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November 21, 2012

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Small Business Economics **: ** **, ** **.

C **** Springer. Printed in the Netherlands.

The Locational and Functional

Behavior of U.S. Autoparts Suppliers Ho Yeon Kim

is to fill this gap by investigating the suppliers

ABSTRACT. The free trade agreement with Mexico was

expected to help U.S. autoparts suppliers move southward to intra-industry structure and their attitude toward

take advantage of low labor cost, but this has not yet

a possible Mexican operation.

happened. We can find explanations for this rather perplexing

Contrary to popular belief, ongoing globaliza-

phenomenon through analyzing the outcome of a postal survey

tion tends to strengthen regional clustering of

conducted just before the North American Free Trade

assemblers and suppliers. Amiti (1998) suggests

Agreement (NAFTA) went into effect. The responses from the

suppliers highlight the apparent hierarchy in the lean produc- that comparative advantage does not always

tion system and its impact on the location choices of the

determine the production and trade patterns fol-

parts-manufacturing firms. Despite advances in transportation

lowing trade liberalization, especially when the

and telecommunication technologies, the need to maintain

industry is characterized as being vertically inte-

short distance with respect to customers is still the single most

grated, as is the case with the automobile sector.

important consideration in their decision-making. Given the

reluctance on the part of the vehicle assemblers, a mass Because of the industry s hierarchical structure,

migration of suppliers to Mexico seems unlikely, although it

relocation of an assembly plant will likely cause

is true that they are quite attracted to the low wages offered

a secondary wave of upstream parts suppliers. As

south of the border.

demonstrated by the development of the Japanese

transplants network in the U.S., relocation of the

1. Introduction auto industry usually takes the form of circular

causation, in which an assembler initiates the

During the lengthy negotiation process for the

move. After the suppliers are brought in, other

North American Free Trade Agreement (NAFTA),

assemblers are lured to the area. New Japanese

many rounds of heated debate were generated

transplants, seeking non-union labor, chose

regarding the fate of the automobile industry in

southern states. Then, Japanese suppliers came in

the continent. A number of researchers presented

to serve not only the transplants, but the U.S.

possible scenarios for the vehicle assembly

assembly plants as well.

industry from various perspectives.1 As for parts

The causality can run in the other direction,

suppliers in the U.S., the central theme has been

which poses an interesting question for the gov-

whether Mexico s low wages could outweigh the

ernment of host country. If attracting an assembly

need to maintain proximity to the assembly plants.

plant guarantees that suppliers will seek to be

Scrutiny of the autoparts sector in this regard has

close by it, it would be rational to give a subsidy

been neglected, however, despite the fact that it

to lure the hub facility. On the other hand, if sup-

employs more workers than the assembly industry

pliers pursue low wages rather than customers, a

proper, and this was partly due to difficulties

case can be made for developing an optimal policy

associated with probing into their complex hier-

mix in that direction. This aspect is intriguing

archical structure. The main objective of this study

because it is an empirical question, and with little

sign of large-scale relocation so far, it is especially

Final version accepted on February 28, 2003

meaningful to look back and find out what sup-

Department of Economics pliers were actually making of the impending

Sungkyunkwan University

changes just on the brink of entering NAFTA.

Seoul

Most of the previous studies on the autoparts

Korea 110-745

suppliers treat them as one homogeneous group,

E-mail: abpxt7@r.postjobfree.com

80 Ho Yeon Kim

were promised a copy of the research findings.

focusing rather on technological changes in the

The bulk of the mailing list was built from the

automobile industry as a whole and their impact

PhoneDisc USA Business Directory, using the

on the spatial organization of the suppliers. For

instance, Bingham and Sunmonu (1992) compare Standard Industry Classification codes as

Fordist (U.S.) and post-Fordist (Japanese) pro- keywords (Table I). Complications arose because

duction systems in terms of locational structure. SIC 3714 is not the only group selling parts to the

They predict a continued transition to flexible and assemblers. Likewise, not all firms listed in those

lean production that would result in a tighter geo- groups are necessarily in the automotive business.

graphical clustering of suppliers around assembly To supplement the list, more businesses were

plants. Glasmeier and McCluskey (1987) found selected from the Automotive News Market Data

that labor-intensive parts-making activities had Book (345 firms) and Ward s Automotive Yearbook

continued to expand to the Southeast in pursuit (175 firms). In addition, 240 Japanese suppliers

of cheap labor, while the headquarters of large were obtained from the Directory of Japanese-

suppliers had been agglomerating in the Detroit affiliated Companies in the USA & Canada. This

area. brought the total number of businesses to 2,213.

To study the location of suppliers, one might After eliminating duplicates and businesses with

make the strong assumption that each supplier incomplete addresses, the total number of firms in

serves the closest customer, which may well be the mailing list came to 1,860.

true for most manufacturing industries. However, The questionnaires were mailed out during the

in the case of the automobile sector, not all sup- first week of June 1994. Within the following two

pliers are functionally identical. It would be mis- months, 54 envelopes were returned unopened

leading, for example, to presuppose that direct because the addressees had moved with no for-

linkages exist between an assembly plant and all warding address. The locations of the 1,806 survey

the parts-manufacturers located within a 50-mile recipients are shown in Figure 1. More than half

radius.2 Therefore, an appropriate survey is essen- (957) the recipients are located in the inset which

represents the Midwest and the so-called trans-

tial if a more systematic analysis is desired.

plant corridor, showing a heavy concentration of

Although there do exist quite comprehensive

parts-manufacturing activities in these regions.

studies based on surveys, notably by Helper

Eventually, 201 usable responses were generated

(1991) and Miller (1988), they either focus on the

out of the pool of 1,753 eligible firms, showing an

large first-tier suppliers or make no effort to

effective response rate of 11.5%. This rather low

dissect the supplier groups and compare their

response rate is understandable, given that firms

functional behavior. To address these short-

are generally reluctant to share their sensitive

comings, another survey was conducted, which is

business information. Nonetheless, this exercise

discussed in this paper. As the first of its kind,

seems to have been a success, considering that

the findings shed light on the factors affecting the

occasional surveys conducted by trade magazines

location of the suppliers, relationships among

usually generate less than 150 replies.3

firms at different stages of production, and, more

importantly, their views on Mexico as a potential

manufacturing base. In the following sections, the

survey procedure and major findings are pre- TABLE I

sented. Composition of the primary mailing list

SIC Title Size

2. Methodology

3011 Tires and inner tubes 181

In designing the questionnaire, a high level of 3465 Automotive stampings 228

detail was sacrificed for the sake of a simple and 3592 Carburetors, pistons, rings, and valves 127

inviting appearance. Most questions had a 3647 Vehicular lighting equipment 075

3691 Storage batteries 180

multiple- or binary-choice nature. Anonymity was

3694 Engine and electrical equipment 434

assured by including an unmarked postage-paid 3714 Motor vehicle parts and accessories 228

reply form. In addition, interested respondents

Behavior of U.S. Autoparts Suppliers

Figure 1. Location of survey recipients.

3. Major findings years. The majority of the questionnaires were

filled out by individuals who are in positions that

The 201 firms collectively represent over 47,700 enable them to make important decisions: presi-

employees and $14 billion in annual sales revenue. dents (19.9%), vice-presidents (17.4%), and

On average, they had been in business for 26.5 managers in various areas (42.3%). It is neces-

82 Ho Yeon Kim

sary to divide the respondents into several groups replacement demand. Because their markets and

because of the heterogeneous roles they play in functions vary, suppliers in different groups are

the production chain. In the following analysis, expected to exhibit somewhat heterogeneous

four mutually-exclusive groups are formed: 47 locational and managerial behavior.

pure first-tier firms (PF); 42 firms that represent In our analysis, the respondents are classified

the rest of the first-tier firms (RF); 46 low-tier into four groups: PF firms, serving only assembly

suppliers (LS); and 41 aftermarket suppliers (AS). plants; RF suppliers catering to the aftermarket

and/or other suppliers as well as automakers; LS

firms, selling to the aftermarket and other sup-

3.1. A hierarchical structure

pliers (but not to assemblers); and AS firms,

In broad terms, automotive suppliers consist of selling only to the aftermarket through retail stores

original-equipment-manufacturer (OEM) suppliers and service stations. Such a classification scheme

that cater to assemblers or other suppliers, and makes it possible to contrast their differences in

aftermarket suppliers who sell replacement parts terms of a given firm s position relative to other

and consumables to the general public through suppliers in the industry pyramid. As shown in

retail outlets. Furthermore, a hierarchical order Table II, PF is characterized by a very large-scale

exists among OEM suppliers. The first-tier sup- operation, much higher sales revenue per

pliers provide assembly plants with complex pre- employee, and strong commitment to autoparts

assembled modules such as engines and seats, manufacturing. LS firms have more diversified

while lower-tier firms serve the first-tier firms markets than first-tier suppliers do. The AS firms

with basic components. These relationships are are smaller than those in the other groups in size,

illustrated in Figure 2. Some OEM suppliers also but seems more involved in the automotive

sell to the aftermarket, which can be more prof- business than the RF and LS firms. Also apparent

itable.4 In fact, it is not uncommon for suppliers is the differing level of dedication to customers.

If foreign customers are eliminated, most first-

to accept a bad deal from assemblers just to put

tier suppliers serve only a handful of domestic

their parts in vehicles, in anticipation of future

Figure 2. A hierarchy in the automobile industry.

Behavior of U.S. Autoparts Suppliers

level on the part of suppliers.5 At the same time,

TABLE II

Descriptive characteristics of firms advances in transportation and communication

technology made regional concentration less

Group No. of Sales Autoparts No. of

important, suggesting that the automotive sector

employees ($ mil.) sales customers

would also undergo a considerable degree of

geographic dispersion. The past couple of decades

PF 531-***-**-**,29

RF 279-***-**-**,93 have witnessed the rise of simultaneous global-

LS 183 026 68 0,379

ization and regionalization of industrial activity,

AS 118 022 86 2,413

and many now seem to believe that the two might

be complementary rather than contradictory modes

of industrial and spatial organization.

customers. In contrast, the large number of cus-

To understand where U.S. suppliers fit in the

tomers for the AS firms illuminates the role they

picture, the firms were asked to choose three

play in the industry.

factors out of 16 items, shown in Table IV, which

Differences can also be found in the types of

most heavily influenced their decision in selecting

parts each group produces. In general, first-tier

their current manufacturing sites. Many respon-

firms tend to specialize in bulky and vehicle-

dents selected more than three locational deter-

specific modules, whereas low-tier firms and

minants. Figure 3 shows the percentage

aftermarket suppliers produce small standardized

distribution of each factor, weighted against all

components and replacement parts. From Table

factors chosen by the first-tier suppliers. As

III, it is clear that PF firms function as full-service

expected, proximity to customers (Item I) turns out

suppliers, producing all kinds of non-standardized

to be critical to the pure first-tier suppliers. For

parts in a more integrated form. The RF suppliers

them, maintaining short distances to assembly

appear to be less involved than PF firms in the

plants is the most important consideration,

production of exterior and interior parts. The LS

followed by good labor relations. At this level, any

group specializes in basic materials and electrical

disruption of production and delivery flows would

components, whereas the AS firms concentrate on

be devastating because, given the minimal inven-

the powertrain (small engine components such as

tory level that is maintained by the assembly plant,

spark plugs) and electrical parts (starters, alterna-

the lack of a major part means a complete

tors, connectors, and batteries) which are stan-

shutdown of the assembly line. Close proximity

dardized and easily replaceable.

offers the additional benefits of joint product

development and informal exchange of informa-

3.2. Locational preferences tion. On the other hand, RF suppliers seem to be

somewhat insulated from the two factors men-

The automotive industry has long been character-

tioned above, probably because they can fall back

ized by a high degree of regional concentration.

onto less restrictive aftermarket sales.

Recent literature on industrial agglomeration

Figure 4 presents a slightly different preference

explains the tight clustering through an assem-

structure of low-tier suppliers and aftermarket

bler s preference for a variety of differentiated

suppliers. Unlike those in the first tier, an LS firm

parts and the economies of scale achieved at firm

TABLE III

Parts produced by firms (% for each group)

Group Materials Exterior Interior Chassis Powertrain Electrical

Note: The row sums are greater than 100 because a given firm may produce more than one item.

84 Ho Yeon Kim

need more warehousing space to stock up on

TABLE IV

Proposed factors for choosing current location overproduced parts as well as incoming inputs

(Item J). This need for space becomes more acute

Item Description

for aftermarket suppliers. Interestingly, many AS

plants are set up near the owners residences,

A Low labor cost

which could be far from the customers (Item P).6

B Availability of labor

C Good labor relations/low unionization rate Respondents showed little interest in local gov-

D Availability of capital/low interest rate

ernment incentives (Item O). Perhaps such bidding

E Low transport cost of input

wars are more pronounced when different states

F Low transport cost of output

are trying to host an assembly plant, because

G Transport facilities (highways, airports)

government officials are well aware that suppliers

H Good infrastructure (utility, communication)

I Proximity to assemblers/markets tend to follow assemblers. It is also worth noting

J Land availability and cost

that the localization economy (Item M) was found

K Availability of warehousing

not to be very influential for all four groups,

L Availability of business services

although the externalities (informal technology

M Proximity to other parts manufacturers

transfer, etc.) are generally regarded as very

N Amenities (cultural and climatic)

O Local government incentives important factors for firms locating together.7 In

P Proximity to owner s residence

other words, the survey results suggest that any

Q Other

spatial agglomeration of suppliers may be simply

the outcome of their individual decision-making

cannot possibly be situated near the large number with regard to forward linkages with their

of customers who are geographically dispersed. customers. Regional clusters observed in the auto-

The greater distance is compensated for by better motive industry indeed differ from the agglomer-

transportation facilities (Item G). LS firms also ation patterns identified by Alfred Marshall, in that

Figure 3. Factors of current location for first-tier firms (% Figure 4. Factors of current location for LS and AS .

of responses).

Behavior of U.S. Autoparts Suppliers

they take the form of hub-and-spoke nexus con- considerable differences: 60% of PFs are located

sisting of complexes of suppliers surrounding a within a 200-mile radius of Detroit, while only

central hub or anchor assembly facility, where the 40% of RFs and 30% of LSs can be found there.

hub firm plays a key role in organizing the entire The reversal in density of RF and LS at the tail

production system.8 (greater than 1,000 miles) is explained by the fact

Figures 5 through 8 show the location of each that they also sell to aftermarket outlets in Texas

group of suppliers, plotted according to their and Florida. In sharp contrast to OEM suppliers,

postal codes. Because some firms use post office AS firms gravitate toward major markets away

boxes as their mailing address, the postal codes from the Midwest, confirming the observations

for actual manufacturing sites were solicited in the made by Glasmeier and McCluskey (1987) that

questionnaire.9 The maps show an increasing aftermarket suppliers show a markedly decentral-

degree of dispersion moving down the supplier ized pattern because final consumers are widely

hierarchy, which, in general, seems to reflect their dispersed around the country.

locational determinants discussed earlier. That is, It is also possible to examine the locational

pure first-tier suppliers are more tightly clustered patterns of the firms, given a particular pulling

around the assembly plants in the Midwest than factor. Figures 10 and 11 show the geographical

are RF and LS companies, while aftermarket sup- distribution of firms, with the relevant factors

pliers are located near large markets in the South. superimposed. Most firms quoting good transport

As a simple graphic measure of dispersion, facilities as one of their location determinants (58)

Figure 9 presents the distribution of suppliers by are shown to be situated on or near the interstate

their distance from Detroit, the epicenter of the highway network. However, the relationship

automobile industry. According to the figure, the between expected and actual locations is not

distribution of each OEM supplier group displays always obvious, and this is shown by looking at

Figure 5. Geographic distribution of pure first-tier suppliers.

86 Ho Yeon Kim

Figure 6. Geographic distribution of the rest of first-tier suppliers.

Figure 7. Geographic distribution of low-tier suppliers.

Behavior of U.S. Autoparts Suppliers

Figure 8. New-vehicle registrations by state in 1993 and geographic distribution of aftermarket suppliers. Source: Automotive

News Market Data Book (1994).

Figure 9. Distribution of firms by distance from Detroit.

88 Ho Yeon Kim

Figure 10. Interstate highways and firms attracted to transport facilities.

Figure 11. Unionization rate in each state and firms attracted to good labor relations/low unionization. Source: Distribution,

September 1989, p. 70.

Behavior of U.S. Autoparts Suppliers

(Figure 13). Although the data set does not permit

the rate of unionization: 72 firms indicated that

mapping out of suppliers and their respective

good labor relations/low unionization rate is one

customers, it would be interesting to investigate

of the most important factors. Surprisingly, 17 out

changes in the average distance between them over

of 44 firms located in Michigan cited this factor,

time and to see how these changes mirror the

despite the fact that the state has the highest

overall developments in their production linkages.

unionization rate in the entire U.S., implying that

the two notions (good labor relations and low

unionization rate) are not necessarily synonymous.

3.3. Changing supplier-customer relationships

Further study is needed to clarify this issue.

Alternatively, one might wish to compare the In the 1980s, Just-In-Time (JIT) was a buzzword

locational propensity of indigenous firms and that resonated throughout the American manufac-

foreign firms. Forty-one suppliers indicated that turing industries as they were undergoing waves

they were of either Japanese origin or a joint of process innovation. The basic philosophy of so-

venture, and most of these were in the first-tier. called lean production entailed manufacturing

They tend to locate in what is known as the only the amounts of products for which there were

indicated demands, thereby reducing inventory

transplant corridor, between interstate highways

costs and eliminating defects. Of course, the

I-65 and I-75 in the Upper South, where Japanese

practice of JIT alone does not necessarily help

assembly plants can also be found (Figure 12). A

achieve successful waste-free manufacturing

similar picture emerges when the firms are

operations. Yet, high delivery frequency, along

classified according to their age. Old firms are

with increasing inventory turns, provides the best

found primarily in the traditional manufacturing

available measures of progress in lean production

belt, whereas newer establishments tend to prefer

systems.10

greenfield sites in the Upper Southern states

Figure 12. Location of Japanese-affiliated suppliers.

90 Ho Yeon Kim

Figure 13. Location of firms by year of establishment.

According to the survey, first-tier suppliers are weaker linkages in both directions. At the same

increasingly tied to assembly plants in the form of time, JIT delivery is claimed to be widely prac-

long-term contracts. Furthermore, most first-tier ticed. The distance between each pair of groups

suppliers get involved in joint developments of is manifested in the number of deliveries each firm

new products at an early stage: 81% of PF and makes per day. Namely, it shows (1) short dis-

74% of RF participate, compared with only 22% tances between assemblers and first-tier suppliers;

of LS and 5% of AS. Table V shows various (2) relatively long distances between first-tier and

measures of ties between suppliers and customers. low-tier firms; and (3) close proximity between

aftermarket suppliers and their customers.11

Clearly, the first-tier firms are closely linked with

assembly plants and less so with their own sup- The need to exchange information frequently

pliers, while the LS and AS firms exhibit much and extensively, and the need to resolve difficul-

TABLE V

Supplier-customer relationships

Group Long-term Long-term Practice Practice Average Average

contract with contract with JIT in JIT in output input

customers suppliers outputs inputs delivery delivery frequency frequency

PF 80.9 57.4 89.4 74.5 5.4 2.6

RF 92.9 69.0 88.1 76.2 4.4 1.8

LS 43.5 34.8 78.3 65.2 1.1 1.6

AS 29.3 43.9 53.7 48.8 4.5 1.3

Behavior of U.S. Autoparts Suppliers

As shown in Figures 14 and 15, the JIT has

ties associated with design, manufacture, installa-

made remarkable progress in the early 1990s.

tion and operation all seem to indicate that firms

Between 1989 and 1993, inventory turns for

prefer to develop their manufacturing bases in

outputs increased by 76%, 33%, 19%, and 52%

close proximity to one another. However, exactly

for each respondent group. Input figures were even

what makes first-tier suppliers maintain much

more striking, registering 125% for PF, and 40%,

closer relationships with their customers than do

35%, and 60% for the remaining groups, respec-

lower-level firms? McCann (1993) offers a more

tively. The significantly higher output inventory

plausible explanation as to why JIT mandates

turns of PF (compared with those for inputs) seem

proximity: a firm does not locate so as to minimize

to suggest that they manufacture essential parts on

just total transportation costs, but rather to

short notice in an effort to reduce defects, while

minimize its total logistics costs, which include

stocking up on sufficient input materials just in

the costs of the ordering, the holding, and the

case.

transportation of goods.

A typical passenger car is built from over

The value added at the point of production, as

20,000 components. Rather than maintaining too

the argument goes, is the primary factor that

many suppliers or attempting to produce every-

governs the optimum location of the firm. As the

thing in-house, an assembly plant relies on several

delivery frequency increases for a fixed total

hundred first-tier suppliers, the number of which

volume of material, the total transport cost per unit

is rapidly declining year by year. This trend is

carried also increases. The firm s optimal location

reinforced by the spread of single sourcing, in

moves towards the market as the value added per

which automakers rely on only one supplier for

unit of output at the point of production increases

any given part.12 It is being met with parallel

because the costs of holding finished-goods

inventories (warehousing, interest and insurance action on the part of the suppliers. Only a few

payments, etc.) rise, requiring more frequent years ago, suppliers were cautious about dedi-

delivery of outputs and economy in their trans- cating their entire resources to just one or two

portation. This is achieved only by reducing the customers. It was too risky, and they concluded

output-delivery distance. In our case, then, the that they could prosper as a second- or third-tier

first-tier suppliers manufacturing sophisticated supplier. That kind of fear has been somewhat

modules would feel a greater need to be close by mitigated as both assemblers and suppliers have

their customers than do low-tier suppliers. come to recognize the value of a stable and coop-

Figure 14. Growth in output inventory turns.

92 Ho Yeon Kim

Figure 15. Growth in input inventory turns.

quality targets.14 In this regard, Womack et al.

erative relationship, which is required to maintain

a successful lean-production system. (1990) are quick to emphasize that the Japanese

Were suppliers reducing the number of their tradition of tight linkages is not based on blind

own suppliers as well? The reality is quite the trust, but on mutual benefits such as joint analysis

opposite. According to our survey, a typical PF of costs, fair determination of prices, and sharing

firm increased the number of its own suppliers by of profits. The U.S. assemblers will have to

40% during the 1989 1993 period. Actually, first- redefine their relationships with their suppliers for

tier suppliers increasingly bear a heavy burden in the better. If genuine cooperation between the two

acting as quality filters; the defect rates of parties is to be realized, multiple bidding and other

incoming parts can be up to five times the level old habits need to give way to more sensible

of complaints by customers (i.e., assemblers).13 measures to increase the joint profits of both

Comparable figures are 43% for RF, 31% for LS, parties over time.

and 26% for AS firms.

Even though the general picture looks encour-

3.4. Mexican connection

aging to the advocates of lean-production practice,

our survey statistics on delivery frequencies and One of the main objectives of the survey was to

number of suppliers are not sufficient to attest to uncover the implications of the NAFTA for U.S.

the real changes in supplier-assembler relation- parts suppliers by investigating, in conjunction

ships, as Womack et al. (1990) point out: with the findings on their locational factors and

customer relationships, how they are responding

It is true that supplier engineering, combined with long-

to the threats and opportunities represented by free

term contracts, . . . more frequent deliveries, and single-

trade. Firms were asked to express their views on

sourcing of many components characterize a new North

Mexico as a potential production site by indicating

American supply system . . . [but] all have been driven by

cost pressures and mass-production logic: single-sourcing what they think the country has to offer, again

for achieving economies of scale, just-in-time for shifting

among the factors presented in Table IV. The total

the burden of inventories, and more (p. 161).

number of responses was significantly lower than

that for current locational factors (315 vs. 569),

Indeed, in a survey conducted elsewhere, 74% of

the GM s suppliers who were interviewed said that possibly reflecting their ignorance or lack of

they feel that the industry giant will find a new interest in Mexican operations.

substitute if a supplier fails to meet the cost and Roughly speaking, what attracts U.S. suppliers

Behavior of U.S. Autoparts Suppliers

is invariably the cheap labor south of the border. TABLE VI

Interests of respondents in Mexico For PF firms, existing assembly plants in Mexico

(Item I) also provide an incentive, as shown in Group Exporting Has twin Planning Will

Figure 16. Moreover, they are currently utilizing to plants in to move/ follow

Mexico to a greater extent as a market and/or a Mexico Mexico expand customers

manufacturing base, are more willing to move or

PF 23 23 17 38

expand there in the future, and intend to accom-

RF 19 12 12 57

pany their customers in the event that the cus- LS 15 07 11 33

tomers decide to move south of the border (Table AS 15 02 07 20

VI).15 In this hypothetical situation, the size of

potential migrants increases drastically in each

category. In total, 42 (47%) of first-tier firms Mexican vehicles (mostly compact) more than

expressed willingness to follow their major cus- tripled, from $3.7 billion to $11.3 billion, and

tomers into Mexico, should this become the case. Mexican parts exports to the U.S. increased from

The RF firms showed even more enthusiasm than $7.4 billion to $11.6 billion. In Mexico, retooling

the PF firms, perhaps due to an added benefit of of existing plants is actively under way for

compact cars and light trucks, in which they have

Mexico s market potential.

a competitive edge. For instance, Volkswagen s

During the years following the introduction of

Puebla plant is now the sole supply point world-

NAFTA, the impact of free trade was clearly

wide for the New Beetle. Around the plant, invest-

visible, despite the severe recession of 1995 in

ment by European suppliers is growing. However,

Mexico. According to USTR (1998), between

new automakers and suppliers in Mexico face a

1993 and 1996, U.S. exports of vehicles to Mexico

number of challenges; for example, transportation

recorded a 548% increase amounting to $1.3

can be difficult and time-consuming in the interior,

billion, while parts exports dwindled. Imports of

Figure 16. Perceived benefits from Mexican operation for Figure 17. Perceived benefits from Mexican operation for LS

first-tier firms . and AS .

94 Ho Yeon Kim

the roles they play in the value chain. Their loca-

not to mention political instability and lagging

domestic demand.16 tional patterns clearly reflect these differences.

Among the results, it is noteworthy that the

It is a mixed blessing for indigenous parts

popular notion that low unionism is a prerequi-

makers in Mexico. In 1992, there were 396

site for maintaining good labor relationships is not

Mexican-owned companies, compared with only

warranted. In addition, cautious cooperation

24 foreign-owned suppliers. By the end of 1995,

between assemblers and suppliers appears to be

there were equal numbers (155 each) of foreign

and Mexican-owned suppliers.17 Exposed to fierce stronger than ever, thanks to wide adoption of lean

production, which is epitomized by the just-in-

international competition, they are undergoing a

time inventory system.

metamorphosis. The worry of a complete shakeout

The survey results summarized and discussed

has not materialized yet, as some firms are now

in this paper should not be read as definitive state-

said to be comparable with others in North

ments of what the suppliers are doing and will do

America in terms of quality, productivity, absen-

in the future. Some sort of non-response biases

teeism and turnover rate.

and selection effects are bound to exist in this type

Based on these facts, along with the survey

of postal survey, calculating the exact magnitudes

results, some careful speculations can be made

of which is beyond the scope of this paper.

about how the automotive firms would react to

Nonetheless, the findings strongly support general

NAFTA. Obviously, the first impact is felt by final

perceptions on both locational and technological

assemblers. In addition to providing a new market

inter-firm linkages that exist in the U.S. automo-

niche, Mexico could be the optimal production and

bile industry today. The findings may have policy

distribution point for all of North America,

implications, too. If the Mexican government is

depending on the market structure and types of

serious about developing a full-fledged automo-

automobiles. As for parts-manufacturers, the

tive complex, it should begin to focus on luring

survey reveals their conditional preferences about

assembly plants. The first step is to improve its

Mexican operations. Although Mexico s cheap

transportation links with the U.S. to help reduce

labor is quite appealing, suppliers (especially first-

vehicle distribution costs, a foremost concern for

tier) will not make their moves unless their cus-

the assemblers. Once they set their feet in Mexico,

tomers move first. This seems to explain why a

it would surely trigger a chain reaction where large

mass southerly exodus of the auto industry is yet

first-tier suppliers begin to relocate, followed by

to occur; as politically-sensitive automakers are

their own suppliers.

still very cautious about relocation, parts suppliers

have no good reason to move first. Given the

strong hierarchical structure, the probable reaction

Acknowledgements

of suppliers will be to remain watchful of their

The author is grateful to two anonymous referees

customers. Despite high hopes, Mexico offers

for providing insightful comments and sugges-

limited prospects to many U.S. suppliers for now.

tions.

It would be worthwhile to go back and ask the

survey respondents the same questions after the

terms of NAFTA are fully implemented in 2004.

Notes

See, for example, Hufbauer and Schott (1992), Kim (2003),

4. Conclusions Markusen et al. (1995), and Womack (1991).

The study by Smith and Florida (1994) is justifiable in this

This paper has presented the main results of a regard because most of the Japanese transplant suppliers are

postal survey on U.S. automotive suppliers. The in the first tier.

approach taken is unique in that careful grouping 3

The actual response rate must have been higher because

many of the survey recipients are presumably not related to

is attempted according to their place in the indus-

the auto industry, including the 53 firms that returned blank

trial structure and not just their sales revenue or

forms citing that reason. Incidentally, firms in states with high

employment size. To reiterate the major findings, concentration of the auto industry showed greater interest in

there exist considerable characteristic differences participating in the survey (and presumably receiving the

among the four groups of suppliers, according to result thereof). Regionwise response rates are as follows: West

Behavior of U.S. Autoparts Suppliers

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