steps. In the second panel of Table 4, we rank the programs that have seen changes in the firm’s “active involvement”, from the largest increase at the top to the largest decrease at the bottom. Not surprisingly, cost reduction has moved to the top of the list. More interesting, it also seems that suppliers have chosen to scale down activities related to innovation, product development, and continuous improvement before de-emphasizing customer satisfaction or supplier development initiatives. This is somewhat surprising since latter steps are likely to have a more immediate impact on product quality.<sup>10</sup>

# **3.3    Lead firm strategies toward developing country expansion: A case study of China**

In this section we discuss the impact of the 2009 economic crisis on developing countries through a comparison of two distinctive strategies that foreign multinational lead firms in the automotive industry have followed in China. Because all of the firms discussed are huge firms with established brands and extensive international operations, their strategies share many elements. However, there are differences in how the rapidly growing Chinese market is being integrated with their global operations.<sup>11</sup> Following from the discussion in the previous section, we can say that some firms have actively tailored their existing vehicle portfolio to the local tastes (the first dynamic mentioned above), while others have focused on selling existing vehicles in upper market segments (the second dynamic played out in the largest developing country market). The former strategy, while riskier because of the larger investment and supply-base support required, has led to greater success because it has allowed MNC lead firms to sell more vehicles and compete more directly with local carmakers.

We draw on information collected as part of a global automotive supplier benchmarking study of the International Motor Vehicle Program (IMVP), which aims to compare and contrast practices, capabilities and performance of automobile suppliers around the world. The international assessment, focusing on seats, exhaust systems and brakes, will cover plants in China, South Korea, Japan, Europe and North America. We have already collected data in plants in China, Japan, and a in few European plants. Further information of this project can be found in Brandt and Van Biesebroeck (2008).

The identities of the firms we interviewed cannot be revealed, but given that the differences fell largely along national lines we will discuss the two strategies in general by contrasting Asian and Western automakers. The first strategy can be referred to as “cautious localization.” The Japanese and Korean producers interviewed favor this approach. Vehicles are produced in China in large volumes but entirely designed overseas. Most first-tier suppliers are joint ventures (JVs) between a local Chinese firm and a foreign partner that is responsible for manufacture and often the design of the part back in the home country. Some modules are supplied by wholly owned foreign subsidiaries (WOS), which are allowed in China for parts but not for final assembly. The lead firm has to give explicit approval to use domestic firms, which tend to have a large cost advantage, even as second- or third-tier suppliers. As a result, a majority of second-tier suppliers also tend to be either JVs or WOS.

This centralized GVC organization facilitates product quality but raises costs since parts cannot be altered or easily outsourced to take advantage of lower cost, lower quality manufacturing. In the end, vehicles may cost too much to appeal to a large number of buyers, and it is more difficult to introduce products specifically aimed at the local market. While average income levels in the Chinese economy are rising rapidly, relatively wealthy customers have led the market, leaving the lower priced segments of the market as the fastest growing segments. Japanese and Korean lead firms have sought to avoid competition

> 10 In some instances funding for continuous improvement projects was refused because downsizing had left firms too short staffed to carry them out.

> 11 These differences are not limited to China. Also in Europe or in Latin America some firms have always followed a lot more engaged strategy. The chosen strategy in China for a given firm seems to carry over well to its operations in different parts of the world.

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