European production chains : the new geography of automotive

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Abstract:

Automotive production is one of the main drivers of intra-EU trade in intermediates. In latest years, EU automotive GVCs became more and more geographically dispersed and integrated, also due to Eastward EU enlargement.

The present paper aims at describing the evolution of such GVCs from 2000 to 2014, singling out structural change in their geographical-sectoral composition and trying to assess the consequences of such an evolution on national economic systems currently involved.

Answer to these questions is given by performing an Input Output analysis based on the World Input Output Database (WIOD), a multi-regional model of world trade. Computing internationally vertically integrated sectors leads to identifying a set of indicators of labour intensity of the different stages and of diversity of national participation to automotive GVCs.

The analysis performed clarified the relevance of automotive production in EU GVCs. In fact, this manufacturing activity is by far the one triggering the highest proportion of EU employment, in all countries, with an inter-industry networks deploying all throughout Europe – and beyond it.

Eight GVCs, with their heads in as many countries, emerged as being relevant for EU employment. Five of them have their head in western EU – Germany, France, GBR, Spain, Belgium – and three in eastern Europe – Czech Republic, Hungary and Slovakia. Of course, the most important automotive GVC is the one headed by Germany, which is by far the country triggering EU production and employment to the greatest extent.

Besides country-specific trends, our analysis stressed some generalised phenomena which characterised the geographical distribution of production stages across EU and the rest of the World.

The Automotive GVC with its head in Germany saw a strong reduction in the participation of Germany itself, since a considerable amount of labour intensive production activities have been moved abroad. In particular, the weight of eastern EU countries increased with respect to first tier supplies. With EU enlargements, these countries started supplying automotive components which in their turn were the result of assembling less specialised parts coming from countries located at the periphery of the EU, such as Turkey. We can conclude that Germany resorted to western EU countries – such as Italy – for high quality componens (e.g. dashboards for Porsche), while shifting the remaining purchases to the East.

Besides country-specific conclusions, some more general trends emerged.

First of all, eastern EU countries specialised in the production and provision of first-tier, low labour intensive automotive components, with a parallel despecialisation in almost all other more basic industries (basic metals, chemicals, fabricated metals, rubber plastic, etc). Far from being beneficial for the economic system of the countries we are talking about, this strong specialisation entails a strong dependency on the heads of GVCs as concerns investment decisions (i.e. capital accumulation) and development trajectory. In other words, were Germany to find out a way of further reducing the cost of automotive supplies by shifting supply relation to other, lower cost, countries, eastern EU states would find themselves with a totally displaced production matrix.

In general, but even more so in the automotive industry, supply relationships are increasingly dependent on the decisions and needs of OEMs, which demand just-in-time and just-in-sequence deliveries and even decide on the times and rhythms of work in supplier plants – as well as the detailed technical specifications of the components ordered. This implies such a strong customization of the characteristics of these components, that a symbiotic relationship between OEM and suppliers emerges, which obviously makes a possible conversion of production by the latter very difficult. Despecialization in less specific sectors – such as Basic Metals, Fabricated Metals, etc. – aggravates the problem, since the output of these industries can also be used in sectors other than automotive.

Turkey also became more relevant in the production of relatively labour intensive automotive components, which suggests it supplies eastern EU countries which then supply western EU ones. In its turn, the country reduced the relevance of its supplies of less specialised intermediates such as Textiles and Rubber Plastic in favour of India. Hence, the production chain seems to run as follows: India supplies Turkey with these low-quality intermediates; Turkey uses these intermediates to produce labour intensive components which it then sells to eastern EU countries, which in their turn supply Germany. Geographical proximity becomes important within just-in-time and just-in-sequence business models, and the development of this GVC exactly deployed following this logic.

China, on the contrary, increased its relevance in almost all EU automotive GVCs, but did not at all develop any kind of dependence: Chinese production matrix, as regards this supply relations, on the contrary became more and more complete and complex, and direct and indirect deliveries to the EU more and more heterogeneous.