Shifting Geographies of Production and Consumption - Essay Example

ESSAY SHIFTING GEOGRAPHIES OF PRODUCTION AND CONSUMPTION Globalization has brought with it a slew of strategic shifts in the global automobile industry during the past decade. Preceding this period of time, a series of dynamic changes took place in the automobile industry though such changes were less noted for their decisive history making trends by analysts. Global automobile industry is necessarily characterized by the output of cars while commercial vehicles are just part and parcel of the inevitable progress scenario. During the past thirty years or so it has been evolving in different directions with greater emphasis on more fuel efficient automobiles. The late seventies, the eighties and the nineties all were dominated by the Japanese manufacturers. Even in the 21st century this dominance is not only visible but disturbingly complex with geographical concentration shifting in directions that defy economic sense and reinforce the multinationals’ perception of competition. The automobile industry has some peculiar characteristics when it comes to the question of concentration. There is a common tendency for every industry to be agglomerated geographically. However the automobile industry has a typical tendency for such geographical agglomeration. For instance within the frontiers of a country, a regional concentration would mean many manufacturers of an industry concentrating their output in a particularly advantageous geographical region such as Detroit in America. The same region would act as a focal point for international companies, thus completing an international cycle of geographic attraction. The automobile industry has some peculiarities in shifting the geographic epicenter of activity away from the initial centers of development to newer more demand-centric market–oriented regions in the globe. During the last three decades manufacturing centers have been shifted from low-cost, skilled-labour, market-centric regions to still low-cost, skilled-labour, market-centric regions elsewhere, e.g. China and India in Asia, East European countries in Europe and Latin America. Markets beckon not only the industry but also individual manufacturers. Toyota Motor Corporation, Mitsubishi Motor Company, Nissan Motor Company and Honda Motor Company, all of Japan first entered the European Union (EU) to make use of tariff-free entry into the then flourishing market for automobiles. Next they entered the North American enclave. Finally they are making entry into the Latin American and East European markets. The Japanese management and labour practices are rather revolutionary and Europe and North America had much to learn from them (Deyo, 1996, p.68). According to Nobel laureate Krugman (1992), industries agglomerate in geographical regions where access to markets and raw materials coupled with the availability of skilled labour and a network of accessory producing machine shops, is easier. Though the theory sounds little old-fashioned it goes with the oligopoly industry which typically characterizes the automobile industry throughout the world. Oligopoly market structure provides the automotive industry with all that’s necessary to lead and follow. Japan leads and others still follow though reluctantly. Hybrid technology advantage along with strategic non-cooperation helps Japan to overcome competition. Theories on the geographical concentration of manufacturing industries vary from agglomeration theories based on external scale economies to structural theories based on the industrial structure. For instance following Michael Porter’s publication of the book The Competitive advantage of Nations (1990), the term industry cluster was popularized. It was followed by Paul Krugman’s Geography and Trade (1992). Cluster models have increasingly been accepted as greatly influencing the theories of geographical agglomeration ever since the concept was discussed by Porter. A cluster can be divided into four as follows: (a). Geographical cluster (b). Sectoral cluster (c). Vertical cluster (d). Horizontal cluster (a). Geographical cluster A geographical cluster, as already explained, is a concentration of a number of firms in the industry in a geographical region. This geographical cluster enhances the existing patterns of evolution towards a more formidable growth process. (b). Sectoral cluster Sectoral clusters exist when there is a cluster of businesses operating within the same commercial sector such as biotechnology. Such clusters tend to be identified with firms operating in a given environment. As for the automobile industry specialist areas of production such as gear boxes and pistons, nuts and bolts and air-conditioners and upholstery all will have their own individual clusters of firms in and around the geographical region where the industry as a whole is concentrated. (c). Vertical cluster Vertical cluster is essentially connected with the supply chain but does not necessarily imply various sectoral clusters outlined above. It might consist of such spare parts producing firms as well though. Down the supply chain there can be a number of firms that operate as suppliers to the main industry. For example in the case of the automobile industry tyres and tubes, upholstery and even pistons and rings all come under the vertical supply chain. However, such vertical processes do not necessarily constitute an integrated whole. In other words supply chain network might be an independent structure serving as a feeder service. (d). Horizontal cluster Horizontal cluster refers to such connected business processes with an industry. For example knowledge management processes including Research & Development come under this. The recent trends are particularly dynamic in nature because both the World Trade Organization (WTO) and trading blocs such as the North American Free Trade Agreement (NAFTA) and the European Union play a very significant role in the international automobile import and export markets. WTO rules applicable to global automobile trade have evolved through years of negotiations at various rounds of the General Agreement on Tariffs and Trade (GATT). Currently negotiations are going on at the WTO to reach agreement on the global automobile trade. However agreement cannot be reached unless countries which support the agreement account for 99% of the global trade in automobiles. Despite all these efforts, only 30% of the total world trade in automobiles is free according to international standards. In fact recently the WTO ruled in favour of the EU, America and Canada against China on the latter’s higher tariffs on the imports of car parts. On the other hand free trade areas and customs unions such as the NAFTA and EU cause innumerable reversals to WTO led efforts to create a liberal world trade environment (Wilkinson, 2006, p.126). For instance while there are no tariffs among member countries of these trading blocs, they might either have a common tariff structure on imports into the bloc (e.g. EU) or their own tariff structures (e.g. NAFTA). These tariff structures might have an undesirable impact on exports by individual countries. China and India both have a flourishing domestic automobile industry. While the WTO rules allow a higher domestic tariff structure on imported automobiles, it does not allow such higher tariffs on automotive parts imported into a country. China has already been found guilty of this rule while EU and NAFTA too have been accused of adopting protective tariff bands on imported automobiles. Japan’s inability to export both automobiles and parts forced its manufacturers to locate new manufacturing plants and assembly lines abroad as early as the 1980’s. Geographical location of the automobile industry must be studied against this backdrop during the last three decades. Japanese manufacturers enjoyed such protection for number decades (Coffey, 2006, p. 121). As much as NAFTA has been affected by recent developments in the evolving patterns and shape of the global automobile trade due to protectionist measures such as tariffs and quotas and even standards, those individual countries in Latin American and elsewhere have also been affected by its highly protective trade practices. Spatial inhibitors to globalization efforts that existed in the 1980’s do not exist any more. The current decade is particularly characterized by spatially integrated supply chain networks that are spread across the globe and located in different time zones. Economies of scale have acquired a new dimension here. Mass manufacturing processes are given little or no attention by modern automobile manufacturers because after all today’s fashion is obsolete by tomorrow (Deyo, 1996, p.261). Engineering Design Outsourcing (EDO) is here to stay. Unlike Business Process Outsourcing (BPO), EDO is a highly technical specialist area of operations that requires not only specific skills but also specially designed capacities to rationalize output and distribution. As a corollary outsourcing is not a mere process of service provision but a highly efficient, technically accurate, integrated function. A systematic approach is needed to a carry out such tasks. Both Toyota, the world’s number one automobile company and General Motors, the second largest, make modern automobiles whose parts have been designed and machined in countries as far apart as India and Argentina. These developments have brought with them a structural redesign of processes and procedures too. After all WTO and trade blocs are unlikely to stop the current trends in demand and supply because the conventional or stereotypical explanations and reasons do not have any logical hold on these developments any more. Problem statement or hypothesis Global automobile industry has been traversing a rather curvaceous uphill growth trajectory during the past three decades, of which the last decade or half a decade is particularly characterized by catalysts that foreshadow a mammoth shake-up of the industry at all levels of production ranging from outsourcing to the formation of parts manufacturing cartels. Demand has lost its orthodox drivers of change and moorings of security; and now it is seen in regions that were once regarded as poverty-stricken, e.g. China and India. At the microeconomic level individual countries and trading blocs have adopted taxation policies that encourage domestic production of automobiles and parts while discourage imports of the same. At the macroeconomic level individual governments and trading blocs seek to emphasize the need to protect their balances of payments against persistent deficits. Either way free trade in automobiles has been affected. Notwithstanding these barriers to free trade in automobiles, rising incomes of developing countries, e.g. India and China, persistent strategic reorientation of manufacturing companies and WTO rules have set in motion a newer trend in demand and supply. While demand is engendered by a desire to overcome state sponsored barriers to free trade, the supply-side is aided and abetted by a series of beyond-the borders-factors, i.e. supplier networks are formed by cartel-like operators in regions where demand is persistent and positive. Global automobile industry has further been influenced by a series of Mergers & Acquisitions (M&A) in the recent past. What was unimaginable a few years ago has become an ordinary event today, viz. an Indian automobile manufacturer (Tata) acquiring the British Jaguar. The industry domination by US, European and Japanese firms has ceased and what has come out of it all is a rather daunting phenomenon. No less than twenty state and private manufacturers in China deliberately target sales in Europe and North America. After all most of these products are Daimler Benz and BMW look-alikes. Technology has taken a back seat for a while in this industry. Will Germany be able to withstand the onslaught? As much as the Japanese manufacturers were pricing themselves out of the market some time back, Germans in particular and Europeans in general would price themselves out soon. Thus M&A sprees by Indian and Chinese entrepreneurs cannot be ruled out. Americans have got to reinvent the industry for survival. After all the price rules here. REFERENCES 1. Abbott, J. D and Moran, R. T (2002), Uniting North American Business: NAFTA Best Practices, (Culturally Managing Differences), Massachusetts, Butterworth- Heinemann. 2. Coffey, D (2006), The Myth of Japanese Efficiency: The World Car Industry in a Globalizing Age, Massachusetts, Edward Elgar Publishing. 3. Deyo, F. 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