (Chrysler) 74, 170, 179 Ka (Ford) 124 Kia Motors 138 Korea, South 138, 139, 145 labor: co-operative relationship with 106–10, 112–13; costs, advantage in Canada 153–5; costs, US Big Three disadvantage on 114; GM agreements with UAW 19–20; relations, Ford record 221; relations, US/Canadian political approaches to 155 laissez-faire ideology 20 Laser (Ford) 122 Latin America 22, 25–6, 28–9, 69, 90, 128, 137 lean production see Japan, production system of Lincoln Continental 211 Lio Ho Motors 111 local content 55–7, 68, 72, 176–7 local partnership 137–8 long-term/short-term actions, combination of 105, 118

Losch, J. Michael 172 LTD/Marquis (Ford) 76 Mahindra & Mahindra 138 management: Ford Motor Co. 224; global strategy 120–2 Mark VIII Lincoln (Ford) 117, 211 market: access, Mexicanization and 54– 5; fragmentation 58–9; leadership, GM succeeding Ford in 17; seeking, Ford strategy of 23–4, 62; size in Mexico 93; success of Japanese production system 98–9 mass production: competition, rules of 18–19; constraints of 74; emergence of 14–15; flexibility in, GM and 17–18; Ford and following rules of 219; GM and introduction of ‘flexible’ 17–18; intrinsic rigidity of 17; Japanese lean production and 99; rationale for 16; stability, need for 16–17; structural rules of: 14-16; techniques of 15; vertical integration and 15–16; vulnerability to change 16–17 matured markets, long-term growth in 135–7 Maverick (Ford) 76 Mazda–Ford co-operation 111, 122, 123, 138, 181, 220 Mercedes-Benz 135, 207 Mercosur 130, 139 Meteor (Mercury) 22 Mexico: added-value, calculation of 193; Auto Decree (1962) 53–4, 57–60; Auto Decree (1972) 86–7; Auto Decree (1977) 162, 166–8, 174; Auto Decree (1983) 176–7, 177, 181, 182; Auto Decree (1989) 184–5, 189, 193, 194; compromise with Ford in 56–7; conflict of strategies 51; contradictory policies in 87–8; costs of production in 59; economic considerations in 67; exports from 89–90; Ford strategy in 209–17; GM major investment decision (1978) 97; investments in 199; Mexicanization, emphasis on 53– 4; prohibition on used car imports 193; relevance for US Big Three 91 Mexico, and Ford in: assembly sector inefficiencies 66–9; Auto Decree (1962) 53–4, 57–60; auto parts, inefficiencies in sector 69–71; automotive capability, lead role in development of ‘national’ 71–2; cooperation, basis for 60–4; competition within 62; competitive structure of

Index industry 65–6; compromise 56–7; conflict of strategies 51; consumer tastes 66–9; costs of production 59; defensive investment 61–4; export program, consistency in 89; exports strategy 86–7; foreign capital, dominance of 95; foreign capital, government dependence on 53–5; foreign ownership, restrictions on 69– 71; GM investment decision (1978) contrasted 96; government, direct incentives of 63; import proliferation 52–3; import substitution 51–60; inbond assembly plants 124; inappropriate development model, replication of 70; incorporation of activities in 130; inflation, government objectives on 68; interbureaucratic disagreements 65; local content 68, 72; local content objectives 55–7; market access, Mexicanization and 54–5; market fragmentation 58–9; market-seeking strategies 62; market size 93; Mexicanization, emphasis on 53–4; models, restrictions on numbers 67; NAFIN (Nacional Financiera) 54–5, 69; nationalistic preferences, limits on 64–72; oligopolistic competition 61–4; opposition to 1977 Auto Decree 96–7; ownership, attitudes towards 55, 56; ownership, performance and 70; product differentiation 55–7, 66–9; production quotas 91, 94; profitability 62; protectionism 62–3; Regulation for Automotive Assembly Plants (1947) 52; sourcing policies 69–71; sourcing strategies, inefficiency in 71; strategic goal 89; structural inefficiencies 57–60; supplier base support 70; trade deficit growth 52–3, 59–60; triangular diplomacy 51; US dominance, government concerns 66; US government negotiating support 64–5; US proximity, results of 68–9; vehicle demand and supply, economic considerations 67; vertical integration 55–7, 69–70, 70, 71, 94; World War II, positive effects of 52; see also export dynamism minimum commitment strategy 81–3 minimum investment strategy 155–8 Mitsubishi Motors 139 Model A (Ford) 16 Model T (Ford) 16, 52 Mondeo (Ford) 132, 133

357

‘moral suasion’ 149–51 most favored nation (MFN) tariffs 207–8 multidomestic strategy: centralized management at Ford 25–7; collective bargaining, UAW and 19–20; competition, rules of 18–19; ethnocentric management at Ford 25– 7; European operations, Ford rationalization of 27–8; Ford Motor Co. 21–9; government intervention 20–1; institutional factors, competition and 19–21; interdependence of US Big Three 18– 19, 21; Latin American operations, Ford rationalization of 28–9; marketseeking, Ford strategy of 23–4; organization, multidomestic basis at Ford 24–5; price competition, focus on 18; stability and change 16–21; structural rules of mass production 14–16; tariff barriers 24, 33; vulnerability to change 16–21 multinational enterprises (MNEs): assessment of internationalization/ globalization strategies 118–20; barriers to global economic networks 2; comparative perspective, Canada and Mexico 12–13; complexity of 119; cross-border integration 1; Ford Motor Co., historical perspective 8, 10–12; Ford Motor Co., one-firm approach 9–10; global integration strategies (GIS) of 4–6; government and GIS of 5–6, 8, 11–12; industries as complex power systems 6–9; international trade, control by 3–4; IPE perspectives on state relations with 2–3, 6–8; negotiating dynamics with states 30; perception of 1; power distribution, states and 231–5; power relations with states 2, 8; as purposive actors in relations with states 3, 9; regional integration of 231–5; relations with states, need for new theoretical framework 2–4; relationship between 228–9; state relationship with 225–8 Mustang (Ford) 22, 48, 76 NAFIN (Nacional Financiera) 54–5, 69 Nasser, Jack 122 National Highway Traffic Safety Administration (NHTSA) 75 Navajo (Ford-Mazda) 122 Nemak (Ford-Grupo Alfa) 171 Neon (Chrysler) 133

358

Index

New York Times 33, 113 newly industrialized countries (NICs) 145, 173 Nissan 64, 66, 72, 90, 151, 162, 163, 166, 179, 190, 205–9, 215 non-regional producers 205–9 North American Free Trade Agreement (NAFTA) 138, 139, 187–203 Nova (Chevrolet) 74 oil shock: sales decline 142–3; uncertainty and 73, 76 oligopolistic competition 61–4 Organization for Economic Co-operation and Development (OECD) 62–3 organizational inertia 77–5 original equipment manufacture (OEM) 162, 203 outsourcing: auto parts and global strategy 129; constraints on 111; operations and survival strategy 110– 17; practices, interdependence and 145–7; US Big Three 111; see also sourcing overseas network of Ford 22, 221 overtime payments 108 ownership, attitudes towards 55, 56, 70 Packard Motor Co. (Canada) Ltd 33, 34 parts production 43–4, 47–8, 112 PEMEX 179 performance gap, US/Japan 103 Pinto (Ford) 74, 76, 77, 111 Poland 128 policy options: gloominess of perspectives on 148–9; limited for Canada 30 political controversy, Auto Pact as cause of 42–3 Pontiac T-1000 111 Portillo, President José López 95–6 power distribution 231–5 power resources 166–8 price competition 18 Probe (Ford) 117, 122 product development, efficiency in 123–4 product differentiation 55–7, 66–9 product strategy at Ford 76–8 production: dispersal and global strategy 124–34; expansion, export dynamism and 165–6; GM cuts in Canada 43; inefficiencies, Ford in Canada 48–9; new perspectives for 177–8; outside US 127–8; productivity performance 107; quotas 91, 94; safeguards, Ford in Canada 39; sales ratio, Auto Pact provision 45

production, NAFTA and North American System of: Annex 300-A 191–4; CAFE regulations 193–4; Canada, Ford strategy in 209–17; content requirements 190–1; Cuautitlán, Ford performance at 215–16; CUSTFA and 187–99; duties on imports 208; export leadership of Ford 215; Ford 2000 centralization process, reversal of 216–17; Ford strategy 209–17; foreign content tracing 190–1; integration of Mexican industry 200–2; integration strategies 203–9; Mexican addedvalue, calculation of 193; Mexican Auto Decrees 189; Mexican investments 199; Mexican prohibition on used car imports 193; Mexico, Ford strategy in 209–17; negotiations on NAFTA 188–91; non-regional producers, relative disadvantage of 205–9; post-NAFTA 194–203; protectionist demands of unions 188– 9; rationalization strategies 205; regional content, calculation of 190; rules of origin 189–90, 193; sourcing decisions 214; specialization patterns 201–3; triangular diplomacy 187 profit-sharing 108 profitability: guarantees in Mexico 205; Mexico, Ford in 62; survival strategy 116–117 protectionism: export dynamism, US Big Three in Mexico 185–6; Ford in Canada 36–7; interdependence, US Big Three in Canada 142; Mexico, and Ford in 62–3; protectionist demands of unions 188–9 Q-1 Preferred Quality Award 115, 116 Ranger (Ford) 122, 211 rationalization: Canadian perspective 45–50; Ford in Canada 44, 48; strategies of Ford 222, 224; strategies of US Big Three 230–1; strategies post NAFTA 205 Reagan, President Ronald 147 regional: content 190; integration 130–1, 231–5; markets, protection of 138–40; production, integration and 175–8 Regulation for Automotive Assembly Plants (1947) 52 relocation: exit barriers and 222; strategies, US Big Three in Canada 146 Renault Motors 98, 182

Index research and development (R&D): costs in Japan 100; Ford in Europe 77; Ford Motor Co. 219–20; see also design and development risk-averse behavior of US manufacturers 84 rules of origin 189–90, 193 Sable (Mercury) 106 selective trade liberalization 49 Sentra (Nissan) 201, 207 Sloan Scientific Management 17 small car import policies, US Big Three 73–4 sourcing: decisions 214; policies, Ford in Mexico 69–71; strategies, inefficiency in 71; see also outsourcing South Africa 90, 128, 137, 138 South African Motor Corp. 138 ‘sovereign risk’ 84, 97 Spain 92–3, 145 specialization patterns 201–3 Spicer, S.A. 71 stability and change 16–21 Strange, Susan 3, 6–8 strategic: alliances and global strategy 120; attitude to suppliers 116; coordination and global strategy 135; differences, GM from Ford 22–3, 46; impact of GM on Ford 21–2; options for Ford 21–9, 218–19 strategies: global see global strategy; multidomestic see multidomestic strategy; survival see survival strategy structural constraints, Ford in Canada 34–7 structural inefficiencies, Ford in Mexico 57–60 structural rules of mass production 14– 16 Studebaker Corporation of Canada 34 style leader, GM as 19 subcompacts, support for 110–11 subsidization 149–51 ‘sunk’ costs, Ford regard for 127, 222 supremacy, decline of US Big Three in Canada 142–8 survival strategy: automation 107; component operations, revamp of 112; constraints on outsourcing 111; continuous improvement plan 105, 106; defect prevention approach 105; development costs 115, 116; employee involvement 107; Ford labor strategy, GM compared 108–9, 110; foreign operations, network of 104; global

359

expertise 104; industry crisis (1970s), Ford’s predicament 103–4; labor, cooperative relationship with 106–10, 112–13; long-term/short-term actions, combination of 105; outsourcing operations 110–17; overtime payments 108; productivity performance 107; profit-sharing 108; profitability 116–117; refurbishment, strategy of 104; strategy toward suppliers 116; twofold nature of 117; UAW and 108–9, 110, 113–14 Suzuki Motors 110, 138, 153, 190 Swing (Chevrolet) 215 tariff barriers 24, 33 Taurus (Mercury) 74, 106, 211 technological investment 105 Thailand 128, 137 Thunderbird (Ford) 117, 177, 211 Topaz (Ford) 177 Toyota Motors 110, 139, 151, 153, 160, 190, 205–9 Tracer (Mercury) 111, 122, 178, 209 trade deficit growth in Mexico 52–3, 59– 60 trade patterns, US–Canada 40–3 Transit Van (Ford) 128 Transmisiones y Equipos Mecánicos 71 triangular diplomacy: constraints, structural (1970s) 83; Ford in Canada 37–43; interdependence, US Big Three in Canada 142; learning process and 230–1; Mexico, and Ford in 51; production, NAFTA and North American System of 187; state to state 229–30 truck operations, Ford’s healthy 104 United Autoworkers (UAW) 19-20, 102, 108–9, 110, 113–14, 139, 154, 181, 190, 217 United States: attitudes to CVA agreements, Ford in Canada 40; dominance, Mexican government concerns 66; Generalized System of Preference (GSP) 187; government as constraining factor 83–5; government negotiating support 64–5; Hermosillo’s geographic proximity to 180; import strategies, Ford in Canada 35; International Trade Commission 37–8; protectionism, responses to 173–4; proximity and advantages to Ford in Canada 32;

360

Index

proximity and results for Ford in Mexico 68–9 US Big Three: Asian producers’ US assembly, exploitation of 112; ‘Auto Pact club’ 160; declining supremacy of 142–8; demand changes, abrupt nature of 74, 75; disagreements within 88; economic considerations in Mexico 67; efficiency-seeking strategies of 104; emissions regulations 83; European presence of 134–5; integration strategies of 203– 9; interdependence of 75; Japanese challenge to 98–103; Japanese competition 73–4; job security, commitment to 113; labor costs, disadvantage on 114; mass production, constraints of 74; Mexican market, relevance for 91; Mexico, exports from 89–90; MFN tariff advantage of 207; minimum commitment strategy 81; outsourcing 111; power distribution 231–5; profitability guarantees in Mexico 205; proliferation of models offered in Canada by 35–36; rationalization strategies of 230–1; regional integration 231–5; small car import policies 73–4; strategies and Japan, production system of 102–3; subcompacts, support for 110–11; utility vehicle sales 138; see also Chrysler Corporation; Ford Motor Co.; General Motors (GM); interdependence

US–Canadian Automotive Trade Agreement see Auto Pact utility vehicle sales 138 vehicle program centers (VPCs) 123 Vehículos Automotores de México (VAM) 182 Venezuela 89 Vernon, Raymond 231 vertical co-ordination 100–1 vertical integration 15–18, 55–7, 69–70, 70–1, 94, 219 Vietnam 128 Visteon 113–14, 122, 123 Vitroflex (Ford-Grupo Vitro) 171–2 Volkswagen 64, 72, 85, 90–1, 137, 162, 166, 170, 179, 190, 201, 205–9, 215, 220 Voluntary Export Restraint Agreements 139 voluntary export restraint (VER) 151 Volvo Motors 159–60 vulnerability to change, mass production and 16–21 Wall Street Journal 217 Ward’s Auto World 172, 174, 178 Ward’s Automotive Reports 207, 209 ‘who-gets-what’ rules of mass production see structural rules Windstar (Ford) 211, 215 world car projects 131–4, 221, 222–3 Zetec engine 133, 209