The example of the automobile industry
ECON 3730 –Economic Geography
William H. Warren
When I think of Globalization, I always have the car companies in mind as pioneers in many aspects of globalizing. This paper is going to examine the reasons why automobile companies are shifting production from Germany in particular to foreign countries. I will also compare the major locations for manufacturing, China and Eastern Europe, and show how those regions qualify for as production locations. Reasons for shifting production to a foreign country:
The relocation of production facilities to foreign countries is a very costly and time consuming endeavor, however more and more companies take this crucial step, which can have several reasons. But why is the trend going more and more away from domestic production? The sales figures in many western countries such as Germany and the US are pointing down. This can be due to economic reasons such as stagnating levels of income, with a high inflation at the same time. Other factors include that people can drive their cars longer as quality goes up and cars last longer. The cars manufactured today last longer and the streets are getting better which can make a major impact. In Germany the average durability of cars rose from 7 years in 1991 to 11, 9 years in 2006 (automotiveworld, 2006). Clearly every country has to be examined individually, as there are too many unique traits defining each country. For Germany for example, the typical “German canniness” in times of recession or stagnation of the economy plays a major role when looking at sales figures. Simultaneously the competition in the car industry is getting more intense. The Chinese manufacturer Jiangling, for example, came out with a 17,000 $ SUV called “Landwind” in 2006, which added a major player to the car industry (Depner 2006). The car manufacturers try to react to those trends with expanding to new markets. Emerging markets such as China and other parts of Asia as well as Eastern Europe were a major target of this expansion. Another motive for manufacturing abroad are the various tariffs and quotas which sometimes makes it very costly to export to those particular countries applying tariffs. By manufacturing abroad, the companies avoid those barriers and therefore stay more competitive. Why China and Eastern Europe?
Why some regions are more suitable for car production than others, is a main question when looking at aspects of globalization. Ernst & Young, one of the world's leading professional services organizations, did a study on which aspects are crucial for the choice of location in 2004. Overall production cost was the number one on the list followed by labor cost and the qualification of the local work force. However, there many more aspects which have to be taken into consideration. Proximity to major markets, regional infrastructure, political terms and availability of resources are just some factors which cannot be overseen. In Germany for instance the production cost is particularly expensive because of the high labor cost and the high real estate prices. Looking at Germany, where labor and production costs are extremely high, shifting production can be extremely beneficial. Along with the obvious benefits there are some other factors which made the decision of outsourcing even easier. For example most of the lower income countries do not have as strict environmental regulations as Germany does, which makes a production a little bit cheaper again (Depner, 2006). Concluding from Ernst & Young study, the best markets for production are the ones which have low production and labor cost in addition to a high qualification, motivation and flexibility of the work force. Approximately every third German supplier is operating in Eastern Europe, and every sixth is in China by 2008 (wikipedia, 2007). Furthermore 39% of global companies are planning to outsource in one of...