The internationalisation of the automobile industry

Int. J. Automotive Technology and Management, Vol. 12, No. 1, 2012

The internationalisation of the automobile industry and the roles of foreign subsidiaries Marcos Amatucci* ESPM, Rua Dr. Alvaro Alvim, 123, Room C-404, Vila Mariana – 04018-010, Sao Paulo-SP, Brazil E-mail: [email protected] *Corresponding author

Fábio Luiz Mariotto Management Department, EAESP/FGV, Av. 9 de Julho, 2029, Bela Vista – 01313-902, Sao Paulo-SP, Brazil E-mail: [email protected] Abstract: This study analyses the change in the roles of Brazilian subsidiaries of automotive multinational corporations, specifically those that have developed products in Brazil. The main goal is to offer a causality hypothesis for the reasons why subsidiaries of the same sector in the same country have different roles in their corporations after developing engineering capabilities for innovation. The analytical framework involves a discussion of subsidiary development and the degree of internationalisation of each company. The study was carried out between 2007 and 2009 at five Brazilian subsidiaries: Renault, General Motors, Volkswagen, Fiat, and Ford. The results suggest that these subsidiaries occupy a continuum of corporate roles that vary from global centre of excellence (CoE) to local implementer, with intermediate categories. The construction of an explanatory hypothesis results in a ten-step model for the internationalisation process of the auto industry. Keywords: automotive business; internationalisation process; subsidiary role; product development; PD; international management; automotive technology and management. Reference to this paper should be made as follows: Amatucci, M. and Mariotto, F.L. (2012) ‘The internationalisation of the automobile industry and the roles of foreign subsidiaries’, Int. J. Automotive Technology and Management, Vol. 12, No. 1, pp.55–75. Biographical notes: Marcos Amatucci is an Associate Dean of Research at ESPM/Sao Paulo, Brazil and an Associate Professor of the Master of Science in International Management of ESPM. Fábio Luiz Mariotto is an Titular Professor at EAESP/FGV São Paulo, Coordinator of FAPESP (Sao Paulo State Research Support Foundation) and member of the board of Revista de Administração de Empresas (RAE).

Copyright © 2012 Inderscience Enterprises Ltd.

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M. Amatucci and F.L. Mariotto

Introduction

During the 1980s, a profound transformation took place in the thought of MNC (multi-national corporation) scholars’ regarding the role of foreign subsidiaries (Birkinshaw and Hood, 1998). We had learned from the economy that ownership advantages were created in headquarters, and the unique role of foreign subsidiaries was to exploit this ownership in new markets (Dunning, 1988 Vernon, 1966), thereby bringing more of the same to the business. With the growth of subsidiaries and the development of their own resources, subsidiaries increasingly became sources of international competitive advantage, and new roles beyond manufacturing and marketing were assigned or earned by subsidiaries (Hedlund, 1986; Bartlett and Goshal, 1986 Birkinshaw and Morrison, 1995; Jarillo and Martinez, 1990 Birkinshaw and Hood, 1998). Moreover, the economy theory assumes that ownership may be ‘exported’ to the subsidiaries without local adaptations, which does not occur in all kinds of products and services. When products or services need local adaptations, there is a local development of knowledge to address the challenge of the local differences. This knowledge may be transferred to other subsidiaries and even to headquarters (Moore and Birkinshaw, 1998). This has been observed to be the case for some subsidiaries of the automobile industry (Amatucci and Bernardes, 2007). The adaptations of global models to the local realities of the Brazilian market (an emerging market with demand for low-cost, entry-level family cars) and operational conditions (Brazilian roads and streets) led to increased engineering development in the Brazilian subsidiaries of the automobile industry (Amatucci and Bernardes, 2008, 2009b; Balcet and Consoni, 2007; Consoni and Quadros, 2006; Cauchick Miguel, 2006; Quadros and Consoni, 2009; Queiroz and Carvalho, 2005). The Brazilian automobile industry then acquired and developed competence in product development (PD) (Consoni and Quadros, 2006; Cauchick Miguel, 2006; Amatucci and Bernardes, 2008). The history of PD in Brazil and its varying degrees of local engineering involvement goes back to the 1970s with the SP-2 and the Brasilia from VW, and it continues to the present with derivative designs (Amatucci and Bernardes, 2008, 2009b; Balcet and Consoni, 2007; Consoni and Quadros, 2006; Cauchick Miguel, 2006; Quadros and Consoni, 2009; Queiroz and Carvalho, 2005). Recently, the most advanced engineering teams have achieved local developments such as the Ecosport (Ford), the Meriva (GM) and the Fox (VW) (Cauchick Miguel, 2006). Not all subsidiaries of the automobile industry have PD capability, however. The industry has global models with very few adaptations, and when large adaptations are required by markets worldwide (mainly emerging markets), the engineering work is done in the subsidiaries with engineering capabilities. Typically, a global automaker will have four or five engineering centres around the globe while maintaining 50 to 60 subsidiaries for manufacturing and marketing or for marketing only. Emerging engineering capabilities are related to the size of the local market, which has to be large enough to economically sustain the engineering activities (Amatucci and Bernardes, 2008, 2009b; Balcet and Consoni, 2007; Consoni and Quadros, 2006; Cauchick Miguel, 2006; Quadros and Consoni, 2009; Queiroz and Carvalho, 2005). It has also been observed that when the subsidiary acquires new capabilities, its role in the MNC changes (Birkinshaw and Hood, 1998). This is particularly true in the case of the automotive industry (Amatucci and Bernardes, 2009a). The impact of the PD

The internationalisation of the automobile industry

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activities necessary in the Brazilian subsidiaries led them to new roles within their corporations (Amatucci and Bernardes, 2008, 2009a). The role of the subsidiaries of different automakers in their respective corporations varies, however. Each innovative Brazilian subsidiary (i.e., with engineering capability for PD) has a different role in its global corporation (Amatucci and Bernardes, 2008). This study aims to relate the differences between the roles of the innovative Brazilian subsidiaries of the automotive industry immediately after earning PD capabilities with the internationalisation process of the automobile industry.

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Methodology

The research strategy for this study was qualitative, using interviews and document analysis in five Brazilian subsidiaries as primary data, and documents, doctoral and master thesis, articles, books and institutional reports as secondary data; and qualitative analysis of the obtained data to create theory. The methodology was a multiple case study (Eisenhardt, 1989; Yin, 1989) that used grounded theory techniques for data analysis (Glaser and Strauss, 1967; Strauss and Corbin, 1998) supported by Atlas.ti© software. Case study methodology is characterised by a broad source of data, and for being appropriate for explanatory research questions such as ‘how’ and ‘why’ (Yin, 1989). Grounded theory is a qualitative methodology developed by Glaser and Strauss (1967) to generate emerging theory, that is, theory that comes directly from the data (‘grounded’). This means that researchers go into the field without established questions, and the theory is solely generated by the analysis of data. Glaser (1978, 1992) maintains that this is the only way this method and its techniques should be used. Strauss and Corbin (1998), however, have popularised the method as a powerful collection of qualitative analysis tools that can be used together with the case study method, using previously established questions that can be answered in the field. It is in this sense that the techniques are used in this study. Other examples of the use of grounded theory in studies of the automobile industry are Kotabe et al. (2007) and Amatucci and Bernardes (2009b). Also, Yin (1989) states that case studies share with history methodology to be appropriate for the research questions ‘how’ and ‘why’. The major reason to choose case study over History methodology is the focus on contemporary events. During the research, the case study researcher may directly observe some of the events as they occur, and talk to the mains players as they are still available, what usually cannot be done in history studies. However, Yin (1989) also sustains that the boundaries between methodologies are not always sharp. As this study involves the internationalisation process of companies, we included automobile history books as part of the cases descriptions. According to the grounded theory techniques, all sources of data are treated the same way. The primary data came from five subsidiaries that effectively developed an entire product in Brazil: General Motors do Brasil (GMB), which developed the Meriva; Volkswagen do Brasil (VWB), which developed the Fox; Ford do Brasil (FB), which developed the Ecosport; Fiat, which developed the Palio and the Adventure line; and Renault, which developed the Sandero. Primary data came from 22 interviews conducted between February 2007 and August 2008 in the Brazilian states of São Paulo, Bahia, Minas Gerais and Parana with executives (directors, managers and engineers) involved

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with PD, with functional areas that included planning, engineering, marketing, design, procurement and sales. In addition to the interviews, we generated data from speeches by the industry executives at our university, including their speeches in technical meetings and congresses of the field promoted primarily by the Brazilian branch of the society of automotive engineering (SAE-Brasil). Secondary data were obtained from the companies’ websites. The documental data includes technical folders of the companies and executives’ slides for internal and external presentations. The data were recorded, transcribed and analysed. Following grounded theory techniques, the analysis consisted of searching for categories (groups of similarities) in the data. The categories were organised and related to one another. The software Atlas.ti supported this analysis by allowing the researchers to mark the ‘raw’ data with pointers to each defined category, organising the marks so that the researchers could return to the original data from the categories. In our case, the categories were the roles of the subsidiaries and the international stage of the firms. Furthermore, the software allowed the researchers to organise notes and field insights (‘memos’) and relate them to the categories and the data. Table 3 is a summarised example of the kind of analysis performed with the software support.

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Literature review

3.1 Subsidiary role evolution Studies have evaluated the evolutionary degree of a subsidiary by the sophistication of the function it performs in the host country and by its contribution to the multinational corporation beyond its local responsibilities (Bartlett and Ghoshal, 1986; Birkinshaw and Morrison, 1995; Birkinshaw and Hood, 1998; Moore and Birkinshaw, 1998; Birkinshaw, 2001). The set of functions performed by the subsidiary and its relationship with other units of the corporation has been called the subsidiary’s ‘role’ or ‘strategy’ (Birkinshaw and Morrison, 1995; Birkinshaw, 2001). Since the 1980s, the role or strategy of the subsidiary has been the object of different taxonomies in the literature (Bartlett and Ghoshal, 1986; Jarillo and Martinez, 1990; Birkinshaw and Morrison, 1995). Birkinshaw and Morrison (1995) proposed a ‘consolidated’ taxonomy from previous developments and tested their model on a sample of 126 subsidiaries of several sectors from six countries. The roles in this taxonomy included local implementer, specialised contributor and world mandate. The local implementer has a restricted influence area, mostly the host country itself, and a reduced number of functions performed (e.g., marketing and sales or production, marketing and sales). The rest of the productive chain is performed centrally (for example, high-value-added activities such as project, design, product and process development). The specialised contributor has important competences in a few functions of the value chain, and it operates in a strongly integrated and coordinated fashion with other activities of the international group. The subsidiary with a world mandate operates in close cooperation with headquarters to develop and perform international group strategies. It may have world or regional


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responsibility for a product or for an entire business, with or without scope restriction and with a very large value-adding gradient. Generally, the subsidiary was not created with its current role but evolved in a trajectory, and the differences between the trajectories or paths may be relevant. Birkinshaw and Hood (1998) define a subsidiary’s evolution as a function of two variables: the enhancement or depletion of its capabilities and the changes in its charter. A ‘charter’ is the set of functions performed by the subsidiary with acknowledgment from headquarters. According to this model, subsidiary ‘evolution’ may be for better or for worse (i.e., evolution or involution). In the matrix framed by these variables, the changes may follow different paths.

3.2 Units of excellence, world product mandate and centres of excellence Holm and Pedersen (2000) separate the characteristic of excellence, “having a distinct specialized competence in one or several activities”, from the characteristic of being a centre – excellence and competences that are useful to and used by other MNC units, with headquarters’ recognition. Therefore, a focused subsidiary may have distinct competences that are only locally useful, which makes it a unit of excellence (UoE), or it may have distinct competences that are useful for other MNC subsidiaries, which makes it a centre of excellence (CoE). The main distinction lies in the use of the competences created in the subsidiary in other contexts. Hence, we may conclude that a CoE is a charter given to the subsidiary by headquarters, which relies on its impact over its sister units and on headquarters’ recognition of the subsidiary competences and the impact of these competences throughout the MNC. Birkinshaw (1996), stressing the literature discussion on the World Product Mandate, argues that in practical terms, the traditional definition of the concept (subsidiary responsibility for export markets and product renewal) barely distinguishes such subsidiaries from other arrangements, notably rationalisation-integration, which is an international labour division within the MNC. Instead, Birkinshaw (1996) suggests, “specialization, and hence decision making authority, over a broad array of interconnected functions including business management” (p.470) – that is, transferring the focus from results to internal processes and functions – is a better definition for the World Product Mandate.

3.3 The internationalisation process of the firm Johanson and Vahlne (1977) outlined a model for the gradual internationalisation of enterprises, considered the ‘normal’ way to internationalise. Based on the experience of the internationalisation of Swedish companies (Sandik, Atlas Copco, Facit and Volvo), the authors conclude that firms will internationalise gradually in small steps, preferably making large investments in the first few experiences. Johanson and Vahlne (1977) classified the companies relative to a given country as no activity in that country (‘n’), exporting through an agent (‘a’), having a sales subsidiary (‘s’), or having a production subsidiary (‘p’). Table 1 shows the internationalisation pattern of the Swedish companies that originated the model.

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Table 1

Patterns of internationalisation for selected Swedish firms

Firm/pattern

Sales subsidiary n→s

a→s

Sandvik

2

18

Atlas copco

3

Facit

n→p

Production subsidiary a→p

s→p

0

2

13

14

0

3

9

0

14

0

2

3

Volvo

2

10

0

2

3

Total

7

56

0

9

28

Notes: ‘n’ denotes no regular export activity, ‘a’ denotes selling via an agent, ‘s’ denotes sales subsidiary, ‘p’ denotes production subsidiary, and an arrow denotes change from one state to another. Source: Johanson and Vahlne (1977, p.25)

The authors observed the evolution of the subsidiaries as follows: seven cases of subsidiaries evolving from ‘n’ to ‘s’, 56 cases from ‘a’ to ‘s’, zero cases from ‘n’ to ‘p’, nine cases from ‘a’ to ‘p’ and 28 cases of ‘s’ to ‘p’ evolution. These data support the idea that companies will prefer a sequence such as ‘n’ to ‘a’ to ‘s’ to ‘p’, first establishing a sales representative (agent), then a commercial subsidiary, and then a production subsidiary. This order is now considered the ‘normal’ process of internationalisation of a company, against which actual internationalisation processes are compared. This model of gradual internationalisation is widely known as the Uppsala model, and we aim to derive a model of internationalisation for the automotive industry from it. For this purpose, it is interesting to highlight two aspects of the Uppsala model. First, the evolution of subsidiaries does not go beyond the production stage. The model does not go beyond this point, and the subsidiaries it analyses are not involved in innovation. Therefore, as suggested by the subsidiary role evolution discussed above, we put forward the following proposition: P1

The process of internationalisation of a company after the establishment of production subsidiaries continues as a gradual development of the innovation function in the subsidiary and the related subsidiary’s corporate responsibility.

Second, not all sales subsidiaries evolve to production subsidiaries in the same company, and a company with production subsidiaries may be considered ‘more developed’ in international terms than one that has only sales subsidiaries. In other words, the degree of internationalisation of a company is determined by the degree of internationalisation of its most developed subsidiary. Similarly, we may consider a second proposition: P2

The degree of internationalisation of a multinational firm is the degree of development of its most advanced subsidiary.

Therefore, if we consider the presence of innovation, in varying degrees, as a changing role of the subsidiary, we can relate this model to models of the subsidiary role, as seen above. The production function of the subsidiary begins with the role of the local implementer, which can develop into the specialised contributor, global mandate, UoE or CoE, enhancing the internationalisation of the firm through the decentralisation of innovation functions.


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3.4 Internationalisation of the automobile industry The automobile industry was internationalised early. Ford and GM established facilities outside the USA within the first decade of the twentieth century in an attempt to scale their models in overseas markets. In the early stages of the internationalisation process, the ‘normal’ method of automotive industry internationalisation is very close to Johanson and Vahlne’s model. However, because the car is very complex, expensive and bulky, the opportunity exists to establish intermediate steps. Typically, the automotive industry begins internationalisation with the export of fully assembled vehicles (CBU, completely built-up vehicles), then it establishes a small workshop for assembling and exporting large pre-prepared sets, or semi-dismantled vehicles (SKD, semi-knocked-down vehicles). With the experience gained by the workshop, the next step is to export parts to complete the assembly of the vehicle, (CKD, completely knocked-down vehicles). This strategy has allowed automakers to settle in countries with no tradition or infrastructure in the automotive industry. The process fostered the development of local suppliers, and the next steps relate to the progressively greater degree of participation of local suppliers in the assembly of the vehicle (Freyssenet et al., 2003b; Amatucci and Bernardes, 2009a). The next step is the development of local suppliers to increase the domestic content of the vehicle. Having come very close to 100% in most countries where subsidiaries were established in the automotive sector, this index dropped back to levels around 40% or 50% with the internationalisation of suppliers. This enhances the internationalisation of the industry with global sourcing for its parts. Internationally, the main shift in the auto industry during the 1990s was the perception that the globalisation of products should be managed vis-à-vis localisation needs (Freyssenet et al., 2003a, 2003b). Models designed in a standardised way to be marketed worldwide were not performing well. Localisation pressures in this industry are intense, and figures show that vehicles adapted to local conditions boost sales levels (Carvalho, 2005). This phenomenon, along with the development of engineering capabilities in foreign subsidiaries, creates the opportunity to internationalise nobler functions such as PD (Consoni and Quadros, 2006) and to create CoE with global or regional mandates (Amatucci and Bernardes, 2009b). Nevertheless, Jetin (2003) shows that the automobile industry is currently more regional than global. Notwithstanding the industry concentration in the mid-1980s (in 1985, three companies produced 42.2% of the world’s total vehicles; in 1990, six companies produced more than 65%), the need for local models and the difficulties integrating engineering teams scattered worldwide prevents automakers from profiting from scale, and the competition becomes regional instead of being a global oligopoly. The measures generally associated with the globalisation or regionalisation of the firm are its revenues throughout the world as a rate of the industry presence in these regions (Lasserre, 2003). Usually, the regions are the USA, Europe, Japan (and sometimes Asia), and the ‘rest of the world’. The more of a firm’s revenues that come from regions outside its ‘origin’ region, the more global it is. Table 2 shows the sales proportion of selected world automakers in each of those regions. Note that the figures show sales including exports and foreign production.

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Table 2

Commercial revenues of selected automakers by world region

Automaker Fiat group (1995-9) Ford (1990-9) GM (1990-9) Honda (1997-9) Renault (1995-9) Toyota (1997-9) VW (1995-9) World market (2000)(iv)

Sales NAFTA

Sales Europe

6.8% 69.8% 75.4% 50.1% 10.0% 36.6% 10.4% 28.0%

79.5%(i) 23.7% 19.2% 12.0% 85.0% 9.0% 74.2% 39.1%

Sales Asia/Pacific

Sales rest of the world

n.a. 3.5% 3%

11.8%(ii) 3% 3% 28.4%(iii)

3.5%

n.a. (iii)

42.5% 4.1% 18.3%

9.8%(ii) 14.6%

Notes: (i)1999,. (ii)South America, (iii)Asia/Pacific plus rest of the world, (iv)family cars and light trucks Source: Jetin (2003, pp.18–20) and Lasserre (2003, p.39)

It can be observed that, with exception of Honda, which has half of its sales in the US, all automakers depend heavily on their regions of origin. Individual automakers’ sales do not follow the world market sales distribution. Industries in this condition are generally considered regional by the International Business criteria. Pressure for localisation and obstacles to the integration of the subsidiaries from different regions, while preventing oligopolistic behaviour, also counter Porter’s (1986) criteria for global industries.

3.5 PD in the Brazilian auto industry The literature agrees that capability development for PD in the Brazilian auto industry’s subsidiaries was reached by a gradual learning process because of the necessity of local adaptation of the products/services. This process was supported by several factors: a local market important to the auto industry; host government policies that specifically targeted this industry; maturing of the productive supply chain, which currently offers international suppliers capable of co-development and even innovations; and an adequate infrastructure for engineering education in Brazil (Amatucci and Bernardes, 2008, 2009b; Consoni and Quadros, 2006; Cauchick Miguel, 2006; Dias and Salerno, 2004; Quadros and Consoni, 2009; Queiroz and Carvalho, 2005). Consoni and Quadros (2006) classify Brazilian automaker subsidiaries in the local development process into two large groups: those who adopt a product policy of centralisation and those who adopt a product policy of decentralisation. The latter may be divided further into more decentralised and less decentralised. These authors identify the first group as the new players, automakers who came to Brazil after the 1990s, such as Toyota (family cars), Peugeot, Citroën and Renault. On the other hand, the ‘traditional’ Brazilian assemblers, Fiat, VWB, GMB and Ford (present in the country for approximately 30, 50, 80 and 90 years, respectively), tend to show decentralised product strategies, with GM and Fiat being more decentralised and VW and Ford being less decentralised. Dias and Salerno (2004) also relate the PD in the subsidiary to the decentralisation of activities in the multinational corporation. According to these authors, global PD in the auto industry did not bring the expected results; currently, the ‘global’ model is adapted to specific local conditions of the market in which the cars are commercialised. There are


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limitations to the diversity that can be developed centrally, so enterprises of this industry adopt some degree of decentralisation in PD. In addition to decentralisation, the PD structure involves discussing the creation of centres of development offshore as well as a competition among subsidiaries and between subsidiaries and headquarters for hosting PD. According to Dias and Salerno (2004), the role of headquarters is to design a strategy capable of integrating subsidiaries in the corporate structure of PD.

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Results

4.1 Ford Ford was practically born international. The company already had facilities in Canada in 1909, in the UK (Manchester, England) in 1911, and until 1930, it had 14 plants in 14 countries (Jones et al., 2004). In 1919, Edsel Ford, the son of the founder, took the chair of the company. That same year, the automaker’s Brazilian subsidiary was approved by the board with an initial investment of $25,000.00 from the Argentinian subsidiary, where Ford had been present with a sale subsidiary since 1914 and as a manufacturer since 1917. The Brazilian venture began in Sao Paulo, where twelve employees used SKD and CKD systems to assemble the Model T, created in 1908, and the TT truck model, created in 1917. In 1921, the first plant designed to function as an assembly line was inaugurated, also in Sao Paulo. By 1923, it had 124 employees and the capacity to produce 4,700 cars and 360 tractors per year (Ford, 2007). As part of the development policy of President Juscelino Kubitschek de Oliveira’s government, at the end of World War II the company built its plant in Ipiranga. The plant was completed in 1952. Ford continued bringing projects from the US to manufacture in Brazil, with a gradual increase in the index of nationalisation of parts. In the late 1980s, prompted by the poor performance of the economy and the institutional conditions (accelerating inflation, import ban, slowdown in the automobile market), the company joined Volkswagen in the joint venture Autolatina. About ten years later, Ford ended the joint venture with a weakened engineering area and no models to market in the country, unlike VW, who had been in charge of the Autolatina engineering. VW therefore left the alliance better equipped for PD, whereas Ford did not have competitive products. Ford was forced to resort to imports to keep its dealer network alive until the arrival of the global Ka model, which was adapted to the Brazilian market from the global Fiesta platform. The Ka and Fiesta were embedded in Ford’s globalisation policy, known as Ford 2000, the first globalised planning among automakers (Bordenave and Lung, 2003; Consoni and Quadros, 2006; Carvalho, 2005). This policy was a reaction by the US automaker to the movement toward the unification of markets, especially in Europe. The policy consisted of integrating and centralising functions, reducing the ‘duplication’ of activities, and wiping the number of platforms. Far from strengthening the subsidiary’s engineering area, however, this strategic decision further restricted their participation, causing disinvestment in relation to the earlier stages of this function in Brazil. According

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to Consoni and Quadros (2006), the engineering area of the Brazilian subsidiary had only 120 engineers in 2000, the lowest among the four traditional Brazilian automakers. If participation in adapting the global Focus on the Brazilian market has been limited to less complex tasks, participation in the development of a model designed specifically for the Brazilian market, the Amazon project has been even smaller. Even in the production of the derivative Courier pickup on the Fiesta platform, Brazilian participation was low. The crossover Ecosport model on the same platform was developed specifically for Brazil by the European vehicle centre, also with little monitoring of Brazilian engineering.

4.2 General Motors do Brasil In 1925, soon after Ford, GM arrived in Brazil in the same way: with a small CKD and SKD assembly plant for vehicles. The company recognised early that the local market and the operating conditions required adjustments to the designs coming first from Detroit and later from the German company Opel, acquired by GM during the post-war period. By the 1970s, GMB began to distinguish itself for its competence in adapting its models to local conditions. GMB received the project for the small two-door Chevette. With its previous sales success and experience in manufacturing the car, in the same decade the team advanced beyond simply adapting the project (known as the ‘tropicalisation’ of the vehicle) and acquired the technical skills to design local derivatives based on models originally designed by Opel. For example, GMB developed a four-door version of the Chevette and, in the 1980s, a hatchback version, a small station wagon (the Marajo) and the medium pickup ‘Chevy 500’. In the 1990s, the opening of the Brazilian market and manufacturers’ difficulties with global models contributed to the development of local engineering and model adaptations. At this time, the Corsa global model, which arrived in Brazil as a sedan, generated local derivatives (hatchback, station wagon and pickup). The same situation occurred with the Astra, which was designed as a hatchback and was expanded to the sedan version – perhaps the most famous derivative ever, the Vectra, which achieved such success that the German GM commissioned a vehicle project adapted to European conditions for its manufacture. In the middle of the 1990s, GMB launched the Blue Macaw project, which resulted in the ‘Celta’ model. The PD team was involved in all stages of this model from the beginning (Consoni and Quadros, 2006). Finally, during the project that created the compact minivan Meriva, launched in 1999 with manufacturing begun in August 2002 (Brazil) and March 2003 (Zaragoza, Spain), GMB’s role was important. The Brazilian subsidiary proposed the concept, which complied with European requirements, and the Brazilian team led the development of the vehicle in conjunction with the German team. The Meriva used parts of the Corsa platform and parts of the Astra platform, leading to considerable discussion about the true character of this innovation. However, in the case of the Sloan model, innovation occurred through shared platforms. A new platform project is tremendously expensive and requires world-scale financial planning years in advance. Nevertheless, the consensus is that the model resulted in significant innovations compared to previous models. The result for the subsidiary was positive. During the worldwide restructuring in 2008 (because of the company’s crisis of an accumulated loss of $80 billion since 2005),


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GMB leapt forward in its position within the corporation and its relationship with headquarters and other subsidiaries. GMB became a global centre for the development of medium-sized pickups regardless of their production or marketing in the local market. The duties of the engineering team of the Brazilian subsidiary were divided between the local market and high-tech services for the corporation (e.g., reengineering the Hummer for right-sided wheel markets, which is not the case in Brazil), setting the engineering of the Brazilian subsidiary projects quite apart from the other local business functions, particularly production and marketing. This situation characterised the emancipation of the engineering function from other productive functions.

4.3 Volkswagen do Brasil The first Brazilian plant opened in 1959 (Anchieta) and was remodelled in 2002 (Nova Anchieta plant). VWB began assembling the 1,200 Sedan and Kombi (Bulli) models under the CKD system. This assembly plant in Brazil, which preceded the Anchieta plant, was the first direct foreign investment made by VW, in 1953. This occurred under the auspices of a committee created by the Kubitschek administration to boost the country’s industrialisation, the GEIA (Executive Group of the Automotive Industry). In 1976, VWB opened a factory in Taubaté, with moulded parts, stampings and upholstery. The serial manufacture of cars began in 1980 with the Gol. In the 1990s, the company set up an innovative plant in Resende (RJ) for the manufacture of trucks, a just-in-time plant with Tier 1 suppliers ‘embedded’ in the assembly line of VW, and an engine plant in São Carlos in 1996. In 1999, the factory in São José dos (PR), one of the most modern plants in the world, was established. Suppliers operated within the producing plant (14 companies). The factory included technologies such as water-based painting and laser welding and maintained technological cooperation agreements with universities in the region. During the 1980s, the company entered a joint venture with Ford, called Autolatina. In this period, VWB significantly developed its engineering capacity because the mother company was reluctant to send original designs to be shared with its US rival. VWB previously had some degree of training for the development of derivatives with the SP2, a national sports car developed by VWB almost forty years earlier that had a good market and was praised by headquarters. With the end of the joint venture, however, the local subsidiary returned to the status of an adapter of global models. In the late 1990s, the company responded to new entrants with significant investments in modernising the Anchieta plant (about two billion euros, according to interviews), preparing it for the manufacture of the global model Polo. However, the global model was found to be expensive for the local market. Therefore, the capacity of the subsidiary ran idle, and its performance was at risk. The Brazilian subsidiary then took the initiative to develop a model aimed at emerging markets as a way to seize the previously developed competences and the modernised facilities present in Brazil. It projected and produced a compact hatchback vehicle with an elevated ‘H-point’ (‘King-of-the-Road’, similar to the Meriva), and the Designed Around the Passenger (DAP) design technology on the Polo platform. It held several provisional designations (such as VW Tupi) before becoming the Fox, as it is known today. The car was launched in 2003, and in the same year, VWB engineering led the development of a sedan version for the Polo model (Consoni and Quadros, 2006).

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The process of marketing research that set out the Fox’s main attributes led to innovations, and the product soon became a best seller, occupying an important position in worldwide sales of the VW group (the fifth-best selling VW AG worldwide car, including all brands, in 2007). With this balance more or less established, the subsidiary was able to make a leap in quality. In the international restructuring of the 1990s, which relocated the logistics and organisation of production (Mariotto, 2003), the Brazilian subsidiary took a new role in VW’s global engineering: developing cars for the popular markets in the international region it serves.

4.4 Fiat Automoveis After dealing with the state government of Minas Gerais since 1969, Fiat concluded its direct investment in Brazil in 1973 and built a large plant in Betim, where it is still located. Fiat began production of its 147 model, which was derived from the Italian 127, a popular (entry-level) and fordist car. The original (127) model earned the ‘auto of the year’ prise in Italy in 1972, and it was a huge sales success in Europe. Therefore, notwithstanding the fact that the company was beginning with an entry-level model, it was bringing its best technology to Brazil. During the second half of the 1970s and throughout the 1980s, Fiat Automoveis adapted global models to the Brazilian environment (both market and operational scenarios) and developed derivatives of the global models with increasing participation from local engineering. From the basic 147, it developed a small pickup in 1978 and the (small) sedan ‘Oggi’ in 1983. From the global ‘Uno’, the Brazilian subsidiary developed derivatives such as a premium sedan in 1985 and the station wagon ‘Elba’ in 1986 (Calmon, 2006; Garcia and Ladeira, 1998). Following the Brazilian trend towards popular cars, Fiat launched a very successful model, the ‘Uno Mille’, benefiting from government tax incentives for one-litre engines. Throughout its history, Fiat had learned to deal with these kinds of restrictions because of Mussolini’s laws in the early 1930s prohibiting luxury cars. Uno Mille allowed Fiat to lead the Brazilian market for the first time in 2001, ahead of the pioneers – o especially VW, which had both tradition and popular models. From 2001, Fiat and VW took their places in sales leadership with their respective entry-level cars. In the 1990s, Fiat (like most automakers) put forward a global platform, the 178 project (Palio in Brazil). This project integrated the participation of engineers and technicians of several subsidiaries with the Italian team, including subsidiaries from Brazil, Argentina and Poland (Volpato, 2003). According to Brazilian executives, Fiat do Brasil sent more than 200 engineers to Italy, and the project, although hosted in Europe, was developed almost ‘half and half’ between Brazil and Italy. We can understand this as an involvement of the subsidiary in the global PD, fostering a ‘glocalisation’ of the model, which effectively led to local sales success (whereas other brands’ global vehicles in the same period resulted in failure and even abandonment of the global model strategy). Currently (2009), the 178 project, both in its basic version and in the form of derivatives such as a sedan (Siena) and a station wagon (Palio Weekend), is manufactured and marketed by Fiat subsidiaries in Brazil, Poland, Argentina, South Africa, Morocco, Turkey and India and, through other arrangements (licensing, joint ventures, etc.), in


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China, Russia and Egypt (Volpato, 2003). Another derivative designed in Brazil was manufactured and marketed in Brazil and in South Africa: the Strada, a small pickup. Soon after Fiat do Brasil’s role in the development of Project 178, a different edition of the models was developed, designed in Brazil around the concept of Adventure (the name of the line). From the production of a crossover (the Palio Adventure, derived from the station wagon version of Project 178), the concept spread not only to other derivatives of the basic model (such as a version of the Strada Adventure, a midsize pickup derived from the 178) but also models for other platforms, such as the Idea Adventure (a minivan with its own platform) and Doblô Adventure (Furgovan), a global model of Fiat that also had its own platform. In 2008, Fiat do Brasil was the second development centre of the company. After participating in Project 178 when the Brazilian development team was not yet fully qualified in terms of personnel and facilities, its engineering grew. From about 150 engineers in 1999 (Consoni and Quadros, 2006), it grew to 450 at the end of 2005, 650 in late 2007, and was forecasted to have between 800 and 850 engineers by the end of 2008. The development facilities and product testing had computer simulation, prototyping, and laboratory crash-test construction abilities, and it even had a single testing electromagnetic resistance lab, unparalleled in Europe, to which European prototypes were sent. The Brazilian subsidiary, therefore, gradually acquired the more sophisticated functions of marketing and manufacturing to local, regional and global markets (the latter two through exports) and adapting global models. It reached the level of its mother company’s partner in developing models for the world portfolio. Therefore, the Brazilian subsidiary of the Italian automaker now occupies the role of headquarters’ partner in the integrated global PD. This role reflects the degree of autonomy possible within the profit strategy and the production process adopted by the company (Sloan).

4.5 Renault Renault was born in France in 1898, became a limited company in 1922, and was almost destroyed during World War II. It was then nationalised by the reconstruction government in 1945. It remained under the direction of the state until the late 1990s, when the government opened the capital assets of the company to the public and gradually decreased its participation, although it maintains some shares (Mariotto, 2003). Until the Second World War, the company existed on domestic and close European markets. It passed through several unsuccessful attempts at internationalisation after World War II, but state ownership in a reconstruction government has placed severe limitations on the conduct of business: the company’s inability to retain and reinvest any profit, the obligation to repatriate all profits made abroad, and the forced segmentation of popular models in the fordist fashion for the internal market. During the better financial conditions of the 1960s, the company adopted the Sloan model of production, diversifying the models around a few common platforms as allowed by the new distribution of income in the country. The company continued with this profitable strategy until the 1990s, when it adopted a strategy of innovation and flexibility and a ‘hondist’ production model (Freyssenet, 2003).

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In the 1990s, Renault resumed its internationalisation initiatives with the acquisition of Dacia in East Europe, Nissan in Japan, Korea’s Samsung (car division), and important participation in Volvo. It also directly invested in Brazil and Russia, but it remained a very regional business (Jetin, 2003; Mariotto, 2003). According to Consoni and Quadros (2006), the company is among the newcomers in Brazil with a PD policy (or strategy) of centralisation. The situation, however, is changing. We interviewed executives from Renault in Brazil in the midst of this change. For instance, the interview with the chief designer took place while the design centre was still under construction, at Rua Gabriel Monteiro da Silva (a design and fashion cluster) in São Paulo. All the other interviews took place at the main plant, located in the neighbouring state of Paraná. From the experience of developing the Sandero compact for the local market and other emerging markets in conjunction with design centres in Spain and an engineering centre in France, the Brazilian subsidiary enabled a Brazilian development team with future autonomy in this area. In Paraná, the French executive responsible for engineering in Brazil commanded a workforce whose task was to build an engineering centre near the plants. The Sandero was an initiative of the board of Brazilian products, which prepared the business plan for the product and sought technical support in Europe. After an internal search among the units with an emphasis on the characteristics of the market (“here, the car has to be beautiful” – from the interview with the Chief of Engineering in Paraná), the Spanish subsidiary won the design (style) for the vehicle. The engineering of the car was developed in France with the participation of part of the Brazilian team. According to the Chief of Engineering executive, the objective was to have a team of engineers (with a target of 300 in 2008 and 600 in 2009) involved in the development of projects in partnership with headquarters, “the way the big four already do”. The car was launched in the Brazilian market in December 2007 under the aegis of Renault and in Eastern Europe in March 2009 with the Romanian Dacia brand. This process means a breakthrough for the subsidiary towards a position similar to Fiat’s partnership with the mother company in a move toward integrated global development. We had previously seen Fiat at the stage where Renault is today. However, although it has grown dramatically in the past eight years, the relative importance of the French subsidiary in their own group is much smaller than that of its Italian colleague. Although it remained a strong and European company (80.2% of sales in 2008 were made in Europe and Eastern Europe), the company nearly doubled its sales, from 1,167,000 vehicles sold worldwide in 2000 to 2,382,230 in 2008. Brazil had a share of 2.8% in 2000 and 5.1% in 2008, also doubling its relative share (Mariotto, 2003; ANFAVEA, 2008).

5

Analysis

If we place the subsidiaries on a continuum ranging from CoE on one side (including a global mandate to develop products but with a high contribution to the corporation)


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and implementer site with low international contribution on the other end, they would appear in the following order: GMB, VWB, Fiat, Ford and Renault. GMB established itself as a centre of excellence contributing high-tech services for the company and received a comprehensive mandate for small- and medium-sized pickups. VWB received a regional mandate for popular cars for emerging markets (Amatucci and Bernardes, 2009b). Fiat holds the key role of mother company’s partner for integrated global development, a concept that does not fit Birkinshaw and Morrison’s (1995) typology and is part of the contribution of this study. As the second-largest unit after headquarters, Fiat Automoveis has unique capabilities in certain engineering areas (such as electromagnetic interference testing) and initiative in PD, although it has not received formal corporate product responsibilities. Ford historically regresses in its engineering capacity because of its history in Autolatina and the centralised globalisation strategy of its headquarters. The task of its engineering team is to recover lost capacity. The crossover Ecosport is a step in that direction. Renault is a subsidiary in formation, and the movement towards engineering and design centres’ assembly promises an important international role in the future. Nevertheless, it needs assistance from headquarters and its sister companies to launch a new product. Table 3 summarises the role of the subsidiaries, linking them with the explanatory internationalisation stages. These stages are presented in Table 4. The order of the continuum differs from Consoni and Quadros’ (2006) ‘order’ of centralisation and decentralisation: first, because the concepts of a global mandate and a regional mandate do not necessarily imply autonomy, but rather high or low technical dependency from the mother company regarding the product and the ability to contribute to the group so that the corporation can function organically, and second, because Renault’s situation has evolved since that publication. Therefore, the descriptions of the cases of the five automakers lead us to differences that can be placed in a continuum reflecting different stages of subsidiary maturity. If we consider the trajectory that the corporations traced to reach this degree of maturity in their Brazilian subsidiaries, we have a vertical dimension that may be presented in a model of the industry’s internationalisation process (Table 4). The model expands Johanson and Vahlne’s (1977) internationalisation process steps with the technical characteristics of auto industry expansion (CKD, SKD, nationalisation of suppliers, etc.) and beyond the manufacturing subsidiary level, using the subsidiary theory to explain the evolution of the MNC’s foreign presence. The final steps may be tested with other types of business in future research. For the automobile industry, we may propose the following: P3

The automobile industry was internationalised through a gradual process of ten stages of increasing complexity, as outlined in Table 4.

The subsidiary evolution occurs with the assignment of higher value-added functions (such as PD) and corporate responsibility, which extrapolate local market affairs. It is part of the internationalisation of the multinational corporation, representing an advance over centralised structure models.

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Table 3

Different roles of the subsidiaries, internationalisation stages and evidence from the interviews Corporate subsidiary role*

Internationalisation stage (from Table 4)

GM

Small and medium pick-up design, high-value added corporate services.

X – CoE

“We are responsible by the construction of a platform from the entire world, and then our engineering group may be in or out of the country. We have an engineering group working in the USA to develop the engineering part [of a vehicle]. They are settled there to develop a product that will be produced in South America and marketed in Europe. We have several projects which we are developing for cars which will not be produced here, but produced and marketed out of Brazil.” (Brazilian Chief Eng.)

VW

Low-cost small car design.

IX – global (regional) product mandate

“We are competitive in entry-level cars (ELC). We showed it well with our cars Gol and Voyage; we are competent in making highquality and comfortable ELCs (...) And our HQ is very demanding too; they are observing who in the world has competence to make ELCs: Brazil! This is why we have nowadays (...) the second largest development team in VW group.” (President of VWB)

FIAT

HQ partnership with heavy engineering.

VIII – UoE

“They [Italy] don’t have know-how on suspension (...) for a heavy mission profile. They develop cars with vertical solicitation from 3 to 5 g maximum. Here, we develop up to 7 g, due to holes [on the roads] (...). Here we have know-how – people, calculations, testing, what represents a world centre of excellence. This is one of our recognised issues (...) We participate in the suspension of a 4x4 Alpha Romeo... [Panda, which will not be marketed in Brazil].” (Italian Chief Eng. working in Brazil)

Company

Example

Ford

VII – Global manufacturing cars adapted from headquarters’ for local projects ‘localised’ production and marketing. with increasing local subsidiary participation

“These products we have in South America, we constructed here, were originally designed and developed in Europe. (...) I think we have ‘localised’ them, and for now, Ford Europe and the rest of the world has moved on with something else, a new platform, and now we still have vision on the market. The EcoSport is one of our successes, but it’s modified from the Fiesta platform.” (Vietnamese Chief. Eng. working in Brazil)

Renault

Developing VI – manufacturing engineering from headquarters’ capacity for projects ‘localised’ future charter. by headquarters

“We are going to have the same history of the Brazilian ‘big four’ acting like in the Sandero case: participating in the development since the beginning, but now we can’t do 100% of this, we just participate.” (French Chief Eng. working in Brazil)

Note: *In addition to regional production, marketing and exporting responsibilities.

1890–1910

CBU export

SKD assembly shop

CKD assembly shop

CKD assembly shop with increasing local supply of parts

Autonomous manufacturing from headquarters’ standardised projects

Manufacturing from headquarters’ projects “localised” by headquarters

Manufacturing from headquarters’ projects “localised” with increasing local subsidiary participation

Units of excellence

World product mandate

Centres of excellence

I

II

III

IV

V

VI

VII

VIII

IX

X

2000–

2000–

1990–2000

1990–2000

1980–1990

1950–1980

1920–1950

Production characteristic and context

Some subsidiaries with innovation competences and influence over other subsidiaries earn the status of CoE.

Some UoE gain global mandates for product development and other functions.

Some units develop excellence in the product and process development to local performance.

The traditional centres of design and product development of the automakers cannot handle all international adaptations. Subsidiaries take the initiative to design derivatives and complete models.

The global car is found to be not competitive. Emerging markets gain importance in sales of automakers. Models adapted to local market (not just the objective conditions) sell more.

Autonomy in the manufacture of models designed in the array. Administration of the international life cycle of the product. Export of models manufactured in the subsidiary (including the country of origin).

Assembly parts are increasingly “nationalised” (localised) until very close to 100%. Suppliers’ development. Specialisation of the workforce.

Vehicles are exported completely disassembled (100% of parts are exported) and assembled in a local shop. Local workforce with some technical skills. There is no local supply industry.

Vehicles are exported semi-disassembled and assembled in a local shop. Local workforce with low skill levels. There is no local supply industry.

Vehicles are exported completely assembled.

Product follows local expertise characteristics and gains “preparation” (generalisation in parts characteristics) to receive adaptations to be manufactured

Follows local expertise characteristics.

Adapted to the local market and some regions with similar characteristics.

Adapted to the local market.

Standardised adjustments required to meet the requirements of local operation: land, law, limitation of suppliers.

Basically standard, with minor adjustments to replacement of parts imported for local parts.

Standardised.

Product characteristic

Internationalisation motive

Strategy of the subsidiaries, the profitability of the decentralised initiatives and the influence of the subsidiary

International rationalisation, scale and competitiveness seeking.

Subsidiary competence development.

Inability to make international adjustments centrally.

Increased importance of emerging markets. Increase in sales of "localised" vehicles.

Lowering the cost of production of non-innovative models, on which no one can charge premium price and which are already in the process of price competition.

Meet the demands of the host country government. Secondly, lowering the cost of the product.

Overcome market imperfections (tariff and non-tariff).

Sales

Table 4

1900–1920

Approximate period

Internationalisation step

The internationalisation of the automobile industry 71

A ten-step model for the internationalisation of the auto industry.

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For a given company, we conclude that the role of innovative subsidiaries in the automotive industry is a function of the degree of development of the international automaker. Therefore, P4

Risa = f(I) where Risa is the role of the innovative subsidiary of the auto industry, as described in Table 3, and I is the degree of internationalisation of the automaker, as in the model presented in Table 4.

6

Final remarks

This study aimed to describe and explain the roles of corporate subsidiaries of the automobile industry in Brazil. It departed from the study by Amatucci and Bernardes (2008), which suggested that the difference between the roles of corporate subsidiaries was related to the degree of internationalisation of companies. This study took an analytical sample of five subsidiaries to qualitatively explain the roles played by them. We proposed a model of gradual internationalisation for the automotive sector, which was developed based on Johanson and Vahlne’s (1977) model of internationalisation and the further developments in subsidiary theory (Birkinshaw and Morrison, 1995; Frost et al., 2002), adding the specific intermediate steps of the internationalisation of the automotive industry. This model is a continuum that ranges from exports to the establishment of a CoE. The construction of this model corresponds to Propositions 1, 2 and 3. The conclusions derived from the two study cases by Amatucci and Bernardes (2008) fit as part of an evolutionary spectrum of the roles of subsidiaries, which are intimately linked to the stage of internationalisation of the multinational firm. Relating the degree of internationalisation of the companies studied with their current roles in the corporation, we arrive at the relationship shown in Proposition 4. Contributions of this study are the internationalisation model of the automobile (shown in Table 4) and the relationship between the role of the subsidiary and the degree of the company’s internationalisation (Proposition 4). These contributions establish a hypothesis of a causal variable to explain the change in the behaviour of subsidiaries of the same sector in the same host country. In addition to the model and the causal proposition, the study introduced the concept of headquarters’ partner in global integrated development, which describes the contributive behaviour of the subsidiary in the development of integrated products to serve the regions of homogeneous demand, as inferred from the case of Fiat Automoveis. As for practical implications, the executives of the subsidiaries may understand the expected developmental course for their unit, focusing on their actions to move the unit to a more favourable position. Some possible actions in this direction include improving the quality of the relationship with the parent, seeking entrepreneurial orientation, and seeking support from the host government.


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