Discussion Paper on International Management and Innovation

Michael Stephan1, Eric Pfaffmann2

Foreign Direct Investment Strategies by Multinational Automotive Suppliers: A New Link between Outsourcing and Industry Concentration in Turbulent Times

Discussion-Paper 99-03 Stuttgart, March 1999 ISSN: 1433-531X

1 Dipl.-Oec. Michael Stephan, Center for International Management and Innovation. Contact: Department of International Management (510K), University of Hohenheim, D-70593 Stuttgart, Tel: ++49-711-459-3761, Fax: ++49-711-459-3446, E-mail: [email protected] 2 Dipl.-Kfm. Eric Pfaffmann, Center for International Management and Innovation. Contact: Department of International Management (510K), University of Hohenheim, D-70593 Stuttgart, Tel: ++49-711-459-2942, Fax: ++49-711-459-3446, E-mail: [email protected] 2

Contents

1. Introduction 3

2. Data Collection and Sample of Multinational Suppliers 6 2.1 Data Collection Methodology 6 2.2 Characterisation of the Sample Companies 7

3. Sources of New Opportunities for Supplier Companies 11 3.1 Characterisation of the German Market 11 3.2 Changes in Value-added Strategies of OEMs 13 3.3 Challenges for Supplier Companies 17

4. The Use of New Opportunities: Strategic Responses by MSCs 23 4.1 Product Portfolio Strategies of Multinational Suppliers 23 4.2 Investment Activities of MSCs: Acquisitions of National Suppliers and Location Strategies 26

5. Conclusion 35

References 38

3

1. Introduction

Content Trends towards globalisation and foreign direct investment (FDI) in the automotive industry have received considerable attention in international business research and in automotive industry studies. However, most of the extant literature deals only with the globalisation of automotive manufacturers, so called Original Equipment Manufacturers (OEMs), while the automotive supplier industry is neglected. Our investigation therefore attempts to shed light on globalisation strategies of parts suppliers as well as component suppliers in the automotive industry. In particular, we concentrate on FDI strategies of large multinational automotive supplier companies (MSCs) in the German market. The original motivation to conduct our study was based on the observation that, in recent years, MSCs have invested heavily in the German market, although the German market was claimed to be entirely unattractive due to high costs and inflexible labour markets.1

Surprisingly, existing theoretical research and empirical evidence on globalisation and FDI in the automotive suppliers industry is weak, especially for Germany and Europe. We agree with Carr (1993), that in the automotive suppliers industry „internationalisation has been well documented“2, however, we criticise the lack of deeper analysis which is common to most of the studies dealing with the topic.3 Most of the work is simply deduced by research on automotive manufacturers. The OECD, for instance, describes in its analysis of the globalisation of industrial activities the globalisation and foreign investment in the automotive parts production. The study concludes that foreign investment in auto parts has generally followed the pattern of FDI in the automotive manufactures industry.4 For Germany, the study states that, compared to other European countries, the inward investment position in the late 1980s remained relatively low.5 Wells and Rawlinson (1994) have conducted a study on the process of globalisation of the European automotive industry and also refer to the suppliers industry. As part of the investigation, they shed light on inward FDI

1 For studies on the competitiveness of the German automotive industry see Andersen Consulting (1995); McKinsey (1993); Arthur D. Little (1992). 2 Carr (1993), p.554. 3 One exception prove to be the investment activities of Japanese suppliers in the United States. Several studies have analysed the internationalisation strategies of Japanese automotive suppliers following the major Japanese OEMs as part of the keiretsu transfer abroad. See e.g. Banerji/Sambharya 1996. 4 See OECD (1992), p. 38. 4

in East Germany and analyse acquisitions of formerly socialist businesses in specific automotive parts and component segments. In a more recent analysis of the internationalisation of competition in the automotive industry Freyssenet and Lung (1997) as well as Müller-Stewens and Gocke (1995) focus on the wave of mergers and acquisitions in the European suppliers industry since the beginning of the 1990s.6 Their empirical data suggest that in this period Germany was at the centre of FDI activities in Europe.7 Another group of studies deals with globalisation strategies of German-based suppliers. However, the focus of most of these studies is placed upon the difficulties in globalisation faced by small and medium-sized suppliers.8

In this study, we shall examine the phenomenon of high inward investment flows to the German market in greater detail. We have selected 20 non-German MSCs and investigated their investment and value creating activities in the German market. We found that these 20 MSCs have invested almost $14 billion in Germany in the 1987-1997 period. In order to obtain a better understanding of the motives behind the investment activities of these MSCs, we shall develop a conceptual framework with which we can describe and analyse recent developments and structural changes in the world automotive industry. The conceptual framework leads to two propositions which aim to elucidate the foreign direct investment activities in the German automotive supplier industry. The first proposition builds upon the global trend of restructuring the value chain in the automotive (supplier) industry and the resulting pressure on suppliers to become larger in size and broader in their product portfolios: (1) We propose that one major motivation for MSCs to invest in the German market is to acquire knowledge and capacity incorporated in small and medium-sized domestic supplier companies. The acquired knowledge is meant to serve the strategic intent of MSCs to complete their product portfolios and thus to be able to supply complete systems to automobile manufacturers. The second proposition deals with the implications of the globalisation of the industry. The increasing use of global strategies in production and single sourcing by the OEMs puts pressure on the large nationally focused automotive suppliers to

5 See OECD (1992), p. 39. 6 Freyssenet/Lung focus on merger and acquisition activities for the years 1995 and 1996. See Freyssenet/Lung (1997), pp. 15-20. Müller-Stewens/Gocke list selected acquisitions of the period 1990-1995 in Germany and Europe. See Müller-Stewens/Gocke 1995, pp. 165-172. 7 See also Sadler (1996). 5

adjust their strategies globally: (2) We propose that MSCs will invest in Germany to get access to the German market and to tie up with German based OEMs. These investments are likely to be greenfield FDI close to production and assembly plants of the automobile manufacturers.

We proceed to introduce the sample MSCs and to discuss our data collection method (section 2). We then develop the conceptual framework in detail (section 3) and examine our propositions more closely (section 4).

8 See e.g. Fieten et al. (1997); Bleyer (1995); GWZ (1995); Müller-Stewens/Gocke (1995); Bleyer (1995); Fieten (1991). 6

2. Data Collection and Sample of Multinational Suppliers

2.1 Data Collection Methodology

Data Sources. The company data in our study are drawn from secondary sources. All MSCs in our sample are subjected to national publicity law. Hence, we could collect and evaluate data provided by the annual reports of the respective companies as a starting point for our inquiry. All statements about financial measures like domestic and foreign turnover, R&D, assets etc., and structural measures like employees, product ranges, etc., are drawn from the annual reports. We employed industry directories as well as the business databases of several news agencies (Dpa, Iwa) and Reuters Business for those financial and structural measures which are not included in the annual reports. In addition, we utilised these databases for information about investment activities in Germany as far as corporations are not obliged to publish these activities in their annual reports. Furthermore, some of the bigger German subsidiaries of the MSCs in our sample are subjected to German publicity law and have to publish individual annual reports as well. Data concerning the product and customer portfolios of the MSCs under investigation, unless not included in other data sources, are collected from several issues of the journals Automobil-Produktion, Automotive News, Ward’s Automotive International and Ward’s Auto World. We do not claim to include all customers of the MSCs, but the most important ones for our study. All financial and structural measures refer to the fiscal year 1997.9 All currency used is the US-dollar. We applied the corresponding IMF-exchange rates to convert the different currency values into US-dollars.10

Methodological Problems. The top 50 automotive suppliers companies world-wide serve as the parent population for the selection of the 20 companies in our sample. However, the selection from the parent population was not made without bias. We excluded affiliated supplier companies of OEMs as well as suppliers of raw materials (aluminium and steel) and rubber, because we assume that these companies, albeit competing in the same industry, have to comply with different conditions and competitive pressures. Obviously, we also had to

9 In case of a deviation between the fiscal year and the calendar year, our statements refer to the fiscal year that ends in 1997. 10 See IMF (1997). 7

exclude German supplier companies from the parent population. On the basis of this biased selection, a neutral test of „hypotheses“ would not make sense. But the formal test of hypotheses is not the purpose of this paper. Rather, our intention is to get insights into the business activities of major MSCs in the German market.11 Although we believe that our findings can be seen as an indication of developments in the German automobile industry, a statistical generalisation from our sample is not possible, nor can we determine the relative importance of our propositions.

We did not conduct a primary data collection. Thus, analysis of our data is limited to the quality of the data in the original sources mentioned above. Data records of the sample companies consist of data from different sources. To minimise the extent of errors, we use a record linkage-procedure. The procedure is applied at three levels: First, each company data record is composed of several categories comprising data from different sources. This form of data heterogeneity is not problematic, but, on the contrary, can be advantageous for the reliability of the results.12 Second, in a few cases data of equivalent categories across company records have been extracted from different sources. This may cause marginal distortions in cross company comparisons within the categories in question. Third, on the level of individual data records, data within the same category may themself be composed of several sources. Therefore, redundancies cannot be completely excluded.

2.2 Characterisation of the Sample Companies

The sample of our study comprises 20 MSCs with headquarters in North America (twelve companies), Europe (six companies), Japan (one company), and Canada (one company). In 1996, these companies generated total sales of $212.5 billion and employed about 1.186 million people. Ranked by total sales and employment, the largest company is Delphi Automotive Systems with an annual turnover of $26.9 billion and 178,000 employees.13 The smallest company in our sample is the French supplier Bertrand Faure with an annual turnover of $2.5 billion and 14,898 employees. In 1996, the companies in our sample

11 As described in the introduction, we do not formulate hypotheses but deduct propositions based on the reflections in the conceptual framework. 12 See Schnell/Hill/Esser (1989), p. 271. 8

generated about 11 % of their turnover ($23 billion) in Germany and employed 23,070 people in the country. German assets amounted to $15.6 billion. These measures suggest, that operations in Germany account for a significant portion of the value added of the sample companies.

Table 1: Sample companies ranked by automotive sales, 1997

Rank Company Home Total Auto- German Total Employees Total German R&D country sales motive sales employees Germany assets assets sales (dollars in (dollars in (dollars in (dollars in (dollars in (dollars in million) million) million) million) million) million)

1 Delphi Automotive Sys. Inc. USA 26,900.0 26,900.0 2,300.0 178,000 7,444 25,300.0 1,020.0 1,300.0 2 Denso Corporation J 13,446.1 13,446.1 400.0 56,300 84 12,654.7 74.0 830.6 3 Lear Corporation1 USA 6,900.0 6,900.0 821.0 46,000 3,700 4,200.0 700.0 700.0 4 TRW Inc. USA 10,172.0 6,468.0 1,302.3 65,218 9,852 5,890.0 2,361.0 1,963.0 5 Johnson Controls Inc. USA 10,009.4 6,100.0 1,459.0 65,800 5,400 3,945.3 760.0 273.0 6 LucasVarity Plc UK/USA 7,086.4 6,090.0 603.8 57,000 2,620 5,198.9 440.0 308.0 7 Dana Inc. USA 7,686.3 6,070.0 445.0 46,100 670 6,160.0 320.0 149.0 8 Magna International Inc. CAN 5,850.0 5,850.0 1,100.0 24,000 3,200 3,234.2 600.0 315.0 9 ITT Industries Inc. USA 8,910.0 5,613.0 3,458.0 59,000 20,251 5,879.0 1,884.9 182.0 10 Allied Signal Inc.2 USA 14,346.0 5,549.0 1,040.7 87,500 5,000 12,465.0 520.0 310.0 11 Valeo S.A. F 5,517.1 5,517.1 1,151.4 32,600 2,670 4,718.3 1,406.6 301.7 12 Magnetti Marelli S.p.a. I 4,166.0 4,166.0 380.0 25,000 1,300 N.A. 200.0 199.9 13 Eaton Corporation USA 9,961.0 4,119.0 252.3 54,000 1,065 5,307.0 150.0 267.0 14 GKN Plc UK 5,669.6 3,762.0 1,292.4 31,100 4,606 N.A. 920.0 N.A. 15 Rockwell International Corp.3 USA 10,373.0 3,140.0 850.0 58,639 1,800 10,065.0 400.0 518.0 16 Motorola Inc. USA 27,973.0 3,122.8 2,058.1 14,200 2,773 22,801.0 1,203.3 2,394.0 17 United Technologies Corp. USA 22,624.0 3,100.0 1,530.0 170,600 5,300 15,958.0 650.0 963.0 18 T&N Plc UK 3,122.8 3,000.0 1,207.8 40,941 4,500 3,500.0 800.0 N.A. 19 Bertrand Faure S.A. F 2,511.4 2,240.0 728.3 14,898 5,992 N.A. 650.0 N.A. 20 Textron Inc. USA 9,274.0 1,854.0 690.0 59,000 2,915 18,235.0 600.0 576.0

Total: 212,498.1 123,007.0 23,070.1 1185,896 125,350 165,511.4 15,659.8 11,550.2

(1) Figures include operations of Keiper Car Seating, acquired in early 1997; (2) Sales figures include brake system operations, which were sold to Robert Bosch GmbH in 1997; (3) On September 30, 1997, Rockwell spun off its automotive business and established a seperately traded, public company - Meritor Automotive, Inc. Sources: Annual reports; Automotive News, Automobil Produktion, various issues; Dpa, Iwa, Reuters.

In recent years, almost all MSCs achieved notable growth in their businesses, and evolved to big multinational operating companies. The Lear Corporation experienced one of the most significant rates of growth, mainly caused by acquisitions. Annual revenues of this company almost quintupled during the last five years. Other companies pursued considerable growth strategies as well. For example, total sales of the U.S. based Johnson Controls and the Canadian based Magna International Inc. almost doubled. Remarkable in this respect is also the merger of the British supplier Lucas plc with the US-American Varity Corporation.

13 Delphi Automotive is an independent subsidiary of General Motors since 1994. 9

Together they formed Lucas Varity Plc with a joint turnover of nearly $ 7 billion. This move to a larger size reflects the overall trend to consolidation in the industry.14

Only six companies concentrate their activities exclusively in the automotive industry. These are Delphi Automotive Systems Inc., Denso Corporation, Lear Corporation, Valeo Inc., Magna International and Magnetti Marelli S.p.a. The other 14 sample MSCs maintain diversified business activities in other sectors. Most frequently, other business activities are carried out in the aerospace and electronics segment (10 MSCs). In addition, a few MSCs are engaged in industrial services, plant engineering and construction, and consumer electronics. On average, the companies make almost 60 % of their turnover in the automotive suppliers business. Exceptions, with automotive sales amounting to considerably less than 50 %, are the electronic companies Motorola Inc. (11 %) and Rockwell Inc. (40 %), as well as UTC (14 %), Textron (20 %), and Allied Signal (39 %), which concentrate their activities in the aerospace industry. As mentioned above, all sample companies rank among the 50 largest automotive supplier companies in the world. If we exclude German suppliers as well as suppliers of rubber and other raw materials, the sample MSCs rank among the 35 largest non-German automotive suppliers worldwide. Table 2 gives an overview of the 50 largest automotive suppliers.

14 See e.g. Rosegger (1996), p. 707. We will take up this point again in section 3. 10

Table 2: Top 50 MSCs ranked by automotive sales (sample companies bold)

Home Automotive sales Business Rank Company country (dollars in millions) classification 1 Delphi Automotive Systems Inc. USA 26,900.0 System 2 Ford Automotive Products Operations1 USA 16,400.0 System 3 Robert Bosch GmbH GER 16,300.0 System 4 Denso Corporation JP 13,446.1 System 5 Aisen Corporation JP 11,614.0 System 6 Continental AG GER 6,708.6 Rubber 7 Lear Corporation 2 U.S. 6,900.0 System 8 TRW Inc. U.S. 6,468.0 System 9 Johnson Controls Inc. U.S. 6,100.0 System 10 LucasVarity Plc UK/U.S. 6,090.0 System 11 Dana Inc. U.S. 6,070.0 System 12 Yazaki JP 6,000.0 System 13 Magna International Inc. CAN 5,850.0 System 14 Bridgestone JP 5,787.0 Rubber 15 ITT Industries Inc. U.S. 5,613.0 System 16 Allied Signal Inc. 3 U.S. 5,549.0 System 17 Valeo S.A. F 5,517.1 System 18 NV Philips NL 5,482.3 System 19 Michelin S.A. F 5,480.0 Rubber 20 Delco Electronics Corporation4 U.S. 5,350.0 System 21 Thyssen/Budd GER 5,000.0 Steel/System 22 Mannesmann AG GER 4,500.0 System 23 Magnetti Marelli S.p.a. ITA 4,166.0 System 24 Eaton Inc. U.S. 4,119.0 System 25 ZF Friedrichshafen GER 4,056.0 System 26 BASF AG GER 4,000.0 Finishes/Coatings 27 GKN Plc UK 3,762.0 System 28 Du Pont Inc. U.S. 3,747.4 Polymers/Lubricants 29 G.E. Automotive5 U.S. 3,600.0 System/Polymers 30 Sumitomo Electric Industry JP 3,344.8 System 31 Pirelli Spa ITA 3,200.0 Rubber 32 Rockwell Inc. U.S. 3,140.0 System 33 Motorola Inc. U.S. 3,122.8 System 34 United Technologies Corporation U.S. 3,100.0 System 35 T&N Plc UK 3,000.0 System 36 Zexel Corp. JP 2,879.0 System 37 Arvin Industries U.S. 2,863.0 System 38 Chrysler Component Operations U.S. 2,700.0 System 39 Calsonic JP 2,553.7 System 40 Usinor Sacilor F 2,366.4 System 41 PPG Industries Inc. U.S. 2,304.0 Glass/Coatings 42 Toyoda Gosel JP 2,241.5 System 43 Bertrand Faure S.A. F 2,240.0 System 44 NHK Spring JP 2,192.9 System 45 Unisia JECS JP 2,190.0 System 46 Goodyear Inc. U.S. 2,100.0 Rubber 47 Koito Manufacturing JP 2,082.0 Steel/Raw Materials 48 American Axle Inc. U.S. 2,020.0 System 49 Krupp Hoesch AG GER 1,982.0 System 50 Textron Inc. U.S. 1,854.0 System

Notes: (1) Company changed name into Visteon in January 1998; (2) Sales figure includes operations of Keiper Car Seating, acquired in early 1997; (3) Sales figures include brake system operations, which were sold to Robert Bosch GmbH in 1997; (4) Became part of Delphi Automotive Systems, late 1997; (5) Sales figures include financial services. Sources: Annual reports; Automotive News, 1997 Market Data Book; Automobil Produktion, various issues.

11

3. Sources of New Opportunities for Supplier Companies

3.1 Characterisation of the German Market

In this section, we shed light on the attractiveness of the German automotive market. The discussion in this section serves as a prerequisite for the subsequent analysis of the investment motives of the MSCs. In the introduction of this paper, we referred to the pretended negative image of the German automotive industry with regard to flexibility and cost-competitiveness. Nevertheless, despite this negative image MSCs have invested heavily in the German market. We do not intend to reject or verify the results of the various studies dealing with these traditional, supply-side oriented, mostly cost-related location factors. Rather, we would like to raise attention to other factors concerning more qualitative, front-end issues, which play an important but often neglected role in location decisions.15

Customers of the MSCs in the German market are predominantly large OEMs. In the following we illuminate their significance in the world automotive industry and their attractiveness as buyers that stimulate and appreciate technological innovations generated by supplier companies. A high responsiveness for supplier innovations is important because it indicates customer-specific component developments, which require close supplier-customer interactions, and, in turn, value added supplier activities that are located in the near vicinity of customers.16 Moreover, a high responsiveness and high significance of customers infer high cash flows for supplier companies. In short, we ask whether OEMs in Germany do have the potential to be leading edge-customers. We concentrate on two aspects: on the sheer volume of their demand and on their technological sophistication. High volume in demand and technological sophistication of OEM together offer the opportunity for suppliers to generate cash-flow with technologically sophisticated products. This, in turn, leads to the issue whether OEMs show anticipatory buyer needs, in the sense of von Hippel’s lead users concept.17 Suppliers benefit from sophisticated OEMs if innovations can be spread to other

15 See Gerybadze et al. (1997), p. 208-211. 16 See Thompson (1967); Pfaffmann (1998). 17 See von Hippel (1988). 12

countries and regions which enable suppliers to exploit lead-time advantages in foreign markets.

Germany is the home country of five car manufacturers (Audi AG, BMW AG, Daimler-Benz AG, Porsche AG, and VW AG), and host country of two multinational car companies (Ford AG, Adam Opel AG). In addition, six truck manufacturers and several specialised off-road manufacturers are located within German borders. The total turnover of the German-based automotive manufacturers amounts to $104 billion. On the whole, the German automotive industry generated sales of $376 billion in 1997.18 Germany is the largest producer country of automobiles in Europe, and ranks third in the world (by volume as well as by turnover) following the United States and Japan (see table 3).

Table 3: Global car production by region

Global production by region Cars 1996 Trucks 1996 Total 1996 Africa 279,900 206,000 485,900 Middle East 319,400 91,800 411,200 Asia-Pacific 11,952,400 5,510,500 17,462,900 - Japan 7,605,000 2,494,400 10,099,400 - South Korea 2,264,600 547,400 2,812,000 Central & South America 1,860,700 520,800 2,381,500 - Brazil 1,468,100 350,800 1,818,900 North America 8,142,295 7,181,461 15,323,756 - Canada 1,288,676 1,109,034 2,391,090 - United States 6,055,939 5,658,812 11,714,751 Central & Eastern Europe 1,980,500 375,900 2,356,400 Western Europe 14,577,200 2,037,000 16,614,200 - Belgium 1,153,000 101,800 1,254,800 - France 3,147,600 449,100 3,596,700 - Germany 4,539,000 304,000 4,843,000 - Italy 1,318,000 229,300 1,547,300 - Spain 1,942,000 479,300 2,421,300 - United Kingdom 1,686,000 243,800 1,929,800 Total 39,112,395 15,923,461 55,035,856 Source: Automotive News

Apart from pure volume considerations, German OEMs also prove to be attractive customers in terms of technical responsiveness and sophistication. As mentioned above, we define 13

technical responsiveness in terms of stimulation and estimation of technological innovations generated by supplier companies. In numerous studies, anecdotal evidence suggests that German OEMs are leading edge customers which do not only honour but rather demand and stimulate technological innovation developed by their suppliers.19 Of course, to measure technical responsiveness and sophistication is a complex task, and to develop the corresponding concept would probably require a separate study. Therefore, as a rough proxy for technical responsiveness and sophistication, we compare R&D activities in the German automotive industry with activities in other countries.20

On the average, the German based automotive industry invests 5.4 % of their turnover in R&D. Compared to the R&D expenditures of the automotive industry in other OECD countries, Germany ranks second, only the Swedish automobile industry spends more, 6.2 %, for R&D. The intensities of the United States and Japan are with 4.6 %, 2.9 %, respectively, significantly lower.21 The output of these investments can be measured in terms of patent- intensities. The patent-intensity stands for the amount of filed applications for world market relevant patents per country and product category per million persons in dependent employment.22 There is a tight correspondence between the R&D-intensity and patent- intensity, and the German automobile industry takes the first place in the patent-intensity- ranking, before Japan and the U.S.23 On the whole, anecdotal and statistical evidence indicates that German OEMs are important and attractive customers for MSCs because they are responsive for supplier innovations and produce high turnovers.

3.2 Changes in Value-added Strategies of OEMs

In this section, we start to construct our conceptual framework. At the outset we sketch new developments of value creation strategies of OEMs in Germany. The developments can be

18 See VDA (1998). 19 See e.g. Pfaffmann, Bensaou (1998); Peters (1996), N.N. (1996) and Gerybadze et al. (1997). 20 The proxy has also been used by the NIW (1996) and ISI (1996) in their assessment of the technological performance and capacity of the German industry. 21 See NIW (1996). 22 See ISI (1996). 23 See NIW (1996) for details. 14

subsumed under the headings „outsourcing“, „globalisation“, and „platform concepts“. These developments constitute competitive responses of OEMs to major challenges such as cost cutting, reduction of development lead-times, shorter innovation cycles, new model initiatives, or customer-tailored varieties of cars. Although these developments occur more or less in all major automotive producer countries, we put a special focus on the solutions of the German manufacturers.

Outsourcing. Various studies on the manufacturing penetration in the German automotive industry indicate that German OEMs have externalised a significant proportion of production since the beginning of the 1990s.24 A carefully developed and consequently implemented outsourcing strategy marks the end of the traditional hierarchical firm that manages the development and production of most product components and parts in-house. On the contrary, an outsourcing strategy focuses on the entire value chain where suppliers and OEMs co- operate and possess distinct and complementary core competencies.25

An automobile is a complex product that consists of several thousands parts and components which are combined to form larger systems and/or modules. From the perspective of the OEM, all systems, components, or parts of the automobile that are not considered strategic can principally be sourced out to supplier companies in order to achieve an optimal distribution of labour along the value chain.26 Thus, the general goal behind outsourcing strategies is the equilibration of optimal degrees of vertical integration across firms along a particular value chain. This is assumed to be the way to simultaneously achieve innovative products, short development times, competitive prices, and high quality standards, or, in short, dynamic efficiency.27

For instance, faster development cycles can be accomplished by outsourcing development activities to suppliers, since in this case the OEM is required to develop a feasible modular system design in early stages of the product development process. The system design defines

24 See e.g. Freyssenet/Lung 1997; Bossard Consultants (1996); Müller-Stewens/Gocke (1995), p. 12; Wolters (1995), pp. 25-30; von Eicke/Femerling (1991), pp. 7-24. 25 Outsourcing is part of the „lean production“-approach that was worked out during the intercultural comparison of Japanese and American management styles. See Womack et al. (1990). 26 See Müller-Stewens/Gocke (1995), p. 12. 27 See Pisano (1996) and Clark/Fujimoto (1991). 15

the functions of the systems and the interfaces among the physical chunks of the systems.28 This procedure enforces a certain discipline on the part of the OEM in respect of timing and concept development. Furthermore, a lot of detailed development processes are transferred from OEMs to specialised suppliers, which leads to a considerable reduction in the co- ordination of complex development processes. Hence, the development process as a whole is structured in a higher order, and freed capacities can be used to produce new ideas and novel concepts.29

Globalisation. Globalisation and foreign direct investment strategies of automotive manufacturers have received considerable attention in literature.30 European, and especially German OEMs, are „latecomers“ in expanding their production network abroad. Traditionally, the preferred international market entry mode carried out by German manufacturers was to export.31 Only in the beginning of the 90s, the major German OEMs revised their international sales and production strategies. The general tendency has been to move towards a fit of sales and production volumes in the most important world regions.32 One of the most prominent examples prove to be the greenfield investments of BMW and Daimler-Benz in the United States in the middle of the 1990s, and now the proposed merger of Daimler-Benz and Chrysler. Several reasons which underlie this trend can be identified. With a conservative export strategy, the OEM delivers a product to customers abroad which may not be very attentive to particular aspects of local demand articulation. Although, marketing managers and system engineers may have the hard facts about regional customer priorities to their disposal, they may simply not understand the meaning behind the data, and, consequently, transform customer demands into wrong concept specifications. An export strategy may lead to a cut-off from important front end information and result in misplaced concept developments. Moreover, without a local responsiveness achieved by a globalisation strategy, products may not respond to regional administrative and/or fiscal regulations (e.g. environmental norms or taxes on combustion chamber volumes). Therefore, OEM spread

28 This is what Ulrich (1995) calls a modular product architecture. 29 See Penrose (1957). 30 In the introduction, we have already mentioned a number of studies dealing with the globalisation of automotive suppliers and manufacturers. Other studies that discuss various forms of globalisation strategies of OEMs comprise Bélis-Bergouignan et al. (1997), Choi/Parolini (1996); Mueller/Purcell (1992). 31 See Bélis-Bergouignan et al. (1997). Of course, a few German OEMs have long standing traditions in international production, as it is the case with VW in Mexico. 16

their manufacturing operations over countries in different regions in order to combine the advantages of local manufacturing presence, which opens markets and may also make use of low cost bases, with the advantages of economies of scale.33

Platform strategies. There is, however, a trade-off between global efficiency achieved through standardisation, high volume-production, and local responsiveness to front end demand articulation and administrative peculiarities.34 Local responsiveness may lead to cost inefficiencies, not so much in the field of manufacturing, where flexible manufacturing systems allow cost-efficient production of small volumes and large variety. Rather, inefficiencies result from the complexity of the product itself. The price of variety is multiplication of component and parts, development and production efforts. If the components and parts are technology-intensive and execute major product functions, variety produces the need for co-ordination and further derived variety.35 This translates directly into higher costs and longer development lead-times. In contrast to this, global efficiency can be achieved by pursuing a „global car“-strategy. However, designing a single car to meet multi- market objectives would be a difficult task even with relatively well established market definition and customers needs since consumer tastes are diverse.36

Platform strategies are designed to reduce the trade-off between global efficiency and local responsiveness. Platform strategies permit cost reduction to be reconciled with the greater variety. A platform strategy is made up of the essential parts of the product which in their entirety constitute the „platform“ of this product. This platform is held constant across several models and all variants of the models. For instance, Ford sells the model CDW-27 as „Mondeo“, „Contour“ and „Mercury Mystique“ in Europe, Asia, and North America, respectively. Similarly, the VW group uses identical platforms for the group members Audi,

32 Various studies have dealt with this issue. See e.g. Bélis-Bergouignan et al. (1997) and Wolters (1995). 33 Mueller/Purcell (1992), p.18. 34 Note that this trade-off also depends on the design structure of the product architecture. With a complete modular architecture, there may not be a trade-off between global standardisation and local responsiveness. However, the design of the product architecture serves many masters, not the globalisation strategy alone. First of all, technical trade-offs functions and physical chunks or feasibility of the systems design have to be considered. For details on technical trade-offs, see Ulrich (1995); and Ulrich, Eppinger (1995). 35 See Ehlers (1992), p. 6. 36 See Choi/Parolini (1996), pp. 61-62. 17

Seat, Skoda and VW.37 According to the principles of a construction kid, variety for customers across countries is produced by simply exchanging specific parts and components and remaining the „main frame“ of the product unchanged.38

3.3 Challenges for Supplier Companies

As yet, the changes of the value creation strategies of the OEMs have not been linked to resulting changes for supplier companies. In this section, we will extend our perspective and include the interface between OEMs and suppliers. We will see that apart from outsourcing, the globalisation and platform strategies of OEMs also have direct impact on the relationships between OEMs and suppliers. In the following, we discuss three distinct sourcing strategies of OEMs (see figure 1).

Figure 1: Consequence of changes in value-added strategies for the sourcing behaviour of OEMs

Globalisation Global Sourcing

Outsourcing System Sourcing

Platform Strategies Single Sourcing

Changes in Changes in Value-Added Sourcing Strategies Strategies of OEMs

Global sourcing. The coincidence of globalisation and outsourcing supported the tendency on part of the OEMs to buy globally. In the literature, the term „global sourcing“ has been defined and interpreted in numerous ways.39 Since we do not intend to add another version we will confine our remarks to some basic statements. As a consequence of the

37 A number of recent studies document the growing dissemination of platform strategies among German OEMs. See e.g. Freyssenet/Lung (1997); N.N. (1996), pp. 96-98; Chi/Parolini (1996), pp. 61-62; and Girardot (1995), p. 5. 38 Choi/Parolini (1996), p. 62. 39 See e.g. Werner (1991); and Girardot (1995). 18

internationalisation of production and stronger integration of suppliers into the value-added process, OEMs are forced to orient their sourcing globally, i.e., the systematic expansion of the sourcing strategy to international sources.40 For the automotive manufacturer, systematic expansion of the geographical scope of sourcing implies two aspects. First, the OEM must secure the efficient supply of its international production bases with relevant parts and components. The OEM can be forced to either source the parts locally at a supplier factory located in the same country or region or import the parts from a global supplier factory.41 Second, international presence widens potential choices and eases access to the most competitive suppliers world-wide. It should be noted, that competitiveness does not only refer to a lower price, but also comprises superior quality and short time horizons to deliver. The interplay of the criteria price, quality, and time transform into outsourcing efficiency. These criteria are also important to evaluate the proficiency of suppliers. By combining both aspects, we consider global sourcing not as a rigid concept but as a leitmotiv: A global sourcing strategy is the attempt of OEMs to buy from the most competitive supplier world-wide. However, in many cases global sourcing may require local presence of the supplier.

Single sourcing. An increased volume of outsourced value-added to supplier companies externalises interfaces of previous department interactions to inter-organisational interactions and inevitably raises the number of direct supplier companies. The externalisation of interfaces increases the required communication and interaction efforts. For instance, the co- ordination of production and delivery with supplier companies demands new IT-couplings of OEM and supplier processes. This directly translates to an increase of complexity and costs.42 Furthermore, there are other indirect negative cost effects resulting from the heterogeneity of parts and components produced by various suppliers. The sourcing of different parts from many different suppliers jeopardises the interface compatibility of the parts, since slight variations of specifications, like size, material, colour, etc., cannot be avoided.43 This is also the case for identical parts: „If you dual-source the same part, the parts from both suppliers can be within your specification - but still not identical. So they won’t fit the same way.“44

40 Our understanding corresponds to the concept of Müller-Stewens/Gocke (1995), p. 26. 41 See Freyssenet/Lung (1996). 42 See Blaxil/Hout (1991), p. 93; Wolters (1995), p. 25-30. 43 See Matthyssens/Van den Bulte (1994), p. 73. 44 Sheridan (1988), p. 35. 19

In fact, this problem is also thought to be resolved by applying platform strategies which lead to enhanced consistency across various parts. In the context of a global platform strategy, OEMs pursue to buy identical parts from only one source, and endeavour to reduce the total number of parts in order to reduce friction and costs.45

A number of studies report a prevalence of single sourcing strategies.46 As empirical studies in Germany show, OEMs intent to reduce the number of their direct suppliers up to 75% by year 2000.47 The juxtaposition of increased outsourcing and single sourcing implies that OEMs must redefine the value-added they buy from suppliers. OEMs have to delegate to suppliers the responsibility for developing and producing entire systems and modules in order to maintain an efficient inter-organisational value chain management.48 In the following, we shall examine in more detail the resulting systems and modules that direct suppliers of OEMs have to deliver.

System sourcing. As a consequence of increased outsourcing and complementing the trend to single sourcing, OEMs source an increased volume of value-added from a reduced number of direct suppliers. System sourcing contains two defining elements: (1) The integration of constituting parts and components to a coherent system in order to develop a solution to a specific customer problem, and (2) the implementation of this solution by a single supplier.49 For the automobile industry, this translates into value-added activities of developing, and manufacturing entire systems and modules, which are assembled to the final car. Autonomous development, production and assembly activities require the identity of functional and assembled car units, i.e., a one to one mapping of functional elements and physical components that is, a modular product architecture.50 But a one to one mapping is just a special case of a complex n:m mapping. For example, a functional element is sometimes executed by several physical components as is the case for the brake system in a car. The physical components of the system are located at the front and rear axle corners (brake calipers, pads, discs, hubs, bearings, ABS sensors etc.), in the engine compartment (ABS

45 Another common term for single sourcing in the literature is „sole sourcing“. See e.g. Richardson (1993). 46 See Richardson (1993), p. 340. 20

system, brake valves and boosters) and in the cockpit (brake pedal, hand-brake lever). In the case of a n:m mapping, a sourcing package has to be defined according to functional elements or to spatial aspects of assembled components. If a definition is made according to functional elements, this shall be called a system, and hence, system sourcing, if spatial assembly aspects constitute the defining principle, then the parts shall be called modules, and modular sourcing. The decisive criterion for OEMs to source systems or modules are inevitable task interdependencies which cannot be further reduced but may be circumvented by either modular sourcing or system sourcing. Task interdependencies occur during the development phase and the assembly phase of the product.51 The higher the task interdependencies the more difficult is the specification of interfaces among interacting parts of functional elements and assembled units. Hence, it is beneficial to keep task interdependencies at a low level. If the interdependencies of development processes relative to the assembly processes are lower, then system sourcing is more valuable then modular sourcing et vice versa. Figure 2 visualises the concept of system sourcing and distinguishes between modules, systems, and system-modules.

47 See Wolters (1995), pp. 27-30. 48 See Matthyssens/Van den Bulte (1994), p. 72ff. 49 See Murray (1964), p. 51. 50 See Ulrich (1995); Sanchez/Mahoney (1995). 51 See Ulrich, Eppinger (1995), p. 15. 21

Figure 2: System sourcing - definition of sourcing units

System A

Assembly Module A

Development Assembly System System B Manufacturing Module B Sourcing Assembly Module C

System C

System- Development Assembly Manufacturing System D Module D Module Sourcing

Module E

Development System E

Development Manufacturing Assembly System F Module F Modular Sourcing Development System G Module G

Definition of the Sourcing Unit

Since the beginning of the 1990s, system sourcing has become a major trend in automotive manufacturing.52 Wolters (1995) has conducted a study on purchasing strategies of European- based OEMs and concludes that by the year 2000 more than 50 % of the total sourcing volume will consist of systems, modules, and system-modules.53 For several parts of the automobile, system sourcing has already become the exclusive sourcing modality: Prominent modules are doors, seats, and interior trim, whereas typical examples for systems are the safety and thermal system. Lately, the trend towards the definition of system-modules has

52 See Bossard Consultants (1996); Mapleston (1996), p. 26; Von Eicke/Femerling (1991), pp. 38-54. 53 See Wolter (1995), p. 81. 22

increased. For example, suppliers tend to integrate main components of the chassis and brake systems into axle corners system-modules. A similar trend occurs with regard to cockpit system-modules. Suppliers of cockpits are becoming responsible for the development, manufacturing and assembly of complete cockpits comprising the instrument panel, the steering unit, and basic parts of the electric/electronic system.

The changes in the sourcing behaviour sketched above lead to a profound restructuring of the supply chain in the automotive industry. Automotive supplier companies face new challenges in competition and have to respond to the developments with a redefinition of corporate strategies. Suppliers have to decide, whether they should be able to supply complete systems or modules on a world-wide basis and thereby remain in direct contact with the OEM and become responsible for an increased portion of value-added, or whether they can accept to lose direct contacts to OEMs and become second or third-tier subcontractors of single components. If they decide to stay in direct interaction with OEMs as first-tier suppliers, their strategies must be designed to meet the requirements of the OEMs. Suppliers must possess the competence to deliver complete systems and modules and must be able to supply products world-wide. In some cases the latter may imply the global presence in order to deliver modules and systems locally. In other words, suppliers must engage in growth strategies and invest in global presence and capacity as well as in system capabilities.

In the next section, we link up the implications of our conceptual framework with the direct investment activities of the sample MSCs and analyse in detail the propositions we have formulated in the introduction. 23

4. The Use of New Opportunities: Strategic Responses by MSCs

In this section, we examine the strategic responses of our sample MSCs to the changes and opportunities laid out in the preceding section. We focus on three major aspects of MSCs behaviour. First, we review the product portfolio strategies in order to analyse how major MSCs endeavour to become a system and/or module supplier of German OEMs. Second, we examine the major acquisition activities of the MSCs in the German market. This will help us to find out whether MSCs have invested in the knowledge they need to realise their product portfolio strategies. This corresponds to our first proposition, that a major motivation for MSCs to invest in the German market is to acquire knowledge and capacity incorporated in small and medium-sized domestic supplier companies. Third, we analyse the investment (greenfield & acquisition) location decisions of the MSCs in the German market. In detail, we focus on whether MSCs have invested in the vicinity of the OEMs' plants. The latter aspect is linked to our second proposition, that MSCs will invest in Germany to tie up with German based OEMs.

4.1 Product Portfolio Strategies of Multinational Suppliers

In principal, MSCs can position themselves as modules and systems suppliers, or components and parts suppliers. We can only speak of a „strategic response“ if they predominantly engage in the system and modules business, because they only then seek to profit from supply chain redesign of OEMs.

In order to examine the product portfolio strategies of MSCs, we had to rely on company information. This does not appear to be a problem on first sight because we simply collected data about their products. However, this information may include the pitfall that firms label their products „systems“ or „modules“ without referring to the defining criteria. Hence, systems and modules may turn out to qualify simply as parts and components. In principal, wrong labels can result from two reasons. (1) A company deliberately issues wrong information because it intents to move into the systems and modules business but does not yet 24

control the necessary resources and capabilities to implement this strategy. (2) A company unconsciously issues wrong information by defining parts and components as modules and systems without having a precise idea about the profile a system and module supplier must possess. The first case is probably difficult to identify, but, on the other hand, may not have far-reaching consequences since the supplier firm signals that it is on the way to become a system/module supplier. While the second case is easier to detect, it produces more serious distortions because this supplier does not pursue system and modules strategies at all. In our study, we tried to resolve these problems by analysing whether the products which were classified as modules and systems by the MSCs do in fact comprise the defining parts, components and subsystems necessary to execute the functions of a system or module. In cases where it was obvious that products had been mislabeled, we downgraded the products to components and excluded them from our study. As an example, we did not accept isolated tail lights as a lighting system, nor did we include airbag-covers in the vehicle interior as a security system. In addition, we spot checked company data with the help of automobile journals and economic data bases, respectively.

Figure 3 provides an overview of the product portfolios of our sample MSCs. We distinguish among systems, modules, and „system-modules“. System-modules are the special case where the defining criteria for systems and modules equally apply. As one can see, all MSCs of our sample participate in the system and module business. The number of offered products varies between one (T&N Plc) and six (Magnetti Marelli Spa.). On the average, the portfolios of our sample MSCs contain almost 3 (2,7) different systems, modules and system-modules, respectively.

25

Figure 3: Product portfolios of selected MSCs

AS BF DA DE DN EA GK IT JO LE LV MA MM MO RO TN TE TR UT VA

Systems • Lighting system • Thermal system • Safety system • Other electrical systems System-modules • Seats • Cockpit & instruments • Exterior trim • Fuel delivery • Chassis-/Brake system* • Exhaust unit Modules • Doors • Back-end/Trunk • Front-end • Axles/Gearing • Interior trim • Other modules

Abbr.: AS: Allied Signal, BF: Bertrand Faure, DA: Dana, DE: Delphi Automotive, DN: Denso, GK: GKN, IT: ITT Industries, JO: Johnson Controls, LE: Lear Corporation, LV: LucasVarity, MA: Magna International, MM: Magnetti Marelli, MO: Motorola, RA: Raytheon, RO: Rockwell, TN: T&N, TE: Textron, TR: TRW, UT: United Technologies, VA: Valeo. *) Suppliers tend to integrate the main components of the chassissystem and of the brake system into axle corner system-modules.

As can be seen, there is also a tendency towards the supply of system-modules which can be explained by the attempt of MSCs to realise synergy in their product portfolio strategies for several markets. As mentioned above, 10 MSCs in our sample not only serve as suppliers in the automobile industry but are also engaged in the aerospace industry. Very often, the underpinning product and process technologies are similar. Furthermore, even products of their portfolios are sometimes similar with regard to functions, materials, and design. Hence, one can conclude that this constitutes a competitive advantage of MSCs over small-sized national supplier companies to utilise technologies across several industries and thereby realise economies of scope. For example, Bertrand Faure S.A. sells seat modules and interior 26

trim in the automobile as well as the aerospace industry. GKN Plc offers cardan shafts for the rotor gear unit of helicopters as well as for automobile gearings.54

4.2 Investment Activities of MSCs: Acquisitions of National Suppliers and Location Strategies

One of the most astonishing observations at the outset of our study was that the MSCs in our sample invested more than $ 14 billion in Germany over the last 10 years.55 This fact contradicts the general belief that Germany is extremely unattractive for foreign and domestic investors. While this opinion is corroborated by a relatively small amount of total inward investment flows compared to other European countries during this period, as we have seen, it is not valid for the German automobile industry.

We proposed that one major motivation for MSCs to invest heavily in the German market is to buy knowledge incorporated in national supplier companies. This knowledge is meant to serve the strategic intent of MSCs to complete their product portfolios with respect to the supply of entire systems and modules. Clearly, knowledge can only be bought by acquiring a company or some parts of a company. Hence, the implementation of portfolio strategies requires the acquisition of national suppliers. Of course, apart from knowledge the acquisition of German suppliers also provides the MSCs with new customer ties (to German OEMs) of the acquired firms. However, we believe that knowledge matters more than contacts since the latter has already been established by all sample MSCs prior to their acquisition activities in the German market. However, in order to complete system and modules product portfolios of MSCs, the acquired knowledge must complement their existing competence profile. Thus, to examine our hypothesis, we investigated (1) which German suppliers have been acquired by which MSCs and (2) in which way the technological competencies of the acquired firm complemented the technology portfolio of the purchasing company.

54 Very often the direction of the technology transfer across industry flows from the aerospace industry to automobile industry. Textron Inc., for instance, originally developed its fuel supply system for aerospace products and then diversified into the automobile industry. 55 The amount comprises all greenfield investment and acquisitions as well as investment in the extension of productive capacity of our sample MSCs in the German market in the 1987-1997 period. For a thorough discussion of the measurement of FDI activities see Stephan/Pfaffmann (1997). 27

As discussed in the last section, a second, albeit derivative necessity to supply systems and modules is to settle in the vicinity of major customers. We applied this additional condition to further corroborate the validity of our hypothesis. In particular, we explored whether MSCs set up facilities in the vicinity of their major customers by (1) identifying the German customers of the MSCs and (2) allotting the location of the customers plants to the location of MSC plants.

Table 4 provides a list of acquisitions executed by the sample MSCs in the German market. From 1987 till January 1997 we have identified a total number of 61 German suppliers that have been purchased for the sum of approximately $ 6.7 billion.56 These acquisitions stand for 43 % of the sample MSCs' investments in the German market. If one considers that at least 30 % of the total investment expenditures were used to expand existing capacities, it becomes obvious that the acquisition of national supplier companies is the preferred market entry mode.

Within the investigated period, all sample MSCs undertook at least one acquisition, except for the Japanese Denso Corp and the U.S. based Eaton Corporation.57 Several companies exceeded the threshold of $ 500 billion, namely, GKN plc, Johnson Controls Inc., Magna International, T&N plc, Textron Inc., TRW Inc., and Valeo S.A. In the course of the investigated period, the investment intensity reached its peak in the middle of the 1990s. While between 1987 and 1990 only nine acquisitions can be noticed, the number reached its peak in 1992, and then dropped slightly fluctuating around an average of 7 acquisitions per year.

When examining more closely the type of investment targets, we found that with the exception of four cases, the core businesses of the acquired companies correspond to the main area of technological competencies of the investing MSCs. In table 4, we compared the core businesses of the acquired companies with the corresponding businesses of the investors. We indicated the exceptions by an asterix. Of course, in a few cases the classification of the acquired companies is not unequivocal, especially with products and technological

56 In the table we only included the approximate size category of each investment for reasons of disclosure. 57 See Payne (1992), p. 3, for distinctive features of Japanese supplier companies investment strategies in Germany. 28

competencies that can also be used for the aerospace business of the investor. Nevertheless, we find our hypothesis on vertical FDI to be heavily supported by the results: MSCs acquire small and medium-sized German suppliers to complement their technological portfolio. In the following we analyse the investments in more detail.

The results correspond to the previous observation that MSCs increasingly supply complete systems, modules and system-modules. With the purchase of German suppliers the investors enlarge and complement their product portfolios and respond to the increasing demand of OEMs to buy complete systems, modules and system-modules. In the field of modules, the preferred objects of purchase were suppliers of power transmission modules, i.e. axles and gearing components. GKN Plc alone acquired four German suppliers of gearing systems and components. Further stress of the purchasing activities focused on seat manufacturers. In the beginning of the 1990s, the largest supplier of vehicle seats, Johnson Controls Inc., purchased Lahnwerke GmbH in and the Naue GmbH, both manufacturer of seat components comprising textiles and seat metal frames. In 1995, the MSC overtook control of the Roth Frères group, a large French seat producer, located in Strasbourg, close to the French-German border, including its German subsidiary. Additional acquisitions of automobile modules took place in the domain of interior and exterior trim. The Canadian MSC Magna, International Inc., acquired five independent German companies of exterior cover parts and the French MSC, Bertrand Faure S.A., acquired the German Rentrop, Hubbert & Wagner GmbH & Co. KG, a producer of interior trim.

In the system supply business, a field of main acquisition effort was safety systems. The U.S.- based TRW Inc. serves as example, which bought two suppliers of airbag components and safety system electronics in 1996. Besides safety systems, most of the acquisitions took place with suppliers of chassis and brake components. ITT Industries Inc., for instance, increased its brake systems and chassis capabilities by purchasing three suppliers of brake components. Furthermore, ITT purchased Mintec Maschinen- und Industrietechnik GmbH, a company which develops and manufactures chassis components (wheel suspensions). These investments parallel the increasing willingness of German OEMs to source integrated system- modules, which for this particular case means the integration of chassis and braking systems. The disposition of OEMs to source system-modules has also led the cockpit area to become a field of strategic acquisitions. System-module suppliers integrate additional systems into the 29

cockpit module, which increasingly moulds into a unit of air condition system (thermal systems), control panels, steering column, electronic components, pedals and audio system. In fact, our sample MSCs purchase companies that possess the required complementary technological competencies. Delphi Automotive Systems and Valeo S.A., for example, have done so as they purchased Kabelwerke Reinshagen GmbH, Merit GmbH as well as Borg Instruments GmbH and the thermal and heating technology branch of Siemens, respectively.

30

Table 4: Acquisitions of selected MSCs in Germany between 1987 and 1997

Size of Core business of the acquired Corresponding business of Investor Acquired company Year invest- company the investor ment Allied Signal Inc. Jurid GmbH 1989 ≤ 100 Brake linings Brake system Energit GmbH 1991 ≤ 100 Brake components Brake system Polymer u. Filament GmbH 1995 ≤ 250 Fibres/New materials Brake system Bertrand Faure S.A. Rentrop, Hubbert & Wagner GmbH & Co. KG 1990 ≤ 500 Interior trim, Seat components Interior trim, Seats Dana Corporation Stieber Antriebselemente GmbH 1990 ≤ 50 Gearing parts Axles/Gearing Euro Reinz GmbH 1993 ≤ 50 Sealings Motor components Reinz Dichtungs GmbH 1993 ≤ 250 Cylinder head sealings Motor components Friesen GmbH 1995 ≤ 10 Electrical components Chassis system Delphi Automotive Syst. Kabelwerke Reinshagen 1995 ≤ 500 Cockpit/Other electrical systems Cockpit/Other electrical systems Merit GmbH 1995 ≤ 100 Cockpit/Other electrical systems Cockpit/Other electrical systems Eaton Corporation Franz Kirsten KG 1992 .. Electro-mechanical parts Other electrical systems Klifa Fahrzeugteile GmbH 1991 ≤ 50 Plastic parts Cockpit/Other electrical systems GKN Plc Walterscheid GmbH 1987 ≤ 250 Gearing parts Axles/Gearing Walterscheid Presswerk GmbH 1987 ≤ 100 Gearing parts Axles/Gearing Walterscheid Getriebe GmbH 1987 ≤ 100 Gearing parts Axles/Gearing IFA Gelenkwellenwerk Mosel GmbH 1991 ≤ 10 Cardan shafts Axles/Gearing IFA Gelenkwellenbau GmbH 1992 ≤ 50 Cardan shafts Axles/Gearing ITT Industries Inc. Flygt Pumpen GmbH, Langenhagen 1992 ≤ 250 Brake components Brake system Flygt Werk GmbH, Pforzheim 1992 .. Brake components Brake system IFA Renak 1991 .. Brake components Brake system KWK Kraftfahrzeug-Werkstatt-Konzept GmbH & Co. 1993 ≤ 50 Repairs/Services Automotive services* J. Reiert GmbH & Co. KG 1995 ≤ 100 Brake hoses/Fluid technology Brake system Mintec Maschinen- und Industrietechnik GmbH 1995 ≤ 100 Wheel suspensions Chassis system ProSTEP Produktdaten Technologie GmbH 1995 ≤ 10 Automotive software Software* Johnson Controls Inc. Lahnwerk GmbH & Co. KG 1991 ≤ 100 Metal frames for seats Seats Naue Werke GmbH & Co. KG 1992 ≤ 500 Seat components Seats Roth Freres Deutschland GmbH 1995 ≤ 50 Seat components Seats Lear Corporation Keiper GmbH 1997 ≤ 500 Seats Seats Plastifol Holding GmbH 1996 ≤ 500 Interior trim Interior trim LucasVarity Plc Pacoma Hydraulik GmbH 1992 ≤ 50 Hydraulic power transmision Axles/Gearing Perkins Motoren GmbH 1993 ≤ 10 Turbo charger, motor components Motor components Magna International Inc. Zippex GmbH 1993 ≤ 250 Exterior trim Exterior trim Zipperle GmbH 1993 ≤ 50 Exterior trim Exterior trim MATAG Automobiltechnik AG 1994 ≤ 100 Exterior trim Exterior trim Gesellschaft für Innenhochdruckerfahren GmbH & Co 1994 ≤ 50 Exterior trim Exterior trim KS Automobil-Sicherheitstechnik GmbH 1995 ≤ 50 Safety systems Safety systems Eybl GmbH 1994 ≤ 250 Interior trim Interior trim Pebra GmbH 1994 ≤ 50 Exterior trim Exterior trim Magnetti Marelli S.p.a FL Schmierstoffe 1993 ≤ 50 Lubricants Lubricants* Motorola Inc. Iridium GmbH 1990 ≤ 50 Communication systems Communication systems* Rockwell International Golde GmbH 1987 ≤ 250 Roof systems Roof systems T&N Plc AE Goetze GmbH 1992 > 500 Piston rings Motor components (pistons) Goetze Technologie-Vertriebs- und Service GmbH 1992 .. Piston components Motor components (pistons) Goetze Motorenteile GmbH 1992 .. Piston rings Motor components (pistons) Goetze Elastomere GmbH 1992 .. Sealings Motor components (sealings) Goetze-Payen GmbH 1992 .. Pistons Motor components (pistons) AE Motorenteile GmbH 1992 ≤ 50 Cylinders Motor components (cylinders) Textron Inc. Atlantic GmbH 1988 ≤ 50 Motor components Motor components ORAG Deutschland GmbH 1992 ≤ 100 Motor components Motor components Friedr. Boesner GmbH 1995 ≤ 50 Safety systems Safety systems Kautex Werke Reinhold Hagen AG, Bonn 1996 ≤ 500 Fuel delivery systems Fuel delivery systems Kautex Werke Reinhold Hagen AG, Waldkirch 1996 ≤ 50 Fuel delivery systems Fuel delivery systems Klauke GmbH & Co. KG 1996 ≤ 50 Electrical components Safety systems TRW Inc. Presswerk Krefeld GmbH & Co. KG 1991 ≤ 50 Chassis system Brake system Nelson Bolzenschweiss-Technik GmbH & Co. KG 1992 ≤ 50 Fixing devices Motor components United-Carr GmbH & Co. KG 1995 ≤ 50 Chassis system Brake system Temic Bayern-Chemie Airbag GmbH 1996 ≤ 250 Airbag systems Safety systems MST Sicherheitstechnik GmbH 1996 ≤ 250 Airbag systems Safety systems United Technologies Corp. Loewe Opta GmbH 1997 ≤ 50 Electrical components Other electrical systems Valeo S.A. Tibbe Kupplungen GmbH 1993 ≤ 10 Clutch components Axles/Gearing Borg Instruments GmbH 1994 ≤ 50 Electrical components Other electrical systems Thermal Werke GmbH 1995 ≤ 500 Thermal systems Thermal systems Ymos AG, Unternehmensbereich Schließssysteme 1996 ≤ 100 Car lock systems Car lock systems Siemens Klimatechnik 1996 ≤ 250 Thermal systems Thermal systems

Our second proposition suggests that an essential motive for MSCs to invest in Germany is to ease access to the local market. This consideration implies two different aspects. First, MSCs are attracted by the sheer size of the German market, and second, they cannot afford to neglect the technological challenges posed by advanced customers that are willing to absorb as well as stimulate technological innovations. In Germany, MSCs have the opportunity to co- 31

operate with sophisticated customers and to introduce technological innovations to a high volume market. The first step to examine our second proposition is to identify the major German customers of the MSCs in our sample. Table 5 provides an overview on the customer portfolios of each MSC at the time of investigation. We found that each sample company supplies at least three Germany-located OEMs. The average number of German customers in the portfolio of the suppliers in our sample amounts to five. Due to the fact, that the information on the customer portfolios in table 5 is not complete and that each customer contact usually comprises the delivery of a variety of products for different models, it is allowable to draw the conclusion that German customers play an important role for the sample MSCs. For some MSCs, Germany-located OEMs even developed to become the most important customers. Volkswagen, for instance, is the most important customer for Lucas Varity plc. VW is also the second largest customer for Magnetti Marelli S.p.a. as well as for TRW Inc.

Table 5: Customer portfolios of selected MSCs in Germany

Portfolios of German customers Supplier Audi BMW Daimler Benz Ford Opel Porsche VW Others Allied Signal Inc.  Bertrand Faure S.A.  Dana Corporation  Delphi Automotive Systems     Denso Corporation    Eaton Corporation    GKN Plc   ITT Industries Inc.   Johnson Controls Inc.   Lear Corporation    LucasVarity Plc   Magna International Inc.    Magnetti Marelli S.p.a   Motorola Inc.   Rockwell International Corp.   T&N Plc   Textron Inc.  TRW Inc.   United Technologies Corp.   Valeo S.A.  

However, existing customer contacts are a necessary but not sufficient condition for the confirmation of our second proposition. MSCs may supply their customers also via exports from locations in other countries. Our second proposition underlies the assumption, that there exists a growing necessity for suppliers to deliver products flexible and just-in-time. MSC are thus forced to undertake customer-specific investments and locate their production and assembly facilities in geographical proximity to OEM plants. In addition, we have therefore examined the location decisions of the investing MSCs in our sample. Figure 3 provides an 32

overview of the plants and facilities which had been established or acquired in Germany during the 1987-1997 period. We distinguish between research and development units (D), manufacturing (M) and assembly (A) facilities as well as customer service centres (S). Black dots show the location of plants of German OEMs, big dots indicate corporate headquarters.

33

Figure 3: Geographic locations of investments of the MSCs in Germany

Explanation of Symbols: German OEM Manufacturing/Assembly plant (Big dot: Headquarter)

Suppliers of the sample H Headquarter M Manufacturing facility M M D D R&D/ Technical service unit S Customer service center A Assembly plant

S Emden

M D Bremen

A S Wolfsburg M M A A H D M A M M M M H M A D A D A M D M

Bochum M M A M M D M M M M M H M M M D Cologne S M D D M Eisenach M H M M M M M S M M S M S M M A H A Zwickau D M M M D M H M H M M M M D S D S H S M D Ruesselsheim S M D S M M

M M D M H M M D M D D Neckarsulm Saarlouis M M M D M A A D M M M M M D M M Ingolstadt M M Dingolfing A M M D M M Raststatt M D Stuttgart A M D M S S M D D H M D D H M M D M M S S M D M M M Munich D M D H D M D D M D D M M D M D M D M M D

The figure shows an agglomeration of supplier facilities in the proximity of several OEM plants, especially near Wolfsburg (VW), Stuttgart (Mercedes Benz, Porsche), Cologne and Bochum (Ford, Opel), Ruesselsheim (Opel), and Munich (BMW). The agglomerations 34

indicate, that MSCs undertook customer-specific investments in the near vicinity of customer plants. The detailed examination of all MSCs for which information were available revealed that all suppliers undertook customer-specific greenfield investments for those customers that buy systems, modules, and system-modules.58 As a minimum, MSCs set up customer service centres close to the major manufacturing and assembly plants of the OEMs. In case of large volumes of modular sourcing, MSCs also built manufacturing and assembly facilities. Johnson Controls Inc., for example, delivered systems and modules for more than $ 500 million to Ford Europe. Johnson Controls maintains development, manufacturing and assembly facilities close to the European headquarters of Ford Europe in Cologne. Delphi Automotive Systems maintains development, manufacturing and assembly facilities both in Ruesselsheim (Opel) and Wolfsburg (Volkswagen). In Wackersdorf, near the Dingolfing plant of BMW, the Lear Corporation established facilities to manufacture and assemble seat modules for the Bavarian car maker. Almost all sample MSCs possess manufacturing, assembly and customer service facilities in Wolfsburg, close to the corporate headquarters of VW, some of them located in a supplier park. Supplier parks with customer specific investments of our sample MSCs also exist in Wackersdorf near Dingolfing (BMW) and Sindelfingen near Stuttgart (Daimler-Benz).

The juxtaposition of the acquisition of German supplier firms that possess complementary technological competence profiles and the greenfield investment to co-locate MSC facilities and the plants of major customers clearly demonstrates that our sample MSCs have put considerable efforts to make use of new opportunities provided by OEMs in the German market.

58 Due to the strategic importance of details about customers and delivered products, MSCs are often reluctant to provide or publish these information. Thus, the figures in table 5 should be interpreted as the lower limit of supplier-customer relationships that actually exist. 35

5. Conclusion

In this paper we investigated the investment and value creating strategies of 20 non-German large multinational automotive supplier companies (MSCs) in the German market. In recent years, MSCs have invested heavily in the German market. Between 1987 and 1997 these companies invested almost $14 billion in Germany. The development of a conceptual framework helped us to describe and analyse recent developments and structural changes in the world automotive industry. This framework also served to develop a more complete understanding of the motives behind the investment activities of the MSCs.

The target of our study was to elucidate two propositions. Our first proposition states that a major motivation for MSCs to invest in the German market is to acquire knowledge and capacity incorporated in small and medium-sized domestic supplier companies. The acquired knowledge is meant to serve the strategic intent of MSCs to complete their product portfolios and thus to be able to supply complete systems to OEMs. The need to acquire knowledge and to enlarge the product portfolios arose from the changing sourcing strategies of German OEMs. As became clear, German OEMs are important and attractive customers for MSCs because they are receptive for supplier innovations and produce high turnovers. Each sample supplier has at least three Germany-located OEMs as ongoing customers, and for some MSCs, Germany-located OEMs are now the most important customers. The redesign of supply chains - new outsourcing, the globalisation and platform strategies – contains unique chances for MSCs to become first-tier system/module suppliers and therefore is a fundamental strategic challenge for these companies.

In order to analyse how major MSCs tried to become first-tier suppliers of German OEMs, we first reviewed the product portfolio strategies of these companies. We then examined the major acquisition activities of the MSCs in the German market. We found that all sample MSCs participate in the system and module business and that they all invested heavily in complementary knowledge by acquiring medium-sized German supplier companies. Almost all sample MSCs acquired at least one German company during the period of investigation. The results therefore correspond to the observation that MSCs increasingly supply complete systems, modules and system-modules. With the purchase of German suppliers, MSCs indeed 36

broaden and complement their product portfolios and respond to the increasing demand of OEMs to buy complete systems, modules and system-modules.

Our second proposition asserts that MSCs invest in Germany to get access to the German market and to tie up with German based OEMs. These investments are likely to be greenfield FDI close to production and assembly plants of the automobile manufacturers. To explore this proposition we analysed the investment (greenfield & acquisition) location decisions of the MSCs in the German market. We especially focused on the question whether MSCs have invested in the vicinity of the OEMs' plants. This is an indication for supplying systems/modules, since the complexity systems/modules and the corresponding buyer supplier-interaction during the course of the development and production processes are rather high. The co-location of the facilities of co-operating partners is a means to enable and support the high communication requirements between buyers and suppliers. Very often, OEMs even demand co-location from suppliers. Otherwise supplier companies would not get a chance to win single sourcing contracts. Therefore, we explored whether customer-specific investments took place by asking if MSCs set up facilities in the vicinity of their major customers and by allotting the location of the customers plants to the location of MSC plants. The evidence demonstrated that MSCs in fact undertook customer-specific investments in the near vicinity of customer plants. More precisely, all suppliers undertook customer-specific greenfield investments for those customers who buy systems, modules, and system-modules.

Our general conclusion is that our sample MSCs have put considerable efforts to make use of new opportunities provided by OEMs in the German market. This required deliberate portfolio and locational strategies which were, in turn, achieved by acquiring German supplier firms who possess complementary technological competence profiles and by greenfield investments to co-locate MSC facilities and the plants of major customers.

What does this development imply for the supplier industry on the whole? Although we cannot say which of our propositions is more important, it appears to be that, today, suppliers solely have the choice of either to supply complete systems and modules on a world-wide basis or to lose direct contacts to OEMs, and thus, become second or third-tier subcontractors of single components. Supply chain-redesign and globalisation seems to demand considerable growth strategies and investments in global presence and capacity as well as in 37

system/module competence. In the light of this development, this could be interpreted as a signal of the decay of the nationally-focused, domestic suppliers. Particularly in Germany, there is a strong trend towards a consolidation of the supplier industry, resulting in a significant transformation of the traditional industry structure of small and medium-sized independent supplier companies. Does the evidence provided in this paper therefore imply the end of the independent medium-sized supplier companies in Germany?

38

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