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 AutomotiveM industry is #2 for R&D spending V P Telecommunications Equipment Top Industries by 2006 Estimated R&D Spending Motor vehicles and auto parts Software Semiconductor Pharmaceutical 8 7 Top 20 Global Companies by 2004 R&D Spending 6 $Billion 5 0 10 20 30 40 50 60 70 80 4 23.0 Sources: Schonfeld Associates; Corporate3 R&D Scoreca Microsoft 26.9 27.0 Ford Motor DaimlerChrysler Pfizer General Motors Schonfeld Associates forecasts Toyota to be Siemens the #2 R&D investor in $ Billions 2007 at $9.8 billion Toyota Motor 55.1 Matsushita Electric GlaxoSmithKline Johnson & Johnson rd, IBM Technology Review 76.9 Volkswagen Intel Automotive Nokia Non-Automotive Sony Samsung Honda Motor Roche Novartis Merck 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 2002 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