Changing Production Systems: The Automobile Industry in Spain

Clark University

Changing Production Systems: The Automobile Industry in SpainAuthor(s): Montserrat Pallares-BarberaSource: Economic Geography, Vol. 74, No. 4 (Oct., 1998), pp. 344-359Published by: Clark UniversityStable URL: http://www.jstor.org/stable/144329Accessed: 25/02/2010 06:17

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=clark.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

Clark University is collaborating with JSTOR to digitize, preserve and extend access to Economic Geography.

http://www.jstor.org

http://www.jstor.org/stable/144329?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp

http://www.jstor.org/action/showPublisher?publisherCode=clark

Changing Production Systems: The Automobile Industry in Spain

Montserrat Pallares-Barbera

Geography Department, Universitat Autonoma de Barcelona, 08193 Bellaterra (Barcelona), Spain

Abstract: This paper examines the forces underlying the dramatic changes experienced by the Spanish automobile industry in the 1970s and 1980s. Over this period, Spanish automobile production expanded substantially and the industry became more export oriented. The main findings are the following: first, the takeoff of the industry was due to a combination of domestic factors (cheap labor, industrial policies, and increased demand) and international factors (changes in preferences and innovations in organizational systems). Second, the industry introduced flexible production systems and adopted flexible specialization. This process led to a decrease in the degree of vertical integration, introduced just-in-time strategies, and intensified outsourcing. The Spanish auto network was enlarged by the creation of a new type of node: the distribution warehouse. Third, the new strategies adopted by Spanish assemblers did not involve a substantial change in the regional distribution of firms; traditional auto regions essentially have maintained their share of firms. In emerging regions a distribution warehouse replaced the expected cluster of component firms.

Key words: industrial restructuring, automobile industry in Spain, mass production system, lean production system, just-in-time.

Immediately after the civil war (1936-39) the Spanish economy followed a development model that was basically autarkic. In the early 1950s, the government started to implement new policies, particularly in the auto sector, aimed at attracting foreign companies with large spillovers. The automobile industry in Spain was thus created in the 1950s to revi- talize the old industrial regions and to fur- nish cars for the eventually emerging domestic market. But the outcome of this process went beyond expectations, and Spain later became one of the leaders in European auto production.

The Spanish automobile industry has experienced significant growth since the 1970s. From 1975 to 1990, Spain's share of European output increased from 7.7 to 12.5 percent. Moreover, the export share jumped from 21 to 55 percent in the same period. I examine the reasons why the Spanish auto industry attained such a competitive position in the global market. My approach links the expansion of the

Spanish automobile sector to changes in the production system and to the adoption of flexible specialization and its spatial outcomes.

I focus on the transformation of an industry from a mass production system (MPS) to a lean production system (LPS). The framework brings together three liter- atures on production system mutability. The first concerns the shift from MPS to LPS formulated by Womack, Jones, and Roos (1990). Particularly, I study the LPS extension of the just-in-time (JIT) notion (Cusumano 1989; Toyoda 1987), which explains the spatial outcomes of the industrial shift. Second, my analysis of production system changes implemented by the Spanish firms draws upon concepts of networking and value-added chains (Chris- tensen et al. 1990; Porter 1990). These concepts provide a coherent explanation of how firms acquire more internal flexibility, by purchasing some intermediate goods outside rather than producing them inside. Thus, the reduction in the degree of verti-

344

AUTOMOBILE INDUSTRY IN SPAIN

cal integration induces both more output diversification and more flexibility. Third, Sabel's (1989) framework of flexible specialization and industrial districts indicates how flexible firms have to coordinate and cooperate in order to attain greater efficiency with a common goal. In this study, cooperation and coordination among firms of the same or similar sectors seem to be required for efficient performance.

The data come from primary sources- structured and unstructured interviews with industry participants-as well as from secondary ones-national and international databases of the car industry. The managers of the largest auto firms in Spain have provided crucial insights into the determinants of adopting flexible production systems, as well as JIT practices. Automobile union leaders have supplied valuable information about the implications of production changes for job structure and union participation. Panel data of structural and spatial variables of the Spanish car industry-such as sales, investment, production costs, employment, and location-are some of the key variables in the analysis of the overall evolution of the industry.

Restructuring in the Automobile Industry

The automobile industry became increasingly integrated during the 1980s. On the demand side, preferences shifted toward smaller, fuel-efficient cars. On the supply side, the increasing adoption of technological innovations altered production organization and management practices in order to exploit economies of scope. Competition within the global market forced firms to adopt more flexible production systems, which, in turn, changed the spatial pattern of the industry.

Since the standardization of production in Henry Ford's River Rouge Complex, automobile firms have moved slowly

toward more flexible systems. In the Ford complex, the firm was vertically integrated, and all the tasks related to car manufacturing were performed within the firm: design, production, distribution, and management of all parts and components (Hounshell 1975). But, even in the context of the mass production system, improvements in production, technology, and managementl were able to reduce the degree of vertical integration and achieve higher degrees of output diversification. This lower degree of vertical integration provided a competitive advantage to corporations adopting it and enabled some tasks to be subcontracted to subsidiary plants in different locations. Assembly tasks were conducted at points close to final demand; meanwhile, most of the high-value-added tasks remained in the firm's home country. Until the mid-1970s, the MPS was the norm in the global auto industry.

In the 1970s, the Toyota Company adjusted mass production methods in an effort to become competitive in its Japanese market and invented the more flexible lean production system (Womack, Jones, and Roos 1990). The LPS uses flexible production methods and technology inside the firm and adopts flexible specialization between the assembly firm and its subcontractors (Cusumano 1989; Toyoda 1987; Storper and Walker 1989; Wells and Rawlinson 1992; Price 1994; Debbage and Rees 1991). Flexible specialization induces assembly firms to become more dependent upon the resources of component firms, as an increasing share of the resources needed for production is provided by the joint efforts of a network of component producers (Cooke and Morgan 1991). As a consequence, production demands higher investments from the component produc-

1 These improvements were the invention of the mass production chain by Ford, the standardization of machines and methods by Taylor, and the organization of management and logistics by General Motors' Alfred Sloan.

345

ECONOMIC GEOGRAPHY

ers to meet assembler demands, which pre- supposes longer-term contracts among the network members the assembler and component producers. Success in accom- plishing final output is therefore based on the efficiency of the integrated structure of the value-added chain provided by the network (Christensen et al. 1990).

Consequently, the strength of a network of auto producers is determined by the combination of skills and resources, none of which a single participant would be able to provide independently. The large number of components involved in manufacturing a car2 makes the set of automobile producers a complex network of independent firms. Coordination and cooperation among the firms integrated in the production chain are necessary requirements for effective performance. High effectiveness of such a network is achieved by the adoption of the just-in-time delivery system.3 The development of JIT further heightens the need for coordination among firms; assemblers require more efficient delivery systems and demand more outsourcing alternatives in order to increase flexibility (Garrahan and Stewart 1992).

Thus, the stronger linkages of the automobile production network under LPS increase the importance of the location of an assembly firm as a determinant in the location of component firms. It also reduces the influence of other location factors, enlarging the relevance of the "proximity" or "agglomeration" factors. As

2 "The bulk of the [car] process involves engi- neering and fabricating more than 10,000 discrete parts and assembling these into perhaps 100 major components-engines, transmis- sions, steering gears, suspensions, and so forth" (Womack, Jones, and Roos 1990, 58).

3 The just-in-time system involves the sequential, frequent, and timely delivery of parts and components in order to supply the immediate demand of each step of the production process. This also implies a reduction in inventories, a change in the methods of deliver- ing intermediate goods, and application of the Kanban system inside the assembly firm.

Rubenstein notes, "Because of the short notice for delivery, proximity and accessi- bility between supplier and assembly plant are crucial" (1986, 296). Examples of the car industry clustering in space exist in Europe, the United States, and Japan (for Spain see Pallares-Barbera (1993); for the United Kingdom see Morris (1988); Tighe (1991); for the United States see Mair, Florida, and Kenney (1988); Hill (1989); Rubenstein (1988); and for Japan see Cusumano (1989)). Spatial proximity becomes more important "when a [component] firm has only one customer" (Rubenstein 1986, 296); otherwise, concentration might not occur (Schoenberger 1986).

The Industrialization Process in

Spain In the late 1950s and 1960s, the Spanish

government gave priority to industrialization that would stimulate development and fast growth. Spain's industrial network had been destroyed by the end of the Spanish civil war in 1940. Government policy in the 1940s and 1950s based industrial recon- struction on the use of domestic resources, following a model of inward development based on autarky. From the 1960s onward, the Spanish government encouraged foreign investment in some industries in anticipation of producing interlocking ben- efits on a national level. Policies encouraged agricultural decline and internal migration to the more industrialized regions; the growing numbers of workers employed in manufacturing earned higher salaries, which, in turn, increased internal demand. The exploitation of scale economies in several industries consider- ably lowered unit prices of industrial products, making them accessible to industrial workers.

In addition, post-1945 growth in the core industrialized European countries spilled over to nearby countries like Spain, with characteristics of a semiperipheral country-low wages, government incen-

346


tives, and old industrial regions with capac- ity to adjust to new industrial processes.4 Spain's average annual rate of growth of gross domestic product (GDP) in the period 1964-75 was about 6 percent, which was partly a result of transnational investments under a peripheral mass production system. As in other peripheral countries (Oberhauser 1993; Agglietta 1979; Lipietz 1986), firms transferred mass production technologies to a developing semiperipheral Spain for local market penetration and reexport to the center.

The Spanish Automobile Industry

Recent history can be divided into four qualitatively different periods: the prewar period (1904-39), the autarky period (1940-49), the transition period (1950-69), and the expansion period (1970-90).

The Prewar Period (1904-1939)

At the beginning of the century, some foreign companies chose Spain to set up assembly plants. Ford Motor Company located a factory in Cadiz in 1920 and moved to Barcelona in 1923. This was the first factory working for a mass market in Spain. Prior to the advent of Ford, a craft production firm, Fabrica Hispano Suiza de Autom6viles, had been founded in 1904 with Spanish and Swiss capital. Its production plant, located in Barcelona, was the first important such establishment in Spain because of the high quality of its cars. Other lesser-known auto companies working under craft production were the Nacional Pescara, which operated from 1929 to 1932, situated in Barcelona; the Francisco Abadal plant, founded in 1912, also located in Barcelona; and the Anglada

4 Although the Spanish civil war destroyed the industrial network, some preexisting industrial regions retained certain location factors, such as an industrial atmosphere and highly motivated labor, as determinants of location.

plant, established in 1904 and located in Puerto de Santa Maria (Cadiz).

In Spain Ford produced model "T" cars, trucks, and tractors for a relatively large domestic market with a population of 23.4 million in 1930 with low purchasing power, but with a share of agricultural employment of 45 percent (Tamames 1993). The attractiveness of the more-industrialized areas in Spain forced the relocation of the factory from Cadiz to Barcelona in 1923.5 Both locations were important maritime

ports, relevant because of the low percentage of local content in Ford's Spanish production. In 1933, Ford Motor Iberica was forced to increase its share of local content

owing to the difficulty in obtaining foreign currency to import. Production at the Ford

plant was truncated by the Spanish civil war (1936-39), which closed what could be considered the prewar period of the auto

industry in Spain.

The Autarky Period (1940-1949)

In this period there was very low foreign investment; the government instituted an industrial policy designed to promote domestic industry and to protect it from

foreign investments and imports (Tamames 1993). Quotas for foreign capital participation, limited to 25 percent of a firm's capital, encouraged import substitution strategies. At the same time, development of local industry was restricted by the need to import intermediate and capital goods in order to feed the emerging industrialization process. In 1946 the first postwar automobile firm, Empresa Nacional de Autocamiones, was born. Located in Madrid, it produced trucks for the domestic market and was financed by public capital.

5 Ford took over a Spanish automobile firm called Motor Iberica, taking the name Ford Motor Iberica.

347

ECONOMIC GEOGRAPHY

The Transition Period (1950-1969)

During the transition period the government encouraged foreign investment in specific sectors, such as automobiles, an emblematic industry with high spillovers in the host region. Several large automobile firms were founded in Spain: Seat (1950), Fasa Renault (1951), Peugeot Talbot (1954), and Citroen Hispania (1957). All were European corporations attracted by low-cost, non-unionized labor, government incentives, a potentially large domestic market, and the proximity of Spain to European core countries.

The car assembly firms established during the transition period were not spatially clustered. Most of them were located under government guidance trying to promote the Madrid region. The government initially wanted to place the Seat factory in Madrid.6 Eventually, economic arguments, such as cheaper transportation costs, changed the initial decision, and the production plant was located in the coastal city of Barcelona, where Seat's intermediate products would be less costly to transport from Italy to Spain. Seat's administrative headquarters remained in Madrid.

The Fasa Renault production plant was located in Valladolid, a region close to Madrid, with headquarters also in the city of Madrid. Peugeot Talbot was located in Madrid. Only Citroen Hispania did not fol- low this regional development policy and was established in Pontevedra, on the northwest coast of Spain, a port close to the Cantabric Sea, where the French coast could be easily reached by maritime transportation. Hence, industrial policies within the auto sector brought about regional specialization in Spain, with Madrid the headquarters center of the automobile industry and the largest production factories scat-

6 The government contributed 51 percent of its capital, 42 percent was provided by six banks, and 7 percent by Fiat, which also contributed with its fabricating license.

tered in Barcelona, Pontevedra, and Valladolid.

The vehicle assembly plants had a posi- tive impact on some of the regions in which they were located, by promoting the rapid development of auxiliary firm networks. The ancillary auto sector, also destroyed during the civil war, was characterized in the postwar period by a flourishing system of workshops recycling replacement parts. The large market for secondhand components emerged from the impossibility of buying new automobiles and the availabil- ity of secondhand replacement components, including those from automobiles and trucks used by both armies during the war. In the transition period, workshops and component firms adjusted to mass production requirements by creating a new network of ancillary firms prepared to supply assemblers. At the beginning of the 1950s, the government's automobile advi- sory body promoted the creation of the ancillary sector, as stated in Seat's state- ment of principles. By the end of the 1950s, the Spanish automobile industry was already pursuing import substitution strategies, which began to replace imports of local components. Ancillary firms located close to assemblers, resulting in the creation of two main auto supplier regions in Spain-Barcelona and Madrid-and leaving the firms located in Pontevedra and Valladolid still needing to buy components from their parent plants in France.

Toward the middle of the transition period, in 1959, as the government aban- doned the autarky model, the Spanish government prepared what was called the Stabilization Plan (Plan de Estabilizaci6n). As a result, the country partially liberalized goods and capital flows. The share of foreign capital allowed increased to 50 percent of a firm's capital; anything over this proportion required government approval. By 1972 the percentage of direct foreign investment in the auto assembly industry reached 53 percent.

Production dramatically expanded over this period, from 3,000 cars in 1950 to 58,000 in 1960 and 455,000 cars in 1970.

348


Spain's share of European production was still very low; it went from 0.02 percent in 1950 to 4.6 percent in 1970. Most of the production fed domestic demand. The number of automobiles per thousand peo- ple remained low, but increased from 3 in 1950 to 9 in 1960. Total vehicle registration in 1954 was 235,000 units, and in 1969 it rose to 2,682,000 units, making the average annual rate of growth almost 18 percent.

The Expansion Period (1970-1990)

Output Growth and European Markets. During this period four new auto firms located in Spain: in 1972, Mercedes Benz set up a plant in Madrid; in 1974, Ford located a factory in Almusafes (Valencia); and in 1980, General Motors (GM) placed a plant in Figueruelas (Zaragoza). Also, in 1984, Nissan Motor Company took over a Spanish firm, Motor Iberica, and established a plant in Barcelona.

Total automobile production was 536,000 units in 1970, 1.2 million in 1980 (Automotive News 1991; Ward's 1991), and more than 2 million cars in 1990 (between 1970 and 1990, the average annual rate of growth of production was almost 7 percent) (Fig. 1). In 1990, Spain ranked fourth among European car-producing countries; only Germany, France, and Italy-with 4.8, 3.9, and 2.2 million units, respectively-had higher output. The increasing importance of Spain in Europe is also reflected in its production share, which grew from 5 percent in 1970 to 10 percent in 1980 and to 13 percent in 1990 (Pallares-Barbera 1993).

Both domestic and foreign markets absorbed the expanded automobile production. Domestic demand for cars increased along with economic conditions. Although the average rate of growth of GDP in the period 1970-90 was 3.6 percent (Instituto Nacional de Estadistica, 1970-93), far below the level reached in the 1960s, it was clearly sufficient to sup- port a rapid expansion of automobile demand. Between 1976 and 1990, new

vehicle registration almost doubled, from 0.7 to 1.3 million cars. In 1989, total vehicle registration was 13.7 million units, more than four times the 1970 figure of 3 million (Ward's 1991; Motor Vehicle Manufacturers Association of the United States 1991).

The protectionist policy toward the local auto industry that prevailed between 1950 and the end of the 1970s (Castafio Collado 1985) implied that growing domestic demand was mostly satisfied by domestic production. However, from the beginning of the 1980s, lower import restrictions reduced the market share enjoyed by domestic production.

Beginning in the mid-1970s Spain's auto industry shifted from an inward to an export production model. In 1970, Spain's car exports represented 8 percent of total car production; by 1980 this figure had risen to almost 48 percent and by 1989 to 56 percent. Most exports (97 percent in 1989) went to Europe (Fig. 2).

The Input Factors. Spanish automobile employment in the expansion period was not affected by the 1979 oil shock. In 1975, auto employment was 98,000; employment increased until 1980, the peak year, with 160,000 workers. Between 1980 and 1986 (with 137,000 workers), 23,000

2500

2000

S 1500

E 1000

500

0 m 0 m in o 0 n o in o

i f)O ' r- o - 00 00 cs ON ON ON ON ON ON ON ON

Year Figure 1. Production of motor vehicles in

Spain. Source: Pallares-Barbera (1993).

349

ECONOMIC GEOGRAPHY

300-

g 250 - O 200- _ 01980 = 150 * 11989

Fn 5 - () . ---.t

France Germany Italy Portugal

Destinations

Figure 2. Spanish car exports. Source: Pallares-Barbera (1993).

jobs were lost (14 percent of all jobs in 1980).7 Subsequently total employment increased, reaching the figure of 142,000 workers in 1988.

Spanish wages were markedly lower than those in some European countries, including Germany, France, and Italy. In 1979 hourly compensation for vehicle workers in Spain was 20 percent less than in France, 52 percent less than in Germany, and 7 percent less than in Italy. Labor costs were 4 percent higher in Spain than in the United Kingdom (Ward's 1991). During the 1980s Spanish wages increased, but in 1988 they were still lower compared to France by 23 percent, Germany by 53 percent, Italy by 20 percent, and the United Kingdom by 12 percent. Some emerging industrial countries within the European Union, like Portugal, had much lower salaries, undercutting the Spanish position in the auto production network.

7 Similarly, in Europe, industrial restructuring during the same period reduced the number of jobs by 178,000, almost 11 percent of total employment in the industry. Output in the rest of Europe was stagnant during the 1980s, while it increased in Spain. This different expansion path of the European and Spanish car industries is explained by distinctive stages in the life cycle of their industries; while in the 1970s Spanish industry was in its expansion stage, Europe had already reached a mature level. But by 1991, Spanish car production suffered a drop, indicating that a stage of maturity had also been reached.

Spanish labor regulations restricted unionization until the mid-1970ss and later influenced the behavior of unions, which expanded during the 1980s. Union participation was lower in Spain-18 percent of the working population in 1987, compared to 44 percent in Italy and 53 percent in both United Kingdom and Portugal-but the amount of time on strike was much higher in Spain than in these other countries (Pallares Barbera 1988). Unionization has been high in the automobile assembly sector, reaching 45 percent of total assembly workers in 1991, while the rate of unionization in the component sector was only 15 percent (Comisiones Obreras, personal interview, April 1992). This discrep- ancy can be explained by the different structures of these sectors. The assembly sector is characterized by large firms, whereas the average firm size in the component sector is much smaller; by 1992 almost 40 percent of employees of the component sector worked in firms of less than 10 workers and 74 percent in firms with less than 30 workers. The low profit margin of upstream firms, in addition to the low union power of those workers, contributed to lower salaries in the component sector compared to the salaries in assembly.

By the mid-1980s, labor practices in the Spanish automobile industry were influenced by changes in the production system. Specifically, the diffusion of Japanese production methods introduced important changes in the organization of labor, on the basis of the multifunctionality of the worker. Employees were organized to work in groups, each embracing a range of diverse tasks. The introduction of improvements in production by workers was encouraged, usually by economic incentives. Although flexible labor practices have been implemented by most of the auto makers in Spain, some of the production

8 Unions were not legalized until 1977.

350


tasks are still performed in combination with MPS practices.

The search for efficiency in the Spanish automobile industry during the 1980s was attained mostly by rationalizing production in the form of adjustments and concentration of companies, mainly in the component sector, most of which involved merg- ers and buyouts of local firms by foreign, mostly European, capital. This led to a decline in the number of firms in the Spanish industry, from 1,177 in 1980 to 871 in 1988.

Changes in the composition of inputs and in the production system induced an increase in productivity. Between 1975 and 1988 output per worker increased by 202 percent. Value added per worker grew by 208 percent over the same period (United Nations 1991). The average annual growth rate of Spanish auto production was 6.3 percent, compared to 1.7 percent for Spanish industry (OECD 1992). Between 1984 and 1990, the highest labor productivity was attained in assembly plants with more than 500 workers; productivity increases were more modest in smaller firms (Banco de Espafia 1990).

Industrial Restructuring in Five Spanish Assemblers

As described above, since 1950 the Spanish automobile industry has experienced all stages of the industry life cycle. In this section, I describe the strategies of five Spanish auto firms in restructuring production.

In 1990 the five firms together represented almost 80 percent of total output of the industry and held a domestic market share of 57.6 percent. I selected these five firms on the basis of their size, seniority, and technological and organizational characteristics. Fasa Renault and Seat belong to the first generation of mass production auto firms in the country and moreover have been the largest firms for the last few decades (Ward's 1991). In 1990, these two firms produced more than 40 percent of

total Spanish output and had a Spanish market share of 34 percent. Ford Espafia and General Motors Espafia are the largest firms within the last generation of automobile firms locating in Spain. In 1990, their joint output was 35 percent of total output and their Spanish market share was 18.7 percent. Finally, I included Nissan Motor Iberica because it pioneered Japanese production methods in Spain, starting in 1986, despite its relatively smaller size.

Data used in this section are drawn from three sources: first, from the annual reports of each of the firms. I construct a panel data set (1975-90, for each of the five companies) about production, in value units, exports, country of destination, investment, employment, and cost of labor, materials cost, and productivity. Second, for Nissan Motor Iberica and Ford Espafia, some of the data on the microeconomic variables, like production, exports, and country of destination, have been complemented by the firms' internal reports. Third, I conducted structured interviews with each of the firms in the sample. From these I obtained data on the relationships of assemblers and suppliers between 1975 and 1990; number of each type of supplier by firm; location of component production plants; type, frequency, and length of distribution and of the contracts; skills of the labor force; work organization; and research and development. Four, in unstructured interviews with each of these firms I focused on the location decision process and the adoption of JIT. Five, I conducted unstructured interviews with union leaders in order to understand the impact of new production systems on workers in each firm. Six, I held unstructured interviews with executives at each firm's headquarters in order to learn about the position of the Spanish firm in the firm's global strategy.

The Early Starters: Fasa Renault and Seat

Renault and Fiat settled in Spain in the 1950s, and took the names Fasa Renault

351

ECONOMIC GEOGRAPHY

(FR) and Seat. These firms are the largest and most symbolic of Spanish auto firms. Their development occurred in the same political and macroeconomic climate as the country.

Output Trends and Markets. Seat underwent rapid growth from 1953, when its yearly output was only 2,000 cars, to 1961, when its yearly output was 36,000 units. From 1975 to 1990, its output per year went from 317,000 to 505,000 units, which implies an average annual rate of growth of 3 percent. Similarly, between 1975 and 1990 FR increased its output per year from 206,000 to 326,000 units, with the same average annual rate of growth as Seat.

The adoption of an inward production model in both firms during the period 1975-78 was reflected in their demand structures. In 1975, 81 percent of FR's total production and 84 percent of Seat's total production were absorbed by the Spanish market. In 1978, still 77 percent of FR's total production and 71 percent of Seat's total production went to the domestic market.

Seat intensified its international market- ing strategy in 1979, achieving an export share of 40 percent. This increasing trend went on until 1982, when the export share reached 48 percent. Over the following two years, the export share remained roughly unchanged, and in 1986 it jumped again to reach 57 percent of total production. The expansion of exports continued until 1990, when 63 percent of Seat's total production was exported. During this period FR exhib- ited a more moderate export strategy. Between 1979 and 1982, there was a steady increase in the export share, from 28 to 41 percent of total production. Over the following five years, the export trend decreased until 1987, when exports represented 16 percent of total production. From 1988 to 1990, exports increased steadily, from 20 to 37 percent of total production.

Both firms exported mainly to European markets (usually, more than 90 percent of exports), but they differed in destinations,

depending on the nationality of their parent firms. Between 1975 and 1980, more than 70 percent of FR's exports went to France, Renault's home country. This pattern changed from 1985 onward, when exports to France were 59 percent, going down to 47 percent in 1988. In this latter year, 14 percent of FR's export went to Portugal, indicating a certain geographic specialization of FR's plant serving mainly the Iberian Peninsula.

In 1981, following a period of financial distress, Fiat left Seat, and Volkswagen took over the company. This change in ownership triggered a shift in Seat's export destinations. In 1987, 39 percent of total exports still went to Italy and only 8 percent to Germany. Between 1988 and 1990, export destinations diversified, with an increasing proportion going to Germany, 27 percent in 1990, the same percentage as was exported to Italy in that year, and 22 percent of Seat's total exports went to France.

The Input Structure. Following a period of employment growth, both firms suffered a restructuration at the end of the 1970s and during the 1980s, which involved a reduction in the number of jobs. Between 1953 and 1969 Seat's employment increased from 925 to 20,000 workers. In the period of highest output expansion, 1975-90, employment decreased from 30,000 to 22,000 workers. Seat's job reduction clearly started in 1981, when it still employed 27,000 workers, coinciding with the change of partnership from Fiat to Volkswagen. FR's employment went from 18,000 in 1975 to 19,000 in 1990, with a peak year in 1979, when it employed 22,000 workers, a level that was maintained until 1985, when the firm started cutting down the number of jobs.

During the 1980s, Seat began introduc- ing some elements of LPS, which was reflected in the changes in task assign- ments and worker skills. Labor training increased between 1980 and 1990, as reflected in the rise in the number of courses from 320 to 1,300 per year; the number of hours per year devoted to train-

352


ing courses increased from 16,000 to 77,000 in the same period. This higher level of human capital constituted the basis for a move toward more flexible labor practices, which resulted in a growing share of employees working on teams performing assembly tasks. This share rose from zero to 3 percent between 1980 and 1990, with an increasing participation of engineers in these teams.9

In addition to labor adjustments to a more flexible system, there was an increasing investment in technology. Seat's total number of computer numerically controlled (CNC) machines increased from 8 in 1980 to 220 in 1990, which represents 0.2 percent and 8 percent of total machines, respectively. Seat also underwent increasing flexibility in production, installing flexible manufacturing systems (FMS).10

Structural changes in input quality brought about a sustained productivity growth in both firms over the period 1975 to 1990. In 1975 FR's productivity was almost 12 cars per worker, while in 1990 it reached 17 cars. The productivity trend in Seat was steeper: from 11 cars per worker in 1975, it jumped to more than 23 cars per worker in 1990.

Cost Structure and Outsourcing. Between 1975 and 1990, some of the trans- formations in the cost structure of both firms suggest a transition in the production system. Labor cost as a percentage of total cost decreaperd '-' both firms. FR's labor cost share in 1975 was 26 percent, decreas- ing to 15 percent in 1990. Seat's labor cost share went from 27 percent in 1976 to 17 percent in 1990.

In the case of FR, the decrease in the labor cost share was compensated for by an increase in the cost share of external ser-

9 FR did not provide data on these items. 10 FR did not provide information about tech-

nology improvements. An FMS is a computer- controlled grouping of semi-independent work stations linked by automated material-handling systems. All activities in the system are under precise computer control (Jaikumar 1986).

vices, which went from zero in 1975 to 13 percent in 1990. The cost share of materials and capital did not suffer any significant change, averaging around 68 percent throughout the period. For Seat, the decrease in the labor cost share was cap- tured mostly by the increase in the cost share of materials, which climbed from 50 percent in 1976 to 68 percent in 1990. The cost share of external services suffered a moderate decrease, from 20 percent in 1976 to 14 percent in 1990.

Subcontracting and buying out components appear as the largest share of the firms' costs, which is reflected in the very large cost share of materials in both firms1 (more than 50 percent of total cost). This phenomenon underlines the importance of the automobile industry network's efficiency in order to achieve a successful performance at the end of the value-added chain of the automobile. In addition, implementation of the JIT system motivated a drastic reduction of inventories inside the firms' walls-at Seat, component stock was reduced from 15 days in 1980 to 3 days in 1990.

Latecomers: Ford Espaiia, General Motors Espania, and Nissan Motor Iberica

Ford Espafia (FE), General Motors Espana (GME), and Nissan Motor Iberica (NMI) settled in 1972, 1979, and 1984, respectively. These firms' output increased sharply in the second half of the 1980s. FE produced 266,000 units in 1985 and reached 334,000 in 1990-that is, an annual average rate of growth of almost 5 percent. GME's production increased from 246,000 units in 1983 to 383,000 in 1990, an annual average rate of growth of

11 Supporting evidence is given in Pallares- Barbera (1993) by estimating a Cobb-Douglas production function for both firms. Results indicate a very high elasticity of output with respect to materials in the second half of the period, 1983-90.

353

ECONOMIC GEOGRAPHY

almost 7 percent. NMI increased from 20,000 in 1984 to 81,000 units in 1990, with an annual average rate of growth of 26 percent.12

From the beginning, FE and GME followed an export-oriented model while NMI pursued an inward production model. In 1986 FE exported 63 percent of its production, but exports then declined, reaching 58 percent in 1990. Data on GME exports are available only from 1988 on. In this year, 75 percent of production was exported; three years later the figure was 78 percent. NMI's production went mostly to the domestic market, with 72 percent in 1984 and 66 percent in 1990. In 1994, as a result of a general decline in car sales in the Spanish market, NMI reacted by shipping cars to Japan, which was an unprecedented event for the Spanish auto industry. Exports to Japan increased continuously in the following years.13 Data on export destinations, other than the one on NMI, are not available.

FE, GME, and NMI were smaller firms than Seat and FR; total employment in any one did not exceed 11,000 in 1990. At FE employment increased from 9,000 in 1985 to 11,000 in 1990. Employment at GME went from 9,000 in 1986 to 10,000 in 1990, and at NMI, employment decreased between 1984 and 1990, from 9,000 to 7,000. In an effort to adjust labor to a more flexible system, NMI had a policy of increasing the number of training courses to enhance the skills of its labor force. Thus, between 1980 and 1991, the number of courses increased from 406 to 816, and the number of hours devoted to training courses also increased, from 170,000 in 1990 to 242,000 in 1991.14

These three newer firms introduced an unprecedented dynamism into the Spanish

12 NMI produces four-wheel-drive cars, with a focus on Jeep manufacture.

13 Cars are transported by sea from the NMI factory in Zona Franca, Barcelona, to Tokyo.

14 No data on this issue are available for FE and GME.

automobile industry, which is reflected in their relatively higher productivity. Between 1985 and 1990, FE and GME produced on average 31 and 37 units per worker, respectively. NMI had the steepest trend in productivity, going from 2 units per worker in 1984 to 12 units in 1990.15

In all three firms materials accounted for the highest share of costs. Information on the cost structure of FE is available only for 1990 and 1991. In both years the materials cost share was 73 percent, while labor cost declined from 22 percent in 1990 to 10 percent in 1991, and external services increased from zero to 11 percent of total cost. In the case of GME data are available from 1988 to 1990. In all three years the materials share is around 73 percent. The cost share of external services went to around 11 percent, and labor cost share was maintained at around 8 percent. NMI's materials cost share was around 70 percent in the period 1975-90.16 Labor cost share decreased from 23 to 16 percent in the same period, and external services cost share grew from 4 to 10 percent.

The high materials cost share of assemblers implies significant participation by other firms in the assembler's output and suggests that the automobile industry is a network of firms. In addition, the increasing cost of external services in most of the firms supports the view of an increasing participation of other firms in the provision of services to the assembler, which implies a reduction in the degree of vertical integration. NMI data on research and development confirm the change from MPS to LPS. Research and development (R&D) on the overall car was performed almost entirely by the assembler in 1975, while

15 NMI productivity is not comparable to the productivity of the other firms studied, because NMI does not produce the same kind of cars.

16 Supporting evidence for NMI is given in Pallares-Barbera (1993) by estimating a Cobb- Douglas production function for the firm. Results indicate a very high elasticity of output with respect to materials in the second half of the period, 1983-90.

354


only 40 percent was done by the assembler in 1990. Similarly, in 1975, 60 percent of the R&D of main components was done by the assembler, while in 1990 only 20 percent was conducted by the assembler and 50 percent by upstream firms. Such a change in the distribution of R&D activities involved longer-term contracts between assemblers and component producers. In some firms, like NMI, engineers employed by the assembler helped in developing components of the car. Before such a close relationship is established, the component firm becomes a part of the first-tier suppliers of the assembler. In order to be a member of this group, the assembler performs a test on quality, relia- bility, and ability to respond to demand. Most of the first-tier suppliers are not subsidiaries of the assembler.

Spatial Adjustments of the Automobile Industry in Spain

The adoption of JIT practices17 brought about a change in the spatial arrangement of the auto production network, more qualitative than quantitative. On the one hand, between 1983 and 1992, both the number of component producers per assembler (Pallares-Barbera 1996) and the aggregate number of component producers decreased, the latter dropping from 1,417 to 1,096. On the other hand, JIT distribution induced the emergence of intermediate warehouses as new nodes in the network. Warehouses function as a sink for components from different producers and as a source of components for assembly plants (Fig. 3). Given the spatial inertia of component firms, these sink-and-source warehouse nodes substitute some of the functions of component firms, like the JIT

17 Womack et al. define JIT practices as "con- vert[ing] a vast group of suppliers and parts plants into one large machine, by dictating that parts would only be produced at each previous step to supply the immediate demand of the next step" (1990, 62).

1983

-DEMAND

1992

-DEMAND

Figure 3. Changes in Spanish auto network.

distribution. The spatial immobility of Spanish suppliers is due to the lack of mobility of labor and capital.

Warehouses are located close to assembly firms in order to facilitate short, timely, and sequential deliveries-on a daily or even hourly basis-so as to meet the requirements of the JIT system. They have two kinds of ownership: independent firms and subsidiaries of assembly firms. Independent warehouses are usually located in auto regions, and subsidiaries locate closer to their assembly plants- within a five to ten minute driving distance. Evidence of warehouses emerging as inter-

355

ECONOMIC GEOGRAPHY

mediate points between suppliers and assemblers could also be found in Toyota's factory in Europe (Wells and Rawlinson 1992), which built a warehouse to handle components from a wide range of suppliers. The number of warehouses in Spanish auto regions rose from 128 to 259 between 1983 and 1992. The most dramatic changes occurred in Barcelona and Madrid, where the number of warehouses went from 51 to 103 in 1983 and from 56 to 102 in 1992. In other regions, although quantitatively less significant, the increase in the number of warehouses implied a change toward JIT practices, since at least one warehouse was located close to an assembler. For instance, in Pontevedra, Citroen's region, a new warehouse was set up; in Zaragoza, GM's region, the number of warehouses increased from three to six; and in Valencia, Ford's region, they increased from two to six.

The initial location of assemblers determined the later cluster of kindred firms in particular regions. The location of Seat and Motor Iberica in Barcelona and Empresa Nacional de Autocamiones and Peugeot Talbot in Madrid created an important spillover of ancillary networks in both regions. By 1983, component firms were still located mainly in Barcelona and Madrid; these regions hosted 43 and 22 percent of all the component firms in Spain. The rest of the regions had low con- centrations of component firms in 1983: the proportion of these firms located in Vizcaya, Guipuzcoa, and Zaragoza ranged between 4 and 8 percent; and in Alava, Navarra, Girona, and Valencia, between 1 and 3 percent. A few other regions hosted less than 1 percent of suppliers each. By 1992, Barcelona hosted almost 40 percent of suppliers and Madrid 19 percent; Valladolid maintained 0.4 percent of total suppliers, Pontevedra increased to 1.3 percent, Zaragoza decreased to 4.1 percent, and Valencia increased to 3.2 percent (Fig. 4).

Clusters did not develop in regions such as Valladolid or Pontevedra, suggesting that spatial agglomeration is not a direct

1983

1992

Figure 4. Concentration of component firms by region, in percentages. Source: Pallares-

Barbera (1993).

response to the existence of assembly plants in the region. It needs other supporting factors, such as the lack of import substitution strategies of the assembly firms. Over time, Renault and Citroen bought their components in France, using a low proportion of local content. Such low demand discouraged the establishment of component firms in the region.

Conclusion

The automobile industry in Spain suc- cessfully adjusted to the new environment, in terms of both the internal organization of assemblers and the restructuring of the

356


network. In particular, this process led to a decrease in the degree of vertical integration of Spanish assemblers, who adjusted their procurement strategies by introduc- ing just-in-time distribution practices and by acquiring a larger amount of components outside. The Spanish auto network became more efficient through the creation of a new type of node: the distribution warehouse. With the advent of warehouses, assemblers relied on a smaller number of suppliers, adopted longer-term contracts, and performed quality controls of components before assembling.

The new strategies adopted by the Spanish assemblers did not involve a substantial change in the regional distribution of firms. Over the analyzed period, traditional auto regions (the Barcelona and Madrid provinces) maintained their rela- tive position in the ranking of the distribution of suppliers. These traditional regions also hosted the highest proportion of new warehouses. Emerging auto regions, however, experienced little increase in the number of component firms. In these emerging regions, JIT practices were adopted from the beginning, and a distribution warehouse replaced the expected cluster of component firms around the assembler. The previous existence of a large assembler in the region did not nec- essarily imply the creation of a cluster of component firms unless other supporting factors, such as the lack of import substitution strategies by the assembly firms, were present.

The analysis shows that the introduction of a flexible production system has increased the efficiency of the Spanish automobile firms and that flexible specialization has rationalized the auto network. However, these processes have some important shortcomings. First, the decrease of component inventories inside the factory walls makes the assembly plant more dependent on the effectiveness of its suppliers. Strikes in the transport sector have, a few times, actually collapsed the production of some assemblers.

Second, the frequent, timely, and sequential deliveries from component producers to assemblers increase the amount of component load transported ("road warehousing"). This process implies that while assemblers benefit from lower costs inventory, unless transport infrastructure increases commensurably with the greater utilization of JIT, they face higher transportation costs.

Already by 1992, in Japan, the logistics of distribution emerged as the major con- straint for the efficiency of the industry. Under these circumstances, automobile firms considered alternative arrangements involving a relocation of the production points. An interesting hypothesis, related to this emerging model, would be that there exists a production restructuring and a spatial reordering aimed at reducing transactions costs of physical commodities and knowledge flows.

This new production system has four major features. First-tier suppliers serve only one assembler factory, developing a spatial cluster in order to diminish transactions costs of intermediate products. The spatial cluster is located close to a large demand point. The geographic pattern formed by the clusters in a large territory appears to form a cellular structure ("cellular production system," or CPS).

In the CPS, discrete parts of the car are produced by a large number of small factories who serve more than one firm. In addition, these factories diversify their production in order to supply other manufacturing sectors. The dealer transmits client preferences regarding the product to their closest production plant. The assembler receives the dealer's information and produces the customized product in association with its first-tier suppliers. The "main brain" of the firm, located at the central point, receives petitions from diverse production plants about the technical needs required to produce the customized product. The main brain conducts the necessary research and development in order to adapt technology to the production of customized goods

357

ECONOMIC GEOGRAPHY

without incurring significantly higher vari- able costs.

This paper has also shown that the changes in the automobile industry had little immediate impact on the geographic distribution of firms within Spain. Space does not react as rapidly as do other structural variables. The relatively fast changes in the production system contrast with the slowness of the spatial restructuration. The

JIT system was adopted in the second half of the 1980s, while the analysis ends in the early 1990s. Hence, we cannot expect a siz- able spatial reaction of the Spanish auto network in such a short period of time.

Also, the high level of outsourcing of Spanish assemblers, and thus the low proportion of value added generated by assembly firms, implies that future research ought to devote more attention to the role of component firms in the hierar- chy of the network.

Finally, the automobile industry is a complex structure of multiple agents: corporate management, unions, smaller producers, and local and national institutions. The success of the automobile industry in Spain in maintaining its international com- petitiveness is related to the effectiveness of the strategies followed by these agents to enhance the industry-specific human capital. This is because, in contrast to physical capital, labor is a relatively immobile factor and, moreover, human capital accumula- tion is relatively slow. In order to avoid corporations looking for more competitive countries, then, Spain must react to international competition as a core rather than as a peripheral country, by increasing the levels of value added to its automobile products.

References

Agglietta, M. 1979. Theory of capitalist regulation. The US experience. London: Verso.

Automotive News. 1991. 1991 Market data book issue.

Banco de Espafia. 1990. Central de balances. Madrid: Banco de Espafia.

Castafio Collado, C. 1985. Cambio tecnol6gico y mercado de trabajo en la industria del

automovil. Madrid: Instituto de Estudios Laborales y de la Seguridad Social.

Christensen, P. R.; Eskelinen, H.; Forsstr6m, B.; Lindmark, L.; and Vatne, E. 1990. Firms in network: Concepts, spatial impacts and policy implications. In Networks and regional development, ed. S. Ineris and L. Jacobsen, 11-57. Stockholm: Nordisk Institute.

Cooke, P., and Morgan, K. 1991. The network paradigm: New departures in corporate and regional development. Regional Industrial Research Report, vol. 8. Cardiff: University of Wales.

Cusumano, M. 1989. The Japanese automobile industry. Cambridge: Harvard University Press.

Debbage, K., and Rees, J. 1991. Company per- ceptions of comparative advantage by region. Regional Studies 25:199-206.

Garrahan, P., and Stewart, P. 1992. The Nissan enigma: Flexibility at work in a local economy. London: Mansell.

Hill, R. 1989. Comparing transnational systems: The automobile industry in the US and Japan. International Journal of Urban and Regional Research 13:462-80.

Hounshell, D. 1975. From the American system to mass production 1800-1932. The development of manufacturing technology in the US. Baltimore: Johns Hopkins University Press.

Instituto Nacional de Estadistica. 1970-93. Anuario estadfstico de Espaiia. Madrid: Instituto Nacional de Estadistica.

Jaikumar, R. 1986. Postindustrial manufacturing. Harvard Business Review (November- December):69-76.

Lipietz, A. 1986. New tendencies in the international division of labor: Regimes of accu- mulation and modes of regulation. In Production, work, territory: The geographical anatomy of industrial capitalism, ed. A. J. Scott and M. Storper, 16-40. Boston: Allen & Unwin.

Mair, A.; Florida, R.; and Kenney, M. 1988. The new geography of automobile production: Japanese transplants in North America. Economic Geography 64: 352-73.

Morris, J. 1988. New technologies, flexible work practices and regional socio-spatial differen- tiation. Environment and Planning D: Society and Space 6:301-19.

Motor Vehicle Manufacturers Association of the United States (MVMA). 1991. World motor vehicle data. 1991 Edition. Detroit: Public Affairs Division of the MVMA.

Oberhauser, A. 1993. Semiperipheral industrialization in the global economy: Transition in

358


the South African automobile industry. Geoforum 24:99-114.

Organization for Economic Cooperation and Development (OECD). 1992. Industrial structure statistics: 1985-1992. Paris: OECD.

Pallares-Barbera, M. 1988. Economic factors and institutional incentives in industrial location. A comparative study for ten countries: Austria, France, Ireland, Italy, Nether- lands, Portugal, Spain, Switzerland, UK, and West Germany. Barcelona: Barcelona's De- velopments Agency (Consorcio de la Zona Franca).

. 1993. The structural and spatial adjustments of the automobile industry in Spain: 1975-1990. Ph.D. diss., Department of Geography, Boston University.

. 1996. Nissan Motor Iberica in Spain and Japanese production systems. In Japan and the European periphery, ed. J. Darby, 180-91. Basingstoke: Macmillan.

Porter, M. 1990. The competitive advantage of nations. New York: Free Press.

Price, J. 1994. Lean production at Suzuki and Toyota: A historical perspective. Studies in Political Economy 45:66-97.

Rubenstein, J. 1986. Changing distribution of the American automobile industry. Geographical Review 76:288-300.

---. 1988. Changing distribution of American motor vehicle parts suppliers. Geographical Review 78:288-98.

Sabel, C. 1989. Flexible specialization and the

reemergence of regional economies. In

Reversing industrial decline, ed. P. Hirst and

J. Zeitlin, 17-70. Oxford: Pergamon. Schoenberger, E. 1986. Technological and

organizational change in automobile production: Spatial implications. Regional Studies 21:199-214.

Storper, M., and Walker, R. 1989.The capitalist imperative: Territory, technology and industrial growth. Oxford: Basil Blackwell.

Tamames, R. 1993. Introduccion a la economia espaiola. Madrid: Alianza.

Tighe, C. 1991. Nissan favours North-East suppliers. Financial Times, 4 July, 35.

Toyoda, E. 1987. Toyota fifty years in motion. Tokyo: Kodansha International.

United Nations. 1991. Yearbook of industrial statistics. Vol. 1, General industrial statistics, 1975-1990. New York: United Nations.

Ward's 1991 automotive yearbook. 1991. Detroit: Ward's Communications.

Wells, P., and Rawlinson, M. 1992. New procurement regimes and the spatial distribution of suppliers: The case of Ford in Europe. Area 24:380-90.

Womack, J. P.; Jones, D. T.; and Roos, D. 1990. The machine that changed the world. The

story of lean production. New York: Harper Perennial.

359

Changing Production Systems: The Automobile Industry in Spain

Documents

Transcript of Changing Production Systems: The Automobile Industry in Spain