Decentralized globalization in automotive value chains: a motor for functional upgrading?

luciano ciravegna
DESTIN, London School of Economics

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     Last modified: April 30, 2004

Abstract
Luciano Ciravegna
PhD candidate, DESTIN Development Studies Institute
The London School of Economics and Political Science

Theme C: Technical Change, Corporate Dynamics and Innovation

Decentralized globalization in automotive value chains: a motor for functional upgrading?


During the 1990s automotive producers restructrured their operations at a global level, bringing the organizational changes introduced in Japan, the US, and Europe, to their subsidiaries located in emerging markets. Market liberalization forced assemblers to modernize their production facilities or succumb to imports. In order to maximise the benefits of modernization, automotive assemblers, just like most multinational industrial producers, tried to rationalize their operations, concentrating and centralizing core activities in their headquarters.
In other words, the automotive sector’s simplified interpretation of globalization was to reduce the autonomy and range of functions performed by plants located in the developing world, whilst at the same time improving their cost and quality efficiency. The fall of tariff barriers allowed assemblers to fragment locally integrated value chain and reconstruct them at a global level, incorporating more imported parts, and creating new complex logistical arrangements.
As can be detected by the surge in the range of models produced, and by the fall in the age-gap with models produced in the Triad countries (Europe, the US, Japan), during the 1990s developing countries’ automotive value chains went through both product and process upgrading. Unfortunately, these were not coupled by functional upgrading, but rather by functional down-grading: The globalization of automotive production generally entailed reducing the duplication of R&D efforts carried out in the centre, and reducing or eliminating local variations on a car model. Local engineering and testing departments, previously necessary to adapt original blueprints to the supply constraints imposed by minimum local content requirements and by import tariffs were shut, transforming many plants into assembly-only operations.
As a result of this evolution, that in most cases did allow automotive assemblers to increase their efficiency and their sales in developing countries, the literature on the automotive sector and on business organization began assuming that this path of globalization is “the one best way”. In this paper we challenge this concept, arguing that automotive value chains’ product and process upgrading do not have to come together with functional degrading.
We used the case of Fiat’s globalization strategy to prove that in the least case, there is a heterogeity of organizational paths to the globalization of automotive production, in the best case, decentralized globalization can be a motor for functional upgrading in developing countries’ automotive value chains. Fiat’s strategy, strongly criticised in Italy as one of the causes of Fiat’s quasi-bankrutpcy, has been extremely innovative in conception, in that it promoted a concentration of core activities in some of its operations located in developing countries (Polland, Brazil, Argentina, and Turkey). Fiat’ strategy was related to its project of making a world car, a fully standardized vehicle complying to a common set of safety and pollution rules.
According to various academics (Volpato, Enrietti, Balcet, Camuffo, etc.), during the 1990s Fiat was the first automotive assembler to produce a world car. However, that was not the main innovation and organizational challenge faced by Fiat. Moreover, it was not unique to Fiat, as other assemblers were pursuing the same strategic objectives. The real non-conventional challenge Fiat decided to face was the delegation of core functions from the headquarters to subsdiaries located in the developing world.
This paper analyses Fiat’s globalization strategy, focusing on how it affected the relation between Fiat’s headquarters and its subsidiaries, the functions performed by each productions units, governance structures, and the implications for local development.
The first part of the paper introduces the theoretical framework implemented, an ad hoc version of the Global Value Chain framework. We applied the analytical tools devised by the Global Value Chain Initiative of Sussex University, adapting them for the case of Fiat’s corporate network. Fiat’s production units are as independent units acting under hierarchic governance.
In the second part, we present the case study, focusing on the organizational changes Fiat implemented in order to produce the world car. We analysed how Fiat’ strategy changed the nature of its corporate network, using a graphic representation to illustrate the flows of goods and information across Fiat’s corporation before and after the advent of the world car.
In the second part, we question whether Fiat’s globalization strategy promoted functional upgrading for the subsdiaries, or links of the value chain, located in developing countries. We analysed the set of functions performed by each unit of production before and after the implementation of the world car strategy, taking into account that the nature of the good produced has changed together with organizational settings. We found that the plant chosen as major production pole, the Brazilian subsidiary, went through a process of fast and impressive functional upgrading, simultaneous to product and process upgrading. The findings prove that globalization of automotive production does not have to entail the centralization of operations and a functional downgrading of most developing countries’ operations into assembly-only plants.
In the third part of the paper, we question whether a strategy of decentralized globalization, such as Fiat’s, can promote a better utilization of localized knowledge, local capabilities, and accumulated expertise. The outstanding success of Fiat in Brazil points out that, ceteris paribus, the use of local knowledge can be very important in shortening the producer-consumer distance in emerging markets, where there are different patterns of consumer preferences.
We concluded the paper outlining the implications of our research for the Global Value Chain agenda, and for the globalization strategies automotive assemblers will and are implementing in the future.

This paper is based on fieldwork carried out in the context of the Master of Philosophy in Economics and Politics of Latin America carried out at St Antony’s College, Oxford University, under the supervision of Mrs Rosemary Thorp and Prof. Sanjaya Lall.