Foreign Direct Investment in Latin America and the Caribbean 2017

108 Chapter II Economic Commission for Latin America and the Caribbean (ECLAC)
expansion in the product range was achieved by acquiring a number of specialized
manufacturers, together with a resolute R&D strategy to accompany changes in consumer
preferences and to adapt new technological developments —mainly in electronics,
connectivity and new materials— that were starting to have applications available in
the market. For example, the three largest manufacturers —Volkswagen, Toyota and
Hyundai— supply vehicles for virtually every market segment and have pioneered the
launch of hybrid and electric versions (see annex table II.A1.9).
2. The increasing power of suppliers
Complementary to what is happening among the vehicle manufacturers —slowing of
consolidation and the appearance of challenging new firms from emerging economies—
major changes are also taking place among component, parts and accessory suppliers
that will change the industry’s future value chain. 6
To ensure a reliable supplier base, the manufacturers encouraged them to set up
their own factories in the markets to which production was shifting. In this process,
suppliers grew in size and quickly became international enterprises. Thus, auto-makers
are increasingly assemblers rather than “manufacturers”. Between 1985 and 2015,
the contribution made by suppliers to total industry value-added grew from 56%
to 82% (Kallstrom, 2015). The stability and profitability of vehicle manufacturers are
intricately linked to their growing global supplier base, in a dynamic that has intensified
manufacturers’ reliance on their suppliers, especially in emerging markets. As the
international expansion of the industry and convergence between conventional and
electronic automobiles gather pace, manufacturers are forging ever closer relations
with their suppliers.
Mergers and acquisitions among suppliers in the automotive industry have increased
markedly in recent years (see annex table II.A1.8). Between 2010 and 2015, the value
of such operations grew from US$ 13 billion to a record US$ 50 billion, before dropping
back to US$ 20 billion in 2016 (PwC, 2016c and 2017a). At least five forces are driving
this trend:
• Positive expectations for growth in the global automotive industry.
• The intense process of consolidation among the largest global suppliers.
• The growing role of Chinese suppliers.
• The disruptive effect of new regulatory requirements —energy efficiency
and environmental care— and technological changes affecting the supplier
firms’ business model.
• The existence of suppliers that made deep adjustments as a result of the 2008
crisis and now display sound financial indicators. This gives them the liquidity
to make new purchases or become attractive assets for takeover.
After far-reaching internal restructuring, major companies are scaling up their
production and strengthening capabilities to underpin the profitability needed to stay
at the top of the industry value chain (PwC, 2016d). These actions are driving a rapid
process of consolidation of the components, parts and accessories subsector, led by
a small group of firms from Germany, the United States and Japan.
6
Vehicle production requires thousands of parts and inputs from many suppliers. An automobile usually consists of 20,000 to
30,000 components (JAMA, 2016). In the past, the value chain was tightly controlled by the vehicle manufacturers, which
greatly limited the suppliers’ bargaining power. However, as part of their risk reduction strategies, some manufacturers have
decoupled from their component subsidiaries (examples including Ford, General Motors and Toyota with Visteon, Delphi and
Denso, respectively).