I M V P

Offshoring Automotive Engineering: Globalization and Footprint Strategy in the Motor Vehicle Industry

John Moavenzadeh Executive Director MIT International Motor Vehicle Program

NAE Workshop on Offshoring of Engineering National Academy of Engineering Washington, DC October 24, 2006 I M V P Offshoring Automotive Engineering: Globalization and Footprint Strategy in the Motor Vehicle Industry

Overview of Automotive Engineering Globalization of the Automotive Industry Employment of US Auto Engineers Footprint Strategy for Automotive Engineering I M V P

Offshoring Automotive Engineering

Overview of Automotive Engineering Globalization of the Automotive Industry Employment of US Auto Engineers Footprint Strategy for Automotive Engineering I M V P

Two types of automotive engineers: • Manufacturing Engineers (location tied to production facilities) • Product Engineers • Product Design Engineers • Development Engineers • Test Engineers • Advanced Engineering • Many engineers work for the supply base • Tiered supply base • 20-30 thousand parts in a typical automobile • Most (all?) OEMs spend more than half their revenue buying from their suppliers I M V P

Automotive industry is #2 for R&D spending

Top Industries by 2006 Estimated R&D Spending

Software 23.0

Telecommunications Equipment 26.9

Semiconductor 27.0

Motor vehicles and auto parts 55.1 76.9 Pharmaceutical

0 10 20 30 40 50 60 70 80 $ Billions Top 20 Global Companies by 2004 R&D Spending 8 Schonfeld Associates forecasts Toyota to be Automotive 7 the #2 R&D investor in 2007 at $9.8 billion Non-Automotive 6

5 $Billion

4

3

t r r or o ric ng to tis sof IBM kia o nson Intel o Sony o Pfizer Mot ect hKline h N Roche Merck hrysler a a M ovar C Siemens t it amsu N Micr ord Mot m S d ita El S F oyo Volkswagen eneral Motors T xo Hon G la Daimler G Matsush Johnson & Jo Sources: Schonfeld Associates; Corporate R&D Scorecard, Technology Review I M V P

Automakers are under enormous pressure to reduce costs …

Automotive Proportion of Market Capitalization for US, EU, Japan

… including engineering costs. I M V P

Significant differences in engineering efficiency remain among automakers

Adjusted Product Engineering Hours for OEMs in US, EU, Japan

3500000 3000000 2500000 USA 2000000 Europe 1500000 Japan 1000000 500000 0 Period 1 Period 2 Period 3 Period 4 1980-84 1985-89 1990-94 1995-99

Source: Takahiro Fujimoto, University of Tokyo I M V P

Offshoring Automotive Engineering

Overview of Automotive Engineering Globalization of the Automotive Industry Employment of US Auto Engineers Footprint Strategy for Automotive Engineering I M V P

Globalization is not new to the auto industry

Offshore CKD Assembly Plants of Ford, GM & Chrysler up to 1928 Company Number Location of Plants (Year opened) of Plants Ford 24 Canada (1904); England (1911); France (1913); Argentina (1915); Motor Argentina (1919); Spain (1919); Denmark (1919); Brazil (1919); Belgium (1919); Sweden (1922); Italy (1922); South Africa (1923); Company Chile (1924); Japan (1924); Spain (1925); Germany (1925); France (1925); Australia (1925); Brazil (3 locations, 1926); Mexico (1926); India (1926); Malaysia (1926); General 19 Canada (1907); England* (1908); Australia (1923); Denmark Motors (1923); Belgium (1924); England (1924); Argentina (1925); England (1925); Spain (1925); Brazil (1925); Germany (1926); New Zealand (1926); South Africa (1926); Uruguay (1926); Indonesia (1926); Japan (1927); India (1928); Poland (1928); Sweden (1928) Chrysler 3 Germany (1927); Belgium (1928); England (1928)

Source: Rhys, D. G. Maxcy, George. Sturgeon & Florida, Globalization and Jobs in the Automotive Industry . I M V P

… But the industry has undergone a second wave of globalization since the 1960’s

1965 1970’s 1980’s 1990’s Isolated Trade Flows: FDI Flows: Business Regional Imports & Transplants Integration Markets Exports

Increased Global Integration

Globalization of sales (by brand, by owner)
Globalization of production and employment I M V P

Foreign-brand market share has steadily increased in the United States to nearly 43% in 2005

Foreign-Brand Market Share in the US Light Vehicle Market 45 42.642.6% 40.8 40 41.4 37.3 37.8 35 35.2

(%) 29.5 31.7 30 30.2 29.0 28.4 27.8 27.0 26.9 28.7 27.6 26.5 27.3 26.3 25 25.7

20

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 05E 20

Source: Automotive News, Univ. of Michigan I M V P But foreign-owned firms now account for more than half the US market

Foreign-Owned, 2004 Total Sales = 16,912,613 units Domestic-Owned, Foreign-Brands: Domestic-Brands: BMW, Mini, Rolls Royce, Mercedes Ford, Lincoln, Mercury, Buick, Benz, Maybach, Ferrari, Acura, Cadillac, Chevrolet, GMC, Hummer, Honda, Hyundai, Kia, Isuzu, Oldsmobile, Pontiac, Saturn Lamborghini, Lotus, Maserati, Mitsubishi, Infinity, Nissan, Porsche, Subaru, Suzuki, Lexus, Scion, Toyota, Audi, Bentley, Volkswagen 38.2% 45.6%

13.0% Domestic-Owned, Foreign-Owned, 3.1% Foreign-Brands: Domestic-Brands: Aston Martin, Jaguar, Land Rover, Chrysler, Dodge, Jeep Volvo, Saab, Mazda

Source: IMVP, Automotive News 2004 data I M V P

US vehicle market is the most “open” to foreign brands … Country or Region Foreign- Foreign- Brand Ownership Penetration Penetration (2004) (2004) United States 41.3% 51.2% Western Europe 26.6% 38.2% Japan 4.2% 9.0% South Korea 2.3% 26.2%

… But Foreign Penetration Continues to Increase in All Markets and Foreign-Ownership Penetration Exceeds Foreign-Brand Penetration in All Markets

Note: All Data for 2004 Source: IMVP, ACEA, JAMA, KAMA I M V P Transplant production accounted for 30.9% of US production in 2005 US Light Vehicle Production: 1982-2005 14 Foreign-Brands Big 3 12 0.5 2.6 0.7 2.2 2.7 0.3 0.9 2.3 2.4 2.8 0.8 2.4 2.5 3.0 1.3 3.3 10 1.8 2.6 3.6 0.2 1.5 1.7 8 1.5

0.1 6 11.2 10.6 10.6 10.1 10.3 10.1 10.1 9.6 9.7 9.8 Production (millions) Production 9.1 9.3 9.5 9.2 9.3 9.0 8.6 8.9 4 8.3 8.0 8.4 8.0 6.9 7.3

2

0

2 4 6 8 2 4 9 0 5 8 8 8 87 8 89 9 93 9 95 97 9 0 01 03 0 9 9 9 9 9 9 9 9 0 0 0 1 1983 19 1985 19 1 1 1 1990 1991 19 1 19 1 1996 1 1998 1 20 2 2002 2 2004 2

Source: IMVP, Automotive News I M V P The transplants have a different (and expanding) footprint from domestic US production March 2006: Toyota it June 2006: Honda will build 100,000 announces it will additional cars at build new assembly Fuji/Subaru Plant in plant in Greensburg, Indiana Indiana October 2006 : Kia breaks ground on $1 Billion assembly plant in Georgia employing 2,500

Source: JAMA, IMVP I M V P Employment, sales and production have globalized Top ten automakers % employment, production & sales outside home country 9090 % Employees outside home % Sales outside home 80.4 % Production outside home 79.5

80 77.7

80 77.1 75.0 71.0 70.7 7070 70.3 63.3 63.0 60.3

6060 57.9 56.1 53.7 53.3 53.0 52.8 52.5 50.9 50.7

50 48.1 50 47.5 46.7 39.7 39.3

4040 37.8

3030

a a n a lt rd ler d GM VW sa n Fo s PSA Ho Toyot Ni Renau Hyundai-Ki

Daimler-Chrys Home Country of Vehicle Manufacturer Source: company annual reports, except Ford data from Automotive News I M V P

Automotive Supplier Industry Is Also Global • Suppliers “shop at the global mall” • Foreign suppliers (e.g., Denso) follow their customers (e.g., Toyota) to USA • US suppliers (e.g., Lear) pursue business with foreign customers entering the US (e.g., Hyundai) • In 2004, 41% of the combined sales of the top 35 North American suppliers were to customers outside North America I M V P

Offshoring Automotive Engineering

Overview of Automotive Engineering Globalization of the Automotive Industry Employment of US Auto Engineers Footprint Strategy for Automotive Engineering I M V P

Overall US automotive direct employment has declined to about 1.1 million

1400 1312 1313 1272 1242 1240 1254 1213 1169 1151 1200 1125 1113 1078 1098 1084 1054 1048 1018 1000

800 Motor Vehicles Only

600 Motor Vehicles and Parts

400 271 282 295 285 287 284 291 291 279 258 260 264 265 265 256 250 246

Total Direct Employment (thousands) Employment Direct Total 200

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200 2 2003 2004 2005 2006

Source: US Bureau of Labor Statistics I M V P

BLS data indicates about 45,000 automotive engineers in the US …

Occupational NAICS 3361: NAICS: Motor NAICS 3363: Total of All Code Motor Vehicle Vehicle Body Motor Vehicle Three NAICS Manufacturing and Trailer Parts Codes Manufacturing Manufacturing Engineering 610 570 3,960 5,140 Manager Industrial 3,390 1,240 14,460 19,090 Engineer Mechanical 1,920 1,360 9,300 12,580 Engineer Electrical 150 110 910 1,170 Engineer Engineers, All n/a 180 7,200 7,380 Other Total 6,070 3,460 35,830 45,360

All 256,700 168,840 693,120 1,118,600 Occupations

… but this does not include most product engineers!

Source: US Bureau of Labor Statistics I M V P

A bottom-up estimate yields about 34,000 engineers and technicians for OEMs ONLY Company Current Projection Number of Engineers & Technicians General Motors 11,500 Decreasing Ford Motor 12,000 Decreasing Company DaimlerChrysler 6,500 Steady Japanese 3593 Increasing Rapidly Korean 200 Increasing (Hyundai-Kia) Rapidly German (BMW) 150 Increasing Total About 34,000

Source: Company interviews and literature I M V P

Offshoring Automotive Engineering

Overview of Automotive Engineering Globalization of the Automotive Industry Employment of US Auto Engineers Footprint Strategy for Automotive Engineering I M V P

Interviews suggest four key factors that affect automotive engineering footprint:

Customer Where is the vehicle market growing? In which segments?

3C+G Cost Footprint Capability What are local engineering Model Where can we leverage labor rates? What are the specific talent advantages? transaction costs to interface Where is the leading know- within the enterprise? how in technology?

Government What is the influence of government trade and investment policies? I M V P

Different weighting of the four factors for product and manufacturing engineering

Influence on Influence on Manufacturing Product Factor Engineering Engineering Footprint Footprint

Customer High Medium

Cost Medium MediumMediumHigh

Capability Low High

Government High Low I M V P

The Value of Proximity

Manufacturing Production Engineering Engineering (Production) (R&D) OEM-Customer Build where you sell Engineer where you sell Proximity Lower Transport Cost Localization Trade Policy Engineering local Political/Reputation Gain vehicles Reduce Currency Risk Supplier-OEM Supply close to assembly Engineer close to OEM Proximity plant customer Bulky (fuel tanks) Integral systems/ Assembly sequence components (seats) Integral (bumpers) I M V P

Historically cyclical, the US vehicle market has been flat for the past six years

US Light Vehicle Sales: 1982-2005 18 17.0 16.9 17.0 17 16.8 16.9 17.2 16 16.1 16.7 15.5 15.4 15.0 15.1 15.1 15.4 15 14.9 14.5 14.3 14.7 14 13.9 13.9 13 12.8 12.2

Millionsof Vehicles 12 12.3 11 10.5 10

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Automotive News data I M V P

China, India and Russia are growing; US, WE and Japan are stagnant Vehicle Sales by Region/Country normalized to 1999 Volume 3

China United States China 2.5 Western Europe Japan China India 2 Russia

IndiaIndia

1.5 Russia Russia

1 Japan, USA, WesternJapan, Europe WE, USA 0.5 1999 2000 2001 2002 2003 2004 2005 Source: Automotive News data I M V P

Different weighting of the four factors for product and manufacturing engineering

Influence on Influence on Manufacturing Product Factor Engineering Engineering Footprint Footprint

Customer High Medium

Cost Medium MediumMediumHigh

Capability Low High

Government High Low I M V P

Engineering labor rates vary widely

Fully-Loaded Annual Cost of an Automotive Engineer with 5-10 years experience

China India Eastern Europe Mexico Western Europe United States

0 20 40 60 80 100 120 $ Thousand

Source: Company interviews I M V P

Interviews: Chasing labor is not a good idea

• Low labor productivity can cancel out low engineering cost per hour • Low engineering labor rates are not sustainable • Labor accounts for about half of total automotive engineering cost I M V P

Different weighting of the four factors for product and manufacturing engineering

Influence on Influence on Manufacturing Product Factor Engineering Engineering Footprint Footprint

Customer High Medium

Cost Medium MediumMediumHigh

Capability Low High

Government High Low I M V P

Interviews: Capability matters

• Many offshore engineers lack basic automotive domain knowledge • Offshore the routine/repetitive/low-value-added tasks: e.g., FE meshing, engineering bill of materials, component FMEA (not system), generating a tool design from a part specification • Offshore ramp-up time (and cost) is frequently underestimated I M V P

US Firms Offshoring R&D Tech Centers

GM Technical Center GM-SAIC Pan Asia Technical Automotive Bangalore, India Center (PATAC) Opened Nov. 2003 Shanghai, China Employment: 240 Opened June 1997 professionals in 2005 Employment: 660 Designers, Technicians, increasing to 400 in 2006 Engineers Vehicle design tools, virtual 50-50 joint venture between GM and SAIC manufacturing, control provides automotive engineering services systems, materials including design, development, testing and validation of components and vehicles. I M V P Foreign Firms Onshoring R&D Tech Centers

Nissan Technical Center Toyota Technical Center Farmington Hills, Michigan Ann Arbor, Michigan First Established 1989 First established 1977 (multiple expansions) 2005 Employment:1056 (540 2005 Employment: 750 engineers) Toyota’s New $150 Million R&D Facility will In March 2005, Nissan added a join this facility in Ann Arbor, Michigan and add $14M design studio to this site, 400 technical jobs. following a $38M expansion in 2002.. TTC is engaged in engineering design, engine Total vehicle development for US unit design, prototype development, vehicle market. evaluation, evaluation and design of parts and materials, regulatory affairs, emission certification, and technical research. I M V P Foreign-brand R&D and design facilities in the United States employed nearly 4,000 people in 2006

Company Location(s) Established Employees Spartanburg, NC; Woodcliff Lake, NJ; Oxnard, BMW CA; Palo Alto, CA 1982 150 Honda Torrance, CA; Marysville, OH 1975 1300 Hyundai Ann Arbor, MI 1986 200 Isuzu Cerritos, CA; Plymouth, MI 1985 100 Mazda Irvine, CA; Ann Arbor, MI; Flat Rock, MI 1972 100 Mercedes- Benz Palo Alto, CA; Sacramento, CA; Portland, OR 1995 50 Mitsubishi Ann Arbor, MI 1983 130 Nissan Farmington Hills, MI 1983 980 Subaru Ann Arbor, MI; Lafayette, IN; Cypress, CA 1986 30 Gardena, CA; Berkeley, CA; Ann Arbor, MI; Plymouth, MI; Lexington, KY; Cambridge, MA; Toyota Wittmann, AZ; 1977 950

Source: Japan Automobile Manufacturers Association (JAMA), Automotive News, IMVP I M V P Onshore engineering has been growing

Number of engineers and designers working for Japanese OEMs in the United States 4000 3593 3500 3101 3065 2946 3000 2630 2528 2589 2586 2500 2271 2238 1952 2000 1784

1500

1000

500 200

0

7 8 9 0 2 3 4 5 6 7 8 0 1 2 3 5 8 8 9 9 9 0 0 0 98 99 99 99 99 99 00 00 19 19 1 1 1991 19 19 1 1 19 1 1 1999 20 20 2 2 2004 20

Source: Japan Automobile Manufacturers Association (JAMA) I M V P

Concluding thoughts • Finding good data is difficult; Industry viewpoints converge on some issues and diverge significantly on others • The automotive world is not flat; proximity does have value for both manufacturing and product engineering • Growth in manufacturing engineering (production) will continue to be driven by local market growth and government policies • Growth in product engineering is driven by a complex balance of local cost, capability and customer; US vehicle manufacturers are striving to optimize global engineering footprint rather than offshore US engineers