INTRODUCTION
Auto manufacturers from China have made no secret of their intention to compete in the global automobile market. With about 8. million vehicles (6. 4 million cars) produced in 2007, China has already surpassed Germany in number of cars produced and is now the third largest automotive producer in the world behind Japan and the United States. The Chinese automotive industry is highly fragmented so far with more than 100 car manufacturers, ranging from small local producers to large national corporations having multiple joint ventures (JV’s) with foreign companies (Fetscherin and Sardy 2007).
However, the industry is dominated by five major companies (FAW, SAIC, Dongfeng, BAIC and Changan) all of whom have JV’s with foreign partners and together control almost 70% of the market (it is expected that further consolidation will happen leading to greater efficiency). Most cars are currently produced for the large, rapidly expanding, domestic market in China, but some Chinese companies are already exporting their cars or making foreign direct investment (FDI). In 2007, more than 413,500 cars were exported worldwide (Kurtenbach, 2007).
In 2005 Nanjing Automobile Industry Corporation (NAIC) bought bankrupt MG Rover, the last independent car company in Britain, for over USD 90 million. NAIC now builds MG brand cars in China that are sold in the domestic market. However future plans include selling these cars in the European and U. S. markets through the MG/Rover network of distribution. The two independent Chinese automotive companies Chery and Geely have both announced plans to enter foreign markets (Alon et al 2008; Toncar and Fetscherin 2007). To pull that off, Chery for example, has teamed up with Chrysler.
The two have struck a deal that will bring a Dodge-, Jeep-, or Chrysler-branded small car to US shores by 2009 or 2010. India’s automotive industry is also strong and growing. In 2006, total production in India was over 2 million vehicles (1. 4 million cars). Exports of automobiles from India have increased significantly and have reached almost 300,000 units in 2006 (India Auto Report 2006). This sector, largely fueled by passenger car sales, grew at a rate of about 57%. The Indian automotive industry has a fraction of the competitors in the Chinese market.
In terms of domestic passenger vehicles sales, the three main firms (Maruti, Hyundai, Tata Motors Inc. ) control almost 90% of the market which suggest an oligopoly market structure. 1 While there are still many challenges to overcome, it is just a matter of time before the Chinese and Indian firms follow the path of South Korean firms and advance into the global marketplace, albeit with major differences in industrial structure. South Korean automakers were the “most recent” Asian automotive manufacturing companies to emerge as global players in that industry.
So, one might ask how competitive are the Chinese and Indian automobile industries compared to that of South Korea which emerged recently as a global player? Which country of manufacturing in the near future is more likely to become a dominant player in the global automotive industry? We examined these questions using the Double Diamond Model (DDM), a framework based on the well known Diamond Model from Porter (1990) which builds on his model by taking into account multinational activities as suggested by Moon, Rugman, and Verbeke (1998).
It is critical to understand that this paper does not assess the competitiveness of automotive manufacturing companies from these countries but the industry competitiveness and is looking at the competitiveness, dynamics, growth, and industry structure among others. In the next section of this paper we present and explain the Double Diamond Model which serves as our underlying research framework. In section three of the paper we apply the model in the context of the Chinese and Indian automotive industry and compare it to the ne of South Korea. In section four we assess and discuss the competitiveness of each industry in the global context whereas section five provides the conclusion of this paper.
RESEARCH FRAMEWORK
Diamond Model In the book “The Competitive Advantage of Nations” Porter (1990) criticized conventional economic trade theories and their inability to explain the present economic phenomena. Subsequently, he developed a new paradigm, “the Diamond Model” which he used to explain country or industry competitiveness.
His model defines four determinants of industry competitiveness: factor conditions such as the nation’s or industry’s position in factors of production, such as skilled labor and infrastructure, (2) demand conditions such as sophistication of customers in the home country or market, related and supporting industries, and business context such as conditions for organization of companies and the nature of their domestic rivalry. Each of these four determinants defines a point on the diamond and constitutes the system where each point also has influence on the others.
In his model, Porter identifies government influence and chance as an outside variable in the system. He argues that a nation’s industry is internationally successful if it has competitive advantages related to the world’s best competitors. Some researchers like Cartwright (1993) and Lagrosen (2007) believe that there are severe limitations to Porter’s “single” Diamond Model. They argue that it does not explain the effects of multinational activities such as inbound and outbound foreign direct investments (FDI) in the context of the global economy.
Rugman and D’Cruz (1993) argue that it does not apply to countries other than the U. S. Subsequently, a modification of Porter’s model was proposed and is referred to as the “Double” Diamond Model (DDM) (Rugman and D’Cruz 1993; Cho and Moon 2000; Dunning 2005). The DDM incorporates multinational activities and government into the model, instead of treating them as exogenous variables. Although the variables of Porter’s Diamond Model are useful for analyzing an individual nation’s industry competitiveness, the model is too narrowly focused on the home-base to accurately reflect challenges faced in the global marketplace.
The Double Diamond Model has proven to be more useful for making the global comparisons. It has three important extensions to Porter’s single Diamond Model. The model clearly incorporates multinational activities; the model is able to operationalize the competitiveness paradigm. A comparison of the sizes and shapes of the domestic and international diamonds shows major strategic differences; it includes government as an important variable which influences the four determinants of the Diamond Model.
The descriptive data for the domestic and international demand conditions are summarized in Table 3. TABLE 3 Descriptive Data for Demand Conditions Demand Conditions China Domestic Size Domestic Automotive Sales (mm units) Domestic Automobile Sales Growth (%) (2003-2006) Car Ownership of Population (%) Sophistication Educational Index (2004) GDP per Capita (USD) GDP Real Growth Rate per capita (%) International Size Exported Vehicle (units) Vehicle Export Growth (%) (2003-2006) 221,650 54. 6% 280,777 25. 1% 2,650,000 0. 6% 6. 45 9. 4% 1. 1% 0. 84 1,988 10. 5% 1. 15 7. 5% 0. 8% 0. 61 710 8. 3% 1. 22 3. 4% 33. 8% 0. 98 18,605 5. %
India South Korea Source: China Autos Report (2006); India Autos Report (2006); South Korea Autos Report (2006). China is much bigger in terms of automotive sales when compared to India and South Korea. In 2006 China produced five times as many automobiles as India or even South Korea, suggesting that Chinese firms may have scale advantages that may not be available to Indian and South Korean automotive manufacturers. Scale advantages lead to higher bargaining power and might also give more choice of national and international manufacturing partners, closer relationships with components suppliers and preferential treatment.
Balakrishnan et. al. (2007) noted that there were significant scale advantages for domestic producers where they were close to strong component manufacturers. However, while the automotive components industry is important and worthy of further study, this paper focuses primarily on automotive manufacturing industry. In terms of car ownership, not only are there more people in China than in India, but also the percentage of car owners is higher.
In China there are about 14. 3 million cars (1. 1% of the 1. 3billion total population) compared to about 8. 8 million (0. 8% of 1. 1billion) in India. However, compared to South Korean with 16. million cars (33. 8% of 50 million), both China and India have fewer cars so far. This will most likely change in the near future especially in China as the current trajectory of car ownership will probably put China ahead of South Korea in a few years. Thus, for each 1% increase of ownership in China and India it would add another 11-13 million more cars to the domestic base of cars. In terms of customer sophistication, South Korea customers, on average, could be considered more sophisticated as they have a higher educational index and GDP per capita compared to China and India.
The same is true for the number of vehicle exported 5 here South Korea is dominant with about 2. 6 million cars exported in 2006 compared to China and India with only about 220,000 to 280,000. Related and Supporting Industries Related and supporting industries are those where firms coordinate or share activities in the value chain or value system, when an industry is vertically, forwardly or backwardly integrated. Porter asserted that the presence of supporting and related domestic industries that are internationally competitive can provide benefits such as innovation, upgrades, information flow, and shared technology development which create advantages in downstream or upstream industries.
Therefore, success of an industry is particularly likely if the nation has a competitive advantage in a number of related or supporting industries. The automotive industry is closely tied to the auto components industry through alliances and other financial arrangements. This is particularly true in Japan as well as in other countries where automakers and auto components firms are enmeshed in a web of financial and business relationships. However, in today’s global automotive industry increasingly, components and raw materials are sourced globally, so having the competitive suppliers’ industry within a nation may not be as important.
Nevertheless, we will take into account the auto components industry as a determinant of the competitiveness of the automotive industry. After manufacturing, the automotive industry, is dependent on the communication and transportation industries. This is especially true as the coordination and flow of information and products within the value and supply chain becomes more critical. Domestic factors We used four proxies to measure related and supporting industries.
Overall Industrial Production Growth Rate was used as a proxy of productivity of related industries. Second and third are transportation and communication infrastructure for each country which are proxies of effectiveness and efficiency of related and supporting industries. For domestic transportation we used paved highway per capita, since well-paved roads are a necessary complement to support the transportation of automobiles. Roads are needed by people in order to drive a car. Hence, paved highways are important component of infrastructure for the development of the automotive industry as well as a means of transportation for various other industries as well as the usage of cars.
As a proxy for communication infrastructure we used the percentage of Internet users as well as mobile phone users for each country. Finally, in order to approximate the size of the auto components industry we use the combined total of employment in the auto and auto components industry. Thus a large value represents the synergy that would result from the scale advantages of a large industry. International factors As a proxy for international related and supporting industries we used the volume of exports and volume of imports of oil.
We used this because oil consumption is heavily driving automotive industry. We take the number of bulk carriers and cargo carriers as a proxy for transportation demand and capacity as they allow us to measure the strength of the supply chain of the country and their ability to ship their products abroad. This is a useful measure as most cars are exported by cargo or bulk carriers. While there are some large international container fleets that do not reside in the major markets in which they are registered for tax reasons, we still find this a useful proxy.
Source: China Autos Report (2006); India Autos Report (2006); South Korea Autos Report (2006); UNCTAD Database Industrial production growth rate is almost three times higher for China than for India and even South Korea. China is already a global leader in industries such as toys (70%), bicycles (60%), microwaves (50%) or shoes (50%) of world manufacturing. All of these items also require transportation. This creates additional scale advantages in the number of firms that are bulk carriers, whereas China has more than either India or South Korea.
The lower transportation development (as measured in paved highways) is mainly due to China’s larger size and very poor rural infrastructure compared to other countries. Most of China’s highway developments have been around the larger cities and the eastern coast. While the roads may be under developed, mobile phone usage is much higher in China per capita than in India. Additionally, while mobile phone usage does not have the same percentage penetration the absolute numbers of users in China has already surpassed that of South Korea. In the auto components industry, China exports more than South Korea and India and also employs more people.
This is another indication that the competitive landscape of the auto components industry is larger in China than in South Korea and India. Some reasons for that are the low wages or China with respect to South Korea, increased outsourcing to Chinese auto components companies as well as huge and growing Chinese automotive market compared to that of India. Business Context The national business context, often referred also as firm strategy, structure and rivalry, heavily influences how companies operate within their macro and micro economic environment, and is relevant to both their domestic and their international competitiveness.
To examine the competitive environment we measured “rivalry” as the fourth determinant. Domestic factors We used the following measurements as proxies for domestic rivalry: Count of how many domestic automobile manufacturers produce over 150,000 units per year. Automobile manufacturers should be able to produce more than 150,000 vehicles in order to have significant economies of scale, this scale is also necessary to be competitive in the global automotive industry. The threshold of 150,000 cars is based on a study by Truett and Truett (2003), who based . heir findings on two other studies, one from the Australian Industry Commission (1990) which states that assembly volumes of 200,000 per plant are generally regarded as necessary for efficiency in production as well as a study from Booz Allen & Hamilton and INFOTEC (1987) about the Mexican automobile industry which concludes that vehicles assembly at internationally competitive costs levels requires an annual volume of at least 150,000 units. As we deal with emerging markets, we have chosen to take as a threshold 150,000 vehicles.
Calculation of the Herfindhal-Hirschman Index (HHI) to asses the industry concentration and competitiveness in this country. International factors Import or export tariffs have a significant impact on the costs or prices of imported or exported products. This is especially true for cars, where some countries have import tariffs of up to 200%. In order to assess the competitiveness of the automotive industry in a given country, we consider the average tariff rate for automobiles. The lower the average tariff rate is, the more 7 competitive this country is in comparison to others.
As a direct result, industry power was concentrated into fewer companies. Our findings show the average tariffs in India are more than double those of China and about 8 times those of South Korea. This is also due to the fact that China joined the WTO in 2001. The HHI measures show that industry concentration of India and South Korea is extremely concentrated and less competitive compared to the Chinese automotive industry which is moderately concentrated and, hence, more competitive.
RESULTS
Descriptive data for each of the four determinant of the Double Diamond Model are translated into scores to quantify the competitiveness of the Chinese, Indian and South Korean automotive industry. This section displays the results of calculations in a manner similar to the earlier study of Rugman and Verbeke (1993). They transformed the data of the domestic and international diamond into a competitiveness index. They emphasized that this competitiveness index is used for illustrative purposes. To calculate the competitiveness index for each of the four determinants, the country of comparison has a value of 100.
The data are shown in the following Table 6. As we compare the Chinese and the Indian automotive industry to that of South Korean, we use “100” when referring to South Korean (as a point of reference) and the relative ratio is given for the Chinese and Indian automotive industry. There are two ways to calculate the index: (1) If we use a variable where the higher the value the more competitive the industry, we take South Korea as the base or denominator in our calculations. For example; in the case of the Growth Competitiveness Index, South Korea scores a value of 5. 7% and China has a value of 4. 19%.
As this index measures the capacity of the national economy to achieve sustained economic growth over the medium term, a higher value means this industry is more competitive. In this case China would have a value of 83% (4. 19/5. 07) which would mean that the Chinese automotive industry is less competitive in that respect. If we use a variable where the higher the value the less competitive the industry, we take South Korea as the numerator in the calculations. For example; the average tariff rate in 2006 was for South Korea 8% compared to China with 25%.
This means that South Korea has a competitive advantage over China as the average tariff is lower. In this case China gets a Competitiveness Index of 32% (8/25). For the determinant of each country, we calculate three main figures: the index value for domestic variables; index value of international variables; and the total global index for each of the four determinants of the Double Diamond Model of the three corresponding countries. We weight each variable within each group as equally important. This is a limitation of the study and further research might calculate it with different weightings.
For example, in the case of the determinant “Demand Conditions” for the domestic variables we get the following for India: 8 (1. 15/1. 22*100 + 7. 5/3. 4*100 + 0. 8/33. 8*100 + 0. 61/0. 98*100 + 710/18,605*100 + 8. 3/5. 2*100) / 6 = 90%. The same method has been used to calculate the international variables for each country as well. Finally we calculate the global index. Again we assume that both, the domestic and international index, are equally important and hence equally weighted. The following table summarized the various domestic, international, and global indices for the four determinant of the DMM for the three countries analyzed.
The competitiveness index shows that the Chinese automobile industry has strength in both domestic and international factor conditions, demand conditions, related and supporting industries, and business context compared to South Korea. India provides a different picture where, due to low wages it has a significant advantage in terms of domestic factor conditions. However, in all the other determinants India is significant weaker and less competitive than China and South Korea. The following figures provide an illustration of the results of the previous table.
We first draw the domestic diamond, then the international diamond and finally the global diamond for the three countries. The rectangle shows the corresponding diamond of the South Korean automobile industry, and the asymmetric squares represent the Chinese and Indian automobile industry respectively. The following Figure 2 shows the domestic diamond of China and India compared to South Korea. 9 FIGURE 2 Domestic Diamond The domestic diamond reveals some interesting insights.
Overall it seems that the Chinese automotive industry is more competitive than the South Korean industry in their respective domestic markets. On all four determinants of the Double Diamond Model China has a higher value. Of all the dimension China’s strongest are the factor conditions, this is mainly due to much lower manufacturing wages than those of South Korea. India is more competitive than South Korea in only one of the four determinants, namely factor conditions where again this is mainly due to much lower manufacturing wages.
Again China dominates in all determinants over South Korea. India still has an advantage over South Korea in terms of factor conditions due to the low relative cost of Indian labor but on all the other determinants it has the lowest rating of the three countries assessed. FIGURE 4 Global Diamond 11 Michael Porter set government’s role and chance as exogenous variables. He argued that government’s role should be a catalyst and challenger, neither a helper of industry with industrial policies nor a watcher.
While Porter’s original approach sets government’s role as an exogenous variable, the Double Diamond Model includes government in the model as an important endogenous variable which directly influences all four determinants. This is especially important in the case of the automotive industry where China’s entry into the World Trade Organization (WTO) in 2001 led to a more gradual liberalization and hence increased China’s competitiveness. Tariffs on Chinese vehicles declined from over 75% to about 25% by mid-2006, while parts tariffs shrank to an average of 10%.
Foreign auto companies gained the right to offer auto loans and to participate in car dealerships, though they were still restricted to no more than a 50 percent share in assembly operations, and a limit of two Chinese assembly partners. In 1993, India ended licensing of foreign automobile ventures. In 2001 it lifted virtually all restrictions on direct foreign investment in the auto industry. Tariffs remained extremely high on vehicles and just under 35% on parts, though preferential trade agreements with ASEAN, and Thailand in particular, led to some reduction in duties.
India’s government role in decreasing tariffs and allowing foreign entry is now helping the development of India’s automobile industry. Despite the fact that both, China and India are relative new players in the global automotive industry and focus mainly on their domestic market, both are emerging as global players. This is especially true for the Chinese automotive industry. When compared to South Korea, on all four determinants of the Global Diamond, the Chinese automotive industry seems more competitive than that of South Korean.
The automobile industry is paradoxical as China’s has developed inwardly for the domestic market not outwardly through export contract manufacturing like many of their other industries. In the automotive industry China’s hybrid economic system has facilitated conditions that helped build China into an industrial powerhouse in automotives in a different manner to how it grew to global dominance in other industries such as the toys, computer, bicycles, or microwaves where China is the leading producer already. China’s centralized political system has shown strength in its ability to make large-scale changes rapidly.
When combined with a market system, as is the case with China, it can produce large-scale business shifts that are hard to match within other economic and political systems such as India and South Korea. China has an advantage due to low manufacturing wages and high comparable productivity, but also most Chinese automotive companies have joint-ventures arrangements with foreign companies. These JV are about access, for Chinese automotive manufacturers to access and acquire knowledge and technical expertise much faster and for foreign partners to access the potentially largest and growing Chinese automotive market.
All of this is driven by the huge, rapidly growing domestic market in China which enables the domestic auto producers to profit from economies of scale even before entering international markets; which was not the case for South Korea. The Chinese automotive industry has the infrastructure and related and supporting industries to support the industrial challenge of developing a world-class automobile manufacturing industry. They have scale and growth consistent with dominant players worldwide. The business conditions within China also point to global success.
However, China’s success stands in stark contrast to India where bureaucratic inefficiencies have crippled the international competitiveness of domestic industries. The high concentration of automobile production in few domestic firms has stifled growth of the industry. Bureaucratic regulations have slowed the entry of foreign firms which would transfer expertise and technology and strengthen collateral businesses. However, there are several interesting strengths with respect to India. The extremely low labor rates of India may create an opportunity to capture a strong industrial base for either the auto components or the automotive industry.
India’s governmental efforts to reduce tariffs and bureaucracy have made it a more attractive destination for foreign direct investment recently. Although service related industries like software and call centers have had tremendous success in India, much less success is seen in manufacturing industries such as the automotive industry. Even though the labor costs are low enough to make India competitive with China there is still significant need for change in several of the other determinants discussed in the Double Diamond Model.
CONCLUSION
The purpose of this paper was to examine and compare the industry competitiveness of the Chinese, Indian and South Korean automotive industry. As the underlying research framework we used the Double Diamond Model framework, which has three important extensions to the well known single Diamond Model of Porter (1990). First, it incorporates multinational activities. Second, the model is able to operationalize the domestic and international competitiveness paradigm. Third, it includes government as an important endogenous variable.
By using this model, we were able to examine the similarities and differences in industry structure and explain the different strategic approaches taken by Chinese and Indian automotive manufacturers. 12 These approaches were built on the respective strengths of these three countries. Nonetheless, we acknowledge that the inability of our model to find weights for the different variables we used is a limitation of this study. We also acknowledge that significant variables such as supply chain, auto components and other useful variables are only approximated.
Another limitation of this study is that we have not taken any firm level data into account such as brand awareness, brand equity as well as quality perception of cars from companies from these countries as the focus of this paper was to assess the overall industry competitiveness and not firm competitiveness. The global automotive landscape is rapidly changing while South Korea brands are well known internationally already, some recent acquisition by Chinese and Indian companies of international automotive brands threaten to change this.
Recent acquisitions of Rover by NAIC in 2005 and Land Rover and Jaguar by Tata in early 2008 might elevate their global brand recognition but is not subject of this paper. Nevertheless, the results of our study shed some light on this the changing Asian automotive landscape and suggest interesting managerial implications. The two central finding of this paper are as follows. (1) The Double Diamond Model was very usefull to assess the competititveness of the Chinese and Indian automotive industry and also useful in comparing it with a developed automotive industry like that of South Korea.
This is evident as it provides some insights on the domestic, international and global factors that may drive success. The DDM not only appears to capture the similarities and differences in the domestic competitiveness of each country, it also gives important insights for the international and the resulting global competitiveness of each country. (2) Our results show that the Chinese automotive industry is already at least as competitive as the South Korean automotive industry.
This is due to lower manufacturing wages, similar growth and productivity as well as huge inbound FDI and outbound FDI in the Chinese automotive and related industries. Another important factor is that most Chinese automotive manufacturers have between one and two joints-ventures with foreign partners enabling them to access technical expertise and know-how. Demand conditions drive China’s automotive industry, due to the huge rapidly growing domestic market this has given firms a home market to build their scale and scope.
This was not the case for South Korea where the automotive manufacturers needed to expand globally to build their scale and scope at a much earlier stage of their automotive industry’s development. Finally, the business context as well as the industry concentration and competitiveness judged through the Herfindhal-Hirschman Index and other measures shows that the Chinese automotive industry is internally competitive and there are many players sharpening their competitive skills as the market expands, and consolidation begins.
These factors highlight the economic conditions that are important for the automotive industry to thrive and build strong operational units in terms of supply, production, distribution, marketing and sales. In China these conditions are all present and as the domestic auto industry continues to grow, the lure of the foreign markets will eventually draw some of their firms into the global fray. All of our indicators suggest they will be capable of meeting the global challenges ahead.
