GSD doc Pag. 1 a 14 - Iapmei

Global Strategies
for the Development
of the Portuguese
Autoparts Industry
Francisco Veloso
Chris Henry
Richard Roth
Joel P. Clark

Preface
It is acknowledged that the automotive
industry, as well as many other economic
activities, is currently undergoing a structural
change. From the standpoint of the suppliers
of autoparts especially two vectors are of
paramount importance. On the one hand,
the change in contracting paradigm brought
about (in a nutshell) by e-commerce. On the
other hand, the irreversible trend towards
integration, driven by OEMs’ strategies of
concentrating own operations in the highest
value added segments of the value chain.
This profound change can no longer be coped
with by smaller firms by betting on their own
means, market, knowledge and experience.
It goes much further. From a public policy
standpoint the situation can be deemed as
one of market failure, so-to-speak. Specifically,
this means that the amount of structured
information required for the setting up of
viable medium/long term business strategies,
calls for public support.
suppliers, in order to provide them with the
structured information, without which,
strategies will not be self-sustained, as
mentioned above. On the other, to allow
prospective customers to get full insight on
potential, as well as limitations, of the
Portuguese Autoparts Industry.
IAPMEI believes that partnerships can only
be founded on reliable, relevant and factual,
knowledge. This study, no matter its welldefined
scope, certainly is a sure step in
that direction.
H. Machado Jorge
Chairman of the Board
IAPMEI
It was in this sense, that IAPMEI, being the
Portuguese public agency for small and
medium-sized enterprises, agreed in due
time to get associated with the research
project on the development of the Portuguese
Autoparts Industry, led by MIT.
The publication of this report serves, in
particular, two purposes. On the one hand,
bringing it to the attention of the Portuguese
Global Strategies for the Development of the Portuguese Autoparts Industry
3

Page
3 Acknowledgements
Page
44 1.4.4. Finding a Place in the Hierarchy
15 Introduction
45 1.4.5. The Web-centric Supply Chain
PART I
The Global Context of the Auto
Industry
46 1.4.6. Conclusions
47 1.5.Focus on Europe
47 1.5.1. Auto Assembly Trends in Europe
49 1.5.2. Overview of Central/Eastern
25
Chapter 1
An Evolving Industry with a Global Reach
Europe
50 1.5.3. Hungary
53 1.5.4. The Czech Republic
57 1.5.5. Poland
27 1.1.Introduction
61 1.5.6. Conclusions
28 1.2.The Car of the future
62 1.6.Focus on South America
> Index
Table of Contents
28 1.2.1. Driving Force
29 1.2.2. Body & Structures
31 1.2.3. Materials Composition
32 1.2.4. Vehicle Electronics and Electrical
62 1.6.1. General Characteristics of the
Industry
65 1.6.2. Trade Agreements: Mercosur and
Andean Pact
Systems
65 1.6.3. The Automotive Regime in
34 1.2.5. Engine & Drivetrain
Argentina
35 1.2.6. Conclusions
66 1.6.4. The Automotive Regime in Brazil
36 1.3.Globalization of the Automotive
70 1.6.5. Conclusions
Industry
70 1.7.The Role of Government
37 1.3.1. The Drivers of Change
70 1.7.1. Why do Governments Care about
37 1.3.2. Strategic Responses to the
the Auto Industry
Challenges of Globalization
72 1.7.2. Early Policies and Instruments
39 1.3.3. Production Locations
73 1.7.3. Incentives for Tangible vs.
41 1.3.4. Conclusions
Intangible Assets
41 1.4.The Rise of the Suppliers
73 1.7.4. Conclusions
41 1.4.1. Transferring Responsibility
74 1.8.Conclusions
42 1.4.2. Gaining Power
43 1.4.3. Changing Configurations
Global Strategies for the Development of the Portuguese Autoparts Industry
5

Chapter 2
Page 77
Page 88 2.5.6. Implications for Portugal Page 119
Assembler Strategies and Practices for
the Supply Chain
79 2.1. Introduction
79 2.2. Assembler Supplier Strategy
79 2.2.1. General Assembler Strategy in
Europe
80 2.2.2. Increasing Vehicle Outsourcing
and Promoting Supplier Responsibility
82 2.3. Working with Suppliers
82 2.3.1. How Can New Suppliers Get in
the Loop
83 2.3.2. Contracting with Suppliers
84 2.3.3. Supplier Performance and
Technical Assistance
84 2.4. AutoEuropa
84 2.4.1. Decision to Come to Portugal
and Early Days
85 2.4.2. AutoEuropa Teardown. What is
It, How It Works?
85 2.4.3. What Is Your Experience of
Working with Portuguese Suppliers
86 2.5. Working in South America
86 2.5.1. Location Issues
87 2.5.2. Market and Plant Characteristics
87 2.5.3. Working with Suppliers
88 2.5.4. Perceived Capabilities of the
Brazilian Suppliers
88 2.5.5. Role of Local Content
Requirements
89 2.6. Conclusions: Lessons for The
121
Portuguese Suppliers
122
122
93
95
95
99
103
104
110
111
115
117
117
117
PART II
The Portuguese Autoparts Industry
Chapter 3
The Portuguese Autoparts Industry in
the Global Context
3.1. Introduction
3.2. The Development of the
Portuguese Automotive Industry
3.3. The Current Situation of the
Portuguese Industry
3.4. The Industry in an International
Context
3.5. Market Perception and Strategy
of the Autoparts Firms
3.6. Human Resources
3.7. Conclusions and
Recommendations
Chapter 4
The Capabilities of the Portuguese
Companies
4.1. Introduction
4.2. Quality Performance
4.2.1. Quality Key Characteristics
122
124
125
126
126
128
133
134
136
136
140
143
148
150
4.2.2. Benchmarking Quality
4.2.3. Benchmarks by Technology
4.2.4. Conclusions
4.3. Logistics Performance
4.3.1. Logistics Key Characteristics
4.3.2. Benchmarking Logistics
4.3.3. Conclusions
4.4. Manufacturing Capabilities and
System Characteristics
4.4.1. Identification of Manufacturing
Performance Benchmarking Groups
4.4.2. System Characteristics and
Practices as Enablers of Performance
4.4.3. Manufacturing Performance and
Growth
4.4.4. Conclusions
4.5. Engineering and Development
Capabilities
4.5.1. Development Key Characteristics
4.5.2. Drivers of Development
4.5.3. Engineering Capability and
Company Performance
4.5.4. Conclusions
4.6. Appendices
Appendix 1: Detailed Cluster
Characteristics
Appendix 2: Detailed Regression Results
Appendix 3: Assumptions for Product
Development Calculations
6

Chapter 5
Page153
Page175
6.2.1. The Value of Logistics
Manufacturing Case Studies
176 6.2.2. Overview and Shipping Scenarios
155
156
157
157
159
159 160
160
160 161
161 162
162 163
163 165
165 166
166
166 167
167 168
169
168 170
169 170
170
170
173
173
175
175
175
175
5.1. Introduction
5.1.1. Methodology
5.2. Stamping Case Study
5.2.1. Portuguese Company Analysis
5.2.2. Worldwide Stamping Analysis
5.2.2. 5.2.3. Worldwide Stamping Improvements
Stamping Analysis
5.2.3. 5.2.4. Stamping Impact of Equipment Improvements Adequacy
5.2.4. 5.2.5. Progressive Impact of Equipment Die Press Adequacy Sensitivity
5.2.5. 5.2.6. Progressive Tandem Press Die Sensitivity Press Sensitivity
5.2.6. 5.2.7. Tandem Impact of Press Operational Sensitivity Changes
5.2.7. 5.2.8. Impact Conclusions of Operational Changes
5.2.8. 5.3. Injection Conclusions Molding Case Study
5.3.1. Injection Portuguese Molding Company Case Analysis Study
5.3.1. 5.3.2. Portuguese Worldwide Injection Company Molding Analysis
Analysis
5.3.2. 5.3.3. Injection Worldwide Molding Injection Improvements
Molding
Analysis 5.3.4. Assembly
5.3.3. 5.3.5. Injection Conclusions Molding Improvements
5.3.4. 5.4. Conclusions Assembly and
5.3.5. Recommendations
Conclusions
5.4. Conclusions and
Recommendations
Chapter 6
Logistics and Internationalization
Chapter 6
Logistics 6.1. Introduction and Internationalization
6.2. Logistics Cost Modeling
6.1. Introduction
6.2. Logistics Cost Modeling
176 6.2.3. Shipping Scenario Descriptions
178 6.3. Logistics Results
178 6.3.1. Model Variables
179 6.3.2. Model Results
182 6.3.3. Logistics Disruptions
186 6.3.4. International Comparisons
186 6.3.5. Logistics Strategies
187 6.3.6. Conclusions and
Recommendations
188 6.4. Internationalization
188 6.4.1. Introduction to Strategies for
Internationalization
190 6.4.2. The Brazilian Autoparts Industry
193 6.4.3. Factor Conditions and Location
Issues
195 6.4.4. Manufacturing Conditions
198 6.4.5. Strategic Issues
200 6.4.6. Internationalization Case Study
202 6.5. Conclusions and
Recommendations
205 Chapter 7
Conclusions and Recommendations
215 Bibliography
219 Participating Institutions
227 Participating Companies
Global Strategies for the Development of the Portuguese Autoparts Industry
7

Index
Figures
PART I
The Global Context of the Auto
Industry
Page Page 43
15
20
21
25
Introduction
Figure 1: A model for assessing
manufacturing capabilities
Figure 2: Characteristics of the sample
included in analysis of firm capabilities
Chapter 1
An Evolving Industry with a
Global Reach
27 Figure 1: Growth of the auto industry
30
30
31
32
33
34
38
40
Figure 2: Examples of aluminum body
in white cost ranges (low volume)
Figure 3: Examples of composite body
in white cost ranges
Figure 4: Changes in materials
composition of typical car over time
Figure 5: Compositions of different
materials intensive designs
Figure 6: Increasing value of electronics
in cars
Figure 7: Vehicle electronics market
growth
Figure 8: Platform consolidation trend
among the big three U.S. automakers
Figure 9: Big emerging markets
production
40 Figure 10: Big emerging markets sales
42
43
Figure 11: Research and development
expenditures by category
Figure 12: Consolidation trend of the
largest 100 north american-based
suppliers
46
47
Figure 13: Industry reconfiguration
means fewer suppliers deal directly with
automakers
Figure 14: Restructuring the supplier
industry
Figure 15: European automotive
production
47 Figure 16: History of sales in Europe
48
49
49
51
53
57
63
63
66
66
68
69
73
Figure 17: Hourly average industry wages
(1996)
Figure 18: History and forecast of sales
in Central Europe
Figure 19: Auto assembly in Central
Europe
Figure 20: Car sales market shares in
Hungary (1997)
Figure 21: Sales market shares in the
Czech Republic (1997)
Figure 22: Sales market shares in
Poland (1996)
Figure 23: Vehicle sales in South
America by country 1990-1998 (units)
Figure 24: Vehicle production in South
America 1990-1998 (units)
Figure 25: Vehicle production, sales,
and trade in Argentina 1992-1997 (units)
Figure 26: Sales automaker market
shares in Argentina 1997
Figure 27: Vehicle production, sales,
and trade in Brazil 1992-1997 (units)
Figure 28: Sales automaker market
shares in Brazil 1997
Figure 29: Changing role of the
government
8

Chapter 2
Page 77
109
Assembler Strategies and Practices for
the Supply Chain
82
93
96
97
97
101
101
102
Figure 1: Part and supplier approval
process at VW
PART II
The Portuguese Autoparts Industry
Chapter 3
The Portuguese Autoparts Industry in
the Global Context
Figure 1: The Portuguese automotive
market
Figure 2: Sales and exports of the
autoparts sector
Figure 3: Fluxes in the Portuguese
automotive industry in 1995
Figure 4: Tier structure of the autoparts
companies in Portugal
Figure 5: Major destinations of
Portuguese autoparts exports in 1997
Figure 6: National and foreign companies
according to revenues (1996)
104 Figure 7: Autoparts positioning factors
105
Figure 8: Strengths and weaknesses of
the companies
105 Figure 9: Development priorities
106
106
107
Figure 10: Main obstacles faced by the
companies in their business
Figure 11: Shared activities with clients
and suppliers
Figure 12: Importance of communication
means
107 Figure 13: Average company investment
108
Figure 14: Product value added index
(1993=100)
Page Figure 15: Human resources roles in Page 127
the companies
110
Figure 16: Human capital of the
companies
110 Figure 17: Opinion of the school system
115
117
118
Chapter 4
The Capabilities of the Portuguese
Companies
Figure 1: Firm expenditures in quality
as a percentage of sales
Figure 2: Quality certifications of the
autoparts companies
119 Figure 3: Quality performance
119
120
120
121
121
Figure 4: Benchmarking quality based
on client defects
Figure 5: Evolution of quality indicators
for the two benchmarking groups
Figure 6: Capital ownership and quality
performance
Figure 7a: Share of revenues spent on
quality
Figure 7b: Share of firms certified with
QS 9000 by group
123 Figure 8: Logistics costs
124
Figure 9: Logistics capabilities of the
firms
124 Figure 10: Supplier logistics capabilities
125 Figure 11: Logistics benchmarking
126
127
Figure 12: Capital ownership and
logistics performance
Figure 13: Logistics cluster
characteristics
128
129
130
130
131
132
Figure 14: Client defects cluster
characteristics
Figure 15: Other relevant quality
indicators for cluster groups
Figure 16: Size and ownership of
companies in both clusters
Figure 17: Inventory levels in the two
groups
Figure 18: Number of references in the
system
Figure 19: Number of suppliers and
order size
Figure 20: Activities shared with clients
and suppliers
132 Figure 21: Worker management practices
133 Figure 22: Education of the workforce
133
134
134
137
137
138
138
Figure 23: Adoption of manufacturing
support methods
Figure 24: Sales and labor productivity
growth rates
Figure 25: Share of firms in the cluster
that are 1st tier supplier
Figure 26: Development characteristics
reported by the companies
Figure 27: Investment in development
of the autoparts companies
Figure 28: Typical and maximum
engineering hours used in products
developed in the last years
Figure 29: Workers in development
activities
139 Figure 30: Equipment for development
139
Figure 31: Development tools adopted
by the companies
Global Strategies for the Development of the Portuguese Autoparts Industry
9

Page 140 Figure 32: Development lead time Page 164 Figure 11: Press choice feasibility map Page 182
140
140
144
146
Figure 33: Comparison between national
companies and the whole sample
Figure 34: Factors of innovation in the
companies
Figure 35: Benchmarking development
based on engineering effort
Figure 36: Product complexity and
development effort
166
166
167
167
Figure 12: Cost drivers of injection
molded parts
Figure 13: Cost increase due to improper
injection molding machine size
Figure 14: Injection molding assembly
data for cost estimation
Figure 15: Cost estimates by country
for the injection molded part
183
184
Figure 9: Logistics costs at 4 demand
rates, 10 delivery frequencies, with 1
shipment disruption
Figure 10: Added logistics cost due to
safety stock to protect against
undelivered shipments for the 4 shipping
scenarios.
Figure 11: The influence of product value
on direct shipping logistics costs
185 Figure 12: European logistics costs
147
147
153
158
158
160
160
161
162
162
163
Figure 37: Company size and
commitment to development
Figure 38: The Portuguese development
advantage
Chapter 5
Manufacturing Case Studies
Figure 1: Portuguese cost estimates for
the medium stamping
Figure 2: Portuguese cost estimates for
the small stamping
Figure 3: Best cost estimates by country
for the medium stamping
Figure 4: Best cost estimates by country
for the small stamping
Figure 5: Progressive die press
sensitivity for the medium stamping
Figure 6: Tandem die press sensitivity
for the medium stamping
Figure 7: Cost penalty for inappropriate
equipment
Figure 8: The die change time on
capacity
163 Figure 9: Definition of capacity utilization
164
Figure 10: Cost versus capacity
utilization
168
169
169
173
176
176
177
177
179
180
181
181
Figure 16: Injection molding
manufacturing sensitivity
Figure 17: Injection molding assembly
costs by country
Figure 18: Total assembly costs by
country
Chapter 6
Logistics and Internationalization
Figure 1: The important role of logistics
in a competitive market
Figure 2: Logistics cost model shipping
scenarios
Figure 3: Logistics cost model overview
Figure 4: Schematic of logistics pull
system used in the cost model
Figure 5: Average percent breakdown
of logistics costs
Figure 6: Logistics costs shipping at 4
demand rates and 10 delivery
frequencies
Figure 7: Logistics strategy feasibility
map
Figure 8: Logistics costs at a demand
rate of 500 parts per day to two
destinations
200
200
201
201
205
Figure 13: Cost breakdown for a
stamped assembly delivered to a
German customer.
Figure 14: Manufacturing, assembly and
logistics cost for the stamped assembly
delivered to a German customer.
Figure 15: Cost breakdown of the
injection molded assembly delivered to
a Brazilian customer.
Figure 16: Affect of shipping components
from Portugal versus importing capital
for Brazilian operations.
Chapter 7
Conclusions and Recommendations
212 Figure 1: Company Strategies
10

Index
Tables
PART I
The Global Context of the Auto
Industry
Page Page 68
25
35
35
39
50
50
53
54
55
56
58
59
62
64
67
Chapter 1
The Auto - An Evolving Industry with a
Global Reach
Table 1: Energy and power densities of
energy production technologies
Table 2: Energy distribution of a midsize
car
Table 3: Production in countries
peripheral to large markets
Table 4: Location and capacity of major
plants in Eastern Europe
Table 5: Major assembler investments
in Eastern Europe
Table 6: Market size (million of U.S.
dollars)
Table 7: Major passenger and
commercial assemblers in the Czech
Republic
Table 8: Major Czech parts
manufacturers
Table 9: Joint-ventures acquisitions and
investments in Czech Republic
Table 10: Market size (million Of U.S.
dollars)
Table 11: Major Polish parts
manufacturers
Table 12: South American economy and
fleet in 1995
Table 13: Location and capacity of major
plants in South America
Table 14: Location and capacity of major
plants in South America
69
69
71
93
96
98
100
100
100
102
103
115
122
Table 15: Major automaker investments
in Argentina 1996-1999
Table 16: Critical figures of the Brazilian
auto industry 1994-1997
Table 17: Relative shares of the types
of cars manufactured in Brazil
Table 18: Major automaker investments
in Brazil 1997-2000
PART II
The Portuguese Autoparts Industry
Chapter 3
The Portuguese Autoparts Industry in
the Global Context
Table 1: Plants and employment in the
auto industry
Table 2: Major foreign direct invesments
in the auto industry since 1988
Table 3: Importance of the auto industry
for the Portuguese economy in 1997
Table 4: Vehicles assembled in Portugal
in 1997
Table 5: Sales of components produced
in Portugal by large group
Table 6: Distribution of activities of
Portuguese firms
Table 7: International comparison of the
auto industry (1996)
Chapter 4
The Capabilities of the Portuguese
Companies
Table 1 : Quality indicators for stamping
and injection molding
123 Table 2 : Logistics strategy
126
Table 3 : Responsiveness performance
for benchmarking groups
Global Strategies for the Development of the Portuguese Autoparts Industry
11

Page 141 Table 4: Variables considered in the
analysis of drivers of development
Page 194
195
Table 7: Raw materials relative prices
Table 8: Total wages in selected regions
142 Table5: Regression results for total
engineering hours as dependent variable
of Brazil
144
146
148
153
157
159
Table 6: Differences in means of key
performance indicators in four subgroups
Table 7: Simulation of size implications
of product complexity
Table 8: Difference between companies
with and without tool development
Chapter 5
Manufacturing Case Studies
Table 1: Stamping assembly data for
cost estimation
Table 2: Plant analysis of operating and
equipment efficiency
159 Table 3: National factor conditions
173
Chapter 6
Logistics and Internationalization
178 Table 1: Select logistics input variables
184
Table 2: Best truck size and logistics
cost from lisbon based on customer
demand (parts/days) and shipping
scenario
197
Table 9: Manufacturing practices of
the Brazilian autoparts industry - 1997
186
Table 3: Competitive logistics strategies
190
192
193
Table 4: Major areas of Brazilian
autoparts suppliers
Table 5: Hypothetical cost buildup for
imported autoparts vs. price of locally
manufactured autoparts
Table 6: Examples of state incentives
In Brazil
12

Acknowledgements
This report prepared by MIT is the result of
over a year and a half of joint research work
with several Portuguese institutions and
companies. The study brought together
several MIT research organizations
(International Motor Vehicle Program, the
Materials Systems Laboratory and
Department of Urban Studies and Planning),
the Portuguese Government, through IAPMEI,
INTELI – Inteligência em Inovação , FEUP -
Faculdade de Engenharia da Universidade
do Porto, and fifteen national autoparts
companies. It has been a very interesting
project, in which MIT could share some of
its knowledge of the industry, but also had
the opportunity to learn immensely from the
realities and challenges that Portugal is now
facing in what concerns the auto industry.
Throughout the project several people and
organizations played a key role, and we would
like to thank them. In first place we would
like to thank IAPMEI and the fifteen national
companies associated to the project, first
to have given us the opportunity to conduct
this study, and second to be permanently
available for our queries, meetings and
questionnaires. Your active involvement was
vital for the completion of the research.
part of the work, starting with the preparation
and collection of questionnaires, then
inserting the data into electronic format, and
finally having relevant contributions to the
analysis, both in the industry analysis and
in the case studies. INTELI is a wealth of
knowledge on the automotive industry that
Portuguese companies should tap into.
Third, we would like to thank FEUP for the
participation in the preparation of the
questionnaires and the subsequent role
collecting them. Your contribution was
important to assure we had the necessary
data to perform the analysis.
Finally we would like to thank all the people
working with the Portuguese automotive
industry, either managers in companies,
industry experts or researchers, that took
the time and the effort to respond to our
questions, either in the form of questionnaire
or though an interview. All your cooperation
was important for the work now presented.
Francisco Veloso would like to acknowledge
a fellowship from PRAXIS XXI for his research
at MIT (BD/9457/96).
In second place we would also like thank
and value the involvement of INTELI. The
research team at INTELI was active, engaging
and diligent. It took on its hands an important
Global Strategies for the Development of the Portuguese Autoparts Industry
13

List of Participating Institutions:
List of Participating Companies:
IAPMEI
Instituto de Apoio às Pequenas e Médias
Empresas e ao Investimento
MIT
Massachusetts Institute of Technology
INTELI
Inteligência em Inovação
FEUP
Faculdade de Engenharia da Universidade
do Porto
Cabelauto - Cabos para Automóveis, S.A.
Couro Azul – Ind. e Comércio de Couros, SA
David Valente de Almeida, Lda.
Iber-Oleff – Comp. Técnicos em Plástico, S.A.
IETA - Estofos e Transf. Automóveis, Lda.
Inteplástico, Ind. Técnicas de Plástico, Lda.
IPETEX – Soc. Ind. Pesadas Têxteis, S.A.
João de Deus & Filhos, S.A.
Manuel da Conceição Graça, Lda.
Pereira, Barroso e Oliveira, Lda.
Plasfil, Plásticos da Figueira, Lda.
Simoldes Plásticos, Lda.
Sonafi, Soc. Nacional Fundição Injectada, S.A.
Sunviauto, Ind. Componentes Automóveis, S.A.
Tavol, Ind. de Acessórios de Automóveis, S.A.
14

Introduction

Objectives and
Scope of the
Report
Objectives and Scope of the
Report
The principal aim of this work is to contribute
to an understanding of past, current and
future issues associated to the success of
the Portuguese automotive industry, and
derive recommendations for the development
of the sector. Analyzing the success of the
industry entails benchmarking the current
position of the sector against the international
market and assessing the influence of
policy decisions and company strategies on
this position in the past. This analysis comprehends
the first and major part of the study
reported in this book. Developing recommendations
for the future implies interpreting
trends and analyzing scenarios in order to
understand how company and government
decisions condition the development path of
the industry. This is the second component of
the work.
There are several reasons to study the
automotive industry, and the influence of
government policies and company strategies
on its development patterns. There
are additional reasons to consider Portugal
as the object of such a study. We will highlight
some of the more important ones in
the following paragraphs.
The automotive industry is a massive generator
of economic wealth and employment.
In Western Europe, Japan and the United
States, it accounts for as much as 13% of
GDP, and one in every seven people is
employed through the industry, either
directly or indirectly (i.e. insurance).
Moreover, sectors such as rubber or steel
are highly dependent on the 50 million cars
produced each year. The demand side is
also crucial to understand the important
role of this industry. Buying a car is usually
the second largest investment objective of
a household, right after the house. This
behavior creates a predictable demand for
cars in every country.
Auto manufacturing is a vibrant and dynamic
industry, with unique challenges and
equally relevant learning opportunities.
Evolving consumer preferences foster the
development of new styles, increased reliability,
and better vehicle performance.
Government trade, safety, and environmental
regulations establish incentives and
requirements for modernization and
change in design or production. Corporate
strategies provide equally important impetus
for research, design innovation and
changes in the manufacturing process. The
implications of these factors conditioning
the industry are vast and propagate along
the automakers supply chain.
Despite its overall importance for the world
economy, the impact of the auto industry in
each region depends crucially on the role it
Global Strategies for the Development of the Portuguese Autoparts Industry
17

plays in the industry, globally considered.
Countries that choose to participate only in
auto distribution and service have limited
benefits from the industry. In addition,
these nations often experience trade balance
pressure due to the important figures
associated with cars and parts imports.
Wealth creation or backward linkage generation
happens mostly through car assembly
plants or parts manufacturing units.
Besides employment and trade impact,
auto manufacturing generates a significant
demand for intermediate inputs, which can
foster the development of other sectors of
the economy.
Because of these characteristics, most
governments have looked at automotive as
a major industrial development opportunity.
They are aware that it provides a hub for an
integrated industrial structure by triggering
the domestic production and technological
advance of industries such as steel,
machine tools and components, among
others. In more advanced regions, this has
meant aggressive policies to promote manufacturing
excellence of local firms, and
the development of ever more innovative
cars. In less industrialized regions, the
objective has been to gear up manufacturing
capabilities, both by attracting foreign
firms to locate new units in the region, and
by fostering the participation of local firms
in the auto supply chain.
The importance of the auto industry for the
competitiveness of both more advanced
nations and late industrializing regions has
generated important research work.
Academics, politicians and managers have
tried to understand patterns and find successful
strategies and policies to foster
industry growth. Within the developed
world, the emergence of Japanese companies
as manufacturing and development
leaders probably captured most of the
attention of the late eighties and early
nineties. More recently, mergers and acquisitions
and globalization of operations are
probably among the dominant issues. The
study of late industrialization countries has
often focused on large players. The entry of
Korea into the auto industry as a car producer,
the emergence of Mexico’s as an
extension of the US manufacturing base, or
the recent growth in the Indian, Brazilian
and Chinese markets, are all issues which
have captured the attention of academics
across the world.
By contrast, there is very limited work
focusing on the patterns and strategies of
smaller players in the industry. Little is
known on the important role that the auto
industry is playing in regions such as
Taiwan, Portugal or the Czech Republic.
Despite their small influence in the overall
auto industry, the auto plays an important
role in the local economy. Therefore,
understanding the patterns of development
of the auto sector, in these regions, including
successful government policies and
company strategies, yields important
lessons for industrial development.
Portugal is a particularly attractive candidate
because of its recent success in the
industry. During the last decade, the automotive
industry has been one of the centerpieces
in the general path towards
industrialization and development that
Portugal has been following. From 1987 to
1997, the autoparts industry grew sevenfold.
Together with the assembly industry,
it leads the stock of FDI in Portugal as well
as the volume of exports for the country,
representing almost 7% of GDP. The export
capacity of the Portuguese firms, with over
60% of the total production being sent
abroad, demonstrates the important level
of competitiveness Portuguese firms have
achieved.
Despite the recent success, there are a set
of important challenges for both companies
and government. A high atomization of
firms, each with small capacity, and limited
investment in research and development,
has kept the suppliers working mostly at
second and third tier levels. Moreover, the
environment they are now facing is one of
increased concentration in the supplier
industry, and higher collaboration of the
assemblers with their first tier suppliers.
This relationship demands capabilities
18

eyond production, in particular design and
logistics. It also requires that some of the
critical suppliers be physically close to the
OEMs.
How can parts and components produced
in Portugal remain internationally competitive?
What strategies should national firms
follow to move up the tier structure? When
is it necessary to internationalize production,
and under which conditions should it
be done? What role should the government
play? Managers and policy makers are now
facing these and other questions that will
be addressed in the study.
In addition to providing an in-depth perspective
of the reality and future prospects
of the Portuguese autoparts industry, this
report also provides an interesting benchmark
against other small countries that
have tried to leverage on the auto to build
industrial capabilities. It is particularly
interesting for regions that are now entering
the EU (e.g. Hungary) and will have to
go through the process of industrial
restructuring that Portugal has experienced
in last decades.
Analytical Approach and
Organization of the Report
The analysis of the Portuguese autoparts
industry involved a three tiered approach.
First, the automotive industry was examined
on a macroscopic level. Before one
can even begin to discuss strategies for
gaining an increased share of automotive
investment, it is essential to understand
the directions of the industry as a whole,
and the areas in which future investments
are likely to occur, placing the Portuguese
industry within this global context. Second,
an intermediate analysis looking at key factors
that sustain supplier competitiveness
was considered. This analysis is crucial to
identify the actual position and characterize
paths for the development of national
suppliers. Third, selected autoparts segments
were studied in more depth to determine
specific ways in which Portuguese
manufacturers can achieve a competitive
advantage over other producers, both in
Portugal and if producing abroad.
The three levels of analysis provide a diagnosis
of the industry as well as an understanding
of the main opportunities for
Portuguese suppliers. They also provide the
major structure for the report. Therefore, as
described below, the chapters will also follow
the three tiered approach. At the end,
based on this understanding of the industry
and Portugal’s potential, the research
addressed the best uses of government
policies towards promoting the development
of Portuguese manufacturers in these
areas. Firm level strategies aimed at competing
in both the local, European and global
environment were also evaluated.
MACROSCOPIC ANALYSIS
The macroscopic analysis addresses the
automotive industry on several levels. It
provides an understanding of where the
worldwide auto industry is going and the
potential benefits and drawbacks of having
to compete and operate on a global scale,
examining in particular the possible roles
that Portuguese manufacturers might play.
The technical trends in the global automotive
industry are the first issue discussed
in this chapter. The major evolution in the
technical characteristics of the car is
described and the implications for the OEM
and assemblers alike are discussed.
The issue of globalization is examined by
looking at industry data on the changes in
supply chains. The main questions deal
with the establishment of a supply network
near new assembly facilities, and the ability
of local suppliers to compete internationally.
This involves a more detailed look
at logistics considerations and the everincreasing
desire by the OEMs to have Justin-Time
delivery systems.
A review of the European industry focuses
more on the investment decisions made by
the major manufacturers in Europe, evaluating
in particular their perspective towards
Eastern Europe. On the other hand, the
analysis of the South American market
Global Strategies for the Development of the Portuguese Autoparts Industry
19

Figure 1 : A Model for Assessing Manufacturing Capabilities
Objectives Levels Dimensions
Strategy
Cost
Evaluate Position
Delivery
Dependability
Quality
Capabilities
Product Development
Process Development
Derive Trends
Flexibility
Structure
Facilities / Equipment
Technology and Process
Assess System
Workforce and Organization
Logistics and Supply Chain
Infrastructure
Research and Engineering
Interfaces
addresses major trends for the next years,
both at the level of suppliers and assemblers,
focusing some of the opportunities
for investment of the Portuguese firms.
A national, European and global review of
the automotive industry consisted mostly
in gathering industry published data on
trends in demand, investment, etc, as well
as use of the research pool existent at MIT
and in the IMVP. Given major changes taking
place in the South American industry,
a direct visit to the region was used to gather
additional data and discuss some of
the core issues both with industry and government
officials. Direct consultation of
some of the largest world OEMs, through
interviews with top managers in some companies,
was also found necessary to gather
first hand opinion of these companies
about the industry in Portugal and the capabilities
of indigenous companies.
The Macroscopic Analysis is presented in
Chapters 1 and 2; Chapter 1 addresses
the global trends in the industry, including
the focus on Eastern Europe and South
America; Chapter 2 describes the perspectives
of the OEMs.
INTERMEDIATE ANALYSIS
The analysis of the global auto industry
context and the evaluation of the specific
situation of the Portuguese industry provide
a baseline of factors hampering or driving
the development of the industry. An
intermediate analysis builds on the macroscopic
level work and addresses aspects
that are common across the supplier base
in Portugal. Figure 1 presents the overall
model used to assess the manufacturing
capabilities of the Portuguese autoparts
industry.
20

Figure 2 : Characteristics of the Sample
Included in the Analysis of Firm Capabilities
12
350
10
300
Millions of Contos
8
6
4
2
250
200
150
100
50
0
1992 1993 1994 1995 1996 1997 1998 (p)
0
Mean
Median
Total
Maximum
Manufacturing companies compete on a
set of dimensions that are well understood
and characterized in business and industrial
engineering literature. Some of the
critical ones are cost (price), responsiveness,
quality, flexibility and development.
Depending on the positioning strategy
towards their clients, firms will place more
or less emphasis on each of these capabilities,
and organize their internal structure
and infrastructure to better respond to
the chosen strategy. The first aspect covered
by the research was a clear identification
of how relevant each of these strategic
issues were for the companies in Portugal,
their relative strengths and weaknesses in
the face of these issues, as well as their
development priorities and obstacles. The
results are reported in Chapter 3, following
the general analysis of the evolution and
current situation of the Portuguese
autoparts industry.
Given the set of strategic positioning factors
of the industry, the manufacturing
capabilities of the firms were assessed.
The analysis of manufacturing capabilities
involved indicators related to quality,
responsiveness and development.
Automakers have a common set of business
and technology practices and have
been converging in their requirements
towards their suppliers. Therefore, competing
in the auto supply industry creates similar
types of requirements for the companies.
This enables a comparison of a set of
performance indicators across companies,
even if they are producing technologies as
diverse as plastics and metal stampings.
The third critical step involved the identification
of enabling factors in the structure
and infrastructure supporting the capabilities
of the firms. As presented in the figure,
these included human resources, operations
and supply chain, among others.
These also provide critical information
regarding best practices and success conditions.
The evaluation of the firms’ manufacturing
capabilities is detailed throughout Chapter
4 of the report. The research was based on
a detailed questionnaire submitted to a
pool of companies in the industry. The 45
questionnaires that were returned constitute
the basis of the analysis (see annexes
for the list of companies). As seen in Figure
2, this is an important group of companies
representing 285 Million Contos of revenue,
corresponding to 40% of the total
Portuguese autoparts industry sales.
Moreover, there was a concern to choose
companies that represented a wide array of
industry segments, to minimize bias from
having one type of segment (say injection
molding) over-represented. These compa-
Global Strategies for the Development of the Portuguese Autoparts Industry
21

nies are 70% of national ownership and
30% international. As it will become evident
in the study, the growth trend of the
sample follows what is happening in the
industry, as it does the reduced value of
the median sale of the group, anticipating
the small average size of the companies in
the industry.
MICRO ANALYSIS
While the macroscopic analysis leads to a
crucial understanding of the growth areas
for the autoparts suppliers as well as the
industry as a whole, and the intermediate
level analysis results in a road map for
achieving the characteristics essential to
the automotive assemblers, it is the role of
the microscopic analysis to determine the
economic competitiveness of individual
Portuguese suppliers and the autoparts
supply industry in general. The strategies
for interacting with the OEMs outlined in
the macro and intermediate level analyses
will be successful only if the Portuguese
firms achieve cost structures that make
them competitive with their international
counterparts.
The firm level analysis is conducted primarily
through the use of technical cost
modeling (TCM). This methodology looks
at manufacturing as a series of unit
process steps each with a set of cost drivers.
These cost drivers consist of variable
costs such as material, labor and energy,
and fixed costs such as the required investment
in capital, tooling and building. The
cost of each of these elements is a direct
consequence of the process steps and the
parts to be produced. By providing details
about the origins of cost for each process
step and cost element, the methodology
provides insight into the underlying economics
of the overall manufacturing
process. For example, the effects of operating
in a tight capital market can be modeled
using higher interest rates and can be
seen in the resulting equipment charges for
each capital intensive process step. The
severity of this effect will of course depend
on the capital requirements that are a
direct consequence of the chosen production
process. Similarly, labor wage-related
factors could be tracked throughout the
process to determine the most cost effective
manufacturing route for different labor
markets. This type of analysis can be
applied to each of the cost elements under
a variety of manufacturing scenarios and
can be used to relative advantages and disadvantages
of using various production
processes in a given economic environment.
MIT based research projects have used the
technical cost modeling approach, combined
with additional benchmarking data to
determine the competitive position of
numerous manufacturing firms. Studies
recently conducted for the governments of
Thailand and Argentina examined an
assortment of autoparts suppliers and
identified areas of improvement for each.
In some cases, the analyses found fundamental
advantages associated with the
local manufacturers that could be exploited
and turned into an increasing share of
exports provided the companies remained
within certain limits imposed by their technology.
In other cases, the research
helped the firms to understand weaknesses
in there manufacturing processes that
could allow other, more efficient manufacturers
to produce the same products at
lower costs. The point here was to identify
these problems before the market was fully
open to outside competitors, at which time,
the local manufacturer would not be able to
survive as an inefficient producer.
The analyses involve detailed case studies
aimed at understanding the key aspects of
the production process and their relevant
costs. The cases focus on Portuguese
firms, but by necessity involve at least
some analysis of foreign producers as a
basis for comparison and to provide
greater understanding of other manufacturing
options which may help the Portuguese
manufacturers.
Manufacturing cost models are utilized for
studying the stamping and injection molding
processes. In the stamping study, four
22

companies sent current production data for
their stamping operations of small
stamped assemblies. These small
stamped assemblies consisted typically of
two or three parts welded, bolts and nuts
welded, and painted. The stamping operations
received the majority of the focus
because of the extensive amount of benchmarking
data embedded within the cost
model. Such benchmarking data is not
available in the cost models for welding
and painting operations. In the injection
molding study, three companies sent current
production data concerning their current
operations. The small sample of injection
molded parts ranged from small to
large, and from simple to complex.
Therefore, the manufacturing study
focused on the ability to pickup differences
in cost from the benchmarking standards.
Furthermore, Portuguese manufacturing
costs are compared to other European
manufacturing costs to give a sense of how
Portugal is positioned. The manufacturing
case studies are described in Chapter 5.
Logistics cost models are used for studying
the charges associated with getting the
product to the customer. The logistics
costs of prime concern are for shipping,
warehouse space, packaging, and carrying
charges This study focuses on the different
logistics strategies available to get the
orders to the customer. These strategies
include direct, just-in-time, distribution center,
and hybrid distribution center to just-intime
shipping scenarios. The study
addresses cost differences between the
shipping strategies and those resulting
from lengthening geographic distances to
the customer. Logistics costs of companies
were not received, but realistic trucking,
warehousing, and carrying costs were
simulated. Thus, these results will allow
Portuguese companies to consider the
potential strengths and weaknesses associated
with the exporting of goods into
Europe and Brazil. Chapter 6 embodies the
logistics analysis, which is presented within
a broad internationalization case study
that focuses particularly on Europe and
Brazil.
At the end, Chapter 7 presents overall conclusions
and recommendations of the
study. Recommendations include suggestions
in terms of government actions, as
well as a discussion of alternative development
paths that can be pursued by the
Portuguese companies.
Global Strategies for the Development of the Portuguese Autoparts Industry
23

Millions of Vehicles
>
Chapter 1
An Evolving Industry with a
Global Reach
1.1.Introduction
Despite its cyclical behavior, the automotive
industry has maintained an impressive
record of growth ever since World War II.
Nevertheless, this pattern of growth can
hardly be reduced to the numbers illustrated
in Figure 1. Throughout this period, the
industry has endured important changes in
its organization, players and structure.
These have influenced countries and
regions throughout the world, among which
is Portugal. This report is about change in
the automotive industry. It will particularly
address changes happening in the last
decade, as well as what can be foreseen
for the near future. At each step, it will
highlight the implications for Portuguese
firms and government.
Many influential factors affect decisions
made in the automotive world. Consumer
preferences determine the current styles,
reliability and performance standards of
vehicles. Government trade, safety and
environmental regulations establish incentives
and requirements for modernization
and change in design or production.
Competitive rivalries and corporate strategies
provide equally important impetus for
research, design innovation, and changes
in the manufacturing process. All automakers
are constantly under pressure to identify
consumer preferences, national biases
and new market segments where they can
sell vehicles and gain market shares. The
ability to be flexible enough to quickly
respond to all these pressures will determine
their position in this increasingly competitive
industry. The implications of these
factors conditioning the industry are vast
and propagate along the supply chain of
the automakers.
To understand how this complex set of factors
has been shaping the industry, three
patterns of change that have clearly
emerged in the last decade will be analyzed
in detail:
Figure 1: Increasing Growth in the Automotive Industry
World Auto Production
60
50
40
30
20
Commercial
Passengers
10
0
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
Source: Ward’s Automotive Yearbook
Global Strategies for the Development of the Portuguese Autoparts Industry
27

• First, the nature of the future automobile
will be considered. It has been understood
by all players in the industry that the automobile,
as we traditionally know it, is
changing. New materials, advanced electronics
and potentially a new power train
are creating a different car. Chapter 1 will
address the driving forces governing each
of the major automotive features undergoing
transformation, discuss the response
of the automakers and evaluate the relative
feasibility for each of the trends;
• Second, the pattern of globalization in the
industry is evaluated. Although the automotive
industry has always been global, the
characteristics of this world presence have
changed over time. Currently, an intense
wave of mergers and acquisitions is once
again showing an evolution in this dynamic.
Chapter 2 will explore what globalization
means in the context of the auto industry;
what is driving it, how are players reacting,
and what can be expected for the future;
• Third, the role of the suppliers is
assessed. In a decade, these firms went
from unknown minor players to global competitors
with sizes starting to rival some
the smaller assemblers. They are now considered
by the automakers as critical partners
and not merely suppliers. Chapter 3
characterizes this growth process in the
industry, evaluating the implications for
large and smaller players.
The three dimensions of the industry highlighted
above have a horizontal characteristic.
They are happening all over the world, regardless
of the region of the globe where cars are
produced or sold. Nevertheless, they manifest
themselves differently across the globe.
Therefore, two areas that are of particular
importance for the Portuguese auto industry
will be considered in more detail:
• The European Market, where the
Portuguese firms are integrated, will be
investigated in Chapter 4. It will analyze
industry trends and future prospects on the
continent, with a more careful look at the
emerging markets of Eastern Europe, since
it can potentially be both a threat and an
opportunity for the industry in Portugal. It
will also address the perspectives on
Portugal and Spain moving from being a
“least cost option” to becoming a “workbench
extension” of the European Market;
• The South American Industry is the other
area of the globe evaluated in greater
depth. Brazil is now the largest emerging
market in the world, and will probably
remain as such in the following years. This
growth pattern provides interesting development
opportunities for the industry in
the region, and the Portuguese autoparts
should try to seize them as they unfold.
Therefore, understanding the key
prospects of the region is extremely valuable,
an issue addressed in Chapter 5;
• Finally, the report focuses on the role of
the government as a champion of the
industry. Strong industrial policies have
been a tradition in the industry, and will
probably continue for the next decade.
Chapter 6 explains the evolution of the
core features of industrial policy, how they
might evolve, and how they relate to the
stages of development of the industry.
1.2. The Car of the Future
The implementation of new technologies
has been a hallmark of automobile manufacturing.
However, unlike other industries,
intense competitiveness among the many
manufacturers has also required that only
cost competitive technologies find their way
into the final product. As such, the auto
industry has provided a platform for taking
“blue sky” technologies and providing the
development effort necessary to enable the
implementation of these technologies into a
mass production environment.
1.2.1. Driving Forces
Historically, the major driving forces behind
technological implementation in the auto
industry have been based on consumer
demands for better vehicle performance
and reliability. In recent years, technological
improvements have also been aimed at
areas such as safety, reduced environmental
impact and additional consumer fea-
28

tures unrelated to the operation of the vehicle,
such as stereo systems and navigational
aides, to name just a few:
• Consumer demands have been and
remain a strong incentive for the implementation
of new technologies by the
automakers. Numerous automakers, in
particular BMW, have built an entire customer
base around the implementation of
the newest technologies. While some
automakers have used early technological
innovation as a particular strategic plan for
increased market penetration, all of the
automakers eventually adopt many of
these features in response to consumer
demands. This demand for more features
indirectly conflicts with the powertrain
options for environmental friendliness;
• Government regulations, particularly in
North America, Western Europe and Japan
have led to vast improvements in vehicle
safety. Improved crash worthiness, as
required to meet government standards, has
been achieved through the use of new
technologies for body construction which
provide for increased energy absorption
while trying to minimize the intrusion into the
passenger compartment. Government pressure
concerning safety has led to the use of
airbags in all cars and light trucks in the US;
• Environmental regulations have also
spurred development efforts in a number of
areas. Fuel economy requirements, such
as the corporate average fuel economy
(CAFE) regulations and proposed demands
for zero emission vehicles have led the
automakers to invest significant amounts
of their R&D capabilities in vehicle lightweighting,
either through the development
of new manufacturing techniques or
through efforts aimed at using lighter
weight materials. These same regulations
are also driving research into alternative
vehicle power systems, such as electric
batteries, fuel cells and hybrid propulsion
technologies.
These developing innovations will change
the way we view and make automobiles.
Three important categories of research to
consider are the close connection between
car design and the use of lighter and
stronger materials, major leaps in powerplant
technology and internal combustion
engine design, and the proliferation of electrical
systems and electronics.
1.2.2. Body & Structures
Demands for improved vehicle performance,
improved vehicle safety and crash
worthiness and reduced environmental
impact have led to numerous developments
in the area of vehicle structures. The
full frame designs originally used in vehicle
body architecture were almost completely
replaced with unibody construction by the
1980’s. The unibody concept allowed for
significant weight savings by making the
outer skin panels not simply appearance
parts, but also using them to supply the
necessary vehicle structure. Continued
demands for even lighter weight vehicles is
driving the industry towards even newer
body architectures and different materials,
notably spaceframe based designs and
modular composite design:
• Fabrication and body assembly improvements
in the traditional unibody design
include tailored blanks. Blanks of varying
thicknesses are welded together prior to
forming to produce an optimized part.
Traditionally, the use of multiple reinforcements
carries with it additional tooling and
assembly costs. However, the use of tailored
blanks that satisfy structural requirements
with the least amount of material
has led to both weight and cost savings.
Through R&D, this technology can be
applied to aluminum where weight savings
are likely to be even greater;
• Tubular hydroforming is another innovative
metal fabrication technique which has
influenced body architecture. Hydroforming
can be used to produce parts with complex
geometries from welded steel tubes using
internal water pressure. Hydroformed steel
tubes can be used to replace several
stamped rails and provide the basis for
body architectures which lie somewhere
Global Strategies for the Development of the Portuguese Autoparts Industry
29

Body in White Cost (US$)
Body in White Cost (US$)
between traditional unibodies and traditional
spaceframes. The use of hydroforming
and tailored blanks has received a lot
of attention of late due to their use in the
Ultralight Steel Auto Body (ULSAB)
designed by Porsche on behalf of the
International Iron and Steel Institute. This
vehicle body illustrated that considerable
weight savings could be achieved by using
an optimized body design entirely in steel;
• Spaceframe designs have offered another
option for vehicle cost and weight savings
and may be better suited to the use
of materials other than steel. These
designs provide a means for achieving
structural integrity using some new technologies,
and potentially fewer parts.
Aluminum spaceframe designs take advantage
of the ease with which the material
can be extruded to form detailed profiles
from which a frame can be constructed. A
major advantage comes in terms of the low
tooling investment required for these parts.
This makes spaceframe based designs
particularly practical at low production volumes
where the typically high tooling investment
needed to make steel unibodies
results in a very expensive vehicle as
shown in Figure 1;
• The other major benefit of the spaceframe
concept is the ease with which panels
made from different materials can be
substituted in the design. GM’s use of a
spaceframe concept in its Saturn vehicles
allows for significant use of polymer composite
body panels. Because the spaceframe
itself provides most of the structural
strength in the vehicle, the body panels can
be changed without completely redesigning
the vehicle. This is particularly useful in
terms of increased opportunities for vehicle
styling as well as lightweighting;
• Though modular composite designs are
not commonly produced, automakers are
optimistic: composites could reduce far
more weight than either steel or aluminum.
Ford’s composite intensive vehicle program
designed a resin transfer molded (RTM) all
composite body, made from only 8 parts,
compared with over 200 parts for a typical
steel unibody design. The significant parts
consolidation using composites partly offsets
the high material costs and the long
fabrication cycle times. At low production
volumes, composite designs are cost competitive
due to the savings in tooling investments
compared with the traditional steel
unibody. Use of sheet molding compound
(SMC) may be more practical than RTM for
some applications, particularly at moderate
production volumes for an average compact
car as shown in Figure 3;
• Driven by the surge of new investment in
Figure 2: Examples of Aluminum Body in White
Cost Ranges (low volume)
Figure 3: Examples of Composite Body in White Cost Ranges
$10,000
$9,000
Aluminum Unibody
$3,000
$8,000
$7,000
Steel Unibody
$2,500
$6,000
$5,000
$4,000
$3,000
Space
Frame 1
Space
Frame 2
$2,000
$2,000
10,000 20,000 30,000 40,000 50,000
Annual Production Volume
Source: MSL Research
$1,500
10,000 30,000 50,000 70,000 90,000
Annual Production Volume
Steel RTM Glass RTM Carbon RTM Gl_Crb SMC
Source: MSL Research
30

manufacturing with different materials, joining
methods of aluminum and high strength
steels also need to be perfected. While, traditional
resistance spot welding has remained
the standard in the auto industry, it requires
the part to have flanges which enable twosided
access to the weld gun. However, tubular
hydroformed steel parts cannot have
flanges, making other welding techniques that
do not require two sided access necessary.
Continuous laser seam welding is an alternative,
not only for these applications, but possibly
to replace continuous MIG welds in other
parts of the vehicle. Increased use of aluminum
in body panel applications have led to
research and development efforts in aluminum
welding. However, aluminum’s high
conductivity makes welding exceedingly difficult.
Thus, brazing, adhesives or mechanical
fasteners are the main alternatives for joining
aluminum parts;
• Automaker paint lines can cost up to
50% of a plant’s construction. These substantial
investments in new auto assembly
facilities have also led to new paint shop
innovations. Paint is extremely important
because it is the main part of a car that a
consumer sees. In an attempt to ensure
quality solvent-rich paints must be used.
However, because of environmental concerns
with solvent hydrocarbons known as
volatile organic compounds, (VOC), assembly
plants are now using new water-based
paint formulations which are extremely
expensive. In addition, new paint application
technologies, such as the development
of bells that are able to switch
between different colors without the need
to purge the spraying line, have increased
manufacturing efficiency and minimized
waste.
1.2.3. Materials Composition
Design and materials are inextricably intertwined.
Over the years, the material composition
of a typical car has changed moderately
as shown in Figure 4. Between 1980
and 1997, minor decreases in sheet steel
and increases in other steels, aluminum,
and plastics are evident. The average
weight of a car has diminished from approximately
3700 pounds to 3000 pounds
since 1980, yet the proportions of materials
have remained similar.
However, if the car design is changed,
significant shifts in the use of different
materials can occur as shown in Figure 5.
A 1994 steel autobody car was disassembled
to determine its composition. For the
aluminum intensive car, 550 parts were
selected that could be made using alu-
Figure 4: Changes in Materials Composition of Typical Car Over Time
Materials Composition in a 1997 Car
Materials Composition in a 1980 Car
Other materials
20%
Other materials
17%
Aluminium
6%
Regular sheet steel
42%
Aluminium
4%
Plastics and plastic
composites
6%
Regular sheet steel
51%
Plastics and plastic
composites
8%
Iron
14%
Iron
12%
High and medium
strength steel
12%
High and medium
strength steel
8%
Source: Ward’s Automotive Yearbook
Global Strategies for the Development of the Portuguese Autoparts Industry
31

Figure 5: Compositions of Different Material Intensive Designs
Steel Intensive
Aluminum Intensive
Composite Intensive
Other non-ferrous
2%
Polymer
13%
Other
6%
Other non-ferrous
3%
Polymer
14%
Other
7%
Other non-ferrous
3%
Other
14%
Aluminium
7%
Ferrous
72%
Aluminium
24%
Source: MSL Research
Ferrous
52%
Polymer
26%
Aluminium
7%
Ferrous
50%
minum and the weight and material composition
were recalculated. A remarkably
different car results, but still over half of
the car is sheet steel. For a composite
intensive car, a composite prototype minivan
was rescaled to that of an averagesized
car and the materials composition
was recalculated. Similar to the aluminum
car, half of the composite car is still sheet
steel. Though these cars were designed to
emphasize the use of a particular material,
the importance of sheet steel is evident in
every car.
1.2.4. Vehicle Electronics and
Electrical Systems
The use of electronics in cars will continue
to grow substantially in the coming years.
Not only will the average value of the electronics
in cars increase in the future, but
the proportion of electronics cost compared
to the total car cost will also grow as
shown in Figure 6. This is due to the myriad
of electrical systems, electronic sensors,
and actuators already used for the
control and monitoring of car performance.
However, electronics are also used to trouble-shoot
and perform diagnostics, operate
navigational systems, and provide entertainment
units. As designs include more
sensors and electronic components, cars
become more reliant on electronics and
less reliant on mechanical devices.
However, the electronics themselves need
to be responsive and extremely reliable as
direct control of the car is increasingly handled
by microcontrollers and software.
In 1993, the sales of electrical system
auto parts were estimated to be over $800
million, and by some estimates are expected
to grow to nearly $2 billion by 2003,
making-up over 15% of the total cost of the
vehicle. Electronic control of the engine,
drivetrain, and other functions were approximately
$2 billion in 1993 and are expected
to grow to at least $9 billion by 2003
as shown in Figure 7. This is the most
rapidly growing area in terms of its value in
the vehicle. Increased complexity of the
electrical control systems have led to the
deployment of countless on-board microcontrollers
and processors. New electronic
features, aimed at satisfying customer
demands for the latest technologies have
added considerable sophistication to the
vehicle electronics. Unlike body components,
electronics provide features which
are immediately discernible by the consumer,
and are therefore critical to the marketing
success of certain vehicles.
Vehicle system innovations can be seen in
two main areas, those relating to new electronic
based features, and those relating to
32

the generation, distribution and electrical
control systems of the vehicle:
• Electronic driver amenities have emerged
from a legacy of power locks and windows
that add to driver and passenger convenience,
whether for entertainment or for
taking the office on the road. The information
age has revolutionized these amenities
which include improved stereo equipment,
cell phone technologies, and satellite
navigation systems for those that are
willing to pay for it;
• Safety standards are excellent avenues
for the inclusion of new technologies that
will help save lives. Some of these modules,
anti-lock brake systems (ABS) and
airbag sensor technologies, have become
requirements, ensuring their technological
development and maturity. Video cameras
and short-range radar object avoidance systems
are sure to find their way onto niche
market vehicles in the near future;
• Almost every facet of automobile operation
has been affected by the use of electronics.
Sophisticated driving performance
features such as electronic suspension,
electronic steering-wheel handling, electronic
throttle control, and electromechanical
engine valve technologies will continue
to infiltrate the vehicle’s operation. In the
future, control specifications of the
engine’s performance, suspension adjustment,
steering response, etc. may be able
to be uploaded into software when the car
is bought according to the driver’s preferences.
This ever-increasing demand on electrical
load has also driven the need for better
power generation and storage systems.
The standard 12-volt system carries a significant
penalty as the total loads which need
to be supported increase above current levels.
Many of the new proposed electronics
components would operate more efficiently
at higher voltages. The existing inefficiencies
are significant since they result in lost
fuel economy. More importantly, though, is
the absolute limit of the 12-volt system’s
capabilities. The increased power requirements
resulting from new electronic features
will soon exceed the capabilities of the
current 12-volt electrical system.
Research efforts have focused on the
development of a new electrical system
standard. The leading candidate is a dual
voltage system which operates simultaneously
at both 12 and 42 volts. Power generated
at one voltage will need to be divided
into the dual system, likely through the
use of a centralized DC/DC converter specially
designed for the demanding underhood
environment. For this power generation,
new alternator technologies, such as
a combination starter/alternator component
could be beneficial. While many of the
electronics could operate far more efficiently
at 42 volts, using 12 volts for existing
low-power items, such as the lamps, is
Figure 6: Increasing Value of Electronics in Cars
Average Value of Electronics in Cars
Electronics Percentage
of Total Car Cost
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
25%
20%
15%
10%
5%
0%
1970 1980 1985 1995 2005
1991 1998 2003
Source: Ward’s Automotive Yearbook
Global Strategies for the Development of the Portuguese Autoparts Industry
33

Figure 7: Vehicle Electronics Market Growth
Electrical Systems Market
Electrical Controls Market
Millions of US$
$2,500
$2,000
$1,500
$1,000
$500
Millions of US$
$12,000
$9,000
$6,000
$3,000
$0
1993 2003
$0
1993 2003
Source: EIU
clearly advantageous. Though microprocessors
would not benefit due to their low
(less than 5) operating voltage.
The requirement for improved power storage
will necessitate the development of
new battery technologies, specifically batteries
capable of operating at 36 volts.
Considerable hurdles must first be overcome
in order to meet the demands of
automotive applications. Space limitations,
weight, and operating performance under a
wide variability of temperatures are some
of the most important considerations.
1.2.5. Engine & Drivetrain
Due to stricter pollution legislation, many
alternative power sources are being
explored. Performance, durability, lifetime,
and fuel storage issues are all-important
factors for successful implementation of a
revolutionary powerplant. Some of the
inherent advantages and disadvantages of
these technologies are their energy densities
shown in Table 1: Energy and power
densities of energy production technologies.
Petrol has the tremendous capability
of being able to store sizable amounts of
energy within small volumes. However,
Today’s ICEs cannot capture the full energy
content of petrol. When the power output
(200 h.p.) of an internal combustion engine
(ICE) is normalized to its mass (150 kg), its
power density is similar to that of theoretical
fuel cells. Incremental advances in ICEs
will probably improve its efficiency by more
effectively utilizing gasoline’s potential.
Even the theoretical potential of fuel cells
may reach that of today’s ICEs. However,
fuel cells today have the same power output
as batteries. Both fuel cells and batteries
have great potential to improve.
However, even fuel cells may become an
order of magnitude better than the best
battery technology. While batteries should
improve, they may remain as an auxiliary
power storage unit.
The discussion of engine and drivetrain
technological developments will focus on
four systems: incremental advances in current
ICE technologies, purely electrical
based systems (batteries), hybrid electric/ICE-based
systems, and fuel cell technologies.
The future of the internal combustion
engine (ICE) is more uncertain than ever.
Though regulations seem to spell the
demise of ICEs, the full potential of petrol
needs to be explored through the development
of new ICE designs. Many innovative
designs such as the Stirling engine and the
rotary engine are pushing the efficient use
of petrol from today’s 20% to over 50% and
beyond. A great amount of gasoline’s energy
is lost within the engine itself, as displayed
in Table 2. Note that electronic
accessories account for only a small portion
of the total vehicular energy losses.
• The most high profile effort for current
petrol engine systems is aimed at the
development of continuously variable trans-
34

Table 1: Energy and Power Densities
of Energy Production Technologies
Table 2: Energy Distribution of a Midsize Car
Technology
Gasoline
ICE
Fuel Cells
Lead acid
Ni-metal hydride
Ni-Cd
Na-S
Li-ion
Li SPE
Power Density
(Wh/kg)
12,000
1000
150 - 1,000*
35
90
65
80
125
>200
Energy Density
(MJ/kg)
43
0.13
0.32
0.23
0.28
0.45
0.72
Source: MIT research * Theoretical
Source of Loss Urban Highway
Engine Losses
Standby
Accessories
Driveline Losses
Aero
Rolling
Braking
Total
Source: U.S. Dept. of Commerce, 1995
62.4%
17.2%
2.2%
5.6%
2.6%
4.2%
5.8%
100.0%
69.2%
3.6%
1.5%
5.4%
10.9%
7.1%
2.2%
99.9%
mission (CVT). CVTs would substantially
improve the efficiency of delivery of power
to the drivetrain. For diesel systems, the
research effort is primarily directed at lean
burn, direct injection technologies. In the
United States in particular, the use of
diesel fuel has been largely discouraged
due to the potential harmful health effects
which are believed to be associated with
particulate pollution emitted from current
diesel engines;
• Electrical vehicle systems have led to
substantial efforts aimed at the development
of new battery technologies. With a
power density of only 35 Wh/kg, current
lead acid technology is clearly insufficient
to supply the power needs for vehicle
propulsion. Research on lithium ion/polymer
electrolyte batteries are nearly an
order of magnitude better and are lighter
than lead acid batteries. However, this
technology is still in the development
stage. Currently, batteries may provide a
partial short-term solution through a hybrid
approach. However, without significant
improvements, not only will batteries
remain insufficient to meet the rigorous
demands of durability, range, performance,
and efficiency, but will also suffer from
environmental difficulties in production and
disposal;
• Hybrid systems involve the use of a small
ICE which is always run at peak efficiency.
Probably a direct injection diesel engine will
provide power to the drivetrain, and at
points in the drive cycle where energy
demand is low, it is used to charge a battery.
During peak demands, the battery is
used to supplement the engine load. In this
way, only a small engine, which can always
be run at optimal levels of efficiency, is
necessary;
• Fuel cell technologies involve the conversion
of hydrogen to water with the consequent
release of energy. The current technology
is at a power density of 150 Wh/kg.
This is expected to quickly increase over
the next several years to approximately 1
kWh/kg. The main obstacle for vehicle
applications lies in the inability to safely
handle hydrogen directly as the fuel.
Therefore, gasoline or methanol will likely
be the starting material which can then be
converted to hydrogen through a reformer
yielding water vapor and carbon dioxide.
Successful implementation of fuel cell
technologies is dependent upon improving
the reforming process to prevent the poisoning
of the platinum anode.
1.2.6. Conclusions
Though ICEs are viewed as a source of pollution,
they will remain the standard
against which all other powerplant technologies
will be compared. The energy
potential of gasoline cannot be matched by
any of the other proposed technologies.
Several ICEs already exist which release a
Global Strategies for the Development of the Portuguese Autoparts Industry
35

minimal amount of pollutants. Further innovation
in ICEs will improve efficiency and
make it tougher for the other powerplant
technologies.
However, as fuel cells and hybrid powertrains
start to exemplify the environmental
cleanliness mentality, these technologies
will be developed into maturity. The reality
is that chemical reaction alternatives such
as batteries and fuel cells are limited by
corrosion, anode poisoning, and phase
changes. A kinetic alternative is flywheel
energy storage that could have high enough
energy and power densities if safety and
materials issues are resolved.
Thus, the confluence of several driving forces
has promoted the incorporation of many new
innovations and manufacturing technologies
into vehicles. These changes require substantial
investment with the expectation that
huge gains will be made in manufacturing,
regulations, and market entry.
1.3.Globalization of the
Automotive Industry
The automakers’ strategy for the future
depends on their ability to coordinate logistics
and communicate information effectively
on a global scale to reach regional
markets. In order to sell cars around the
world, the automakers are taking a two-fold
approach.
By looking outside of their companies,
auto-makers realize that selling vehicles
requires the convergence of many external
factors. Market access is a function of the
geographic location, governmental trade
regulations, national economic situations,
the automaker’s financial standing, and
industry competition. About the only way
automakers can control the effects of market
fluctuations and minimize risk is to
spread the costs as wide as possible. This
can be done by expanding into carefully
considered markets or through consolidation
with other automakers. These external
factors are the focus of this section.
By looking at themselves internally, automakers
are redefining their own role within the
automobile industry. Thus, automakers are
currently in the process of redefining themselves
as ‘sizzle’ companies that should
maintain brand names, car designs, and conduct
exotic research. All this stimulating,
exciting work is being selected by the automakers
as their new domain. The “steak”
companies are the “meat and bones” of the
auto industry that maintain the manufacturing
and logistics infrastructure characterized
by the huge supplier. These characteristics
could become the distinguishing factors that
separate the new division of responsibilities
between the auto-makers and the suppliers.
However, there is always tension when the
transfer of control and responsibility from the
auto makers to the suppliers must happen.
Internal repositioning by the automakers has
ramifications and consequences that will be
described in the next section, The Rise of the
Suppliers.
The global reach of the automotive industry
is not new. Since the 1960s certain large
automakers have established plants
throughout the world, in developed and
developing countries. Nevertheless, the
strategies of these global automakers have
changed dramatically during the last
decade. There have been a number of collaborations
and acquisitions during this
time. Ford owns Jaguar and Volvo. Chrysler
and Daimler merged. General Motors
bought Opel and Saab. Volkswagen owns
Audi, Seat and Skoda. Many companies in
Italy consolidated into Fiat. These mergers
are aimed at achieving stronger financial
positions and stronger business positions
in a global market. This trend is predicted
to continue until there only approximately
10-20 auto makers remaining in the world.
Several key issues need to be considered
to fully understand globalization patterns.
First, it is important to assess the particular
aspects that drive the globalization
process. Second, analyses must be done
to see how the automakers are coping with
the challenge. Third, evaluation of the geographic
location strategies and the implications
for globalization in the auto sector
must be conducted.
36

1.3.1. The Drivers of Change
A new set of opportunities and challenges
across the globe emerged through the late
eighties and early nineties. The industry
forces that must be considered in a global
context are potential markets, supplier
base, rival automakers, and regional trade
laws or incentives.
• Opening of new investments in East
Europe, India and China. Regions of the
world that had been closed to the world
automotive firms opened up their borders
to sales and, in particular, to investment.
In these Big Emerging Markets (BEM), automotive
firms have responded through massive
investments in all of these regions.
However, these investments do not all
have the same characteristics. While in
China, India, or Brazil, the establishment of
automotive firms is mostly driven by local
market opportunities, these firms establish
new plants in Eastern Europe as part of a
strategy to lower overall costs of supplying
the European market. These could be significant
markets to tap into, but some caution
is necessary;
• Local supplier base. The use of local suppliers
in a region is advantageous because
of local content requirements (LCR). Thus,
the supplier base maintains considerable
leverage where these regulations are put
into place. With the use of local workers,
local economies are built up thus promoting
local buying power and establishment
of potential automakers;
• Global challenge for assembly productivity:
Fierce competition within regions, coupled
with perceptions of superior Japanese
productivity has led automotive firms worldwide
to improve efficiency. This effort in the
late 1980s included plants in the US and
Western Europe, as well as those in emerging
markets. Low cost labor is important,
but only to the extent that it works with productive
capital. Since most investments in
new plants are happening outside the US
or EU, some of the more advanced production
models are now in developing regions.
This contradicts some of the traditional
economic and management results that
associate reduced development to labor
intensive and less productive plants. These
plants are viewed as testbeds for new techniques
that cannot be implemented where
larger US or EU investments are located.
Thus, in Brazil, new and innovative assembly
techniques are being tested for
increased productivity with the possibility
that they could be implemented elsewhere
if the cost is justified;
• Strengthening of regional trade arrangements:
EU, NAFTA, MERCOSUR, ASEAN.
The establishment of regional economic
trade blocs creates trade barriers that have
a strong influence on the strategies within
the automotive industry. Automakers
should analyze their position and potential
markets by using these blocs as basic
global divisions. In all these regions,
automakers balance their existing and new
capacities with investment incentives in
order to minimize marginal cost of production.
This involves shifting assembly and
closing plants according their respective
manufacturing and logistical costs.
1.3.2. Strategic Responses to the
Challenges of Globalization
The automakers are using a variety of measures
to respond to the new characteristics
of globalization. The core strategic
responses involve three dimensions:
• Standardization, through the development
of common platforms and deployment
of common processes. Some
automakers are, to some extent, trying to
create global cars, sometimes attempting
the further step of using standardized fixtures
across similar sized models. Their
objective is to generate ‘global economies
of scale’ and savings in design investment.
Nevertheless, mixed responses from consumers
in some cases (for example the
relatively poor market acceptance of Ford’s
Global Car, the Mondeo), different philosophies
from the companies, or the risk of
‘over-engineering’ a car with solutions for
Global Strategies for the Development of the Portuguese Autoparts Industry
37

Figure 8: Platform Consolidation Trend Among
the Big Three U.S. Automakers
45
40
35
30
Number
25
20
15
10
5
0
1987 1992 1997 1987 1992 1997 1987 1992 1997
General Motors Chrysler Ford
Source: Ward’s Yearbook
Models
Platforms
which local consumers are not willing to
pay, is still commanding an important
degree of tailoring to local markets. The
idea of ‘common platforms’ that homogenize
basic structures of the car (like the
Golf/A3 platform), while allowing adaptations
of the exterior body is now a rather
prevailing concept. Another important
aspect of standardization is the construction
of plants able to produce multiple and
varied models, thereby being able to
respond to sudden shifts in consumer
demands, or to easily fit in a global capacity
management strategy. Platform consolidation
appears to be the general trend
among the Big 3 U.S. automakers, as seen
in Figure 8, to simplify design and reduce
production costs. Despite this, model proliferation
is occurring in developed, saturated
markets, where automakers are trying
to penetrate the market through increased
customization of platforms. Whereas in
underdeveloped countries where market
penetration (cars per capita in general) is
low, the vehicle models are more basic to
have wider appeal. The number of models
is lower where they are not differentiated;
• Simplification is the second dimension
being explored by automakers. The ‘modularization’
of the car is probably the more
visible face of this trend. System integrators
are now assembling important segments
of the car (e.g. the whole front end),
and bringing them ready made to the
assembly line. The new Smart Car plant in
France is probably among those leading
this trend. Because of the complexity of
these new modules, an important design
load has been passed to the suppliers of
these parts, requiring them to make important
decisions in terms of both appearance
and technical solutions. Dana Corporation,
for example, provides the automakers with
its own design for the drive train in many of
the models;
• Vertical shift of aggregation in supply
chain. Faced with productivity challenges,
OEMs are concentrating on overall design
and final assembly of the car. They are also
developing smaller plants, with less than
200,000 vehicles a year capacity, sometimes
less than 100,000. This means that
they are passing to suppliers important
responsibilities. The result has been an enormous
economic growth of the supplier industry,
in particular through the establishment of
large global suppliers. It has also meant a
transfer of manufacturing problems. While
productivity in the US Automaker sector has
doubled since 1980, it has remained constant
in the autoparts sector over the same
period. This fact, together with a recent wave
of mergers and acquisitions in the industry,
indicates that some major restructuring is
likely to occur during the next years. While
there have been 120 acquisitions of
European firms by US firms since 1992,
there have been only 40 mergers of US firms
by European firms. In Europe in 1997, there
were 80 mergers alone.
38

1.3.3. Production Locations
While some features of the strategies highlighted
above are common around the
world, others depend largely on the
specifics of the local or regional market,
either because of the consumer market,
the local industrial and government capabilities,
or simply for pure geographic
regions. The International Motor Vehicle
Program (in Sturgeon and Florida, 1999,
Globalization and Jobs in the Automotive
Industry) has proposed the following typology
for the production locations available
to the automakers:
• Large Existing Market Areas, or LEMAs,
such as the United States and Canada,
Western Europe (with the exception of the
Iberian peninsula) and Japan. LEMAs are
high-income areas, with large ratios of car
per person. Nevertheless, sales growth is
stagnant or negative, and firms’ expansion
can only be achieved by capturing market
shares from other automakers. Thus, production
in LEMAs has mostly been seen as
a zero-sum game that automakers have to
play in order to capture substantial parts of
the market.
External factors account for some differences
in productivity. The causes of productivity
differences are the organization of
processes, labor, and functions within their
plant and with their suppliers. Some of the
main differences stem from the specialization
and compartmentalization of German
versus the Japanese companies which
stress integration and group coordination.
Continuous improvement is a major difference
because of implementation of
employee suggestions to improve efficiency.
Competition among the automotive companies
from Germany, Japan, and the US is
exhibited in different forms based upon
their native markets. The industry in Japan
shows competition on the basis of price,
product range, differentiation, and development.
This puts pressure on other companies
to improve productivity by offering the
same product, or by displacing the competition’s
product with superior ones. The US
industry exhibits substantial competitive
intensity in price and product range.
However, the emergence of Japanese
transplants has made product development
a key competitive variable in the US.
This competitive threat within the US has
led to substantial restructuring in the
1980s. The nature of competition in
Germany is through product differentiation
by adding new features to existing cars.
This strategy does not strongly encourage
productivity increases. Furthermore
German companies tend to be more narrowly
focused on particular market segments
and therefore do not face the broader
competitive pressures of the market.
Transplants have started to behave much
like the German automakers and thus have
not served international automaker convergence.
Four major sources of regulation serve as
barriers for non-European products to reach
Germany. First, EU borders provide an initial
barrier. Tariff for import cars is 10% and
for trucks it is even higher. Furthermore,
there exists an EU-wide voluntary restraint
Table 3 : Production in Countries
Peripheral to Large Markets
Country
Portugal
Spain
Hungary
Czech
Poland
Argentina
Brazil
Cars
1997
Cars
1996
267,163 233,132
2,560,724 2,412,308
75,883 63,033
357,428 263,263
520,757 433,422
446,195 312,910
2,067,452 1,804,328
Source: Ward’s Yearbook 98
Global Strategies for the Development of the Portuguese Autoparts Industry
39

Figure 9: Big Emerging Markets Production
Figure 10: Big Emerging Markets Sales
2.5
2.0
Millions of Vehicles
2.0
1.5
1.0
0.5
0
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Source: Ward’s Automotive Yearbook
Brasil
China
India
Millions of Vehicles
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Brasil
China
India
Source: Ward’s Automotive Yearbook
agreement, (VRAs), on Japanese imports.
Finally, the number of cars produced by
Japanese transplants has been capped.
Other major car producing countries like
France and Italy have much stronger import
restrictions than Germany.
The US has a prohibitive tariff on imported
light trucks of 25% which gives considerable
relief to threatened US companies.
Japan has, since the early 1980s, followed
a voluntary restraint agreement
(VRA) on cars, due to intense US political
pressure. The VRA has lost much of its
importance because of the emergence of
the transplants, as well as the regained
competitive base of industrial operations
in the US.
• Periphery of Large Existing Market
Areas, or PLEMAs, such as Mexico, Spain,
Portugal or Eastern Europe. The main role
of PLEMAs has been to provide a low-cost
environment from which to supply LEMAs.
The close proximity (or the trade block integration)
together with the low wages make
these regions extremely attractive to
automakers fighting for better results in
the larger markets.
Portugal’s role in the worldwide automotive
industry is small in comparison to
other peripheral countries as illustrated in
Table 3. However, with the labor competitive
advantage over other countries,
Portugal has some excellent opportunities
in producing value-added assemblies and
modules. But like the rest of the industry,
sweeping corporate and technological
changes may need to take place before
the full extent of these opportunities can
be realized. In addition, the strategic location
of Portugal’s firms may play an important
role in determining future successes
primarily as an auto parts supplier country.
• Big Emerging Markets, or BEMs, such as
China, India or Brazil. High-populated
regions with low indexes of cars per capita
and growing at a fast pace provide important
market opportunities for automotive
companies. A massive inflow of production
investments in these areas is considered
the only way to ensure participation in the
markets as they unfold. This is illustrated
in Figure 9 and Figure 10.
These categories are important because of
the ‘tit-for-tat’ behavior that has always
been a characteristic of the auto sector:
after one of the large firms invests in a
region as a response to a market opportunity,
several of the other auto-makers usually
follow suit, concerned with being left
behind. As a result, in each of the segments
characterized above, we should
expect similar strategic commitments,
although investment approaches may differ
in some aspects such as exact locations
country or city or degree of integration
with local suppliers.
40

1.3.4. Conclusions
The aspects highlighted above draw a picture
of the industry’ global patterns that
could be synthesized according to the following
lines:
• Automakers are becoming lean, not only
in terms of manufacturing process, but
also in terms of size. Moreover, they are
transferring responsibilities to their suppliers,
both in terms of parts design, but
more important, as concerns whole modules
within standardized platforms. These
have experienced important growth in past
years, but are still having major productivity
challenges for the coming years;
• Investment patterns yield BEM regions
as being automakers, and consequently
suppliers, main target growth opportunities.
Simultaneously, they increasingly look
at PLEMAs as an important part of the solution
for increasing profitability and market
share in LEMAs. During the last five years
automakers have put into place capacity
management schemes that articulate
plants in the two areas, trying to minimize
overall cost and maximize acceptance by
local markets.
What is not yet decided, both at the
automaker level, and also within the new
breed of world suppliers, is how the car
design will evolve. The extent to which
firms will tailor models to local designs, or
rather promote world car concepts will
strongly affect development patterns, particularly
with regard to the involvement of
local suppliers and the development of the
host country manufacturing capabilities. A
more centralized, world car type model,
where most of the design is produced, for
example in Detroit or Stuttgart, will limit the
role of suppliers to those that can be present
at these locations. A more disseminated
model, with tailored cars and local
design participation will probably enable a
much wider participation.
1.4. The Rise of the Suppliers
The increasingly important role that suppliers
possess is a result of automakers
redefining their position within the industry.
If the automakers become “sizzle” companies,
then suppliers become “steak” companies.
The suppliers must not only provide
the manufacturing infrastructure, but must
also develop the products that automakers
desire. This involves taking on more engineering
responsibility from the automakers.
With reluctance, the transfer of
automakers’ long experience and welldeveloped
capabilities is happening slowly.
Several issues are worth considering when
evaluating the changing role of suppliers.
First, how is the supply sector becoming
more important through the transfer of
responsibility; second, how are suppliers
gaining power in the industry; third, are
changing roles from ‘tier’ levels creating a
reconfiguration of the supply sector.
Finally, can supplier firms pursue different
strategies to reposition themselves within
the new playing field?
1.4.1. Transferring Responsibility
An A.T. Kearney/University of Michigan
study suggested that the transfer of direct
task responsibilities began in 1985 and
will continue through 2005. In the 1996
Auto World Survey, 70% of the financial burden
transferred is from design and engineering.
More than half (53%) of the participants
say the costs are in testing, while
41% say they are from prototyping. The
automaker engineers respond to the same
questions with the transfer of cost being
86% in design and engineering, 66% in
CAD/CAE, 63% in testing, and 61% in prototyping.
The study suggests that an automaker corporate
culture change needs to occur
before suppliers have a more engineering
responsibility for systems. Automakers do
not know themselves what abilities they
consider core competencies. They want to
hold onto anything that they think contributes
to the personality of the car or differentiates
the product. But automakers
Global Strategies for the Development of the Portuguese Autoparts Industry
41

are having a hard time letting go of control,
which results in bureaucratic drag and
slowdown. The study finds that supplier
consolidation and responsibility transfer
must take place if the industry change is to
be cost-effective. Forty percent of the surveyed
suppliers think that automaker
requirements for systems capability is the
main driver for consolidation. Forty-nine
percent say that globalization is the reason
suppliers join forces. Eighty percent of the
suppliers in the survey say their customers
are demanding complete modules and systems.
However, the study also indicates
that system-level integration, effective communication,
and modular outsourcing are
developing somewhat slowly.
Nevertheless, it takes time to develop the
ability to engineer, become global, and
strengthen financially. As this ability develops,
suppliers defining themselves as system
integrators will more than double in
size and number by 2005. Furthermore,
systems integrators will be defined more by
their functions and capabilities than by
their exact location in the flow of parts to
the assemblers. Thus, size alone will not
determine a supplier’s role. In some cases
the systems integrator is the company that
has the most important technology.
1.4.2. Gaining Power
Three particular aspects have raised the
importance of the suppliers within the automotive
industry to a level comparable to
automakers:
• The establishment of the global turnkey
supplier is one of the distinctive characteristics
of the auto industry in the nineties.
For example, with ABS systems all of the
development, adaptation, and manufacturing
is done by firms like Bosch or Teves,
with minimal influence from the automakers.
Companies such as Dana, Autoliv or
Bosch are present in almost all regions
where an automaker’s plant exists. These
turnkey suppliers provide the entire system,
often to more than one automaker in
the region;
• Suppliers are generating most of the job
creation in regions with large automotive
industries. The US is a major example of
this situation. When this became clear, it
started to draw a lot of attention both from
firms and governments;
• Suppliers will also generate the majority
of investment, not automakers. Because of
their greater participation in the manufacturing
process, their role as drivers of
investment, and as sources of manufacturing
technologies for less developed
regions, suppliers acquired a new role in
the last decade. In developing these new
technologies, the research burden is now
on the shoulders of the suppliers. The
expenditures and investments for these
manufacturing developments is rising. In
the new Daimler-Chrysler Smart Car factory,
for example, the investment of the suppliers
is 1.5 times that of the automakers.
Figure 11: Research and Development
Expenditures by Segment
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
Engine
Body
Chassis
Percentage of Sales
Driving
Electric
Trim
Source: The Economist Intelligence Unit
42

Research investment by suppliers continues
to grow as their engineering capabilities
increase. Currently, the research
investments by segment are shown in
Figure 11. The importance and emphasis of
electronics research in vehicles is clearly
seen, almost 2% more than the other categories.
1.4.3. Changing Configurations
As one could expect, the growing importance
of the suppliers is affecting their
structure. Traditionally, suppliers were
organized in tiers, with the first tier supplying
components directly to the automaker,
the second tier producing some of the simpler
individual parts that would be included
in a single component, and third and fourth
tiers as sources of raw materials, or other
individual parts. Recent studies are demonstrating
that this simple configuration
no longer fits the actual structure of the
industry. Studies within the IMVP and other
outside analysts suggest a new configuration
that will probably involve a division
along the following lines:
• Component Manufacturer: ‘Process’ specialists,
such as a metal stamper, die caster,
injection molder, or forging shop that
builds parts to print. In almost all cases, a
component manufacturer is an indirect supplier
to the motor vehicle manufacturers.
Their direct customers are other suppliers
that are higher in the hierarchy;
• Subassembly manufacturer (SAM): A
process specialist with additional capabilities
such as machining and assembly. A
subassembly manufacturer has the responsibility
for design and testing of the component(s)
it manufactures, but not the
design of the entire subassembly or the
other components (‘gray-box’ design). A
subassembly manufacturer is an indirect
supplier in most cases, with fewer and
fewer opportunities to supply directly;
• Systems Manufacturer: Suppliers that
are capable of design, development and
manufacturing of complex systems (‘blackbox’
design). Systems manufacturers may
supply motor vehicle manufacturers directly
or indirectly through Systems Integrators;
• Systems Integrator (SI): Suppliers that
are capable of integrating components,
subassemblies and systems into modules
that are shipped or placed directly by the
supplier in the automakers’ assembly
plants.
Figure 12: Consolidation Trend of the Largest 100 North
America Based Suppliers
Sales of top 100 American Suppliers
Figure 13: Industry Reconfiguration Means Fewer Suppliers Deal
Directly with Automakers
Percent of Companies in Segment
100%
90%
80%
70%
60%
50%
Number of Suppliers
3000
2500
2000
1500
1000
40%
30%
20%
10%
0%
1992 1993 1994 1995 1996 1997
Company turnover
less than $100 million
S 100-$300 million
S 300-$500 million
S 500-$1000 million
S 1,000-$2000 million
S 2,000-$5000 million
over $5,000 million
500
0
Chrysler Ford BMW PSA
* Estimates;Source: Automotive News, EIU Reports, Makinsey
VW
1986
1996
2000 *
Source: Automotive News
Global Strategies for the Development of the Portuguese Autoparts Industry
43

This new configuration of the industry
also means an important restructuring,
with some firms actively engaged at some
of the levels identified above, and others
leaving the industry. It has been estimated
that, by the year 2005, the US market
will have 30 to 50 system integrators,
150 to 250 system suppliers, 2,000 to
3,000 subassembly suppliers, and an
equal number of component suppliers.
This restructuring and consolidation trend
is clearly seen in Figure 12. The 100
largest North America-based suppliers
continue to grow larger, solidifying their
position. Consolidation trend of the
largest 100 North American-based suppliers.
Some firms are expected to leave the
industry, partially because of this reorganization,
but also due to an expected gain in
productivity in these firms in the next few
years, that will drive the under performing
firms to pursue a different strategy. This
reorganization combined with the automakers’
desire to reduce their number of
direct suppliers will make the supplier
industry more streamlined. This increases
competition among those remaining surviving
system integrators. These companies
will need to provide a wide assortment of
products and services for automakers.
These SI companies will no longer retain
automaker loyalty. This trend is clear in
Figure 13.
1.4.4. Finding a Place in the Hierarchy
Its current capabilities and position in the
industry, available resources, owner’s
growth, and profitability will largely determine
strategies available to the supplier. These
options are to sell all or some of the business,
move up the supply chain hierarchy by
buying other businesses, or to consolidate
the supplier’s current level or position with
joint ventures or partnerships (Pilorrusso,
1997).
• Sell the business. For some types of
companies selling to another supplier is
the best option. The transformation may be
risky because of unavailable resources or
funds, lack of engineering capability, lack
of technology, or insufficient facilities. The
supplier should also consider its role as a
leader in its field. The timing should also
be sooner rather than later because value
is highest now and will only decrease as
mergers and acquisitions decrease.
• Move up the hierarchy. If moving up the
hierarchy is the best option, then some
considerations to think about are: success
in long-standing relationships, manufacturing
capabilities, ability to react quickly to
meet customers needs, design and development
capabilities and program management
capabilities. However, adding capability
involves significant costs and risks.
Risk could exist in betting the company on
a new capability, or could result from
remaining stagnant within the supplier
industry and going out of business. Thus,
initial investments in new capabilities must
be focused on reducing costs and increasing
sales volume. Later, capabilities in
design, testing and evaluation, and tighter
quality control must be put in place.
Nevertheless, moving up the structure is
seen as a good way to increase profitability
and shareholder value.
- From Component to Subassembly
Manufacturer. The enhancement of their
engineering capabilities is the costliest
aspect of this move. Design, test, validation
and prototyping have to be part of their
capabilities. Overall, it is estimated that
the best subassembly manufacturers consistently
spend about three percent of
sales on engineering, most in product
development. It is also important to have
capabilities in several manufacturing
processes needed to produce the component,
as well as the ability to manage its
own supply chain. Moreover, new subassembly
firms have to be more competitive
than existing subassembly manufacturers,
since it is not easy to displace firms
already entrenched with automakers. It
also means shifting their attention from the
assemblers to System Manufacturers or
Integrators, who will soon be their clients.
44

- From Subassembly to System Manufacturer.
Developing a whole system and
manufacturing it for an automaker requires
important engineering maturity, proprietary
technology, an extended network of suppliers,
presence in key production regions
and plenty of financial muscle. System
manufacturers supply core products and
technologies. Because of this, development
costs easily reach 10% of sales, with
three to five years between starting to work
in a program and starting to produce revenues.
Therefore, any firm wishing to move
in this direction has to be able to cope with
this challenge.
- From systems manufacturer to systems
integrator (SI). System integrators should
place plants where automakers expand.
Possibilities for systems include seats to
complete interiors, axle/suspension/brake
/wheel modules, and complete front-end
modules. The system integrators need to
strengthen systems engineering and integrated
supply chain management capabilities.
System integrators have the potential
for large returns because of the valueadded
processes.
• Consolidate position. Consolidation at all
levels, means constantly evaluating materials,
designs, and manufacturing solutions
for the products in which the firm has
decided to specialize. It also means choosing
a competitive strategy based on decisions
along the critical manufacturing
dimensions of time, quality, flexibility and
cost. For example, the low cost producer is
probably not the most flexible one. Another
strategic mentality is to become product
specialists by focusing on one of the following:
‘core’ components, design specialists,
testing, manufacturing testing, limited
product range, or ‘state-of-the-art’
materials. The flip side strategy is to broaden
ability to consistently meet quality,
delivery, service, or program management
requirements. Additionally, geographic
presence in the different economic blocs
where automakers are trying to position
themselves will also make a difference.
One way to globalize is to pick a partner to
share the expense, especially for smaller
suppliers.
1.4.5. The Web-centric Supply Chain
With the recent announcement of Ford,
General Motors and Daimler Chrysler to join
their e-commerce initiatives, the auto industry
is entering a new era of supply chain
management. Ford and Oracle were creating
the AutoXchange program, an e-business
venture designed to facilitate Ford’s
direct purchasing transactions and, at a
later stage, its extended supply chain. GM
was developing MarketSite, in partnership
with Commerce One Inc., announced to be
a “virtual marketplace” for a wide array of
products, raw materials, parts, and services
that GM purchases. The new marketplace,
of which few is yet known, is going to group
some estimated $300 billion per year value
of purchases of the three big. Similar
announcements are expected within the few
months in what concerns the rest of the
large world automakers.
With the new technology in place, automakers
are aiming to gain lower procurement costs,
reduced manufacturing-cycle times, and a
more responsive supply. These initiatives,
although at their infancy stage, will revolutionize
the way the industry conducts business.
The web will initially be used to purchase
commodities, ranging from paper to
pencils or ethernet cards, or to sell surplus,
including old equipment (this was the one of
the initial sales in the GM site). Nevertheless,
the vision is that it will quickly move into original
components for the vehicles.
A recent National Institute of Standards
and Technology study reported that “interpretability
problems “ that arise when sharing
product and engineering data within
the organization and with their suppliers
impose annual costs of about $1 billion in
the automotive industry alone. Solving supply-chain
issues through the use of Internet
resources is a “natural solution,” according
to analysts. A study by Giga Information
Group predicts that companies will save up
to $1.25 trillion by doing business over the
Internet by 2002.
Global Strategies for the Development of the Portuguese Autoparts Industry
45

As automakers learn how to share car
design information with their suppliers over
the web, this will undoubtedly be a critical
communication means for reducing costs
and enhancing productivity. Nevertheless,
for the Internet’s presence to become a
win-win situation, the whole supply chain
has to enter a new age of web-centric communications.
Therefore, while both Ford
and GM have said that participation in their
networks will be purely optional, suppliers
will be strongly encouraged to participate
Facilitated interaction and faster responses
can have dramatic impacts in assembler
cost reduction, but only if suppliers are
able to respond.
This means that suppliers around the world
have to prepare themselves for this new
way of doing business. Having the auto
supply chain in web may eventually widen
the access of small suppliers to the large
firms purchasing department. It may also
have the opposite effect. As players start
to rely more on these tools, the suppliers
that will be kept in the loop are those who
are better prepared to handle web communications.
Those that are not prepared will
certainly be left out. Moreover, tools such
as on-line auctions will also foster cut-
-throat price competition that will increasingly
leave out the less competitive players.
In a small region like Portugal this perception
is of particular importance. The
web has the power to shorten the distance
between Oporto and Stuttgart, but only if
the companies are ready.
1.4.6. Conclusions
Suppliers must realize their position within
the new supplier configuration as seen in
Figure 14. A supplier should place itself
according to the performance, functionality,
packaging, and customization on one side,
while also considering the assembly and
labor intensity of its parts. This should all
be placed in the context of its geographic
plant location which has various advantages
and disadvantages. From this knowledge,
strategies should be employed that
Figure 14: Restructuring the Supplier Industry
• Performance
• Functionality
• Packaging
• Customization
High
Vehicle engineering impact
Engineer Integrate OEM
Development
Commodities
Paint
Differentiated
Commodities
E-coat steel
System
components
ABS
Differentiated
Commodities
Fuel injectors
True
system
Engine,
BIW,I/P
Differentiated
Commodities
Seats, light pods
Commodities
Screws
Built-to-print
parts
Brake, rotor
Logistics
module
Corner modules
Low
Supplier
Low
Manufacture
• Part number consolidation
• Labor costs redution
Vehicle engineering impact
High
Assemble
Source: The Economist Intelligence Unit
46

Millions of Vehicles
solidify the position in which the supplier
wants to be.
The aspects highlighted in the previous
paragraphs are common to the worldwide
supply structure. Companies in Eastern
Europe, the Iberian Peninsula, Brazil and
Taiwan are facing similar challenges.
Nevertheless, there are also specific concerns
that depend on the specific markets.
Suppliers in LEMAs, PLEMAs or BEMs face
different challenges, which are, in turn, different
for the several regions of the globe,
for example Asia, America, or Europe.
1.5. Focus on Europe
This section of the report analyses how this
overall trend has evolved in Europe and
how it may condition the next decade. First
it analyses the history and current situation
of auto production in Europe, as well as the
key factors affecting automakers decisions.
Second it focuses on what has been
happening in Eastern Europe, addressing
Hungary, the Czech Republic and Poland in
more detail. Finally it concludes with an
analysis of what may be challenges for the
near future.
1.5.1. Auto Assembly Trends in Europe
The Automotive Industry is highly conditioned
by economic cycles. In periods of
expansion, sales grow, and in recession,
they contract. Figure 15 shows the evolution
of auto production in Europe, illustrating
how the overall economic conditions of
the continent have greatly influenced its
development. Nevertheless, it is also clear
from the Figure 15 that there is an overall
growth pattern of the industry in Europe,
although a rather small one. Assembly
climbed from 14 million cars in 1976 to
almost 20 million in 1998, roughly a 1.2%
a composite year average growth during the
period. Slow growth in any industry usually
leads to restructuring. The automotive
industry is no exception to this fact,
although it has witnessed a rather slow
process of adaptation.
During the sixties and early seventies,
investment had primarily been aimed at
gaining access to the market. Severe
import restrictions made local investment
the sole option to the firms, if they wanted
to tap into growing demands for cars. This
pattern included developed and developing
nations on all continents, although larger
markets such as Germany and France obviously
attracted more investment.
Therefore, as Figure 16 shows, when we
enter the seventies, these larger sales
markets hosted most of the assembly lines
in Europe. Eastern Europe was then a
closed area, and had its own car assemblers,
that represented over 10% of all production
in the Continent.
In late seventies and during the eighties,
regions like Portugal, Spain and Mexico
Figure 16: History of Sales in Europe
Figure 15: European Automotive Production
100%
22
20
90%
80%
70%
18
60%
16
50%
14
12
10
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Source: Ward’s Automotive Yearbook
40%
30%
20%
10%
0%
1977 1987
1997
UK
Iberian Penisula
Italy
Germany
France
Other Europe
East Europe
Source: Wards
Global Strategies for the Development of the Portuguese Autoparts Industry
47

Figure 17: Hourly Average Industry Wage (1996)
Poland *
Czech *
Brazil **
Argentina *
Portugal
N. Ireland
Spain
UK
Italy
France
USA
Japan
Germany
$0 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00
Values in US$
Sources: Business Europe, US Dept of Labor and Regional, Fundacion
Invertir, PAIZ, Mondaq, Hungarian Ministry Economy.
Notes: *estimate; ** in S. Paulo wages are 30% higher than the
rest of the country
became low cost export bases for Europe
and the US. Increasing manufacturing
costs at their ‘home countries’ and declining
trade barriers, transformed the manufacturing
base in some of the regions that
had hosted the first wave of investment in
a valuable asset for the assemblers. The
growth of the industry in PLEMAs that has
been observed in the last decades illustrates
how important they became within
the overall strategy of the automakers.
In Europe, as the figure above demonstrates,
this trend was translated into a
growing production in the Iberian
Peninsula, while regions like France and
the UK lost some clout. Simultaneously,
the economic decline of the former Soviet
Union Pact led to a contraction of production
in Eastern Europe, a trend that would
only be reversed in 1994, when some of
the local state owned companies were sold
to global automakers like VW or Fiat.
During the current decade, the industry has
entered a stage that could be called “complementary
specialization” between what is
produced in LEMAs and PLEMAs.
Researchers of the industry have highlighted
that the strict ‘least cost’ approach
that existed until the beginning of this
decade is not valid any longer. Labor cost
is important, but wages may represent less
than 20% of the manufacturing cost and
therefore are only one of the issues that
the companies are pondering in their decisions.
Assemblers are looking at their investment
in new plants more within a capacity management
perspective, trying to minimize marginal
cost across their locations, in particular
for more compact cars, where the margins
are smaller. As a result, we may expect
to find a tendency for periphery regions to
handle cars at a later stage of their life
cycle, or world cars in bottom part of the
product range (like Seat in Spain, Skoda in
the Czech Republic, or the prospects to produce
the Fiat Palio in Poland).
Until this decade, for political reasons,
Eastern European countries had been left
out of these movements. The great beneficiaries
of this situation in Europe were
Portugal and Spain that, although further
away in terms of physical distance to
Stuttgart or Paris, were much closer in
political terms. The collapse of the Soviet
Regime and the subsequent opening of
Eastern Europe countries to investment
and trade with Western Europe is altering
the patterns of investment. As the political
gap is reduced, shorter distances and even
lower wages (see Figure 17) than Portugal
and Spain are arguments that have came
to bear a greater stance.
The question is to understand how this
“complementary specialization” will esta-
48

lish itself, and in particular what will be
the balance between the Iberian Peninsula,
the traditional localization for periphery production,
and the emerging markets of
Eastern Europe. To understand potential
patterns it is important to investigate these
markets in more detail. Not only is there a
need to evaluate the extent to which they
may pose a threat to the growth of the auto
assembly industry in Portugal and Spain,
but also because they may actually emerge
as an opportunity for internationalization of
the local parts companies aiming to grow in
a saturated Western Europe.
1.5.2. Overview of Central/Eastern
Europe
Car sales in the region, since 1995, have
exceeded previous forecasts for the Czech
Republic, Poland, Slovakia, Slovenia and
Russia, and this growth trend looks firm.
According to DRI/McGraw Hill, new car
demand in Eastern Europe and the former
Soviet Union may double in the ten years to
2006, when annual sales in the region will
reach 2.9 million cars. Figure 18 shows
that, in Central Europe alone, sales are
expected to climb up to 850,000 vehicles
in 2000, almost twice the number of vehicles
sold in 1993.
Assembly has also been increasing dramatically
the past few years. Figure 19
shows that between 1993 and 1997,
assembly of cars in the region has doubled,
topping 1 million units. This surge in
production follows a set of acquisitions and
subsequent upgrade of locally owned
plants by the large international automakers.
The firms leading this effort have been
Volkswagen, with the acquisition of Skoda
in the Czech Republic and Fiat, which
acquired FSM in Poland. Former
Yugoslavian plants that had been shut
down because of civil war have also geared
up production, in particular the Revoz plant
in Slovenia, now owned by Renault.
Hungary is still a minor player in terms of
assembly, although investments. The
Asian firms are also trying to position themselves
in this growing market. Suzuki
installed an unit in Hungary, and Daewoo
acquired a controlling share of FSO in
Poland.
The history outlined above reflects the
existing distribution of plants in the region,
which is detailed in Table 4. Nevertheless,
this scenario now dominated by two firms
is likely to change over the next few years.
A number of companies other than Fiat or
VW have investments either underway or
announced, which will bring more balance
Figure 18: History and Forecast of Vehicle Sales in Central Europe
Figure 19: Auto Production in Central Europe
1,200,000
1,000,000
800,000
Number of Vehicles
600,000
400,000
200,000
0
Slovenia
Hungary
Czech
Poland
1993 1995 1997 1998 2000*
Source: DRI/McGraw Hill, Automotive News
* Forecast
Global Strategies for the Development of the Portuguese Autoparts Industry
49

Table 4: Location and Capacity of Major Plants in Eastern Europe
Table 5: Major Assembler Investments in Eastern Europe
Firm Country City Annual Capacity
VW
Fiat
GM
Ford
Daewoo
Suzuki
Renault
Source: Wards, Automotive News
Czech
Hungary
Poland (FSM)
Hungary
Poland
Poland
Poland (FSO)
Hungary
Slovenia (Revoz)
Prague
Gyor
Tychy
Szentgotthard
Warsaw
Plonsk
Warsaw
Esztergom
Novo Mesto
(estimated units)
400,000
30,000
350,000
Closing
15, 00
30,000
100,000
100,000
100,000
Assembler
Daewoo
General Motors
Isuzu (GM)
Volkswagen
Source: Wards, Automotive News
Invest.
($million)
Capacity
(units/year)
350 50,000
150,000
300,000
30,000
Start Products Location
00
99
00
99
Trucks
Astra
Engines
TT
Prague/Czech
Gliwice/Poland
Tychy/Poland
Gyor/Hungary
to the region. Table 5 lists some of the
investments now reaching a final stage.
1.5.3. Hungary
Under central planning, the countries of
Eastern Europe specialized in particular
industry sectors. Hungary produced
trucks/buses to be used at home and
exported to other COMECON member countries.
In turn, Hungary imported passenger
vehicles from Czechoslovakia, East
Germany, Poland, Romania and the Soviet
Union. Very few Western models were permitted
into Hungary.
When economic and political liberalization
started in 1989, the Government of
Hungary lifted trade restrictions and
allowed Hungarians to privately import
used Western automobiles free of duty. A
sudden growth in demand soon anticipated
trade balance problems. In reaction to this
situation, beginning in 1990, the
Government introduced a quota system
and a 25% VAT to control the influx of
imported vehicles. As a result, 164,000
cars were imported in 1990. This quota
has been in existence since then. In 1997
the quota ceiling was introduced at
150,000, and in 1998, it dropped to
131,000. Figure 20 shows the market
share of the major brands in Hungary.
Source: Automotive NewsNew commercial
vehicle and truck sales are also growing.
According to official statistics, commercial
vehicles represent roughly 10% of total
vehicles. In contrast to passenger vehicles,
there is no quota system in place restricting
the import of commercial vehicles.
Individuals are also allowed to import commercial
vehicles that are younger than 6
years.
In addition to the ongoing market liberalization,
the Government of Hungary enacted
legislation to stimulate investment in
the country. As a result of these incentives,
widely available skilled and low-cost labor,
and favorable conditions to re-export its
products to the EU, several automotive
manufacturers were attracted to Hungary,
and vehicle components manufacturing
rapidly became one of Hungary’s growth
industries over the past ten years.
In 1997, the engineering industry accounted
for nearly one third of total industrial
output in Hungary. Road vehicle manufacturing
held a 34 percent share in total engineering
output. The manufacturing of automotive
parts and electric equipment
accounted for approximately one third of
total automotive industry output.
The lead in the development of the industry
was taken on by General Motors, which
formed a joint venture with the heavy truck
50

component manufacturer RABA for assembling
the Opel Astra model in
Szentgotthard. The green-field operation
began production in 1992 and Opel soon
bought its Hungarian partner and built an
engine and cylinder head assembly line.
With these expansions total investment
reached $500 million by the end of 1997.
OPEL-GM Manufacturing Hungary Ltd. rapidly
became the largest company and the
largest Hungarian exporter, selling over 50
thousand Astras in the country over the
past six years. The assembly of the Astra
models was terminated in 1998, but the
plant continues producing over 400,000
engines annually. The plant also produces
painted bodies and cylinder heads for the
Opel assembly plant in Poland and other
European Opel plants.
Opel is also sourcing over $ 150 million
from local component manufacturers.
Morever, GM-Opel recently made a decision
to set up a new transmission plant in
Hungary with a planned annual capacity of
250,000 units per year. Total investment
planned for the new project is US$ 140 million.
The new transmission plant will
employ 500 people and will solely produce
for exports as the only source for the latest
generation Opel transmission within the
GM-Opel group.
Japanese Suzuki Corporation also built a
green-field facility in Esztergom for the
assembly of its Swift models. The plant
began operation in September 1992 and,
as a result of a development scheme worth
HUF 2.5 billion, it has reached an assembly
volume of 70,000 in 1997, 70% of
which is exported to EU countries.
Audi Hungária Motor Kft. soon followed
suit. Audi Hungária Motor Kft. has been
manufacturing engines at its Györ plant
since 1993. Its output totaled nearly
600,000 in 1997. The major German auto
manufacturer would like to concentrate 85
percent of all Audi engine production at this
facility. The total investment by Audi
reached US$ 420 million by 1998 and the
plant employing over 2000 people awaits
further expansion. In addition, following an
investment of HUF 8.5 billion, Audi’s Györ
plant started the assembly of two recently
developed TT sports cars. The newly erected,
13,000 square meter TT assembly
shop is expected to release 10,000 TTs in
1998 and 30,000 TTs in the coming years.
Under central planning, (1950-89) Hungary
solely produced buses (Ikarus) and trucks
(Raba). The hundred-year-old heavy vehicle
component and engine maker Raba, currently
ranks among the five largest heavy
truck axle manufacturers of the world. After
the collapse of the former Soviet and
COMECON, Raba successfully reorganized
and streamlined its operations and subsequently
entered Western European and
North American markets. Today, Raba has
three divisions. The vehicle division manufactures
heavy trucks and fire combat vehicles.
Its axle division is a supplier of significant
international industrial companies like
Daewoo, Dana Corporation, Rockwell, John
Deere and Eaton Corporation among others.
Raba’s joint venture with Detroit Diesel
Figure 20 : Sales Market Shares in Hungary (1997)
Others
39%
Suzuki
18%
Opel
15%
Renault
5%
Ford
6%
Daewoo
8%
Volkswagen
9%
Source: STAT-USA / Internet, US Department of Commerce
Global Strategies for the Development of the Portuguese Autoparts Industry
51

Corporation assembles the popular Series-
-50 and Series-60 electronically controlled
diesel engines for truck, bus, construction,
industrial, and marine application.
Presently, local content achieved by foreign
manufacturers is relatively low. Suzuki is
the only exception, where local content is
approximately 60 percent. Suzuki, an
Asian-based manufacturer, has contracts
with several Hungarian suppliers and continues
to seek more domestic suppliers in
order to be able to export its vehicles duty
free to the EU.
Before 1989, component parts were manufactured
for the truck companies in
Hungary enterprises. However, a small
amount of automotive parts were also produced
for export to auto manufacturers in
neighboring countries. During the economic
transition, component and parts manufacturers
found themselves in a difficult situation
because Ikarus and Raba scaled
back production. As a result, some of them
closed or had to find alternative sources of
revenue.
Having settled in Hungary, the new multinationals
that arrived in the early nineties
awarded supplier contracts to several
Hungarian automotive part manufacturers.
As a result, the automotive part manufacturing
industry witnessed an extremely rapid
expansion in the mid and late nineties. In
current cost terms, automotive part and
electric equipment manufacturing saw an
over threefold and sixfold increase between
1992 and 1996, respectively. The combined
sales revenues of the two branches
reached US$ 720 million in 1996. The automotive
part industry employs more than
twenty thousand people today.
Nowadays, there are about 70 small and
medium sized Hungarian companies producing
vehicle parts. In some of them the production
of component parts is the primary
activity (these parts include batteries,
breaks, smaller metal parts, exhaust systems,
glass, etc.). Other companies produce
smaller parts (wiring, smaller electric
products, plastic parts, rubber accessories,
textiles/upholstery, etc.) as a supplementary
activity to their main business.
Investments from assemblers, labor conditions
and generous tax incentives for foreign
manufacturers have also attracted
foreign component suppliers. In 1990,
Ford established its green-field operation to
produce DIS coils, fuel pumps and PM
starters for its car assembly plants in
Western Europe. The total investment of
the Ford Alba plant reached $ 160 million
by early 1998. The plant employing over
1300 people projects 1998 exports around
$ 190 million and plans to set up a new
production line for fuel system controls.
In 1991, United Technologies began manufacturing
wire harnesses to Western
European car and truck manufacturers. After
several expansions, UT Automotive opened
another wire harness assembly plant.
Exports from UTA Hungary exceeded $ 100
million in 1997. With the new plant employing
over 600 people, capacity has been
increased to achieve exports of $ 170 million
by the year 2000. Loranger Manufacturing
Corporation, a supplier of plastic components,
also opened a plant in 1993.Ford, ITT
Automotive, Sumitomo, Loranger and United
Technologies Automotive are among an array
of almost fifty firms that have either established
or acquired plants to manufacture
components to be supplied to assemblers all
over Europe.
As described above, a significant ratio of
automotive parts are not absorbed by the
domestic assembly facilities, but they are
sold at export markets. Over 40 percent of
automotive parts and 87 percent of electric
components were used in foreign assembly
plants in 1996.
Hungary has introduced the Harmonized
Tariff System in January 1992. The customs
tariff for automotive products outside
the EU and EFTA area are between 9 and
14%. Automotive parts are also subject to
the Value Added Tax (VAT) which is 25 percent
(the base for the VAT is the import
price plus customs fee).
52

The Hungarian Government is actively
determined to pursue the growth of this
industry, particularly by encouraging foreign
firms to invest in the country. The government
industrial policy instruments include:
• Special benefits for export oriented companies;
• Interest free loan payable over five years
for investments above 14 million dollars
over 3 years;
• Tax holidays of 50% to 100% if investment
is located in certain areas and
investment is above US$ 4.5 million;
• Reimbursements in Training costs for
some regions;
• Special provisions for job creation.
1.5.4. The Czech Republic
The Czech industrial economy is aiming for
growth in the rest of the decade as domestic
and international groups leverage strong
Czech engineering skills and labor advantages
to transform themselves into worldclass
companies.
The Czech market has benefited from the
country’s rising GDP, growing consumer
confidence, and the rapid development of
leasing services used by both corporate
and individual buyers. According to industry
analysis DRI/McGraw Hill, the Czech
Republic will enjoy the fastest growth rate
for new car sales between 1993 and the
year 2001 of all the major countries in central
Europe. They predict the Czech new car
market will increase by 123% over this
nine-year period, surpassing the 65%
growth rate in Poland and 75% increase in
Hungary. Figure 21 illustrates the relative
importance of the international automakers
in country sales, which is closely tied to the
investment in local industry.
The Czech Republic also has a strong position
as a manufacturer. By the year 2001
the Czech Republic is expected to have the
third-largest car production capacity in the
region after Russia and Poland. Moreover,
suppliers to Skoda Auto are expected to
benefit from export growth within the
Eastern European region and Skoda Auto’s
expansion overseas. Table 6 presents the
key industry figures for the country.
Automotive industry production in 1995
and 1996 increased by almost 30%, and in
1997 by 41%. Production of automotive
firms with foreign capital participation
increased even more, by 46% in 1997.
Final production companies increased production
by 56% and auto parts producers
by 43%. No other Czech industry sector has
approached this high growth rate.
The economic recession in the Czech
Republic decreased the number of vehicles
sold in the country during 1998. Despite
the recession on the Czech market during
this year, domestic firms in the automotive
industry continued to increase production
through active and successful export promotion.
Production of motor vehicles
increased by 17.14% during the first 9
months of 1998, with exports increasing by
44.6% over the first 10 months of 1998.
All together, exports of the motor vehicle
industry represent a 14% share of total
Figure 21 : Sales Market Shares in Czech Republic (1997)
Table 6: Market Size (Million of U.S. Dollars)
GM/Opel
8%
Ford
6%
Fiat
5%
Renault
4%
Daewoo
3%
Items 1996 1997 1998(E) Avg. An. Growth
Import Market
Local Production
Exports
Total Market
790
1,300
570
1,500
1,500
1,650
681
2,500
1,800
1,970
780
2,600
9%
22%
12%
12%
Source: STAT-USA/Internet, U.S. Department of Commerce. E-estimated
VW Skoda
74%
Source: Ward’s Automotive Yearbook
Global Strategies for the Development of the Portuguese Autoparts Industry
53

Czech exports. The majority of production
is exported to the European Union. Import
of motor vehicles to the Czech Republic
reached US$1.8 billion. Of imported cars,
81% are imported also from EU countries.
Of total imports to the industry, 22% come
from Germany, 20% from Italy and 10%
from both France, the UK and the
Netherlands.
The Czech automotive industry is dominated
by Skoda Automobilova, the leading Czech
industrial enterprise. This firm, based in
Mlada Boleslav, 40km north of Prague, was
acquired by the Volkswagen Group in 1991
and has since then been experiencing a
tremendous growth. Volkswagen’s investment
of DM 3.7 billion (US$ 2.6 billion)
upgrading Skoda Auto’s three factories is
now paying off with Skoda being the fastest
growing of the Volkswagen Group’s four
brands. Production has increased from
110,799 vehicles in 1991 to 410,000 units
in 1998, 357,000 in 1997, a figure that
may go up to 500,000 by the year 1999.
Skoda Auto occupies a vital position in the
Czech economy, with over 5% of Czech
manufacturing exports, a percentage that
has been gradually increasing as Skoda
Auto lifts both its production and exports.
SKODA AUTO has also been instrumental
in developing the local supplier industry.
The current Felicia boasts close to 80%
domestically-sourced parts, while Octavia,
which shares a platform with the
Volkswagen Golf and Audi A3, is slightly
more than half local content. SKODA is
developing a new car to complement the
existing Octavia and Felicia ranges, which
should appear in the year 2001.
To cut supplier costs and ensure quality
standards, SKODA is taking major strides
to integrate suppliers. Fifty-two joint ventures
with foreign partners and 38 green
field investments have been established to
supply the VW/Skoda Mlada Boleslav operation.
A lot of these new ventures are located
directly on the SKODA site, permitting
improved quality control, reduced costs
and faster design and production changes.
All of the Czech Republic’s three major former
state-owned truck and commercial
vehicle manufacturers have come under
new ownership during the past half-decade.
Avia a.s., a light and heavy truck manufacturer
based in Prague, is now majorityowned
by a consortium of the Korean group
Daewoo in an investment of approximately
US$ 350 million. Renamed Daewoo Avia,
the firm is a key part of the Korean firm’s
major vehicle manufacturing expansion
strategy in Central and Eastern Europe,
with sales expected to rise to 50,000
trucks by the year 2000.
Skoda a.s., the country’s largest engineering
firm (which is based in Plzen and which
is no relation to Skoda Automobilova), is
attempting to consolidate the rest of the
Czech truck sector into a single force. The
Skoda a.s. team has developed the Beta
commercial van to be built by Tatra in partnership
with Hyundai which is supplying key
component modules including the engine
and gearbox. The most relevant players in
the commercial, truck and bus market are
described in Table 7.
During its five years in the Czech Republic,
the VW Group has rolled out a massive supplier
upgrade program which has transformed
the Czech components sector.
More than 60 joint ventures and greenfield
sites have been set up by foreign component
manufacturers in the Czech Republic
in the half decade between 1992-1996,
and more are in the pipeline. By mid-1996,
33 of the Top 100 European Automotive
Table 7: Major Passenger and Commercial Assemblers in the Czech Republic
Company
Product
Company
Product
TATRA, a.s.
SKODA LIAZ, a.s.
PRAGA, a.s.
AVIA KAROS. BRNO, a.s.
ZETOR, a.s.
Trucks, light com. vehicles
Trucks
Multipurpose vehicles
Commercial vehicles
Tractors
KAROSA, a.s.
DESTA, a.s.
SOR LIBCHAVY, s.r.o.
SKODA ELCAR, s.r.o.
SKODA M. HRADISTE, a.s.
Buses and coaches
Light commercial vehicles
Small buses
Light utility vehicles
Commercial vehicles
Source: STAT-USA/Internet, U.S. Department of Commerce
54

Component Suppliers had either set up
greenfield production facilities in the Czech
Republic or had created a joint venture with
a Czech partner.
The Volkswagen group itself is not restricting
its investment to Skoda. It will invest
US$562 million to build an engine and
transmission factory in Mlada Boleslav.
Construction will begin in 1999 and production
should start in 2001. Engines of
1.0 and 1.4 liters will form two thirds of the
production. The capacity of the factory will
be 500,000 engines a year.
While most of the initial investments were
set up to supply Skoda Auto, a combination
of reasons has made the Czech
Republic very successful in attracting
many of the world’s leading automotive
components companies. Low wage levels;
a well-educated and flexible workforce
which quickly accepts new working practices;
highly-trained and well-qualified
researchers and designers; a new generation
of competent local managers; successful
implementation of 24-hour production;
possibility to supply VW’s Skoda
Automobilova; geographical proximity to
other important car manufacturers in
Germany, Poland and Hungary, etc, are the
key factors.
Western component firms in the Czech
Republic are now exporting close to US$
300 million worth of components annually
to Audi, SEAT and Volkswagen in the VW
group alone. This represents over 3% of
European cross-border components sourcing
by the VW Group. Though no figures
are available to confirm the strength of the
sector, total Czech component exports in
1996 are estimated to exceed US$ 350
million.
Table 8: Major Czech Parts Manufacturers
Foreign companies are a catalyst in upgrading
the entire Czech automotive components
sector. Czech-owned firms form the
majority of existing automotive parts suppliers,
but firms with foreign partners
account for 57% of the production. The
Leading Czech firms in the automotive components
sector are described in Table 8.
A significant number of companies have
established joint ventures or bought a
majority stake in a Czech auto parts producer.
These companies have been
extremely successful. Table 9 describes
some of the major joint-ventures, acquisitions
and greenfield investments.
Although a number of green-field operations
from multinational suppliers have
been established, there still exists a market
for newcomers, as many Czech auto
parts manufacturers, especially those with
Company
ATESO
AUTOMETAL
BRISK TABOR
CZ STRAKONICE
GUMOTEX
JIHOSTROJ VELESIN
KARSIT
KYDNIUM
MITAS
MOEX
MORAVAN
MOTORPAL
PAL MAGNETON
PRAGA
TESLA VRCHLABI
ZKL
Product
Brakes, shock absorbers, heaters
Exhausts
Spark plugs and glow plugs
Transmissions for passenger cars, turbo intercoolers, gear chains, exhaust manifolds
Rubber parts for Mercedes and Audi, seat upholstery, head rests, sun visors, plastic parts for Skoda
Hydraulic power circuits for power steering and tipping
Seat parts for VW and Audi
Precision castings
Special rubber forms for auto manufacturers in Germany, Italy, Britain and the USA
Hoses
Restraint devices, interior fittings
Fuel injection systems for diesel engines and accessories
Ignition systems
Gearboxes
LCD dashboard panels for Mercedes, BMW, Opel, Philips, Blaupunkt and Lucas
Bearings
Source: STAT-USA/Internet, U.S. Department of Commerce.
Global Strategies for the Development of the Portuguese Autoparts Industry
55

Table 9: Joint-Ventures Acquisitions and Investments in Czeck
Company Ownership Product
Autopal Novy Jicin
Ateso
Hayes Lemmerz Autokola
Kautex
Johnson Controls
TRW DAS
TRW Carr
TRW Autoelektronika
Horni Pocernice
AMP
ASCI
Lucas Autobrzdy
Rockwell
Continental
Buzuluk Komarov
Bosch
Siemens
Magna International
Showa
Hella/Behr
Schade
VDO
Akuma
Showpla
100% US Ford
JV with US Tenneco
JV US Nova Hut
US Textron
US
US
US
US
US – TRW
US
US
Lucas Varity
US
German
JV German Continental
German
German, six plants
Canada
Japan
German
German
French
Italian Fiamm
Japanese
Car lighting systems, heat exchangers, fuel-oil exchangers,
air-conditioning cores and hose sets
Shock absorbers, hydraulic and air brakes
Steel wheels Skoda, Opel, Audi, Zetor and Tatra
Auto textiles plant
Seat covers and interior fittings
Steering and suspension products
Seat belts and fastening systems
Plastic and metal switches and electronic modules
Steering wheel
Connectors
Air-bags
Discs and drum hydraulic brakes and complete rear axles
Door and window parts
Tire plant (largest in Europe)
Piston rings
Brakes, traction control, fuel injection systems,
tank pump modules, suction piping, cylinder head covers
and electronic fuel pumps
Cable harnesses, onboard driver and information systems
Suspension, seat and brake parts, steering wheels
Aluminum castings
Lightings
Car doors
Pumps and dashboards
Batteries
Plastic parts
Source: STAT-USA/Internet, U.S. Department of Commerce.
a production intensive in research and
development, lack capital and seek foreign
strategic investors. As the Czech Republic
establishes itself as an efficient supply
base within the European automotive
industry, western firms are finding that they
can upgrade their Czech plants from suppliers
of simple components designers and
producers of sub-systems and modules.
IMPORT CLIMATE
The Czech customs regime is highly liberal
and the country has bilateral trade treaties
with over forty countries. Import tariffs are
applied according to internationally agreed
rates and declined to an average of a few
percent in 1995. Import duties on cars
were lowered on January 1, 1999 from
18.1% to 17.1% for imports from the non-
-EU countries and from 7.24% to 3.42% for
imports from EU countries.
Import duties on automotive components
have been generally low, ranging from 3.2%
to 7.3% in 1998, and were lowered again on
January 1, 1999 to 3.0% - 6.3%. Automotive
components produced in the EU can be
imported into the Czech Republic with no
duty. Some of the foreign auto-parts producers
use this advantage and import components
to the Czech Republic from their
European production facilities.
The Country also has a number of provisions
to encourage investment:
• Inward processing relief is available for
components and materials imported into
the Czech Republic for further processing
and re-export;
• Six Point Investment Package for manufacturing
investments above US$ 25 million;
56

• Tax Holidays for 5 years;
• No customs duty on imported machinery
if it represents more than 40% of investment;
• Interest free loan, potentially convertible
to grant, to cover 50% of training costs;
• Land in certain regions sold at symbolic
price;
• Special grant for job creation;
• Possibility of special customs zone for
plant area.
1.5.5. Poland
With a population of nearly 40 million and
a GDP of US$ 115bn in 1996, Poland is by
far the largest country in Central Europe.
Moreover, since the end of the cold war, it
has enjoyed one of the highest growth
rates of the former Communist countries.
Its economic importance in the region has
a parallel stance in the level of sales and
manufacturing of autos.
Poland has been and will continue to be
the largest market in Eastern Europe in
terms of sales, growing at a rate of over
33% every year, now reaching more than
500,000 units. In 1997, 8.533 million passenger
cars were registered in Poland, but
this number is estimated to reach 10 million
by 2000 and 15 million in 2010.
Production in the country is also developing
at a fast pace. Poland is attractive to foreign
firms, not only because of its internal
market, but also because it is a stepping
stone into both Eastern and Western
Europe, as well as the former Soviet Union
(without the political instability of this
nation).
Poland has a 35% tariff on vehicle imports
as well as a progressive turnover tax based
on the value of the imported car. Therefore,
it is not surprising that Polish-made or
assembled vehicles dominate the passenger
car group, accounting for 70% of all registered
automobiles. As Figure 22 shows,
Fiat has had a dominant position in the
market (Fiat Cinquecento - 14%, Polonez -
16%, Fiat Maluch - 16 %), with Daewoo as
a distant follower. Imported cars account
for 30% of the sales. As far as foreignmade
cars are concerned, the leading positions
in the Polish market are held by GM-
Opel, Volkswagen (with Skoda and Seat),
Renault and Ford.
Production in 1997 reached 520,000 vehicles,
doubling the values of 1993. The
leading firm in the country is Fiat, with a
share of 66% of the total vehicles assembled
in Poland. Daewoo came to play in
1996 with its acquisition of a major local
producer FSO (and now also FSL-trucks).
General Motors is also investing heavily in
the country. Its new plant in Gliwice is set
to build 70,000 Opel Astra annually, and
eventually grow to 150,000 units early in
the next decade with a second vehicle
under development with Suzuki. GM’s
Japanese affiliate, Isuzu, is building a
300,000 a year diesel engine plant and
Ford is setting grounds to start assembling
its small Escort and Transit van in Poland.
A number of parts companies are also following
this assembly investment trend.
Figure 22 : Sales Market Shares in Poland (1996)
GM-Opel
9%
Renault
6%
Ford
3%
VW-Skoda,
Seat
9%
Fiat
46%
Daewoo - FSO
27%
Source: Ward’s Automotive Yearbook
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57

Table 10: Market Size (Million of U.S. Dollars)
Items 1996 1997 1998(E) 1999(E)
Import Market
Local Production
Exports
Total Market
Exchange Rate (PZL$)
715
567
187
1095
2.7
1188
725
282
1631
3.3
1235
900
325
1810
3.4
1350
1100
370
2080
3.5
Source: Chief Statistical Office of Poland (GUS) - Yearbook
The aspects described in the above paragraphs
are illustrated through the numbers
presented in Table 10. The auto market
(vehicles and parts) has experienced an
important growth, with local production
accounting for the largest share of this
development. In terms of imports, Germany
led 1997 market share, with 27%, followed
by Italy with 19.5% of all the imports
The major assemblers that existed before
recent political and economic reforms in
country have either been bought or have
established joint-ventures with Western
auto firms. The following list presents the
major Polish producers and joint ventures
in the automotive sector:
• FSM (Fabryka Samochodow Malolitrazowych)
and FIAT joint venture (cars);
• FSO (Fabryka Samochodow Osobowych) -
General Motors. and Daewoo joint venture
(cars);
• General Motors Opel plant in Gliwice
(cars);
• FSR POLMO (Fabryka Samochodow
Rolniczych) and Volkswagen joint venture
(Commercial);
• FSC (Fabryka Samochodow Ciezarowych)
- Peugeot and Daewoo joint venture (Trucks);
• Ford Assembly Plant in Plonsk;
• WZM (Wojskowe Zaklady Motoryzacyjne -
Military Auto Plant) and Mercedes joint venture;
• Damis in LodzIwag Trade in Slupsk.
Brand-new cars account for about 6% of
registered cars. This means that there still
is and will be a significant market for nonoriginal
parts for the next five to seven
years. Therefore, the market for car parts
and components includes two important
submarkets:
• Parts and components delivered to original
manufacturers (OEM) and assemblers;
• Parts and components delivered to service
stations and retail sale to individuals
as aftermarket.
In the past, Polish automobile assembly
plants made many more (on a percentage
basis) of their components in-house than
Western manufacturers. In addition, there
was a large degree of cross supply by inhouse
component manufacturers to other
assemblers. As a result, only 30-35% of
components came from independent
manufacturers, compared to 60% in
Western Europe and 70% in Japan. The
FSO passenger car factory in Warsaw had
16 subsidiaries, which supplied parts to
the assembly line. The FSM compact car
factory in Tychy and Bielsko-Biala had 11
plants that manufactured sub-systems and
components.
There was a relatively small independent
component sector that supplied a limited
range of components to designs specified
by the vehicle manufacturers. Moreover, in
the early nineties, many of these independent
manufacturers faced severe problems
due to a 30% drop in domestic vehicle
sales and a 20-30% decline in aftermarket
production.
The car parts industry in Poland has been
undergoing a restructuring initiated in 1992
by the sectorial privatization of this industry.
Foreign companies bought out some
Polish manufacturers. Other investors
decided to invest in greenfield production.
Table 11 presents the major component
producers present in Poland.
According to a study of the US Department
of Commerce, Polish auto parts and component
producers are most competitive in:
58

Table 11: Major Polish Parts Manufacturers
Company Ownership Product
VISTEON POLAND
ANDORIA
KROTOSZYN S.A.
ELMOT
Delphi Chassis
FEDERAL MOGUL
CENTRA S.A.
PAFAL S.A.
FPS
PZL-SEDZISZoW
POLMO S.A.
ZELMOT-HANDEL
N.S.K. ISKRA S.A.
Fab. Okladzin Ciernych
POLMO
POLMO LOMIANKI S.A.
POLMO KALISZ
PRIMA S.A.
MORPAK Sp. z o.o.
Zaklady Sprzetu Mech.
F.Osprzetu Samoch.
STOMIL DEBICA S.A.
STOMIL-OLSZTYN S.A.
"STOMIL SANOK" S.A.
FILTRON
TC Debica
Stomil Olsztyn
United Technologies Automotive
Car Batteries Company
PONAR
(Leoni Autokabel Polska)
Allied Signal
Delphi
Isuzu Motors
Polish / U.S.A. capital
Polish 46,6%/ Daewoo 53,4%
Polish
Polish / U.S.A.
Polish / USA ("EXIDE")
Polish 100%
Polish / U.S.A
Polish 100%, state owned
Polish 100%
Polish 100%
Polish 20% Japanese, 80%
Polish / Danish
Polish 100%
Polish 40% / Japanese 60%
Polish 100%
Polish 100%
Polish / USA
French 52% / Polish 48%
Polish 20%
Polish - American 80%
Polish / U.S.A. ("DANA") Filters.
Goodyear
Michelin Tires
USA
CEAC
Leonische Drahtwerke A.G.
USA
USA
Japan
Diesel engines, engine parts
Cylinder liners and castings
Alternators and starter motors
Shock absorbers, gas springs, steering
Slide bearings
Automotive lead-acid batteries
Instrument panels
Gear boxes
Oil and water filters
Steering gears and shafts; drive shafts
Ignition coils, distributors, headlights
Spark plugs
Brake and clutch linings and pads
Electrical products, plastic products
Ignition breakers, reverse light switches,
door circuit breakers
Pedals and heat exchangers
Piston rings
Head gaskets and various seals
Radiators
Carburetors, fuel pumps, compressors
Passenger car tires
Passenger car tires
V-belts, pistons and sealings
Tires
Wire assemblies
Car batteries
Electrical cables
Breaking Systems
Shock absorber, electrical wires, mechanical
equipment, car seats and plans to launch
production of steering systems
Engines
Source: STAT-USA/Internet, U.S. Department of Commerce.
Global Strategies for the Development of the Portuguese Autoparts Industry
59

• Production of castings and electrical
cables, which are supplied to such auto
producers as Mercedes, Volvo,
Volkswagen, and others;
• Generic products such as forgings, castings,
standard bearings, simple plastic
and rubber components, are easier to produce
in Poland because the sourcing criteria
(maintaining quality standards and the
competitive cost of production and shipment)
are relatively simple to meet.
To enter the Polish market for parts delivered
to car manufacturers, investors
ought to consider manufacturing locally
through a joint venture with a Polish firm.
This combines foreign know-how in the
auto industry with local knowledge of the
market, regulations and habits.
Companies, which have previously supplied
auto manufacturers that have already
invested in Poland, such as FIAT, Peugeot,
Mercedes, Volkswagen, General Motors,
and Ford, should look to expand their relations
in Poland.
The general customs duty rate for automotive
parts imports from WTO countries is
15% of CIF price. Car parts are not subject
to excise tax. The VAT is 22% calculated on
CIF price, increased by customs duty and
border tax. Import restrictions, such as
quotas, do not apply for automotive parts
and components.
Automotive parts and components (HZ
8708) imported from EU and EFTA countries
enjoy a preferential customs duty rate of 0%
(Association Agreement with the EU signed
in November 1991). Automobile parts and
components imported from the Czech and
Slovak Republics, Hungary, Slovenia,
Romania, Bulgaria, Latvia, Lithuania,
Estonia, Israel, and Faeroe Islands also
enjoy a 0% rate. Parts imported to Poland for
assembly purposes (in automotive plants
owned partly by foreign investors such as
FIAT, GM, Ford, Peugeot, Volkswagen, and
others) are subject to a 0% rate.
There are no local content requirements in
Poland. However, major assemblers who
have invested in Poland (General Motors,
for example) have declared their willingness
to source as many parts as possible
in Poland, and have even trained selected
independent producers.
Automotive parts and components require
a turnover certificate if they are imported
into Poland in commercial quantities (not
for individual orders). The certification
agency tests the product and determines
whether the product is consistent with
Polish standards and can be sold in
Poland. Tests are not necessary if the
importer presents an international homologation
certificate issued by state agencies
authorized by the General Secretary of the
United Nations.
As Hungary and Czech Republic, Poland
also has a number of government incentives
to foster the development of the
industry. These include:
• Deduction of expenses up to 35% of
Investment if at least 50% of the revenues
are exports;
• Deduction of expenses up to 35% of
Investment if buying licenses, patents or
R&D;
• For investments above 2 million Euro,
deduction of expenses up to 30% of
Investment;
• Tax Holidays during the period for which
certain areas of the country (there are 15
of these) were declared special zones;
• Income deduction for additional employees
in special zones.
There are also several international lines of
credit available:
• The World Bank offers credit for investments
to assist in privatization and for
newly opened small private businesses.
These credits are offered through the
Polish National Bank;
• The European Bank of Investment offers
credits for several industries. The Warsaw
Branch of the Export Development Bank
services these credits;
• The International Finance Corporation.
The Export Development Bank in Warsaw
services these credits.
60

1.5.6. Conclusions
As detailed in the previous sections, the
auto industry in Eastern Europe is growing
at a fast pace. The number of vehicles produced
in the Czech Republic went from
260,000 in 1996 to 357,000 in 1997, and
from 433,000 to 520,000 in Poland.
Slovenia and Hungary are lagging behind,
but they already manufactured a combined
170,000 vehicles in 1997. The parts
industry is also following the pace. In
Hungary industry tripled in value from 1992
to 1997, to an estimated $700 million in
sales, with half of that value destined for
exports. The Czech Republic also exported
$350 million of parts in the same year.
Despite this impressive development, the
industry is still at its infancy when compared
to other countries in Europe.
Portugal, for example, although a small
player in the Industry by any standard, is
still quite ahead of these Eastern European
Countries. Autoparts sales in 1996 were
roughly US$ 3,500 million, with US$ 2,275
million of exports. Moreover, the 2.8 million
vehicles combined production of Spain
and Portugal and a US$ 19 billion parts
industry in Spain provide a sustainable hub
for the industry in the region.
It is important to understand that Eastern
Europe is still catching up with lost relative
production due to the economic downturn it
has sustained during the transition to a
capitalist market. Only in 1997 it has
reached a weight in the industry that is similar
to what it had in 1977, 7% of all vehicles
assembled in Europe. Throughout this
period, the share of European assembly in
Portugal and Spain jumped from 8% in
1977 to 15% in 1997. Nevertheless, the
future may be uncertain. If industry stagnates
in the Iberian Peninsula, with new
investments being transferred to Eastern
Europe, most of the locallly owned firms
will probably be affected, with some of
them eventually leaving the business.
Hedging against stagnation takes several
considerations:
• Local development capabilities. The
trend towards complementary specialization
between LEMAs and PLEMAs
described above implies that automakers
will probably have less concern for low
wages (although it will definitely be a factor),
while having a greater emphasis on
development, quality and logistics.
Therefore, their choice of which plants to
use in future cars will be strongly influenced
by the ability of the local suppliers
(national or foreign owned) to have a strong
participation in the whole development and
manufacturing process. Today, firms in the
Iberian Peninsula are better endowed than
their Eastern European counterparts in
terms of know-how and experience.
Nevertheless, a faster and deeper commitment
in gearing up capabilities is required;
• Investments in Eastern Europe. While
investments in this region may place at risk
firms and jobs in Portugal and Spain, they
may also provide interesting opportunities
for expansion. The old industrial structure
of the East is still undergoing a profound
transformation process, and would welcome
joint-ventures or investments from
companies experienced in the auto industry,
regardless of their nationality.
Conversely, it could ground some
Portuguese companies as international
suppliers for the industry, gaining accrued
confidence from the OEMs.
Overall, the key question faced by the
Portuguese Industry is similar to what other
peripheral regions of large established markets
are now facing: how to move from
being a ‘least cost option’ to become a
‘workbench extension’ of LEMAs. This challenge
represents different facets for companies
and governments, but will strongly
depend on the ability of the local firms to
be effective partners of the OEMs. This can
be achieved by increasing investments of
multinationals with strong hold in the
Industry, but also by enhancing development
and manufacturing capabilities in
local firms, thus reducing the role of low
cost as a competitive factor.
Global Strategies for the Development of the Portuguese Autoparts Industry
61

1.6. Focus on South America
During the last few years, South America
has developed and renewed its automobile
industry, increasing its share of world production
from 3.7% in 1993 to 4.8% in
1997. Moreover, industry analysts predict
that, if Brazil is able to solve its financial
distresses, the next years will be even of
faster sales growth throughout the sub-continent.
Simultaneously, the enactment of
Mercosur has integrated markets that have
been traditionally separated by strong
trade barriers, creating a new set of manufacturing
and market opportunities for the
firms located in the region.
These facts have led the automakers to
make new investments in South America,
aiming at capturing larger shares of this
growing market. Automaker investments
encouraged an associated development of
the autoparts industry, with both local and
international firms fighting for supply contracts
for the new and renewed plants. The
Portuguese parts suppliers are among
these firms trying to seize this market
opportunity. An established competence in
some technologies used to manufacture
autoparts, limited growth of the European
market, and a strong set of cultural links
between Portugal and Brazil are also
among the reasons for this surge of
Portuguese investment.
The importance of this trend justifies a
detailed evaluation of the industry in this
South America, identifying its core characteristics
and analyzing factors that may
condition the Portuguese autoparts firms
investing in this region. This will be the
focus of this section. First, it presents the
characteristics of the industry in the region,
both in terms of sales and manufacturing.
Then, the two regional trade agreements
are discussed. Third, given their role in the
region, Brazil and Argentina are analyzed in
more detail. Finally, potential implications
for the Portuguese firms are explored.
1.6.1. General Characteristics of the
Industry
The South American car fleet is composed
of 30 million vehicles. This means that, for
a population over 300 million, there are, on
average, 10 people for every car. This is a
very high ratio, particularly if we compare it
with Europe (2 people per car) or the US
(1.2 persons per car). As illustrated in the
Table 12, the reason for the small size of
the fleet is mostly the limited purchasing
power of these nations, all with levels of
GDP per capita that are less than a third of
the US. Nevertheless, as these economies
grow, the tendency is for this ratio to
become closer to the more developed
nations. This situation represents a market
opportunity for the automakers that have
Table 12: South American Economy and Fleet in 1995
Country
GDP/Capita
(dollars)
Population
(millions)
Fleet
(thousands)
Inhabitants/
Vehicle
Brazil
Argentina
Venezuela
Colombia
Chile
Peru
Bolívia
Uruguay
Ecuador
Paraguay
Suriname
Guyana
Total/Average
4550
7700
3450
2250
4475
2450
900
5475
1500
1900
1200
750
-
156.4
34.9
22.0
36.9
14.4
24.5
7.2
3.2
11.5
5.5
0.4
0.7
317.5
16,123
5,903
1,997
1,700
1,358
736
547
491
480
125
66
33
29,559
9.7
5.9
11.0
21.7
10.6
33.3
13.1
6.6
23.9
44.0
6.6
21.6
10.7
Source: World Bank and Sindipeças
62

Figure 23: Vehicle Sales in South America
Figure 24: Vehicle Production in South America
3,000,000
3,000,000
2,500,000
2,500,000
2,000,000
2,000,000
Number of Vehicles
1,500,000
1,000,000
500,000
0
Equador
Venezuela
Colômbia
Chile
Argentina
Brasil
1990 1992 1994 1996 1997 1998
Source: Adefa/Anfavea/Automotive News
Number of Vehicles
1,500,000
1,000,000
500,000
0
1990 1992 1994 1996 1997 1998
Source: Automotive News
Equador
Venezuela
Colômbia
Chile
Argentina
Brasil
been facing stagnant demands in Europe
and the US.
Companies are looking in particular at Brazil,
the largest of these economies. Empirical
evidence has shown that the US$5000 GDP
per capita represents a critical threshold
above which the demand for cars rises substantially.
Brazil is just reaching this threshold.
Table 12 confirms this observation,
showing the large gap in the ratio of inhabitants
per vehicle between Argentina or
Uruguay and Brazil. Therefore, during the
next decade, if the financial crisis is
resolved, this nation of 160 million people
will be filling this gap and continue to be one
of the leading world markets for car sales.
As Figure 23 shows, the success of the
economic stabilization programs started in
the eighties throughout the region led to
the growth of sales in the initial years of
this decade. Unfortunately, after 1994, this
trend was stopped in most countries, as
shock waves from the Mexican financial crisis
spread through the sub-continent. Brazil
was able to avoid the slump, and during
the whole decade sales there have thrived,
almost tripling in size. Today, Brazil represents
67% of the sales in South America
and, combined with Argentina, total 82% of
all sales. During the next years, this situation
is likely to continue, with Venezuela
and Chile as distant followers.
The hegemony of assembly in Brazil and
Argentina is even stronger than sales. As
Figure 24 illustrates, since 1990 these two
countries have systematically manufactured
more than 90% of all the vehicles
assembled in South America. In 1997, for
example, Brazil accounted 76% of the 2.7
million vehicles produced, while Argentina
was responsible for 16% of the total.
The relative importance of the assembly figures
is reflected in the location of the
plants in the region. Table 13 shows that
all the plants with capacities of above
50,000 vehicles are located either in Brazil
or Argentina. Moreover, all the large
automakers are present in these two countries,
and some also have smaller plants in
Venezuela. The rest of the assembly units
are mostly Complete Knock Down (CKD)
low volume operations, often to fulfill local
market regulations. This situation is unlikely
to change in the next several years, since
market integration enabled by Mercosur,
together with strong trade industrial poli-
Global Strategies for the Development of the Portuguese Autoparts Industry
63

Table 13: Location and Capacity of Major Plants in South America (3)
Firm Country City Annual Capacity
(units)
VW
Fiat
GM
Ford
PSA
Renault
Toyota
Honda
Chrysler
Brazil
Argentina
Brazil
Argentina
Venezuela
Brazil
Argentina
Venezuela
Chile
Colombia (1)
Uruguay
Brazil
Argentina
Venezuela
Argentina
Uruguay
Chile
Equador
Argentina
Colombia (2)
Venezuela
Brazil
Argentina
Brazil
Venezuela
Argentina
Brazil
Venezuela
Anchieta/SP
Taubaté/SP
Resende/RJ
General Pacheco
Betim/MG
Córdoba
Mariera
São Caetano do Sul/SP
São José dos Campos/SP
Córdoba
Alverar
Valência
Santiago
Bogotá
Montevidéo
São Bernardo do Campo/SP
Ipiranga/SP
General Pacheco
Buenos Aires
Valência
Villa Bosch
Santiago
Manta
Santa Isabel
Medellin
Cumana
Indaiatuba/SP
São Bernardo do Campo/SP
Zarate
Sumaré
Valência
Córdoba
Campo Largo/PR
Valência
276.000
240.000
20.000
140.000
480.000
200.000
12.000
150.000
220.000
25.000
80.000
30.000
25.000
35.000
10.000
228.000
86.000
100.000
100.000
43.000
165.000
3.000
15.000
15.000
110.000
18.000
21.000
30.000
40.000
20.000
30.000
2.000
11.000
12.000
20.000
Source: Donaldson, Lufkin & Jenrette/Cavenez, Gazeta Mercantil e BNDES
Note: (1) GM has a majority stake in Colmotores; (2) Assembles Renault and Toyota in locally owned company, Sofasa;
(3)See tables 14 and 17 for the recent investments.
64

cies in Brazil and Argentina, has led firms
to decide for further investments in these
countries.
1.6.2. Trade Agreements: Mercosur
and the Andean Pact
In order to counter potential negative
effects, as well as to gain additional bargaining
power with NAFTA, a core of South
American countries that included Brazil,
Argentina, Paraguay, Uruguay, Chile and
Bolivia (the two last as associate members)
established Mercosur. This agreement
is having important effects on the
structure of the regional automotive industry,
but with different results among countries.
The reason for this is the limited set
of aspects upon which the agreement has
achieved a consensus concerning autos:
• All parts manufactured in the Mercosur
region are considered as local content,
regardless of the country where they have
been produced;
• There is a Common External Tariff of up to
23% on all products, but autos in Argentina
and Brazil are excluded from this limit;
• Starting in 2000, all members will adopt
common trade restrictions towards automotive
products (cars and parts) originating
outside Mercosur. This common policy will
be negotiated during 1999, and is likely to
include a 35% tariff on imported cars and a
14% to 18% tariff on autoparts.
In contrast to these limited common initiatives,
Brazil and Argentina have had their
own aggressive import limitation schemes,
a strong policy of local content requirements
(60%) and a one to one dollar import
export policy (even within the Mercosur).
The Andean Pact, signed in 1993, groups
Venezuela, Colombia, Ecuador and Bolivia.
Like Mercosur, it also has a set of common
policies for the auto industry:
• Tariffs of 35% on cars and light commercial
vehicles, 15% on trucks, 3% on parts
and CKDs;
• Local content requirements (LCR) of 33%
for cars and light commercial vehicles in
1998;
• All parts manufactured in the Pact region
are considered as local content, regardless of
the country where they have been produced.
It can be concluded from these agreements
that the situation faced by automakers
entering the market is a stark contrast
between large, protected markets, with
strong incentives for local production, and
more open regimes in smaller markets,
therefore easily accessible from the larger
ones. As a result the influx of investment in
the region has been concentrated in
Argentina and Brazil. These have been
somehow proportional to their respective
market sizes because of the import/export
reciprocity required by both countries.
Overall, the perception is that industry has
benefited from greater integration stemming
from these agreements, such as market
access and more competition stimulated
efficiency and improved scale economies,
particularly at the supplier level.
1.6.3. The Automotive Regime in
Argentina
The Argentinean Automotive Regime is an
agreement that regulates trade, local content
requirements and investments in the
industry. It was established in 1991 as a
contract between government, private sector
and workers. Its main features include:
• Assemblers that do not have plants in
Argentina are limited by a quota of 10% of
all the local production, and have to pay a
22% tariff;
• Assemblers may complement locally produced
models with similar imports, paying
2% import tax if the value is balanced by
monetary equivalent (US$1:US$1) exports;
• Local Content Requirement (LCR) of 60%
in local plants (50% first year);
Global Strategies for the Development of the Portuguese Autoparts Industry
65

Number of vehicles
Figure 25: Vehicle Production, Sales and
Trade in Argentina 1992-1997 (Units)
Figure 26 : Sales Market Shares
in Argentina (1997)
600,000
Other
26%
Fiat
21%
500,000
400,000
300,000
200,000
Production
VW
16%
Renault
18%
Source: Ward’s Automotive Yearbook
Ford
19%
100,000
Imports
Exports
0
1992 1993 1994 1995 1996 1997
Sales
Source: Ministerio do Desenvolvimiento, Industria y Comercio, Argentina
• Imports of Components must be compensated
by exports (US$1:US$1);
These policies are complemented by the
Mercosur LCR agreement described earlier.
Argentinean industrial policy has had positive
results for the development of the auto
sector, both in terms of vehicles and parts.
Figure 25 shows that auto production in
Argentina has grown from 270,000 vehicles
to 450,000, despite the drop in 1995 and
1996 that resulted from the financial crisis
in Mexico. During the same period, exports
have consistently grown, with a sharp
increase during the last two years. Contrary
to sales and production, exports never
dropped in 1995, partially because the
Brazilian market (the major customer of
Argentinean exports) kept growing that year,
while simultaneously decreasing its tariffs
on imported cars. In 1997, exports represented
more than 45% of national production,
almost as much as imports, demonstrating
a growing decoupling between market
and production. The autoparts sector has
also experienced a similar growth, with
sales going from US$ 2.5 billion in 1992 to
US$ 3.5 billion in 1997.
Given the set of import restrictions that
existed, the leading sellers are obviously
the brands that have made a stronger commitment
to produce locally. In fact, it can
be observed in Figure 26 that the four top
selling brands have all had major plants in
Argentina for some time.
The prospects for the future seem equally
promising, although partially dependent on
the ability of Brazil to solve its current financial
turmoil. The recent investment decisions
by international automakers, illustrated in
Table 14, demonstrate their commitment to
production in Argentina. Another important
aspect to watch carefully during the year is
the outcomes of negotiations to adopt common
trade and industrial policies across
Mercosur starting in 2000. These are bound
to be resolved in the next few months.
1.6.4. The Automotive Regime in Brazil
Brazil has a complex and detailed industrial
policy scheme towards the auto sector.
Like Argentina, it involves a set of trade,
local content and investment rules. But
Brazil goes beyond Argentina by differentiating
tax structures to promote certain
segments of the market.
66

Table 14: Major Automaker Investments in Argentina 1996-1999
Assembler
Invest.
($m)
Capacity
(units/year)
Start Products Location
Chrysler
Fiat
Ford
General Motors
Mercedes-Benz
Renault
Scania
Sevel/PSA
Toyota
Volkswagen
100
600
1000
1000
100
450
60
300
400
500
6,000
100,000
n/a
n/a
20,000
n/a
n/a
n/a
20,000
n/a
99
97
97
98
99
98
n/a
97/98
n/a
98/99
Cherokee
Siena/Palio
Expand for Escort/Ranger
Corsa/Van
Sprinter
Expand for Clio/Megane
Truck
Improvment for 306/Van
Hilux
Golf/Polo
Córdoba
Córdoba
General Pacheco
n/a
Buenos Aires
Santa Isabel
n/a
Villa Bosch
n/a
n/a
Note: n/a - not available
Source: BNDES
The core of the Brazilian Automotive
Regime was established in 1990 and then
revamped in 1995. The general trend of
the auto industry, like all industry in Brazil
was to liberalize, and tariffs on cars and
parts had been decreasing since 1990.
Nevertheless, in 1995, given a growing
commercial deficit in the sector, the government
changed its strategy and increased
protection. The current regime has the following
key characteristics:
• There is a generic 63% tariff on vehicles;
are entitled to import US$ 1.00 with
reduced import tariff as follows: 90%
reduced tariff on imports of new machines,
instruments and accessories; 40% reduced
tariff from the current auto-parts, sets and
sub-sets;
• The average import duty on auto components
is 16%;
• Imports of components need to be compensated
by exports (US$1:US$1) in
Mercosur;
• Government special financing line for
investment in parts production;
• Additional tax benefits in some of the
regions of Brazil.
Currently, 136 manufacturers of auto-parts
and 10 automobile manufacturers qualify
under the Automotive Regime. Brazil has
also enacted a program to develop quality
and technology with the goal of improving
the still inefficient country industry, in particular
the autoparts sector.
• Auto manufacturers with manufacturing
plants in Brazil qualifying under the
Brazilian Automotive Program are able to
import vehicles at 31.5% tariff;
• Quota of 35,000 vehicles from Japan,
Korea and European Union with a 35%
tariffs;
• For each US$ 1.5 of exports, companies
• Assemblers established in Brazil have to
source 60% locally and new assemblers
must have 50% local content upon opening
and 60% after three years (all
Mercosur is considered local);
• This regime also allows a 140% bonus
on capital investments made in Brazil that
can be used to offset imports with lower
tax rates;
This large set of policies exists because of
the crucial importance of the auto sector in
the national economy. As Table 15 shows,
assembly and parts together account for
over 20% of all industrial output in the
country, and are responsible for 300,000
direct jobs. These figures are expected to
grow during the next years, as new investments
in the sector enter operation.
Global Strategies for the Development of the Portuguese Autoparts Industry
67

Table 15: Critical Figures of the Brasilian Auto Industry 1994-1997
Figure 27: Vehicle Production, Sales and
Trade in Brazil 1992-1997 (Units)
Value of Vehicle Production (US $BI)
Percent of Industrial GNP (%)
Employment in Assembly Plants (,000)
Value of Autoparts Production (US $BI)
Percent of Industrial GNP (%)
Employment in Parts Sector (,000)
Investment in the Industry (US $BI)
Source: BNDES (*Estimate)
1994 1995 1996 1997
26.8
13.5
107
13.4
6.8
237
1310
26.0
12.9
105
15.1
7.5
214
1800
28.7
13.8
102
16.7
8.0
200
2900
31*
13.7*
104
16.5
8.0*
190
3000*
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
Sales
Imports
Production
Exports
0
1990
1991
1992 1993 1994 1995 1996 1997
Source: Adefa
As in the case of Argentina, Brazilian policies
have been rather positive for the
industry. The Brazilian automotive market
has consistently grown in the past five
years, almost doubling in volume during
this period. Moreover, we can clearly see
from Figure 27 that Brazil is a net exporter
of cars, a situation that results from the
strong government protective measures.
The importance of this protection was
noticeable in 1995, as imports doubled
when the government decreased tariffs
from 60% to 20%, only to bring them back
up to 70% in 1996.
Another aspect similar to Argentina is that
leading brands in the market in terms of
sales are those that have started plants
long ago. Figure 26 and Figure 28 demonstrate
the importance of plant operations
in terms of market access. The early
commitments of GM to Brazil and Renault
to Argentina have been transformed in their
relative market share in each of the two
markets.
In addition to generic industry policies, the
government has also intervened by enacting
differentiated tax structures to cars, in
such a way that it has conditioned sales,
and consequential production in the region.
Since 1992 the government reduced the
tax burden on “popular cars”, with engines
up to 1000cc. The three key objectives of
this policy were:
• Increase the number of people that could
afford a car;
• Increase the number of similar cars, so
that there would be larger economies of
scale in parts production;
• Foster the creation of local niches that
would force the automakers to have locally
designed cars, therefore enhancing the
national design capabilities.
Although it is difficult to know if the trend is
self-sustaining, the fact is that the share of
small cars, up to 1000cc, has increased
dramatically, reaching 55% of all sales in
1997. Table 16 illustrates a similar trend
at an assembly level.
The next decade of the industry depends on
whether or not Brazil enters a financial crisis
similar to that of Mexico in 1994 and most
Asian countries in 1997 and 1998.
Government and local businessmen are confident
that the pressure on the Real and the
fleeing of foreign capital will ease, enabling
the reduction of interest rates necessary to
prop up auto sales. The investment in the
68

Figure 28 : Car Sales Market Shares
in Brazil (1997)
Table 16: Relative Shares of the types
of Cars Manufactured in Brasil
Ford
14%
Other
8%
Category Model 1996 1997
GM
21%
VW
32%
Small
Compact
Medium
Large
Chevette/Corsa, 147/Palio,
Fiesta, Fusca/ Gol
Kadett, Premio/Tipo,
Escort/Verona, Voyage/ Logus
Monza/Vectra, Tempra,
Versailles, Santana
Omega
42,9
38,1
17,2
1,8
82,8
7,2
9,7
0,3
Source: BNDES
Fiat
25%
Source: Ward’s Automotive Yearbook
industry that is being undertaken by virtually
all OEMs has been made based on this
assumption. Table 17 shows the main
investments anticipated for Brazil.
Most of these new investments in Brazil are
not located in São Paulo, the traditional
location for the Automotive industry in Brazil.
Curitiba, the capital city of the Brazilian
State of Paraná is becoming the common
destination for those in the automotive
industry. More than US$3.5 billion will be
invested in the region during the next years.
Several aspects have contributed for new
this trend:
• Salaries in São Paulo are usually higher
than elsewhere, up to 30% more;
• The Sate of Paraná has made substantial
investments in infrastructures, that are
now paying off;
• Paraná is in a half-way between the populous
states of São Paulo and Rio de
Janeiro on one side, and the Buenos Aires
on the other. A growing integration of the
Argentinean and Brazilian Auto markets,
with cross sourcing of parts and cars
makes this location attractive.
Table 17: Major Automaker Investments in Brasil 1997-2000
Assembler
Invest.
($m)
Capacity
(units/year)
Start Products Location
Asia
BMW/Rover
Chrysler
Chrysler/BMW
Fiat
Fiat
Ford
General Motors
General Motors
Honda
Hyundai
Mercedes-Benz
Mitsubishi
PSA
Renault
Skoda
Toyota
Volkswagen
Volkswagen / Audi
400
150
315
500
250
500
700
300
600
300
500
800
150
600
1000
150
500
250
1000
60,000
20,000
12,000
400,000
n/a
n/a
n/a
n/a
150,000
30,000
100,000
80,000
30,000
100,000
120,000
10,000
100,000
40,000
170,000
99
97
98
00
98
99
98
98/99
97
99
98
00
98/99
98
98/99
96/97
98/99
Towner/Topic
Defender
Dakota/Neon
Engines
Improvements/LCVs
Engines
Improvement of Plant
Cars and Parts
Mini Corsa
Civic
Accent
Classe A
L200
Xsara and new Peugeot
Mégane/Clio
Trucks
Corolla
Trucks
Engines/Vento/A3/Golf
Bahia
Minas Gerais
Campo Largo/PR
Campo Largo/PR
Betim/MG
n/a
Ipiranaga/SP
n/a
Gravataí/RS
Sumaré/SP
Bahia
Juiz de Fora/MG
n/a
Pouso Alegre/MG
S.J. dos Pinhais/PR
Santa Catarina
Indaiatuba/SP
Rezende RJ
S.J. dos Pinhais/PR
Source: Anfavea/BNDES
Note: n/a - not available
Global Strategies for the Development of the Portuguese Autoparts Industry
69

1.6.5. Conclusions
The analysis presented along this section
clearly demonstrates that the South
American automotive market provides an
excellent opportunity for both automakers
and parts producers. Despite some uncertainty
arising from a potential financial crisis,
the overall trend is for growth. Brazil in
particular, if it regains its economic development
path, should experience even
faster growth in auto sales.
In light of these conclusions, the implications
for the Portuguese Autoparts Industry
are:
1.The interest of the Portuguese autoparts
firms in South American market is well
grounded and their efforts to invest there
should be encouraged by the government;
2.The integration process between countries
in the region, particularly between
Brazil and Argentina will continue. This
means that firms should consider both
countries when scanning potential investment
options. The final choice should then
depend on the specific conditions the firm
is able to find;
3.The outcome of the negotiations for the
Mercosur agreement as concerns the automotive
industry will condition the development
of the industry, since they will affect
the balance between local production and
imports. This new agreement will be in
place starting in the year 2000, but the
decision should be made in the following
months. Because of its importance, the
firms and government should follow it carefully.
4.Although the largest concentration of the
industry is the state of São Paulo, within
Brazil, rising costs (especially wages) and
population pressures are making the
region less attractive. Therefore, potential
investors should also consider other locations.
Curitiba in particular is capturing the
attention as an alternative destination.
The effort of the Brazilian government to
generate markets for specific Brazilian cars
has been working and automakers have
been tailoring their products to local
demands. Therefore autoparts producers
that wish to be major players in the region
may need to have design capabilities which
are even stronger than the equivalent firm
in other regions of the world. This means
that Portuguese firms may potentially need
to establish local resources for development.
1.7. The Role of Government
This section focuses on the role of the
Government in fostering the development
of the automotive industry. First it explains
why this industry is so important to most
national governments. Second, it details
the instruments and reasons underlying
government actions since the sixties.
Third, it analyzes the shift from incentives
for tangible investments into intangible
ones. Finally, it concludes with perspectives
on government intervention in the
economy.
1.7.1. Why do Governments Care
about the Auto Industry
The automotive industry is a massive generator
of economic wealth and employment. In
Western Europe, Japan and the United
States, it accounts for as much as 13% of
GDP, and one in every seven people is
employed through the industry, either directly
or indirectly (i.e. insurance). Moreover,
sectors like rubber or steel are highly dependent
on the 50 million cars produced each
year. Another important characteristic of the
motor industry is that it does not operate in
an economic environment of competitive
markets, where each of the multiple firms is
too small to influence the future of the market.
It is fundamentally oligopolistic in
nature and structure.
The demand side is also crucial to understand
the role of this industry. Buying a car
is usually the second largest investment
objective of a family, right after the house.
70

This behavior, that is similar around the
world, creates a predictable need for the
availability of cars in every country.
Nevertheless, the amount of the investment
makes the buying decision highly
dependent on the income level of the
household.
Because of these characteristics, the auto
industry has been extremely important to
national economies and a source of concern
for the governments, particularly since
the 1950s, with a world ‘boom’ in the
demand for consumer and industrial products.
The late industrializing countries
that started their catch-up process during
this period have accrued sources of concern.
As demand started to grow, imports
of cars and parts from the world oligopolistic
producers started to create important
trade balance disparities that affected the
capacity to access capital goods much
needed for their industrialization process.
In the process of targeting solutions on
how to address this important issue, most
governments realized that this predictable
demand for cars could also be seen as a
major industrial development opportunity.
In fact, besides the employment and trade
issues, this industry created a significant
demand for intermediate inputs, creating a
pressure to develop other sectors of the
economy. What they figured is that it could
provide a hub for an integrated industrial
structure by triggering the domestic production
and technological advance of
industries such as steel, machine tools
and components, among others. The problem
was the creation of national industrial
capability in a context of oligopolistic producing
companies. The solution was the
adoption of strong trade protection mechanisms
(quotas, tariffs), forcing the assemblers
to locate their plants in the countries
if they wanted to access local demand.
Simultaneously, the enactment of policies
Table 18: Changing Patterns of the Auto Industry
to stimulate Foreign Direct Investment (FDI)
and local content requirements would foster
the desired linkages within the national
economy. These policies evolved over time
and the initial schemes were complemented
later with measures for export promotion,
quality, R&D, etc.
Today, governments in most latecomers
consider that the auto industry established
in the country has fulfilled their expectations,
although with different levels of success.
While very few were able to develop
their own brands (Korea is the most prominent),
they all now have an important
indigenous autoparts industry. Whether in
Mexico, Brazil, Spain, Taiwan, Korea or
Thailand, the automotive industry is considered
a key pillar of their respective
industrial base and determinant for the
future development.
Portugal is no exception in the landscape
Categories
Before (60s-80s) Now (90s) Implications
Markets
Conditions
Learning
Requirements
Policy
Environment
• National Markets isolated
from each other
• Limited exports of parts
and vehicles
• Local Companies dominate
• Separate roles for
assemblers and suppliers
• Shop-Floor, production
process oriented
• Worker skill and machine
capability determinant
• Policies based in trade
barriers and local content
requirements
• Strong participation of the
government at all levels of
the industry
• Strong independent
regional blocks
• Large movements of parts and
vehicles across the globe
• Multinational firms dominate
• Shares responsabilities between
assemblers and suppliers
• All levels integration, including
logistics, product and process
• Design and systems
capability determinant
• Open Markets (WTO)
• Non-Trade barriers
(e.g. Environemental)
• Limited role for the government
in the economy
• Firms need to be present
internationally or be part of
a global alliance in order to
have sustained growth
• Increasing focus on
Intangible Assets
and Learning
• Government has to have
a stimulus rather than
restrictive role
• Government support
shifting from tangible to
Intangible investments
Global Strategies for the Development of the Portuguese Autoparts Industry
71

of latecomer countries that developed local
automotive production capabilities.
Although with no national brands, the
Portuguese auto industry is now exporting
70% of the production, representing 13% of
total national exports. The autoparts producing
firms account are an important
share of the industry. In addition, some of
the most important technological and
managerial capabilities are located in
these firms.
1.7.2. Early Policies and Instruments
Trade deficit was the original motivation for
the enactment of government policies
directed at the automotive industry.
Therefore, trade barriers, either banning
imports or establishing quotas and high tariffs
for cars were the first and have been
the more common policy instrument used
by governments. Automakers solved this
problem by establishing local assembly
units of CKD kits that would be imported.
This reduced substantially the import burden
on the country, and fostered the creation
of local jobs. The automakers looked
at it as an opportunity to take hold of growing
markets, since they would be the only
ones selling there. As was discussed
before for the cases of Brazil and
Argentina, being a first to the market has
usually meant larger market.
Soon governments realized that having
CKD assembly units was not doing too
much for the local industry, except the
direct jobs created through the plants.
Therefore, countries interested in using the
automotive industry as a hub for gearing up
manufacturing capabilities also established
complementary Local Content
Requirements (LCR). Since local producers
were usually not prepared for the demands
of the assembly plants in terms of quality
and productivity, this required an intense
effort from automakers. Therefore, to compensate
for the intense effort of the
automakers, governments also gave incentives
to the firms establishing plants in the
country, usually through a combination of
low interest rate loans, grants and tax
reductions. The problem with this approach
is that it often led to inefficient manufacturing
practices, either due to diseconomies
of scale in each market, or
because of the lack of incentives both from
parts producers and automakers for
improvement (they had the market anyway).
As Table 18 illustrates, during most of the
sixties, seventies and into the eighties the
trends described above have been the context
of the industry at a global level.
Nevertheless, the past success of these
countries was based in a national protected
environment. This situation is now
changing due to trade agreements such as
NAFTA, European Union and Mercosur, as
well as a general reduction of trade barriers
within the World Trade Organization negotiations.
These agreements limit the ability
of the government to use the traditional
restrictive trade policies used to assure
that industry stays within national borders.
In addition, short product life cycles, lean
manufacturing practices and environmental
concerns are demanding additional capabilities
to assemblers and suppliers. While
the main oligopolistic characteristics of the
large assemblers still exists, only slightly
diminished by the entrance of a very
reduced number of new competitors, what
is also being observed is a growing trend
towards concentration of suppliers throughout
the globe. This new market environment
is changing the competitive conditions
for the industry, and renewed government
policies and company strategies
need to continue the growth path of the
past. Portugal, once again is no exception.
1.7.3. Incentives for Tangible vs.
Intangible Assets
The critical change in the paradigm of government
intervention in the industry
involves shifting the focus from tangible to
intangible assets. Until the eighties, what
mattered was having the plant nationally at
all costs, and forcing it to source locally.
That was seen as the key driver to all other
aspects of industrial development and all
72

Figure 29: Changing Role of the Government
Low
High
Low
High
Incentives for Intangible Investment
Low High
Incentives for Intangible Investment
US
Germany
Spain Portugal
Brazil Czech
Argentina
Thailand
Low High
Incentives for Tangible Investment
Incentives for Tangible Investment
government schemes were set up that way.
While this is certainly important, even today,
other intangible aspects have arisen as crucial
for competitiveness in the industry. In a
world of integrated markets intangible
assets such as speed, quality, design, distribution
and, above all, productivity are the
key to success. This means that governments
must realign their incentive schemes
to cope with these changes and focus on
improving more of these intangible aspects.
This becomes more important as markets
get more sophisticated.
Therefore, as depicted in the left-hand side
of Figure 29, one should expect to find different
incentive regimes throughout the
world, depending on the level of the development
of the country and the local
industry. As described in earlier sections of
the report, we find a mixture of incentives for
installation of plants and investments in
quality or R&D in countries such as Spain
and Portugal, with Latin America and
Eastern Europe close followers, but still with
a greater emphasis on ‘having the plant
there’. By contrast, nations such as the US
or Germany focus mainly on providing incentives
for intangible investment, since they
are aware that international competitiveness
stems from these activities.
Other areas that some governments are
exploring for the purpose of enhancing
local development of intangible assets are
particular tax structures that generate local
market specificities. These policies,
besides being difficult to sustain under
grounds of fair competition, are only possible
in large countries. Brazil has been pursuing
this approach, but it’s too early to
evaluate its results.
1.7.4. Conclusions
Based on the analysis presented in the previous
items, a proactive government intervention
in light of today’s restrictions and
demands should encompass the following
measures:
• Government should provide some degree
of guidance. This should be done through
continual consultation among state and
producers, export and labor organizations.
Flexible but institutional channels ought to
be used, enabling a feed-back cycle that
centralizes information and selectively
shares it among firms;
• States should provide venture capital for
new projects, often at highly favorable interest
rates. A development bank, representing
forms of lending that traditional
banks are not willing to undertake can be a
potential solution. Moreover, the knowledge
acquired by an institution that provides
this type of credit would prove very
important in terms of multiplying effects for
Global Strategies for the Development of the Portuguese Autoparts Industry
73

other industries. This shouldn’t mean that
public investment crowd out the private
one, but rather crowds it in;
• States should give support to thrust
industries, but specific performance criteria
for support should be enacted. The
clear measures to be used are exports and
technical advance. Additional conditions in
terms of scale can also be considered
whenever relevant. Criteria that take into
consideration some of these factors in
ought to exist for Foreign Direct
Investment, but it should be extended for
nationals as well;
• Knowledge spill-overs from foreign companies
to local firms and universities
should be carefully addressed. It is fundamental
that the presence of more
advanced companies in the country create
spill-overs to the economy to enhance technical
advance. The establishment of
requirements for R&D funding of national
universities and institutes, as well as
cooperative research with national companies
ought to be considered;
• Infrastructure in its widest sense, particularly
education in technical skills has to
be enacted.
1.8. Conclusions
Forces which include consumers, environmental
regulations, safety laws and other
automotive companies try to push and pull
new car technologies. These forces are
strong enough for automakers to invest billions
of dollars in research, better equipment,
new expansion plants and consolidation
with others. Cars of the future may
be radically different or they may be merely
refinements of today’s cars. New technologies
will affect the body and structure of
the car, the materials composing the car,
the electronics and electrical systems and
the engine and drivetrain. Each new technology
is a huge investment, which could
reap huge rewards, but only if adopted
across large volumes of cars and several
platforms. During the next decade, the
intertemporal trade-off between car cost
and societal benefits will increasingly govern
the pace at which innovations are
adopted by the industry in a large scale.
Government and buyers mandate change.
To be able to cope with the pressure,
automakers are banding together, cooperating
with each other and the government
to reduce industry pressures. Some of the
strategies that automakers are employing
in order to diminish these effects are:
• Joining government initiatives to curtail
emissions from vehicles;
• Transferring responsibility to suppliers;
• Standardizing parts and modules and
simplifying designs;
• Consolidating with other automakers to
spread costs and production;
• Investing in emerging markets;
• Balancing capacity across large high cost
areas and their lower cost peripheries.
Above all, as it has become clear with
recent acquisitions in the industry,
automakers that do not know which direction
to go in redefining themselves, are
being forced a particular identity by outside
influences, in particular other automakers.
Suppliers are attempting to determine, in
light of the automakers’ struggles, how it
can benefit. They need to realize where they
fit, or want to fit, in the new industry configuration.
Their position depends on a complex
articulation of performance, functionality,
packaging and customization of the parts
they manufacture. Once an objective is set,
supplier strategies to solidify their positions
may include selling the business, moving up
the hierarchy, or consolidating their present
position. Globetrotting with automakers
must be done carefully. By locating in regional
trade blocs, a supplier can build sound
operations within the local economy. By
spreading production, the effects of local
market fluctuations can be diminished.
74

One of the key areas at which automakers
and suppliers are focusing on is Eastern
Europe. This region is growing at a fast
pace in comparison to the rest of Europe. A
favorable synergy in complementary specialization
between LEMAs and PLEMAs is
a large impetus for entry. Portugal is ahead
of these Eastern European countries in this
respect, as its symbiosis with Spain flourishes.
However, low wages will be less
important in the future as emphasis on
engineering development, quality and logistics
take a front seat. Firms with this knowhow
have a unique opportunity to expand
into Eastern Europe through investment or
joint ventures. Doing so could mitigate economic
stagnation in the Iberian Peninsula.
new technology in more advanced nations
like the US or Germany. What is important
is to target the set of policies to the particular
level of development of the region
and the industry.
South America, in particular Brazil and
Argentina, provide the other locus for development
of the industry. Fast growth in
sales and large packages of government
incentives for the industry create uniquely
favorable conditions for development.
Provided that the financial crisis is
resolved, it should be considered as a priority
target for investment of Portuguese
companies.
Finally, government in this industry has
made and will continue to make a difference.
This can be done either through
incentives for the establishment of new
plants in less industrialized areas like
Brazil or Eastern Europe, or the fostering of
Global Strategies for the Development of the Portuguese Autoparts Industry
75

PART I
The Global Context
of the Auto Industry
Chapter
2
Assembler Strategies and Practices
for the Supply Chain

Chapter 2
The Assembler Perspective
2.1. Introduction
The position and strategy of the
Portuguese auto components sector is
highly influenced by the strategies of the
assemblers. To gain a first hand opinion
from these companies, key persons
responsible for purchasing in several
assembler firms were interviewed, both in
Europe and South America 1 . This Chapter
describes the key findings of the discussions
and their implications to the
Portuguese companies. Issues debated
include the overall OEM location patterns in
Europe and South America, supplier relationship
strategy, and their experience of
working with Portuguese suppliers. Given
its role in the national industry, particular
detail is given to the AutoEuropa investment.
2.2. Assembler Supplier
Strategy
2.2.1. General Assembler Strategy in
Europe
The analysis of the evolution of the patterns
of assembly in Europe shows a tendency
towards a reduction of the amount of
assembly done in the core of Europe, and
an increase of the figures in the periphery.
This raises the hypothesis, presented in
Chapter 1, that car companies may have a
deliberate strategy of reducing the levels of
assembly in LEMAs (Large Established
Market), and transferring this capacity to
PLEMAs (Periphery of Large Established
Markets). There are a number of reasons
why this trend could be taking place,
among which the high labor costs in these
established markets.
Given this potential trend, and the impact
that it could have in the development of the
European auto industry, this issue was
thoroughly discussed. Their overall perspective
is that:
• There is no generalized trend to move the
industry further away from LEMAs to
PLEMAs, with capacity in LEMAs likely to
stay constant in the next five to ten years.
Recent closing decisions in Western
Europe were mostly a response to overcapacity
problems, which led to the need for
rationalization, rather than a transfer of
manufacturing;
• The plants in the PLEMAs, particularly
those in the East are essentially to supply
local demand and not to transfer capacity
from Germany or France. Therefore, they
are mostly assembling low-end cars.
Nevertheless, given that cars are not developed
for a single country, some degree of
1 Interviews: Ford Europe; Renault Europe and South America; General Motors South America; VW /Audi Europe and Portugal
Global Strategies for the Development of the Portuguese Autoparts Industry
79

complementary specialization will be developed
by the brands, with inexpensive high
volume cars in PLEMAs and more expensive
lower volumes in LEMAs.
The strategy of Renault in Europe illustrates
the above points. Renault closed
Valladolid, Boulogne, Belgium and Portugal
to rationalize capacity. In the near future,
no other major changes are predicted to
happen. Moreover, the closing decision
was based on characteristics of each plant
and their distance to the vehicle’s target
market. For example, Renault was faced
with an option of either closing Cacia or
Slovenia. The first was closed because
Slovenia could serve Swiss and Italian markets.
On the contrary, Cacia had an overlap
with Valladolid and was not close to a relevant
market. This happened despite the
fact that Cacia’s plant intrinsic manufacturing
quality was better than Slovenia’s. In
addition, the need to respond to growth of
the Eastern European market has led
Renault to make new investments in the
region. These included the expansion of
Slovenia plant, the acquisition of Dacia in
Romania, and the establishment of a plant
in Russia.
pressures onto national car brands not to
close local plants, make it difficult to transfer
capacity to peripheral regions like
Portugal. On the other hand, the challenges
of market growth in Central and Eastern
Europe and the distance of Portugal to both
these emerging markets and the center of
Europe, place Portugal in an important disadvantage
in terms of logistic costs.
Differences between France and Portugal in
logistic costs of up to fifty percent are
pointed by some of the interviewed as a
critical disadvantage of Portugal.
The situation briefly described makes it
increasingly difficult to have Portugal as the
destination of a major assembler greenfield
investment. Eventually, some of the
established firms could expand operations,
increasing the volume of assembly done
close to Portugal. Nevertheless, the volume
of vehicles that are produced in
Portugal and Spain constitute a strong hub
for the national autoparts industry, which
ought to be pursued as relentlessly as possible.
2.2.2. Increasing Vehicle Outsourcing
and Promoting Supplier Responsibility
was discussed at length with the assemblers,
with the aim of exploring the implications
for Portuguese suppliers.
The initial aspect discussed with the
assemblers was the motivation for increasing
supplier responsibility. The key reasons
pointed out by assemblers were:
• Most assemblers consider that risk and
not manufacturing cost is driving the subcontracting
trend. Companies want to minimize
risk by reducing fixed costs, transforming
them in to variable costs. They
acknowledge that manufacturing cost
through subcontracting is often as high or
higher than in-house production 2 ;
• Cost wise, subcontracting becomes
worth doing if the supplier does all the engineering
work. This is particularly relevant
for products with high development costs,
where it is assumed that the supplier
shares this cost across several clients
(assemblers). As this tendency gets
entrenched, there are reinforcing effects in
terms of knowledge, so that access to
unique technology is mentioned as an
aspect of growing importance.
These trends have important implications
for Portugal. The need to rationalize capacity,
together with unions’ and government’
A recurrent issue in the recent development
of the auto industry is the increase in
responsibility of the suppliers. This issue
The increase in supplier responsibilities is
reaching impressive levels. Renault, for
example, claims that it purchases 80% of
2 Wages in assembler plants are often higher than average manufacturing (30% to 40% in Spain, 10% in Portugal), which is sometimes thought as one of the potential reasons driving
subcontracting. This factor was considered of limited importance in terms of the decision.
80

vehicle value added, with several other
brands not very far on this figure. Given the
increasing complexity of the systems being
subcontracted by the assemblers, there is a
clear tendency to have a smaller number of
large suppliers with important responsibilities
in the vehicle. For example, the objective
for Renault is to have 350-400 suppliers
by the year 2000. A small factory like
AutoEuropa, despite its actual 350 direct
suppliers, should not have more than 200.
Although there is a general trend towards
increasing supplier responsibility and associated
reduction in number of direct suppliers,
assemblers are pursuing different
strategies. Companies like Renault and
Volkswagen have a more conservative policy
strategy in what concerns supplier reduction,
while Ford is being more aggressive.
The strategy of VW and Renault could be
described as the 2+1 suppliers:
• For each function/large part, the assembler
forms a strategic partnership with key
suppliers;
• In each region, two suppliers are considered
privileged partners, with involvement
since the early stages of the development
process. A third one will follow close, being
given less responsibility, but enough for it
to be ready to replace any of the existing
suppliers;
• Because the same cars are being sold in
several regions of the globe, this partnership
strategy is generating a tendency to
have also the same suppliers around the
world for a given part in a particular car.
Since assemblers demand that car parts to
have the same characteristics in any given
plant, suppliers often prefer to invest themselves
near new the assembly units rather
than transferring process and product
knowledge to a local supplier if they don’t
follow into new regions;
• These assemblers consider the strategy
to go towards a mono-supplier to be a bad
idea.
In VW there has been some a conflict of
interests between supplier reduction and
cost reduction objectives. Given that VW
has a parts open bid process in place (see
below), suppliers are often coming up with
new and attractive technologies at low cost
that VW eventually adopts. As a result,
there has been only limited reduction of
suppliers.
The overall Ford-Europe supplier strategy is
more radical:
• The tendency is towards increased use
of entire modules rather than individual
components or even subsystems;
• The ultimate (theoretical) goal is to have
a single source for modules like the entire
interior. Most current first tier suppliers
are likely to become second or even third
tier;
• The company is also pushing for the
supplier to own the tools, another way of
pushing the risk associated with volume
fluctuations onto the supplier rather than
Ford. Suppliers will now have to be very
concerned with their amortization schedule
when quoting prices because payback for
the investment in tools must now be included
in price.
This policy is inevitably going to lead to a
drastic reduction in Ford’s direct supplier
count, but might also lead to an overall
reduction in the size of the entire supply
chain as consolidation occurs at lower tier
levels. As admitted by Ford, their supply
strategy is not the industry standard. Ford’
strategy also is not without pitfalls. By outsourcing
more and more parts, and worse
still, moving towards a single, very large
system integrator (like Lear or Magna),
Ford will be giving up a lot of power over
there supply chain, and knowledge of the
supplier industries. At the moment Ford
has an extensive databank of the “benchmark”
cost of supply for many parts.
Therefore, Ford is able to understand what
the cost of assembled modules containing
these parts should be. In the future, they
may only know about the cost of the entire
Global Strategies for the Development of the Portuguese Autoparts Industry
81

system, and not its individual components,
and thus will have little knowledge to use
during negotiations with the major systems
integrators. While this is true for all assemblers
aiming at supplier reduction, it is of
particular concern in Ford because of the
focus on one large supplier.
Given what was described above, choosing
partners that are able to work with the
assemblers in the development and manufacturing
of the systems becomes crucial.
Major criteria for choice of supplier to be a
strategic partner include:
• Cost and quality competitiveness;
• R&D capacity;
• Closeness to development center
(France for Renault, Wolfsburg for VW);
• For parts with substantial logistics costs,
location is also an issue;
• Absolutely no nationality criteria.
In either policy followed by the assemblers,
but particularly in the case of Ford, the possibility
of having a Portuguese supplier
remaining as a first tier is particularly difficult.
Therefore, most national companies
have to accept that they will be rapidly
becoming 2nd or 3rd tier suppliers.
2.3. Working With Suppliers
2.3.1. How Can New Suppliers Get in
the Loop
Given the degree of requirements and a
global presence associated with being a
supplier to these assemblers, how do new
firms get accepted as suppliers to the automotive
industry? The VW system is presented
to illustrate how the process works.
This company claims that the process is
rather open, with virtually any supplier with
the necessary cost, quality and development
capabilities being admitted in the
chain.
The process is as follows (see figure):
• Whenever there is new design or
redesign of a car, a supplier presents a
local bid for supplying it. (For most assemblers,
QS9000 certification is demanded
up-front);
• This bid is presented in Corporate
Sourcing Committee, where other purchasing
managers suggest alternative suppliers
for the component. These suppliers are
invited to present bids, and at number of
them are selected for Engineering Source
Approval;
• The critical step is ESA - Engineering
Figure 1: Part and Supplier Approval Process at VW
Supplier Bids
for Part in Plant
Purchasing Manager
Presents Bid in
Corporate Sourcing
All VW brands
participate
Other Purchasing People
Present Alternative
Suppliers for Part
Selected Suppliers
Compete on Price with
Purchasing of Plant
Selected Suppliers
go to Wolfsburg
Source Approval
82

Source Approval. For most components,
Wolfsburg has to approve both component
specifications and overall company engineering
capabilities. For example, 60% of
the AutoEuropa parts have ESA;
• Suppliers with ESA make final price bargaining
at plant site.
Variation in the process described above
among assemblers is mostly related to the
steps required for engineering approval.
While VW has a more centralized engineering
process, in GM, for example, technical
review are most likely to be done more on
a regional basis, joining technical people
from the plant and a regional development
center. Ford is once again more at an
extreme. Although they have had a full service
supply accreditation program (the
Q101/Q1), they believe that this is likely to
diminish in importance with Ford’s policy of
limited first tier suppliers. The expectation
is that their first tier suppliers will develop
their own certification program for their own
suppliers in which Ford will have a limited
role.
To work with the assemblers, suppliers
need, not only to be able to supply at low
prices, but they must also demonstrate
significant engineering capabilities and
enough financial resources to withstand
financial outlays on product development
for up to 3 years before actually seeing
returns on investment. Engineering capabilities
are critical and can be costly. While
there is no minimum requirement for number
of engineers or CAD stations (assemblers
are able to easily evaluate engineering
facilities upon sight and past experience),
facilities with less than 10 CAD stations
are usually considered insufficient.
For first tier suppliers, the company usually
must have 3 - 5 engineers dedicated to
the specific project who will come and stay
at the OEM for a number of months just
before and after product launch.
These requirements described above are
probably beyond the possibilities of a substantial
share of Portuguese suppliers, particularly
if working in isolation. Moreover, in
addition to capability limitations, national
firms are sometimes the victims of discrimination
and arbitrariness in engineering
approval. Some of the interviewed recognize
that the absence of tradition in automotive
engineering in Portuguese companies
makes assemblers suspicious of new
proposals by these suppliers. Moreover,
assemblers often make them stand to a
higher standard than they do to suppliers
with whom they have had joint engineering
history.
2.3.2. Contracting with Suppliers
Once the supplier is approved, a contract is
established. There are several important
issues included in a contract. The
approach of the several assemblers in
what should be included in a supplier contract
converges in some of the aspects,
while is very different in other.
Different perspectives exists is the level of
delegation to their first tier suppliers:
• In one extreme, VW often specifies who
should a 1st tier buy from in terms of materials
and parts. This has seen as potentially
negative for some of the individual
plants;
• Ford does not interfere with the first
tier’s choice for their suppliers, but is currently
prepared to give “advice” on which
lower tier suppliers are cost competitive,
etc. First tiers are completely free to
choose any of their own suppliers, even if
these companies do not have Ford accreditation,
but they know of no cases where
this has happened;
• The rest of the players in the industry are
somewhere between these two extremes.
Ford made an additional remark in what
concerns their decision not to interfere with
supplier materials purchase. Despite their
potential purchasing power, their perception
is that supply companies are actually
able to get better prices. They attribute
this to the intimate level to which each sup-
Global Strategies for the Development of the Portuguese Autoparts Industry
83

plier knows its material needs and the
materials supply chains and use this higher
level of knowledge to get better prices.
Also, the small supplier’s survival is highly
dependent on its ability to negotiate lower
materials prices and thus the incentive to
find the best price is much greater for
these suppliers than it is for Ford.
One of the issues where all assemblers
have a uniform perspective is the inclusion
of price reduction objectives in the contract.
General Motors, Ford, VW and
Renault all agree in this issue. The key features
are:
• Contract length and overall value are
related to price reduction targets that the
supplier is able to commit to;
• For some of the assemblers, suppliers
can also propose alternative designs that
have the same economy results;
• Magnitude of reduction per year varied
from 2% to 8%. Renault claims to have had
reductions of 8.2% in 1997, 8% in 98 and
6% in 99 (objective). Half of these improvements
have been achieved through design
changes.
Global purchasing schemes are also having
important implications for the contracts
established between assemblers and first
tier suppliers. The latter are being asked to
supply the same components at the same
price across plants, regardless of where
they are located. This includes having the
same price reduction objectives. Price comparisons
are made on an ex-works price
base.
2.3.3. Supplier Performance and
Technical Assistance
All assemblers have instruments to evaluate
their suppliers. Most of the evaluation
is based on logistics issues (several items
such as delays, order lead time, etc.) and
Quality (ppm rejects).
Assemblers usually have some type of
organization to provide suppliers technical
assistance (STA). STA works through
audits and recommendations at the level of
process/quality improvements. The perception,
nevertheless, is that increasing
responsibility and knowledge of first tier
suppliers will diminish the role of this organization.
Eventually, large suppliers like
Magna may set up their own organization to
help their lower tier suppliers.
2.4. AutoEuropa
As detailed in several sections of the
study, AutoEuropa is seen as a crucial step
in the development of the Portuguese Auto
Industry. Therefore, an effort was done to
capture some critical aspects of the decision
of the consortium to invest in Portugal,
as well as the existing experience of working
with local suppliers.
2.4.1. Decision to Come to Portugal
and Early Days
The first aspect addressed were the key
factors associated with the decision to
establish the plant in Portugal. The following
lines present some of the original key
issues considered by the consortium.
• Site investigation done by Ford and not
VW. Selection study considered about 90
factors, including Logistics, Wages,
Strikes, Grants, etc.;
• Decision was made taking in consideration
the following locations:
a)VW proposed Zona Franca in Spain –
Ford against;
b)Ford proposed to go to Valencia – VW
against;
c) Murca (Spanish government would give
support);
d)Bratislava;
e)Portugal.
• The opinion is that Portugal had a lot of
issues that were attractive, and scored
high in a number of items. Still, the magnitude
of the incentive package may have
had some importance in the final decision
84

etween Murca, Bratislava and Portugal.
• As it is known, the investment finally
took place, with the following values:
a)Plant: Total of DM 2.7 Billion, with 30%
grant excluding Tools and Jigs;
b)Vehicle Development: DM 1 Billion, with
no grant;
c) Selection and Training: DM 50 Million,
with 90% grant.
When the AutoEuropa investment took
place, there was an agreement with the
Portuguese government in what concerns
Local Content Requirements (LCR).
Nevertheless, a decision by European
Court has yielded the LCR moot, and they
are seen as a good will clause. The opinion
of the VW officers is that LCR made a difference
in early stages of AE because they
forced the company to go the extra step
needed to include a new supplier, even
with limited experience in the industry. The
perception is that the level of local content
would be smaller if there was no agreement
on local content.
Overall, there was a very good relationship
with the Portuguese government throughout
the investment period. Of particular
importance was the smooth establishment
of the infrastructures necessary to the
plant operation (railway and roads).
Nowadays, AE is seen as one of the most
competitive plants of the VW group, together
with Mozel. VW has been evaluating
the possibility of expanding AE.
2.4.2. AutoEuropa Teardown. What is
It, How It Works?
As part of an overall strategy of VW,
AutoEuropa has an open bid process
towards suppliers of any of the components
of the vehicle. Suppliers may step
forward with interesting and attractive technologies
at reasonable cost, which eventually
are taken as a replacement to the
existing ones. In Portugal the process is
run within the Product Engineering.
Department, under running changes or cost
optimization programs.
This process has been used to try to
increase local content in the vehicle, partially
responding to the (now informal)
agreement to have a certain level of
domestic content in the cars. The local
suppliers have claimed that the process
has not been working well towards them.
From the discussions held, some of the
reasons for the difficulties may be:
• Some parts have long term contracts
that cannot be changed;
• The strict requirements for Engineering
Source Approval (ESA) and the small size of
the national companies make it difficult for
national companies to invest in doing all
the necessary developments without any
guarantee of favorable decision;
• Some mistrust on Portuguese engineering
capabilities means that ESA may hold
national companies to higher standards
than other experienced suppliers;
• Even after Portuguese supplier goes
through ESA, current supplier often offers
same price as Portuguese company to
keep the contract.
2.4.3. What is Your Experience of
Working with Portuguese Suppliers
AutoEuropa has 20 key suppliers. Out of
these, only 2 are Portuguese owned. All the
other Portuguese suppliers to the plant,
either deliver components of smaller importance,
or deliver as a second tier. There
was a lot of investment of AE in the early
years through Supplier Technical
Assistance to help Portuguese Suppliers to
prepare to supply the chosen parts. The
companies have proved to be good learners,
and they have never created any major
supply problem, not even at startup phase
The overall opinion about the suppliers is
that they have good capabilities and that
may not be getting enough opportunities
from VW.
Global Strategies for the Development of the Portuguese Autoparts Industry
85

2.5. Working in South America
Chapter 1 explored the car growth trend in
South America in the past few years.
Despite recent financial crisis that tampered
the auto market and induced important
losses to the assemblers, the overall
opinion of the assemblers is that the market
will soon pick up, with Brazilian assembly
figures expected to start growing again
in the year 2000. For this reason, all major
auto brands are establishing new operations
in the region or expanding those that
exist nowadays.
Growth will resume, but no one is sure
about the rate. The key aspect ruling uncertainty
is the dependence of the market in
interest rate. The sales of cars in Brazil are
governed by access of people to credit.
Therefore, demand will grow as economic
conditions enable a fall in interest rate.
Since this is seen as a matter of more or
less time, most assemblers have accepted
that they will lose money in the early years,
but that it won’t change their overall strategy
towards the region.
2.5.1. Location Issues
Automakers have an integrated perspective
of the Mercosur region, that is expected to
become stronger as the countries of the
economic region enfold a more integrated
policy framework, which is expected to take
place at any moment (negotiations for a
new Mercosur auto regime have been
undergoing for months without a clear solution).
Nevertheless, because of its greater
importance, most of the purchasing decisions
are done in Brazil. Moreover, the
incorporation of Brazilian local content has
been changing. Given the new exchange
rate, companies are investing more in the
region (new engine plant by Renault is an
example) to make cars more competitive
and with higher margin.
Assembler location in Brazil is a hot topic,
in particular given the large incentive package
given by the Federal and Local
Government to the latest Ford investment.
Opinions on the subject are different. The
perspective of Renault is that São Paulo is
out of the question in terms of new investments
due to high wages, high industry
concentration and overall city chaos. The
overall strategy for regional position is that
location should be to the south of the São
Paulo / Rio latitude to better serve core
Brazilian and Argentinean Markets. The
possibilities include west São Paulo,
Paraná, Sta. Catarina, Rio Grande do Sul,
Minas Gerais. It believes that government
incentive packages make only minor difference
in the decision, while other aspects
seem to be more relevant for their decisions.
The Curitiba investment issues are presented
as an example of what makes a difference
for location decisions:
• Investment meets overall location strategy
and is close to São Paulo, which is particularly
important for Renault because it
did not have any plant there;
• Education of population is good;
• Infrastructure was very good: It has a
close port, Paranagua, which is being
revamped and privatized, and which does
not have the strike problem of Santos in
São Paulo; it has good roads and a railway;
• The State leaders were very dynamic,
easy to work with and facilitated quick solutions
to the problems of Renault;
• Renault received no subsidy from the
Government to locate in Curitiba. It did
have the commitment of the local authorities
in terms of enacting a strong worker
training program, which was heavily subsidized.
It was also given substantial tax benefits;
• An ex-post bonus was that Curitiba
attracts good executives to work in the
plants.
Renault also noted that the sudden growth
of auto assembly in Curitiba is the maxi-
86

mum that should exist. More than this and
it will enter the same path as São Paulo.
The fact that the local government is not
trying to attract more assemblers to locate
in the region corroborates this perspective.
The view of GM seems to be different, since
it sees no particular concerns on where to
locate nowadays. The opinion is that conditions
given by the state in the south for its
recent investment made a difference in
terms of the final decision for the new plant.
The company also considers that when
negotiations are taking place, the whole
assembler and supplier package is evaluated
and considered by both sides. The new
plant in South of Brazil has 17 suppliers
inside the industrial park, and GM shared
with them the incentive package given by
the government. These firms are system
integrators that supply GM with all the critical
modules in a JIT basis and they are
given a contract through the car life-time.
2.5.2. Market and Plant
Characteristics
Another issue discussed with assemblers
was the characteristics of the cars sold in
Brazil and the associated requirements of
the plants. Being one of the first in the new
generation of investments in the region,
the discussion of the Renault plant in
Curitiba is a good illustration of the general
trend of the assemblers in the region:
• Market studies have shown that the cars
that appeal to the local customer are
European. Therefore, assembled cars will
be based in European models, and will be
launched in Brazil and in Europe at the
same time. Nevertheless, the design will
be done mostly in Europe, with plant in
Curitiba transformed in only a very lean productive
unit;
• Important challenge has been to adapt
technologies to low volumes and larger
diversity of models produced and sold in
Brazil. For the sub 1000cc car, made
extremely popular in Brazil by the existing
the tax structure, they adapted a 1200cc
engine without major hurdles;
• There is an important level of vehicle outsourcing
(about 80% of the car value
added). The plant has about 100 direct
suppliers, including major stampings that
have traditionally done in-house. The plant
purchasing has had a strong concentration
in the region. About 80% of the value of
subcontracts and 60% of the payments are
done in the Curitiba region;
• Plant has a large overcapacity for the
current level of market demand. It is
designed to be able to manufacture
120.000 vehicles a year, and it is scheduled
to produce 30.000 cars (Scenic and
Clio) in 1999.
2.5.3. Working with Suppliers
Contracts with suppliers follow the general
procedure similar to what has been
described in Section 3.3. Therefore, final
admission is decided in Brazil, but within a
global sourcing strategy. Given that models
produced in Brazil have been mostly the
same as those assembled in Europe,
assemblers try to have the same supplier
for the same cars in both regions, particularly
if the firm is responsible for a critical
part of the car.
Renault has an extreme policy in what concerns
the policy of maintaining design and
component consistency. Therefore, whenever
an European supplier for a certain
component of the car starting to be produced
in Brazil is not present there, it is
given two choices:
a)Installs a plant here to supply Renault;
b)Gives the design of the component to a
supplier present locally, even if a competitor.
Since concentration of suppliers of the
same part in the same region does not
make sense, Renault believes that there
will be regional specialization in terms of
certain components, at least between
regions of Brazil (e.g. Johnson Controls in
Curitiba, Lear in Minas Gerais, etc).
Global Strategies for the Development of the Portuguese Autoparts Industry
87

Because the parts and the suppliers in
Europe and South America are the same,
the objectives in terms of quality, cost
reduction and responsiveness are the
same as in Europe. For example, Renault
has set the price reduction target of 8% per
year.
2.5.4. Perceived Capabilities of the
Brazilian Suppliers
A very limited number of Brazilian suppliers
are found to be supplying directly to assemblers.
The level of responsibilities demanded
is well above their capabilities.
According to the assemblers, this situation
is not bound to have significant changes in
the next few years. Their perspective is that
the challenge of locally owned firms is
more whether or not they are able to stay
as second tier, or if they are moved to third
level.
The reason for the lack of capabilities of
Brazilian forms has deep historical roots.
When Brazil escaped the hyperinflation
trap, most companies were highly inefficient.
Nevertheless, some of them had
some strength and could have joined
efforts to generate powerful local suppliers.
What ended up happening was that
firms that had some level of capabilities
were bought by multinationals (e.g. COFAP
was bought by Magnetti Marelli).
The perception is that lack of cooperative
and nationalistic vision from the entrepreneurs
prevented the possibility of joining
efforts. Moreover, individualistic behavior
is also considered to be behind the reason
why cooperation and joint ventures
between European and Brazilian supplier
companies have had problems throughout.
Nowadays, local companies need joint ventures
with foreign companies to survive the
industry shake-out. Regardless of that are
the options of the local firms, assemblers
anticipate a round of industry concentration,
with associated gains of efficiency.
2.5.5. Role of Local Content
Requirements
A long-standing debate exists in what concerns
the positive and negative effects of
the existence of policies that force assemblers
to have certain levels of local content.
The impact of such a measure is difficult to
measure. Nevertheless, one can ask the
assembler if the policy is creating additional
stress in their operations. The opinion
of the industry is unanimous:
• LCR is a good approach, both to the
assembler and the government. They are
well placed and do not cause particular
problems to the assembler. On the contrary,
interviewed believe that it forces
them to pay more attention to local suppliers,
that they could neglect at a first cut;
• Firms are mostly complying with the 60%
LCR that exists in Brazil, although all stated
the objective to increase LC in the near
future as a response to the devaluation of
the Real. Integration of more local manufacturing
components by first tiers is seen
as a crucial part of this process;
• Taxes and logistics associated with
imports mean a 35% ex-works price
increase, which work as an important
incentive to foster local content.
2.5.6. Implications for Portugal
Despite the economic slump, Brazil is a
fast growing market that presents important
opportunities for suppliers. Entering
the market is not easy and requires
extreme caution. Some of the critical
issues include:
• Portuguese Suppliers have been encouraged
to come through the global sourcing
scheme of the assemblers. Nevertheless,
none of them has been granted a contract
up-front. The firm took their own risks.
Given the similarities between the models
in Europe and Brazil, good recommendations
from European operations are key for
contracts in Brazil;
• The crucial aspect upon deciding to
come to Brazil is financial muscle to withstand
fluctuations of the market that cause
88

large periods of financial losses. It is
important to have other sources of revenues
with different economic cycles to balance
those in Brazil;
• Joint Ventures with Brazilian companies
can be tricky because of important differences
in business culture. In most investments,
foreign investors ended up buying
the Brazilian partner. Besides, most companies
that chose Greenfield as an investment
option were able to match up with
those who chose brownfield or JV in less
than 3 years;
• There are business opportunities for
companies that supply small stamped and
injection molded parts in Europe to come
and specialize in the production of those
same parts that are now being imported
due to low local quality. The key for success
is:
- Make a market study about what large
suppliers don’t want to have in house in
Brazil
- Evaluate if volumes demanded justify the
duplication of the tool between Europe and
Brazil;
• Tool making is a very interesting opportunity
because of the low quality of the
local tool making plants.
2.6. Conclusions: Lessons for
The Portuguese Suppliers
Given the trends and prospects explored in
the previous sections, it is important to
reflect in the advantages and disadvantages
of the Portuguese suppliers, as well
as what is necessary for further development
of the nationally owned companies.
The following paragraphs summarize the
key issues.
(DIS)ADVANTAGES OF THE PORTUGUESE SUPPLIERS
• Labor Costs are catching up with the rest
of Europe. Therefore, a low cost positioning
strategy for Portugal is no longer sustainable.
Companies have to be able to position
themselves in the market based on
distinctive capabilities. Most of the firms
are aware of this situation and are responding
accordingly. The general opinion is
that national companies have proved to be
good learners. They now have good manufacturing
capabilities, and that may not be
getting enough opportunities;
• The relative geographic location of
Portugal, far from the center of Europe has
important implications for logistics. There
are high logistic costs to the transportation
of vehicles and parts, which have to be
taken in consideration by the companies.
Ford Europe, for example, is increasing
looking to Eastern Europe for inexpensive
labor, particularly for low value added products
like small injection moldings. This
could present significant problems for the
Portuguese companies since Eastern
Europe is significantly closer to the major
assembly plants in Germany. (Only one out
of six of Ford’s European plants is closer to
Portugal than E. Europe, the one in
Valencia Spain);
• Very few existing suppliers have the ability
to remain as first tier on their own. The
two critical factors which most of the
Portuguese companies lack are (1) a large
engineering capability and (2) significant
financial resources. As described above,
to be able to compete as first tier, companies
need at least 10 CAD stations, and
the ability to have several engineers in the
OEM for several months. Moreover, they
need financial resources to be able to outlay
cash for the entire product development
cycle as well as to deal with the risks associated
volume fluctuations once manufacturing
starts;
• Most of the problems with lack of financial
resources are related to the small size
of the companies. There are too many
small suppliers in the industry in Portugal.
Each of them in isolation has very limited
capabilities;
• There are different perspectives in what
Global Strategies for the Development of the Portuguese Autoparts Industry
89

concerns tooling capabilities. Ford confirmed
that Portugal’s traditional mold making
expertise is indeed an advantage for
the local injection molding industry. The
Portuguese tool making industry is considered
to offer excellent quality, with good
lead time and very competitive prices for
tools. Good tool making abilities are particularly
important because the number of
engineering changes is almost always significant
and can as much as double the
cost of the tool. The ability to do these
changes inexpensively and locally is critical.
On the contrary, VW considered the
mould making companies in Portugal were
only able to work in simple tools, particularly
during the early tool making decisions
of AE. They said that had to get more complex
tools outside of Portugal because local
companies did not have the ability to supply
them;
• It is very unlikely that top management of
their companies decides to locate a new
large green-field assembly plant in
Portugal.
RECOMMENDATIONS FOR THE DEVELOPMENT OF THE
SUPPLIER INDUSTRY
• In what concerns the smaller suppliers
located in Portugal, companies should analyze
what auto components are bought outside
industrial parks and concentrate manufacturing
activities on those. Remain a
strong second or third tier player ultimately
requires cost effectiveness rather than
engineering. Success is often associated
to very low overhead costs, and adequate
use of modern equipment. Eliminating indirect
positions, including engineers, is key
to do cost effective manufacturing;
• They should also focus first on Iberian
Peninsula market then on the others. Small
stampings and injection molded parts do
not have a lot of engineering; therefore
logistics costs become a bigger issue. This
provides a comparative advantage to
Portuguese suppliers that are able to supply
locally. Some of this advantage is offset
by the fact that Portugal does not have the
necessary raw materials produced nationally,
and the fact that inbound logistics
are higher than outbound logistics. This
becomes an important disadvantage when
they are trying to compete against companies
supplying German assemblers from
Eastern Europe;
• For companies with international and
first tier ambitions, opening facilities there
to be near their major customers is critical
for success. Ford, for example, said that
there was a lack of low cost, good quality
injection molders in Northern Europe. Thus,
having good Portuguese injection molder
suppliers opening plants in France,
Germany or Eastern Europe would increase
the likelihood to be considered as a first
tier supplier in the near future. The strategy
of Simoldes was pointed as very good;
• To be able to pool the necessary engineering
and financial resources, companies
need to join efforts. Mergers and
Acquisitions are seen as one of the mechanisms.
Autosil was pointed as an example.
Groups of companies like the ACECIA
seemed like a good idea but, some raised
questions as to whether they are really
working. Joint-ventures with larger foreign
companies are also proving to be a successful
strategy (Iberoleff, Plasfil and
Gametal were referred examples of this situation);
• In what concerns developing the needed
engineering capabilities and training, the
role of Government in helping the initial
stages was seen as important.
• Despite the economic slump, Brazil is a
fast growing market that presents important
opportunities for suppliers. Entering
the market is not easy and requires
extreme caution. Again, financial muscle to
sustain market fluctuations is key for success.
90

Chapter 3
The Portuguese Autoparts
Industry
3.1. Introduction
For several decades, Portugal has used a
number of policy initiatives to foster the
development of the auto industry. Foreign
Direct Investment coupled with a rapid
upgrading of national firms are at the core
of a success story. In ten years, from 1987
to 1997, the autoparts industry grew
sevenfold. Together with the assembly
industry, it leads the national economy in
FDI and exports, representing almost 7% of
GDP. This chapter assesses the history
and actual context of the national auto
industry.
The chapter has five additional sections.
Section 2 presents a brief history of the
development of the auto industry in
Portugal, starting in the sixties, when the
first government decrees concerning the
industry were enacted and goes up to the
stage when AutoEuropa begins operations.
Section 3 makes a more detailed characterization
of the actual conditions in the
industry. It describes the industry within
the overall Portuguese economy, and then
analyses both assembly and components
operations, with particular attention to the
latter. Section 4 places the Portuguese
industry in an international context, providing
figures that enable a relative comparison
of the importance and development of
the industry. Section 5 presents the strategic
options and perceptions of the companies
established in Portugal, providing
insights on how the companies are positioned
towards the market, what are their
strengths, weaknesses, development
options and difficulties. Section 6 provides
a set of conclusions and recommendations.
3.2. The Development of the
Portuguese Automotive Industry
During the decades of 1950 and 1960,
most industrializing nations established
trade-related policies directly aiming at the
development of a local automotive industry.
Portugal started this process in 1963
with a decree that forbade the import of
CBU (Completely Built Up) units, while
requiring 25% of national added value to be
included in the cars to be assembled locally.
As a response to this closure of borders,
five of the big international companies
(Ford, GM, Renault, Citroen and BMC)
established producing subsidiaries in
Portugal. In addition to these, a number of
other assembly lines were also started
through licensing contracts, particularly for
commercial vehicles. As a result, in 1973,
30 assembly lines were producing autos
(passenger and commercial) for a national
market as low as 50.000 new vehicles per
year.
The small scale of the assembly plants
Global Strategies for the Development of the Portuguese Autoparts Industry
95

Figure 1: The Portuguese Automotive Market
Table 1 : Plants and Employment in the Auto Industry
Number of Vehicles
400000
350000
300000
250000
200000
150000
100000
50000
Year 1979 1983 1991 1995
Assembly Number 31 24 17 13
Lines Employment 10000 n.a. 5000 7000
Autoparts Number 212 160 130 150
Firms Employment 14800 16600 18000 23500
Source: AFIA; n.a. - not available
0
1
9
7
9
1
9
8
0
1
9
8
1
1
9
8
2
1
9
8
3
1
9
8
4
1
9
8
5
1
9
8
6
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
Import Export Production Sales
1
9
9
6
Source: ACAP, AFIA 2
made them highly inefficient, a situation
that was equally true for their suppliers 1 .
The small quantities produced (even considering
the after-market) and the frequent
changes in the model prevented the components
companies to have any profitable
operation by producing only for the assemblers.
As a result, with the exception of a
few companies that aimed at the export
market, suppliers were mainly caming out
simple operations, mostly related to metal
work. These small-scale problems became
critical towards the end of the decade
because of the fall in sales that happened
in the years following the 1974 Portuguese
revolution. Nevertheless, by 1979, despite
the problems outlined, a total of 25.000
jobs had been created in the industry,
including both assembly operations and
component manufacturing.
In 1980 a new regulatory framework
towards the automotive industry emerged.
On one hand, the EFTA and EC trade agreements
signed by Portugal required the
reduction of the severe restrictions on the
imports of CBUs. On the other hand, the
Government realized that the problems
hampering the development of the industry
were partially the result of the existing policies.
As a result, a new policy framework
was devised. This included quantitative
restrictions (quotas) on the imports of
CBUs and CKDs (Complete Knock Down),
that could be exceeded through the export
of parts and components manufactured in
Portugal. These trade policy measures
were complemented with incentives for
Foreign Direct Investment (FDI). The
assumption underlying the enactment of
this policy was that the quality of the
Portuguese labor force, its low cost, as well
as the country’s geographic condition and
climate would prove to be complementary
ingredients for the development of a strong
and modern automotive industry.
Changes in the policy environment, coupled
with adverse market conditions in Portugal
and throughout Europe in the early 80’s,
generated a profound rationalization
process in the industry. Inefficient assembly
and component producers closed or
were reconverted (see Table 1), while new
firms with a scale adjusted to the European
market were established. The most important
one was, undoubtedly, the Renault
investment project. It included three production
lines, one with a capacity to
assemble 80.000 cars, one capable of
manufacturing up to 220.000 engines, and
another with a capacity for 180.000 gearboxes
and water pumps, as well as a
foundry. The new legislation and the
Renault project led to an important influx of
FDI. From 1980 to 1983 roughly 10 Billion
of Portuguese Escudos were invested in
the autoparts sector, creating 4000 new
jobs. Simultaneously, with the aims of
adapting the local suppliers to market
1 It is important to understand that efficient production scales for autoparts are within the orders of magnitude of 500.000 per year in stamping, 250.000 in machining, 200.000 in casting
2 ACAP - Associação do Comércio Automóvel de Portugal; AFIA - Associação de Fabricantes para a Indústria Auntomóvel.
96

demands, 50 technology transfer agreements
were signed, mainly with European
firms. During the second half of the
decade, as Figure 1 and Figure 2 show, the
new investments and reconverted national
firms began to generate result in terms of
both internal sales and exports.
In 1988 Portugal joins the EEC and opens
its market to the imports of products from
other member states. Despite the important
growth in imports, the initial reaction
of the industry was very positive. Sales and
exports kept their ascending path, both in
terms of vehicles assembled (Figure 1) and
particularly in the autoparts sector (Figure
2), confirming the positive impact of the
industry restructuring process that
occurred early in the decade.
The year of 1988 is also the beginning of
the first specific program for the development
of the Portuguese Industry. PEDIP
was a European co-funded industrial policy
initiative aimed at speeding the catch-up
process that Portugal was undertaking to
join its more developed European partners.
The program included a number of subsidies,
financial incentives and special credit
lines to support firm initiatives ranging from
increase in production capacity, to promotion
of R&D (for the first time in a program
within an industrial context) or exports. It
also included a number of incentives for
the establishment of foreign firms in
Portugal. Although the program did not
have explicit sector priorities, the
Portuguese Government considered the
automotive to be of extreme importance for
the development of the national industrial
capabilities, and special attention was
devoted to it.
By the end of last decade, the automotive
firms established in Portugal, both national
and foreign, had become aware that focusing
on a small market such as the
Portuguese could not foster growth. During
the first half of this decade, with the help
of PEDIP, existing companies took crucial
steps towards positioning themselves as
competitors in the international market. At
the same time, a number of foreign components
firms established green-field operations
in the country. As a result, a rapid
decoupling between consumption and production
in the Portuguese market for both
assembly and components took place.
As can be observed in Figure 1, imported
vehicles assured most of the growth in car
sales experienced since 1988. In 1995,
over 85% of the vehicles sold in the national
market were imported. Conversely, 75%
of the vehicles produced in Portugal were
directed to the international market, a
Figure 2: Sales and Exports
of the Autoparts Sector
Figure 3: Fluxes in the Portuguese Automotive Industry in 1995
Million of Contos
800
700
600
500
400
300
200
100
IMPORTS
672
INTERNAL
MARKET
Components
Supply
100
99
After
Market
Components
Imports
Assemblers
191
36000
Vehicles
382
Vehicles
Imports
Domestic
Market
235000
Vehicles
0
1
9
8
6
1
9
8
7
Source: AFIA
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
National Export Sales
1
9
9
7
1
9
9
8
618
EXPORTS
384
234
123000
Vehicles
Export
Market
Source: AFIA; Some figures are estimations
Global Strategies for the Development of the Portuguese Autoparts Industry
97

Table 2: Major Foreign Direct Investments in the Auto Industry
in Portugal since 1988
Company Investiment Date Product
Yasaki Saltano May 1988 Wiring/Harnesses
Ford Electronic I July 1989 Audio Systems, airbags, alarms
Delco Remi December 1989 Ignition Systems
Covina January 1990 Glass
Continental Mabor June 1990 Tires and Tubes
Cofap Europa July 1990 Segments
Ford/VW July 1991 Vehicle Assembly
Indelma July 1991 Wiring/Harnesses
HUF November 1992 Locks
Johnson Controls December 1992 Seat Covers
Dalphi Metal February 1993 Steering System
Kupper e Schmidt June 1993 Forgings
Cablinal September 1993 Wiring/Harnesses
Fico Cables December 1993 Wiring/Harnesses
Sommer Allibert December 1993 Plastic Components
Indelma February 1994 Wiring/Harnesses
Iralusa March 1994 Interior Ceiling
Hoheica May 1994 Rear View Mirrors
Karmann Ghia May 1994 Seat Covers
RSL July 1994 Plastic Components
Jonhson Controls December 1994 Seat Foams
Ford Electronic II October 1995 Air Compressors
Opel Portugal February 1996 Improvement of Operations
UTAutomotives April 1998 Wiring/Harnesses
Lear Corporation March 1998 Interiors / Seats
trend that was further reinforced by the
AutoEuropa plant discussed below.
Separation between manufacturing and
sales also happened in the autoparts sector.
As Figure 2 demonstrates, during the
first half of the decade, national supply of
parts and components was almost constant,
while exports grew at a fast pace.
Figure 3 illustrates the decoupling phenomenon
in both markets. The numbers presented
clearly reflect how most of the
Source: ICEP
transactions in the industry were across
national borders, rather than locally.
The beginning of operations of AutoEuropa
marked the first half of the decade, an
event considered the second key milestone
in the development of the industry (the
Renault project being the first). When
PEDIP started, the Government team working
in the auto sector saw the establishment
of a large car assembler unit as a
major opportunity to strengthen the development
of the auto industry and, because
of the effects in the economy, the overall
national industrial capabilities. In 1991,
ending a long period of negotiations, the
Portuguese Government signs an agreement
with Ford and Volkswagen for the
establishment of the AutoEuropa joint venture
in Portugal. This investment turned out
to be, not only very important for the auto
industry, but for the overall economy repre-
98

senting, in 1997, 2.5% of the Portuguese
Gross National Product.
The green-field plant has a capacity of producing
up to 180.000 Multi-Purpose
Vehicles (MPVs) per year. It is the single
most important FDI in Portugal, having
generated almost 5000 direct jobs and
7000 indirectly. The direct impact of the
plant in the national auto industry can be
noticed in Figure 1 and Figure 2, where
1995 corresponds to the year when production
started. AutoEuropa was important,
not only in itself, but also because it
induced a number of related investments by
international firms, most of them needed to
supply the components used in the plant.
Table 2 describes these investments, characterizing
the types of products that each
company is producing and the dates at
which they decided.
Besides the direct immediate impact, there
were also important indirect results, partially
due to the local content agreement
between the government and the consortium
that aimed at pushing the level of the
national autoparts companies. To prepare
firms to supply AutoEuropa, a number of
quality and productivity initiatives were
enacted with the help of PEDIP funds.
Among these, 12 joint ventures or technical
cooperation agreements with
Portuguese firms were established. By mid
1995, 44 national firms had achieved the
highest quality certification level (Q1) from
Ford, and were supplying parts and components
that corresponded to more than 40%
of the car’ value added.
These excellent results were achieved
through an articulated effort between economic
agents, in particular government and
firms, both local and multinationals 3 .
Throughout this process, the knowledge of
the industry imbedded in government institutions
has played a key role, in particular
in the negotiations with multinational companies.
In a context of international subsidy
races among regions to attract global
firms, having informed negotiators can
make a substantial difference in the outcomes.
The ability to work closely with
national firms, responding and anticipating
some of their needs and opportunities is
also crucial for successful industrial policy.
The growth in sales volume and the positioning
of the industry in the international
market has been quite important. This success
path has led the auto industry to
become the leader in terms of contributions
for the national trade balance, surpassing
textiles for the first time in several
decades. Nevertheless, given its international
characteristics, it is important to
position the industry in a broader context,
as well as to understand who are the
Portuguese component firms, what they
are producing, and what makes them competitive.
3.3. The Current Situation of
the Portuguese Industry
The importance of the automotive industry
for the Portuguese economy can be
assessed in a number of ways. Table 3 presents
some of these indicators. As it can
be observed, 4% of industrial employment
is associated to this industry, making it
rather important in the Portuguese context.
Nevertheless, this is the least significant of
the indicators when compared to other. The
industry is leading the economy in terms of
exports, representing a fifth of the
Portuguese exports, and in FDI, with 18% of
the total stock in the manufacturing industry
(in both indicators partially due to
Autoeuropa). In addition to represent the
largest share of FDI in Portugal, investors
in this sector are also leading in terms of
return on assets. The average return of all
FDI in 1996 was 6.54%, against 7.43% in
the auto sector. This leadership is continuing
from previous years.
The international characteristic of the auto
industry, evident through the magnitude of
3 See a detailed description of the role of the parties and the negotiation process in the essay by Palma Feria.
Global Strategies for the Development of the Portuguese Autoparts Industry
99

Table 3 : Importance of the Auto Industry
for the Portuguese Economy in 1997
Category Value Share of Total
Employment 30500 workers 4% 1
FDI Stock (1996) 178,158x10 6 contos 18% 1
Exports (Autoparts) 460x10 6 contos 11%
Exports (Assembly) n.a. 9% 2
Importance to GDP n.a. 7% 2
Source: AFIA, Banco de Portugal, INE, Min Trab Sol.; 1 Only Manufacturing Industry; 2 estimate; n.a.: not available
Table 4 : Vehicles Assembled in Portugal in 1997
Type of Vehicle Passenger Light Comercial Heavy Comercial Total
AutoEuropa 131400 n.a. n.a. 131400
Opel Portugal 7569 56195 114 63878
Citröen Lusitânia 28725 n.a. n.a. 28725
Renault/Sodia 18316 6699 n.a. 25015
Ford Lusitania n.a. 9909 n.a. 9909
Mitsubishi Trucks n.a. 4115 3150 7265
Salvador Caetano n.a. 5837 527 6364
Total n.a. n.a. n.a. 271737
both indicators, also has important implications
for technology. The auto industry is
technologically very dynamic, with constant
evolutions in materials, processes and
electronics. To compete in the auto sector,
national and international firms located in
Portugal have to follow closely these new
needs and challenges. Given some degree
of backwardness in the Portuguese industry,
these companies rank among the technological
leaders in the national manufacturing
industry, and drivers of development
for the overall sector.
The overall position of the auto sector in
the Portuguese industry is a starting point
for a more in-depth look at the industry.
Source: AFIA; n.a. - not available
This includes a general overview of the
assembly industry, as well as a careful
analysis of the autoparts firms. We will
start with the assembly operations. In
1997, 271.000 vehicles were assembled
in Portugal. Table 4 presents the breakdown
of this figure. As we can see,
AutoEuropa is the clear leader in the group,
with 131.400 cars assembled in 1997, followed
by Citroen, Renault (that closed its
plant in the meanwhile) and Opel. The figures
for the rest of the lines suggest that,
beyond AutoEuropa, there has been an
important concentration of the plants
installed in Portugal in the assembly of
smaller volume commercial vehicles. A
total of roughly 80.000 units were assembled,
with the OPEL/GM plant reconverted
in 1993 playing the most important role. All
together, the industry employed slightly
less than 7000 workers.
Although these numbers represent the
largest volume of cars assembled in
Portugal ever, it is still a very small fraction
of the 18.7 Million cars assembled in
Europe in 1997. As a result, despite the
impressive growth, Portugal remains a relatively
small player in the auto assembly
industry. Moreover, as one would expect in
this highly concentrated global industry,
only one nationally owned company,
Salvador Caetano, has been able to continue
to play a role in the assembly busi-
Table 5 : Sales of Components Produced in Portugal by Large Group
Engines, Chassis Electric Other Sales
Year Transmis., Suspensions Interiors Comp. Tires Body (Dies, tools) (10 6 contos)
Brakes
1992 24% 7% 17% 25% 7% 17% 3% 350
1995 26% 8% 21% 24% 4% 14% 3% 484
1996 24% 11% 27% 24% 4% 8% 2% 629
1997 24% 11% 27% 25% 4% 8% 2% 710
1998 24% 11% 27% 25% 4% 8% 2% 736
92-98 0% 4% 10% -1% -3% -9% -1% 110%
A B C D E F G
Source: AFIA
100

Figure 4: Tier Structure of the Autoparts Companies in Portugal
90%
80%
90%
80%
Frequency of Products
70%
60%
50%
40%
30%
20%
10%
70%
60%
50%
40%
30%
20%
10%
0%
1 st Equipment Replacement
0%
1 st Tier 2 nd Tier 3 rd Tier
ness. Previous attempts to launch national
brands such as UMM were washed by
fierce market competition and high barriers
to entry in the international market.
The autoparts industry is more diversified
than the assembly business, and renders a
more careful and detailed analysis. Table 5
shows the growth and structure of the
Portuguese autoparts manufacturing. As
can be seen, turnover doubled in five
years, from 350 Million Contos in 1992 to
736 Million Contos in 1998, making it a
record growth industry that employs
23,500 workers and is now leading the
national export market. Production is dominated
by segment A, engines, transmissions
and brakes, segment C, interiors and
Source: Questionnaire Results
segment D, electric components. Within
segment A, the production of the Renault
plants established in the early 80’s, manufacturing
engines and gearboxes, represents
for almost a third of the exports. In
interiors, the production of seats and
bumpers are the most important activities.
Segment D is dominated by the manufacturing
of cabling and auto-radio assembling.
Analyzing the relative evolution of the segments
it can be seen that interiors are
becoming a major strength of the
Portuguese component sector. In six years
its share of total revenues grew from 17%
to 27% of total sales, and it is now topping
the segments in terms of sales. Given the
strong growth of the industry, this represents
tripling the volume of sales, from 60
Million Contos in 1992 to 197 Million
Contos in 1998.
The companies in Portugal are mostly supplying
at a first tier level, although a substantial
share of the firms also delivers
products at other levels of the auto tier
structure (see Figure 4). According to
some industry leaders interviewed, this
seems to be a growing trend in small and
medium sized companies, as the assembler
concentrates some functions in system
integrators, thus requesting its small
suppliers to redirect their shipping to these
larger firms. Figure 4 also demonstrates
that companies in Portugal are almost com-
Figure 5: Major Destinations
of Portuguese Autoparts Exports in 1997
7%
22%
28%
Germany
France
Sweden
Italy
UK
3%
9%
Source: AFIA
3%
4%
24%
Benelux
Spain
Other
Global Strategies for the Development of the Portuguese Autoparts Industry
101

Figure 6: National and Foreign
Companies According to Revenues (1996)
Table 6 : Distribution of Activities
of Portuguese Firms
Above 10M Contos
Product/Activity
% of Total
Battery 1
Rubber 9
Electric Components 9
Forging 7
Stamping and related 34
Plastics 22
Tires 2
Textiles 6
Other 10
Source: ITEC
5 and 10M Contos
2.5 and 5M Contos
1 and 2.5M Contos
0.5 and 1M Contos
Below 0.5M Contos
0
5
10 15 20
25
Number of Companies
International
National
Source: Ministry of Economic Affairs
pletely geared towards the supply of original
equipment, with much less involvement
in replacement parts.
Not only are the national firms supplying
components to assembly plants, they are
also doing it internationally. As pointed out
before, since the early nineties, exports
grew to be the destination of most of the
production of the firms located in Portugal.
These are mostly directed to the European
market, with Spain, France and Germany as
the leading nations in terms of destinations.
Figure 5 presents the breakdown of
exports from Portugal in 1997.
Electric Components and Interiors also
dominate the export market. In 1995, interiors
accounted for slightly less than 30%
of exports, while electric components
accounted for over 30%. The characteristics
of electric component exports show
how low wages are still conditioning the
competitive position of the Portuguese
autoparts industry. Cabling and auto-radio
assembling, two labor-intensive activities
represent more than ninety percent of the
exports in this segment clearly dominated
by foreign firms. Overall, eight specific
categories of production account for
almost eighty percent of the exports of the
country. These include some referred
above, such as cabling, auto-radios,
engines, gearboxes, seats, bumpers, as
well as tyres and batteries. Within these,
nationally owned firms play a major role in
seats, bumpers and batteries.
This dependence from foreign firms and
the secondary role of Portuguese owned
firms becomes more evident when we
explore the structure of the industry. In
1996, 150 firms were listed as auto component
suppliers established in Portugal.
Out of the total, roughly 65 had the majority
of the capital owned by foreigners.
Although foreigners represent less than
half of the total, they account for 75% of
the revenues of the sector, and 90% of the
exports. The reason for this imbalance in
terms of revenues is the difference in size.
As Figure 6 shows, half of the nationalliowned
companies have revenues below 1
Million Contos, and only 5 firms sell more
than 10 Million Contos.
Nationally-owned firms manufacture a wide
range of products for the industry (see
Table 6), and they are mostly supplying for
the first market (as opposed to the replacement
market). Nevertheless, their small
size limits their ability to take upon responsibility
from the assemblers. In AutoEuropa
only 9 out of 40 main components and
functions are coordinated by Portuguese
firms and, among these, the least complex
102

ones. Therefore, most of the suppliers are
working at a second and third levels. A
similar situation exists in the renewed
Opel/GM plant. In 17 main suppliers, only
5 are Portuguese firms (Source: Revista
Competir, 1995). These numbers are
expected to go down even further as the
assemblers demand more responsibility
from their suppliers.
The national firms are aware of their shortcomings
and the most dynamic units are
trying to invert this situation, particularly in
the areas of the industry where there is a
stronger presence of national firms (see
Table below). They are investing in
research and development as well as internationalizing
operations to be able to
respond to the demand of the assemblers
and retain their first tier status.
3.4. The Industry in an
International Context
An analysis of the Portuguese autoparts
industry requires placing the industry in an
international context. Table 7 presents a
comparison of key characteristics of the
auto sector across countries that are either
play, or are aiming at playing an important
role in the industry. In the first three, the
components industry evolved with an
assembly industry that is native to the
country. As a result, the manufacturing of
components has long traditions, and tight
relationships with the assemblers. In the
rest of the list, the promotion of national
capabilities in the industry has been at the
core of the industrial policy decisions in the
past decades.
The three most striking success cases
seem to be Spain, Mexico and Brazil. The
three have seen the assembly and
autoparts industry grow to a size that rivals
or even surpasses Italy, the smallest of the
countries with native assemblers.
Moreover, each of them has close to
200,000 workers associated to the
autoparts industry, a number that would
place the industry high in the agenda of any
Table 7: International Comparison of the Auto Industry in Selected Countries (1996)
Assembly Components Industry Autopart Autopart
Country Vehicles Workers Firms Turnover Exports Sales Exports
Units Number Number Million of Million of Per 1000 Per 1000
US$ US$ Vehicles Vehicles
France 3,571,049 600,000 300 40,262 14,291* 11.3 4.0
Germany 4,842,909 800,000 3,000 112,500 28,611* 23.2 5.9
Italy 1,545,365 n/a n/a 19,734 9,011* 12.8 5.8
Spain 2,412,308 180,000 2,000 19,105 10,054 7.9 4.2
Portugal 233,132 24,000 160 3,500 2,275 15.0 9.8
Hungary 63,033 16,200 160 720 340 11.4 5.4
Czech 263,263 n/a n/a n/a 350 n/a 1.3
Poland 433,422 n/a n/a n/a 232* n/a 0.5
Taiwan 366,000 95,000 2,500 4,320 2,338 11.8 6.4
Mexico 1,200,000 192,000 500 14,000 4,678 11.7 3.9
Argentina 312,910 38,000 n/a 3,200 945 10.2 3.0
Brazil 1,804,328 200,000 1,300 16,700 3,500 9.3 1.9
Sources: Japan International Cooperation Agency; US Chamber of Commerce; Taiwan Chamber of Commerce; AFIA, InfoAmericas; UNCTAD;
BNDES (Brazil); Mondaq (Czech); Hungarian Ministry of Economic Affairs; The Economist Intelligence Unit;
* It may under-represent true values because it is based on UN trade data ; n/a – not available.
Global Strategies for the Development of the Portuguese Autoparts Industry
103

policy maker or CEO of an industrial group.
Nevertheless, although informative, a
direct comparison between absolute magnitudes
is not adequate to compare the
development of the industry. It has been
shown that differences in demand due to
population and GDP sizes have a clear
effect in the industry, particularly in what
concerns the assembly of vehicles.
Therefore, a fair comparison to somehow
account for this difference.
Although several indicators could be considered,
we believe that the ratio of component
sales to the volume of cars assembled
in the country is a reasonable good
control for the size effect. The right handside
columns of the Table above represent
these ratios. As can be observed, with the
exception of Germany, the heart of the
automotive industry in Europe, for every
1000 vehicles produced, there are around
US$ 10 Million of revenues in autoparts
sales. Portugal is quite above this average,
with US$ 15 Million. As one would expect,
a similar thing is true for exports, where the
Portuguese ratio is the highest in the sample,
including Germany. This means that
Portugal has been able to establish a
strong components industry, one that is
clearly established in the international market,
and positively disproportionate in size
in favor of the country. The unique combination
of aggressive national firms and
strong foreign investment is responsible for
this strong position.
Another aspect that Table 7 shows is that
the components business in Eastern
Europe is still rather small, both if we consider
the absolute of the relative figures.
Nevertheless, as detailed in previous sections
of this report, their evolution has
been quite rapid, and they are expected to
Figure 7: Autoparts Positioning Factors
gain an increasing stance in the industry,
particularly as the volume of assembly
grows in these regions.
The challenge for the future is to maintain
the growth path the industry has experienced
in the past decade. As the wage
level goes up, the ability to enter in the
manufacturing of higher value added products
seems to be the crucial aspect. This
challenge is valid both for multinationals,
keeping these firms interested in manufacturing
in Portugal, as well as through promoting
the development of capabilities
within the national firms of the sector.
3.5. Market Perception and
Strategy of the Autoparts Firms
The previous sections analyzed aggregate
indicators for the industry, interpreting
some of the trends and general characte-
Product Breadth
Product Development Lead Time
Product Uniqueness
Geographic Proximity
Fast Assurance of Desired Quantities
Raw Materials Quality
Low Price
Fast Delivery
Product Quality
Reliable Delivery
1
1.5 2 2.5 3 3.5 4
1: Insignificant - 5: Crucial
4.5
3 years ago
Now
104

Figure 8: Stengths and Weaknesses
of the companies
Figure 9: Development Priorities
Partnering
Manufacturing Costs
Internationalization
Development Capability
Information Technologies
Human Resources Ability
Increase Capacity
Technological Capability
Diversification
Delivery Flexibility
Product Quality
Increase Product Value Added
Improve Engineering
1 1.5 2 2.5 3 3.5 4 4.5
1: Very Week - 5: Very Strong
ristics. This section presents the view of
the industry players regarding of the challenges
and obstacles they are currently facing.
It includes strategic issues, development
priorities, problems and constraints,
as well as innovative behavior. A detailed
analysis of the human resource structure
of the companies evaluated is also presented.
All the aspects discussed in the rest of this
section are the opinions of the companies,
collected through the questionnaire
described in the initial sections of this
report. Because some of the aspects
asked are rather broad, they are subject to
different interpretations among the persons
answering the questionnaire.
Therefore, throughout the presentation of
the results, we will also try to analyze how
these different interpretations can bias
some of the results.
Manufacturing Excellence
0% 20% 40% 60% 80% 100%
Frequency of Responses
The first thing that companies were asked
was to value the importance of several factors
in what concerned their strategic positioning
towards the assemblers. Figure 7
presents the average of their responses for
each factor, now and three years ago. As
we can see, responsiveness (including reliable
and fast delivery), quality and price
lead the strategic positioning of the companies.
While the generic importance of
these aspects could be anticipated, there
are relevant issues revealed by the company
responses, in particular related to the 3-
year change. The first is that price was at
the top of the list three years ago, but it is
not any longer. Assemblers, these firms’
clients, are running increasingly lean operations,
which can easily be disturbed by
variations in delivery or in the characteristics
of the product. Therefore, when they
are deciding between bids from their suppliers,
the issues of product quality as well
as fast and reliable delivery are commanding
more importance than just price. The
issues of delivery are particularly growing in
importance. Not only are they leading the
positioning, but they were also the factors
that showed greater change since three
years ago.
The figure also shows that issues such as
geographic proximity and development are
ranked as of medium or below medium
importance. As to geographic proximity, the
average level shows that this issue would
probably depend on the product under discussion.
In fact, the need to be near the
assemblers becomes crucial on large components,
with tight just-in-time schedules
and important logistic costs. On simple
components, costs of logistics can be as
low as 1% of product cost, and other
aspect become more salient. More surprising,
perhaps is the low valuation of product
uniqueness. The tough competition on
quality and responsiveness is bringing up
Global Strategies for the Development of the Portuguese Autoparts Industry
105

more intangible aspects such as new technologies
and solutions from the suppliers.
Therefore, even if not as important as quality
and responsiveness, the expectation
was to find this strategic factor growing in
importance over the last three years. This
was not what was found.
The responses of the companies regarding
their strategic positioning will also work as
a guide for the detailed analysis presented
in the following chapters. Given that quality
and responsiveness are considered the key
positioning factors, we will evaluate how
they are faring on these critical indicators.
On the other hand, we will further investigate
development capabilities and practices
to shed some light on why is this
aspect not so valued by the companies.
Given a set of positioning factors, we also
asked what did the companies consider as
their strengths and weaknesses. Figure 8
describes the results of this question. As
can be observed, there are no substantial
differences in the values of each of the
dimensions considered, with none of them
in the weak side. Moreover, quality and
flexibility are unexpectedly leading the
group, while cost is lagging. In fact, given
what was found in other parts of the study,
cost would have been the more obvious
issue that the Portuguese companies
would rank as strength, while quality something
that they would still be struggling
with. Another aspect that may be striking is
the fact that companies ranked development
capability to be above average. Again,
as it will become clear in subsequent chapters,
development is certainly something
where most of the companies analyzed are
lagging. These differences between analysis
and perception from the companies
lead us to interpret this ranking more as a
hierarchy of concerns rather than their
strengths and weaknesses. In any case,
these results suggest that companies
should be careful on their self-assessment,
trying to collect more data to enable a careful
benchmarking of their capabilities.
Positioning factors together with strengths
and weaknesses set the stage for priorities.
Figure 9 describes the frequency of
responses for each of the factors that companies
marked as part of their development
priorities. Given the importance given
to quality and responsiveness identified
before, it is not surprising to find excellence
in the manufacturing system to be
the leading priority. The subsequent
aspects are related to development capabilities
and include improvement of engineering
ability and increase in product
value added. This means that companies
are responding to the overall industry trend
Figure 10: Main obstacles faced
by the companies in their business
Figure 11: Shared Activities with Clients and Suppliers
Facilities
Old Equipment
Capital Shortage
Labor Regulation
Loss of Clients
Labor Costs
Competition
Dedicated Production
Operations
Access to Plan. System
3rd Part Logistics
Stock Information
Technical Support
Logistic Equipments
EDI Communication
Engineering
Worker Qualification
0%
10% 20% 30% 40% 50% 60% 70% 80%
1 1.5 2 2.5 3 3.5 4
1: Insignificant - 5: Critical
Frequency of Responses
Suppliers
Clients
106

Figure 12: Importance of Communication Means
Figure 13: Average Company Investment
Extranet
160000
EFT
Internet
Letter
EDI
Email
Telephone
Contos
140000
120000
100000
80000
60000
40000
20000
Telefax
1 1.5 2 2.5 3 3.5 4
0
1992
1993 1994 1995 1996 1997
1: Insignificant - 5: Critical
EFT - Electronic Funds Transfer; EDI - Electronic Data Interchange
The values reported are medians
to assign further responsibilities to the
suppliers, in particular activities related to
the development of the components they
supply. The importance given to development
is more in line with the findings and
recommendations of the present study. It
also reinforces the comment regarding the
unexpected low importance given to product
uniqueness in the set positioning factors
reported in Figure 7. Given that we now
find this issue to be high on the list of priorities,
a possible explanation for the low
score found in the previous question could
be an ambiguous interpretation of the product
uniqueness category.
The aspects that were least mentioned are
also extremely relevant. The low score of
internationalization can be explained by
two facts. First, multinational companies
come to Portugal as a part of an internationalization
strategy. Therefore, it is reasonable
that this issue may not feature
high on their priorities list. As concerns the
Portuguese owned firms, the largest and
more progressive companies are pursuing
this strategy, but it is still far from being an
overall industry trend. Internationalization
is a complex process, which demands
large resources and a clear strategy.
Therefore, companies are approaching it
with caution, which may be an adequate
strategy.
The most striking aspect of Figure 9 is the
very low priority given to partnerships. In
fact, as seen in the previous section, most
of the national firms are small. Therefore,
they have limited resources and reduced
bargaining power when negotiating either
assemblers or multinational suppliers.
Given this situation, one would expect the
establishment of partnerships as an interesting
development strategy. These can
take the form of general agreements, as
we already see taking place among several
national firms, but could also include mergers
and acquisitions. Still, this strategy is
the least valued by the companies. Industry
leaders with whom we have discussed this
issue have suggested the difficulty of
cooperation to be almost endemic, clearly
related to the personalities of the people
leading the companies. Our opinion is that
partnership is a very important development
strategy for national firms, and that
the lack of perception from the industry
leaders regarding this opportunity may
hamper the future of the autoparts sector.
The following question was related to the
key barriers/obstacles that companies are
facing when doing their business in
Global Strategies for the Development of the Portuguese Autoparts Industry
107

Portugal. The results, presented in Figure
10 provide important insights for public policy.
The most critical barrier pointed by the
firms is related to worker qualification. This
aspect was then confirmed through discussions
with industry leaders. The opinion is
that there is not an adequate supply of
workers with appropriate qualifications to
work in the industry. While it is normal for
some training to be provided by the firms,
the perception is that companies are
spending time providing them with skills
that they feel ought to have been acquired
through formal education. In the other
extreme we see that access to the necessary
equipment is clearly not what is concerning
the managers in the industry.
Moreover, we see that neither is the capital
needed to run the business. This means
that, either internally or through the set of
available instruments in the market (banks,
government programs, affiliated companies,
etc), companies have been able to
raise the capital for the necessary investments,
particularly in what concerns their
equipment. Of some interest is also the
fact that labor regulations do not score
high on the obstacle list of the companies.
The two other issues valued by the firms,
loss of clients and competition, result from
doing business in a dynamic industry such
as the automotive.
In addition to understand these companies’
opinion, position and strategy
towards the market, we were also interested
to assess the degree of closeness in
the relationships along the tier structure.
To accomplish this objective we asked the
firms to report on the activities that they
shared with their clients and suppliers. The
results of this request are presented in
Figure 11. The figures show that a substantial
share of the companies has a vast
interaction with their clients. This interaction
includes everyday activities such as
logistics and planning information, but also
technical assistance and engineering. The
fact that 78% of the companies report joint
engineering with their clients shows how
crucial this aspect is for doing business in
this industry.
The Figure has another striking result: the
gap in the level of shared activities
between clients and suppliers. In almost all
categories, the frequency of activities
shared with suppliers is half the one taking
place with clients. The magnitude of this
gap shows that firms interviewed, most of
them working at least partially as first tier
suppliers (see Figure 4) are still far from
being able to demand from the lower tier
firms the same level of involvement and
responsiveness that the assemblers
demand from them.
According to local industry participants,
there are two complementary reasons for
the difference in the relationships. Either
the lower tier suppliers are so small that
their operational capability is reduced, and
Figure 14: Product Value Added Index (1993=100)
150
145
140
135
130
125
120
115
110
105
100
95
1993 1994 1995 1996 1997
Index calculation is based on the average ratio of revenues over units of produts sold
108

they are not able to foster closer relationships,
or they are extremely large (e.g. a
sheet steel producer), and they do not find
useful to expend resources cooperating
with small Portuguese autoparts suppliers.
Regardless of the reason, this situation is
most probably affecting the supplier ability
to respond to the demands of the assemblers,
and should be an issue of debate
among industry leaders.
Associated with less involvement of the
firms surveyed with their suppliers than
with their clients we find more volatile contracts
with the former than with the latter.
The average contract duration with clients
reported by the firms is 2.5 years, while it
is only 1.5 years with their suppliers.
Companies were then asked about their
means of communication with these
clients, suppliers, and the rest of the community.
As Figure 12 shows, fax and phone
are the most critical forms of communication
of these companies with the business
world. Given a general perception of how
the business world works, this is hardly a
surprising fact. Unexpected though, is the
fact that email is ranked third, right after
the first two, and ahead of EDI, a technology
that assemblers have tried to push their
suppliers to use for a long time. We also
see that there is very limited recognition of
benefits to adopt tools that enable a closer
link with the assembler, such as
Extranets of the Internet. Nevertheless,
because this issue was not further
explored, it is not clear whether the reason
for this lack of interest is coming from the
inability of the assemblers themselves to
integrate suppliers in their internal networks.
The two last generic issues surveyed were
investment and value growth. Figure 13
reports the average investment of the companies
in the last half-decade. During this
period, the AutoEuropa effect can be clearly
observed. In the years preceding the
start of operations in 1995, an important
share of the companies present in Portugal
were making an effort to prepare their operations
to respond to the contracts they
had signed with the consortia. In the following
years, the level on investment went
down, only to regain again in 1997.
The investment of the companies and the
operations of AutoEuropa had an important
impact on the companies. Figure 2 had
already shown the important growth in
terms of overall sales that AutoEuropa had
enabled since 1995. Figure 14 shows that
this growth was accomplished through an
important increase in the value added of
the products manufactured in Portugal. In
fact, while in the period 1993-1995, the
value added of the products was almost
constant, this index grew by 50% in the
subsequent two years.
This is an interesting implication of the
establishment of an assembly line in
Portugal. The relevance of proximity and
the local content agreement negotiated
between the government and the joint venture
enabled a number of companies located
in Portugal to get involved in the manufacturing
of more complex products, for
which they have been able to command a
higher price per unit sold. While this may
Figure 15: Human Resources Roles in the Companies
4%
0%
5%
5%
4% 2%
Shop-Floor
Technical
Quality
7%
Marketing
Sales
Logistics
Staff
73%
Purchasing
Global Strategies for the Development of the Portuguese Autoparts Industry
109

Figure 16: Human Capital of the Companies
Figure 17: Opinion of the School System
8%
1% 0%
Technical Schools
28%
63%
Until 9th Grade
9th to 12th Grade
College
Master
Ph.D.
High Schools
University and College
0% 20% 40% 60% 80%
Not Adequate
Fairly Adequate
Very Adequate
have limited impact on multinationals that
decided to open operations in Portugal to
tackle the sourcing opportunity, a substantial
positive impact may exist on the local
suppliers. If companies that were given this
opportunity had a good response and are
now able to bid for a different set of products
in the international market, the
assembler investment gains a multiplicative
effect that goes beyond the direct costbenefit
analysis of the volumes of sales to
the joint-venture.
3.6. Human Resources
Given that companies elected the access
to qualified workers as their top difficulty in
terms of future development, this section
presents a more detailed look at the characteristics
of the human resources in the
set of firms that was studied. Figure 15
presents the relative importance of the
workforce. As it can be seen, almost three
quarters of the workforce is doing shopfloor
activities. The following categories are
technical and quality. These figures are a
very clear demonstration of how much
these firms are geared towards the manufacturing
activity, either directly trough the
workers performing the manufacturing job,
or through the people assisting it: the quality
technical people.
The relative importance of the activities
performed by the workers conditions the
levels of qualification in these companies.
Figures presented on Figure 16 strongly
reflect this characteristic. The 63% of the
workforce with up to 9 years of school correspond
mostly to shop floor level workers,
which often only have the compulsory level
of education in Portugal: the 9th grade.
Nevertheless, given the importance of
human capital to excel in the increasingly
complex manufacturing and logistics tasks
associated to the autoparts industry, it is
important for the managers of these companies
to improve the overall education
level of their workers.
Frequency of Replies
To understand the problems in hiring, the
survey asked the opinion of the industrialists
on the school system. Figure 17
presents the responses. As can be seen,
universities and colleges are fairly adequate.
This is a reasonable set of answers
given the fact that no university education
is directly tailored to the needs of a particular
sector. Of much more concern is the
fact that high schools are considered
either fairly or not adequate to the needs
of the companies. Given the low levels of
education of the workers, these companies
ought to be hiring people with high
school complete. Because they find their
education inadequate, a gap between supply
and demand of labor for the sector may
exist.
The reason why it is not possible to be sure
about this situation is the fact that companies
do find technical schools fit to their
needs. The conclusion would be that fostering
vocational high school education and
their link with the industry may have a very
positive impact in the overall human capital
of these companies.
110

3.7. Conclusions and
Recommendations
• For several decades, Portugal has used a
number of policy initiatives to foster the
development of the auto industry. The
Renault plants in 1980 were the industry’s
first large integrated automotive projects,
which included assembly, engines and
gearboxes, as well as a specific concern
with the integration of nationally sourced
components. These new investments, an
environment favorable to the establishment
of FDI, renewed financial instruments
to help the development of the industry
spurred the autoparts industry growth during
the eighties and early nineties, particularly
through exports;
• The AutoEuropa joint venture established
in early nineties gave the second boost to
the industry. The plant not only doubled the
national assembly capacity, but it also
induced a number of national and foreign
investments in the components sector
through a local content agreement between
government and the joint venture. Several
foreign firms invested in Portugal to be able
to supply the consortia, and national firms
were scrutinized to identify those that could
become suppliers;
• Government policies and company
strategies are having a large payoff for the
national industry. In ten years, from 1987
to 1997, the autoparts industry grew sevenfold.
Together with the assembly industry,
it leads the stock of FDI and the
exports in Portugal, representing almost
7% of GDP. This growth seems to be
accomplished partially though the increase
in the value added of the products manufactured
in Portugal. In the period following
the start of operations of AutoEuropa, the
value of the products included in the sample
we analyzed grew by 50%;
• Although small in absolute figures, both
in terms of assembly and parts, Portugal is
an absolute leader in what concerns the
relative size of the components industry.
Despite the limited number of units assembled
locally, the country has been able to
develop a remarkably large components
industry. If we compare autoparts turnover
per 1000 vehicles assembled across a
wide variety of countries around the world,
we see that only Germany surpasses
Portugal, while it tops in export revenues
per 1000 vehicles assembled;
• The history and figures places Portugal in a
unique position. They describe a country that
has been able to breed an industry and place
it at the forefront of its economy. Moreover, it
also says that multinational companies in the
sector have had an immense interest and willingness
to start operations in Portugal. Since
these foreign owned firms guarantee most
national exports, the Portuguese leadership
in exports per vehicle assembler show a clear
preference of these firms for the country
when compared to other regions, particularly
in Europe;
• Results were achieved through an articulated
effort between economic agents, in
particular government and firms, both local
and multinationals. Throughout this
process, the knowledge of the industry
imbedded in government institutions has
played a key role, both in the negotiations
with multinational companies and in the
work with national firms. These encouraging
results present an important lesson
for the country as regards industrial policy.
Although there were particular aspects
related to the context of the auto industry,
there is no reason why a similar strategy
would not work for other sectors. What is
important is to assure a platform of understanding
between the key economic agents
in the sector. Specific knowledge of the
industry on the side of the government
institutions is crucial for the success of the
initiatives;
• With the exception of AutoEuropa, the
remaining assembly lines are specialized in
low volume commercial vehicles. This
could be an interesting opportunity to be
further explored. In fact, the assembly of
low volume commercial vehicles is not subject
to the logistic constraints that are
Global Strategies for the Development of the Portuguese Autoparts Industry
111

prevalent in large-scale car assembly operations.
This reduces the potential negative
impact of the periphery location of Portugal
that is sometimes pointed out by assemblers.
Therefore, a detailed analysis of the
locations and characteristics of the commercial
assembly lines with the clear objective
of attracting some of these operations
to Portugal could be fostered;
• The most important segments of the
components industry are interiors and electric
components, which lead the industry
both in terms of revenues and exports. The
first of the two has been experiencing an
important growth in the last years and is
becoming a distinct feature of the national
components industry. This is true for multinational
companies, but also for some of
the more progressive national companies
that wish to move from producers of part
into components and systems in this particular
area of the car. This trend constitutes
an excellent opportunity to promote
the country as a center of expertise in car
interiors. While an open information campaign
about the distinct characteristics of
the industry can be explored, an important
step could be the enactment of a research
and development center with expertise,
among other, on car interiors. This center
can have the participation of national and
international firms, and could be supported
by the local government;
• The promotion of specific national expertise
in certain areas of the car (interiors or
other) that would foster the manufacturing
of higher valued added components is
important for a number of reasons:
- First, an important share of the products
manufactured by multinationals is still
based on the low wage advantage of
Portugal when compared to other European
nations. This may prove difficult to sustain
during the next decade, as Eastern Europe
makes a stronger entrance into the industry,
even with lower wages;
- Second, a group of more progressive
firms is investing in research and development
as well as internationalizing operations
to be able to respond to the demand
of the assemblers and retain their first tier
status. Components for the interior of the
car have been at the core of some of these
initiatives. Since nationally-owned suppliers
are mostly small firms, with limited
resources, expertise centers would help
their efforts;
- Third, companies located in Portugal
have mostly tried to position themselves
through manufacturing excellence, in particular
responsiveness and quality, with
price a close follower to these concerns.
These have also been the development priorities
for the firms, as well as the categories
where they express greater
strengths. Surprisingly, cost is something
that they rate as the least of their capabilities.
Improvement in Engineering ability
and increases in Product Value Added
come next on the list of concerns of these
companies. Focus around particular issues
may have a very positive impact in the
future.
• Companies give very limited value to
partnership activities. This is very unexpected
because the small size of national
firms renders informal and formal cooperation
a critical development issue. Given
that interviews with industry leaders uncover
cultural aspects to be at the root of this
problem, there is an absolute need to
develop activities that minimize this negative
perspective that exists in the national
entrepreneurs concerning this issue;
• The key obstacle presented by the companies
for their development is the qualification
of the human resources. The perception
is that companies are spending
time providing them with skills that they
feel ought to have been acquired through
formal education. Moreover, their perception
is that existing schools may not be the
more appropriate for their needs. Firms
also reported that access to capital and
equipment are the least of their concerns.
The enactment of a Technical School for the
Auto through consortiums of firms is something
that local companies could explore;
112

• A substantial share of the companies
has a vast interaction with their clients,
including everyday activities such as logistics
and planning information, but also
technical assistance and engineering.
Nevertheless, there is a gap in the level of
shared activities between clients and suppliers.
In almost all categories, the frequency
of activities shared with suppliers is
half the one taking place with clients.
Streamlining the relationship across the
tier structure ought to be an important priority
for the companies.
Global Strategies for the Development of the Portuguese Autoparts Industry
113

PART II
The Portuguese
Autoparts Industry
Chapter
4
The Capabilities of the Portuguese
Companies

Chapter 4
The Capabilities of the
Portuguese Companies
4.1. Introduction
This chapter of the study conducts a
detailed assessment of the capabilities
and system characteristics of the companies
that participated in the questionnaire.
Both the sample characteristics and the
generic issues considered in the companies’
analysis were described in the introduction.
This section will exclude mouldmaking
companies, since their manufacturing
process is not suitable to the analysis
performed here.
To guide the focus of the analysis, the company
responses on what they consider
strategic positioning factors towards their
clients, as well as their development priorities,
will be used. As presented in Figures
7 to 9 of Chapter 3, manufacturing excellence,
in particular Quality and Logistics
are driving company concerns and priorities.
These will be addressed in sections
4.1 and 4.2. Section 4.3 will then use both
performance benchmarks to investigate
system characteristics affecting company
performance. The following section investigates
Engineering and Development, the
other issue considered as a key priority for
the firms. In each of the sections, specific
conclusions are presented.
4.2. Quality Performance
4.2.1. Quality Key Characteristics
In chapter 3 quality had been indicated as
one of the top strategic positioning factors
used by the auto components companies.
This section makes a detailed analysis of
the capabilities of the firms as regards
quality. This strategic option seems to be
heavily supported by the internal decisions
and systems that firms are putting into
place. Figure 1 shows that expense in quality
related issues has been steadily
Figure 1: Firm Expenditures in Quality as a Percentage of Sales
Percentage of Sales
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
8%
7%
6%
5%
4%
3%
2%
1%
0.0%
1993 1994 1995 1996 1997
0%
Average
Maximum
Global Strategies for the Development of the Portuguese Autoparts Industry
117

Figure 2: Quality Certifications of the Autoparts Companies
Other
1992
1993
ISO 9003
Q1
ISO 9001
1998
1994
1995
QS 9000
ISO 9002
1996
0% 10% 20% 30% 40% 50% 60% 70%
Share of Companies with Certification
1997
Share of certifications per year
increasing during the past few years, and is
now amounting to 1.5% of the company
sales. Nevertheless, the maximum spent
by the companies seems to follow a pattern
around 4%, with the exception of the
year of 1995, most likely due to specific
quality problem solving activities generated
with the start of supplies to AutoEuropa.
This concern with quality systems is also
seen through the pattern of quality certification
seen in the sector during the last
years. In 1998, virtually all the companies
in the sample report to have at least one
type of certification. Two in the whole sample
reported to be in the process of acquiring
certification. The left-hand side of
Figure 2 shows the types of certifications
granted to the companies, and the righthand
side presents the share of the total
number of certifications given in each year.
It can be seen that ISO 9002 is the most
popular certification, followed by QS9000
and ISO9001.
The high shares of certified companies present
a very bright picture for the companies
in Portugal. Nevertheless, the right-hand
side of the figure also says that 60% of
these were awarded in 1998 or 1997.
Therefore, potential impact in quality performance
is most likely to be taking place
now. Overall, the number of certifications
has been growing at a very fast pace since
1992, again demonstrating a growing
awareness and pursuit of quality. It is also
relevant to note that over a quarter of the
companies already possess the ISO 9001
development certification. This shows an
increasing concern with development capability.
This issue will be dealt within a separate
section.
If company performance in terms of key
quality variables is analyzed, very positive
evolution can be noticed. Figure 3 shows
that, in four years, companies in Portugal
went from an average 1 of 0.5% of client
rejects to 600 parts per million (ppm).
Moreover, scrap rates have been consistently
within world class benchmarks. This
is a very important result because it stages
a clear entrance of Portugal in the lot of
high performance regions in terms of quality.
Despite the nationality of the company
at stake (an issue addressed below) the
figures indicate that Portuguese managers
and workers have been able to set up and
manage high quality systems.
It can also be noted that internal defects
have been kept at a somehow constant
level. This seems to indicate that the adoption
of stricter quality practices, potentially
associated with the increasing certification
and quality expenses noted above, has
been enabling the companies to better control
the product being shipped to the client.
A different aspect that could raise some
questions is the large and abrupt fall in the
client rejects from 1996 to 1997. Our interpretation
is that despite the important
efforts of the companies in what concerns
1 Throughout the document, except when noted through the use of the word Mean, we will be using the Median statistic when we refer to averages. The reason for this choice is that
the distribution of results for most of the indicators is highly non-liner, with very small and very large numbers. Because of that, reporting the mean instead of the median would severely
bias the results upwards, with negative effects in the interpretation of most indicators The sense of this option will become evident as the analysis evolves.
118

Figure 3: Quality Performance 2
Figure 4: Benchmarking Quality based on Client Defects
Parts per million supplied
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
World Class 0
1993 1994 1995 1996 1997
1.2%
World Class
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Percentage of parts supplied
Parts per million
40000
30000
20000
10000
Bellow
Median
Above
Median
Client Defects Internal Defects Scrap
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Median = 600 ppm
their quality systems, the start of
AutoEuropa operations prevented a
smoother fall in the levels of this indicator.
The years of 1995 and 1996 corresponded
respectively to the start of operation and
move into high volume. These are complex
processes that usually imply a high volatility
in supplies and a number of last minute
changes. In 1997, as the supplies were
stabilized, the quality benchmark was dramatically
improved.
These results seem to endorse the companies’
perception presented in Figure 8 of
Chapter 3, whereby quality is a strength
with which they can position themselves in
the market. Nevertheless, as discussed in
the following sections, the values presented
are industry aggregates that give limited
information regarding the consistency
of the performance across companies and
the drivers of quality. This will be considered
in the next section.
4.2.2. Benchmarking Quality
This section tries to uncover what are the
differences and characteristics of the better
and worse quality performers in the
sample. To accomplish these objectives,
benchmarking groups using client defects
in the year 1997 as the key performance
measure will be generated, one with higher
quality firms, and another with lower quality
companies. The group generation follows
the methodology illustrated in Figure 4: first
firms are ranked in the sample according to
client defects level; second the sample is
divided into two sub-samples, those above
and below the median, which will be the
benchmarking groups.
As can be seen in the figure, out of the 43
questionnaires collected, there were 22
valid observations for this variable, all presented
in the figure below. The most striking
aspect of the graph is the fact that
there are profound asymmetries in quality
performance across the sample. The subgroup
below the median of the sample has
an average client reject rate of around 400
ppm, clearly within world class values considered
to be on the order of 300 ppm. On
the contrary, those above the median have
an average of 4,250 ppm, quite far from
best practices.
The benchmark used, as well as numbers
described in the paragraph above refer to
the year of 1997. As informative is to compare
the tendency on the two sub-samples
over the last years (the number of observations
for 93-94 was very small). Figure 5
2 In all graphs with columns and lines, the first are on the left hand scale and the second on the right hand scale.
Global Strategies for the Development of the Portuguese Autoparts Industry
119

Figure 5: Evolution of Quality Indicators for the Two
Benchmarking Groups
Figure 6: Capital Ownership and Quality Performance
100%
ppm
10000
9000
8000
7000
6000
3.0%
2.5%
2.0%
Parts per parts
90%
80%
70%
60%
50%
40%
5000
1.5%
30%
4000
3000
1.0%
20%
10%
2000
1000
0.5%
0%
High Quality
Low Quality
0
1995 1996 1997
0.0%
National
International
Client Def. LQ
Client Def. HQ Scrap HQ Scrap LQ
does precisely that. The pattern reveals a
very interesting fact. During this period, the
higher quality companies (HQ) had a rather
constant level of performance, close to the
world standard they have shown for the year
of 1997. This is true for both client defects
and scrap, although there has been some
improvement in the level of internal defects
(not reported in the graph). On the contrary,
the least performing companies (LQ), have
been undergoing an important evolution,
cutting by half the results in both indicators
presented in the graph.
These results suggest that it would be
interesting to do a further characterization
of the two distinct groups of companies. In
fact, by analyzing group ownership, it can
immediately be seen that the high performing
group mostly comprises multinational
companies. Consequentially, given the
characteristics of the international companies
present in Portugal, this set of companies
is also on average, much larger
than the lower quality group. The average
revenue of the higher quality group is 8 million
Contos, against 2 million Contos of the
Lower Quality companies. Nevertheless,
nationally-owned companies can already be
found in the better performing group. This
shows that the leading Portuguese-owned
companies are able to rival the capabilities
of the multinationals.
The ownership characteristics of the benchmarking
groups also help to understand
the pattern of expenses in quality and the
levels of certification. Figure 5 had shown
that quality performance of the leading
group had remained similar across previous
years. Figure 7 also tells that expenses
in quality for this group seem to have
an average around 1.5% of revenues, disrupted
in 1995 and 1996 because of the
start of operations of AutoEuropa. This is
somehow a feature one would expect in a
multinational company. Provided that the
country where it is operating satisfies some
average working conditions (which Portugal
does), these companies put in place management
and quality systems already tested
and used elsewhere, and perform at a
rather good level. This is precisely the reason
why assemblers would choose these
companies as suppliers, rather than local
suppliers with less history of quality. The
fact that some of the national companies
have entered this group indicates that their
systems are working at the level of these
high performing multinationals.
120

Figure 7a: Share of Revenues Spent on Quality
Figure 7b: Share of Firms Certified with QS 9000 by Group
3.5%
3.0%
Percent of Revenues
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1993
High Quality
1994
1995 1996 1997
Low Quality
High Quality
Low Quality
With QS 9000 No QS 9000
The trend in the lower quality companies is
as interesting. It was seen that this group
has experienced a rapid fall in the number
of client rejects during past years. If quality
expenses are analyzed, it can be seen that,
as defects are reduced, expense share
grows steadily, with a jump in 1995, again
potentially due to AutoEuropa. This would
signal a growing concern of this group with
quality issues, particularly because the
growth path is converging to the levels of
the higher quality group. Nevertheless,
expense is not the only aspect that matters
for the establishment of a high performance
system. In fact, too much expense
could be the result of bad performance.
The certification indicator presented below
illustrates this point.
The firms with higher quality are more
aggressive in terms of certification. As,
seen in Figure 7b, more than 70% of the
firms in the group have QS9000 certification
(in addition so some other more basic
one such as ISO9002), while only 10% of
the lower quality group does so. This happens
despite the fact that expenses are
becoming very similar among the two
groups, suggesting that quality management
systems of the better performers are
better organized. The importance of better
organization is also suggested by the fact
that the higher quality group has less than
4% of the personnel working on quality,
against almost 6% for the lower quality
group.
4.2.3. Benchmarks by Technology
As seen in Chapter 2, some technologies
are particularly present in the national
autoparts sector. These technologies are
stamping and injection molding. Table 1
presents the median values for the companies
included in the sample. Although the
number of observations is very small, the
numbers should at least be indicative.
What can be seen is that the results for
both sets of companies are much closer to
the performance levels of the low quality
group than those of the high level.
Nevertheless, the standard deviations for
all indicators in both technologies are as
large as the averages. As a result, most of
these companies seem to be part of the
group that should continue its upgrading
process. Nevertheless, some companies
are still very good.
Global Strategies for the Development of the Portuguese Autoparts Industry
121

Table 1: Quality Indicators for Stamping and Injection Molding
Median
Stamping
Client Defects (ppm)
Internal Defects (ppm)
Scrap Rates
Rework Rates
5000
6000
0,1%
Injection Molding
Client Defects (ppm)
Internal Defects (ppm)
Scrap Rates
Rework Rates
2350
11,200
0.4%
7,65%
4.2.4. Conclusions
This simple analysis enables a more definite
conclusion regarding the quality performance
of the national companies. What
can be said is that there is not one but two
realities for quality capabilities in the
Portuguese autoparts industry:
• There is a set of companies, including
the large majority of the multinationals, as
well as a smaller number of nationallyowned
firms, that excels at quality. These
have levels of defects and scrap rates that
are clearly at world class levels. They
should also have the necessary internal
systems to support this level of performance,
as the high level of QS 9000 certifications
seems to indicate;
• There is another group that, despite a
very positive evolution, is still quite far from
the desired level of quality performance.
These are mostly of nationally-owned firms,
which still have not been able to put in
place the necessary systems to properly
manage quality.
For the first set of companies, using quality
as a strategic positioning factor, and
labeling it as a strength is certainly appropriate.
This is not true for the second set of
companies. Section 4.4 will address what
are the system characteristics of the firms
with better manufacturing performance.
4.3. Logistics Performance
4.3.1. Logistics Key Characteristics
The second set of issues evaluated within
the autoparts companies manufacturing in
Portugal was logistics. As for the case of
quality, this issue was included in our initial
model of analysis, and considered by the
companies to be of critical importance for
their positioning towards the clients. The
measurement of this capability was made
through three major indicators. First, companies
were asked to report the period of
time between receiving the final order from
their customer and delivering it to the
client’s location. This was used to generate
the order lead-time indicator. Second, they
were asked the time between two consecutive
deliveries to the client. This became
the frequency of delivery indicator. The
third indicator is just the percent of deliveries
that were delivered late. The firms
were also asked to provide answers for the
exact same questions, with regard to the
performance of their suppliers. Other
generic questions related to logistic
processes were considered.
Before entering the discussion of the
results it is important to note an important
limitation of these results. It is certainly not
the same to deliver product across the
street or to load it in a truck and send it to
Germany or France. Nevertheless, since
there was no information available regarding
the transportation time of each product,
it was not possible to account for this
aspect in the calculations. Therefore, the
122

Figure 8: Logistics Costs
Table 2: Logistics Strategy
2.5%Ł
6%
Company Characteristic
Yes
No
Percent of Revenues
2.0%
1.5%
1.0%
0.5%
5%
4%
3%
2%
1%
Formalized Logistics Strategy
Evaluation Mechanisms
80%
67%
20%
33%
0%
1993 1994 1995 1996 1997
0%
Average
Maximum
Order Lead-Time indicator could be penalizing
the companies that have to send their
product to more distant plants. To minimize
potential bias in the analysis, world standards
were set to 3 days. This includes
transportation time for most of the situations
where the product has to be sent for
long distances. These issues will be dealt
with separately and in further detail in the
case studies.
The first generic aspect considered was
logistics cost. The objective was to assess
the importance of logistic costs in the overall
activity of the firm. Figure 8 presents
these costs as a share of total sales for
the period 1993-1997. As can be seen,
logistic costs represent between 1.5% and
2% of the sales. The maximum level of
expenditure in logistics reaches 5% of
sales. As in other indicators, we also see a
sudden rise in the cost for the year of
1995, only to diminish slightly in the subsequent
years. Nevertheless, while in other
situations linking the cause to AutoEuropa
was direct, the same is not so obvious in
this case, particularly because this plant is
much closer than others located in Europe
to which local companies export.
These overall figures for logistic costs
reported by the companies seem to be too
low. Generic studies for the industry as well
as the case studies presented in the report
place this value to be much higher. This
issue will be addressed in more detail in
the case study.
In addition to costs, there was also an
interest in additional information regarding
their practices in terms of logistics. Two
questions were asked. The first was
whether or not the firm had a formalized
logistics strategy (in a document). As it can
be seen in Table 2, four fifths of all companies
gave a positive answer to the question.
The second question tried to assess
how serious the companies were regarding
their strategy by asking if they had established
mechanisms that enabled an evaluation
of the efficacy and efficiency of the
logistic system. Here the number dropped,
but still to a reasonable 67%. These are
quite large numbers that would indicate
that the logistics system of the companies
has been planned and ought to be working
well.
Figure 9 presents the key logistics indicators
for the sample of companies in
Portugal from 1993 to 1997. As can be
seen, the indicators show a very positive
evolution, and both order lead-time and frequency
of delivery are considered world
class. On average, it takes companies 3
days from order to delivery, and they have
Global Strategies for the Development of the Portuguese Autoparts Industry
123

a daily frequency of delivery. These are very
good figures, particularly because some of
the companies are shipping to distances
that are 3 days away by truck. Nevertheless,
these values do not tell us how these
companies are able to respond this fast. In
fact, nothing guarantees us that response
is not being achieved through higher levels
of inventory, rather than a true pull system,
whereby parts enter the manufacturing line
only as orders are confirmed as final. The
remaining indicator, delays, is also close to
best practice.
As seen in other sections of this study,
some disruption in the figures around
1995 can be found. This event could again
be related to the start of AutoEuropa.
Nevertheless, a potential causal relationship
for these events is not so easy to
establish as, for example, the case of quality.
Therefore, no particular interpretation
will be proposed.
If performance of the firms investigated in
terms of logistics is excellent, the same is
not true for their suppliers. As seen in
Figure 10, supplier order lead-time is
around 20 days, and has been constant
over the past few years. Similarly, frequency
of delivery is around a week, and again
it has been constant. Only delays have
shown a rapid improvement in the last
year, entering what can be considered good
practices. This situation is according to
early findings presented in chapter 3,
whereby these companies show a tight
relationship with their clients, but very limited
interaction with their suppliers. This
gap in the levels of supply chain relations
is bound to have a negative effect on the
logistics ability of the firms, if not now,
potentially in the near future. Therefore,
firms in the industry ought to join efforts to
correct some of these problems with their
suppliers and better streamline the chain
of delivery.
4.3.2. Benchmarking Logistics
A procedure similar to what has been done
for quality is also pursued here, with order
lead-time as the benchmarking indicator 3 .
As before, the sample is divided into two
sub-samples, those above the median, that
will be characterized as Low Logistics
Capabilities (LLC- in the sense their system
is not able to respond fast enough) and
those below the median, considered as
High Logistics Capabilities (HLC - in the
Figure 9 : Logistics Capabilities of the Firms
Figure 10: Supplier Logistics Capabilities
6
4.0%
35
6.0%
Days
5
4
3
World Class
2
1
World Class
0
1993 1994 1995 1996 1997
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Order Lead Time Frequency of Delivery Delays
Values are medians of relevant variable for companies in the sample
that reported data
percent of deliveries
World Class
World
Class
Days
30
25
20
15
10
5
World Class 0
1993 1994 1995 1996 1997
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Order Lead Time Frequency of Delivery Delays
Values are medians of relevant variable for companies in the sample
that reported data
percent of deliveries
World Class
3 Delays were an alternative possibility. Nevertheless, the reduced number of observations in this variable prevented it from being considered.
124

Figure 11: Logistics Benchmarking
Days
30
20
Bellow
Median
Above
Median
10
Median = 3 days
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27
sense that their system does respond
fast). There were 28 valid responses for
this indicator, as illustrated in Figure 11.
What is immediately noticed is that there is
inbalance in the sample, with very rapid
firms, that report less than a day of order
lead time, together with others supplying
their clients with very long lead times.
Nevertheless, only three companies present
severe differences from the median.
Therefore, differences in performance
between the two groups should not be as
important as in the quality situation.
In fact, by looking at Table 3 two groups of
companies can be found. The first and
more diligent set of companies operate on
a daily basis. Every day they receive their
final order, and in that same day a truck
leaves the plant to deliver the product the
next day at the clients’ location. The less
diligent group operates on a week schedule.
They receive the orders with a week in
advance and, until this year, they have
been delivering also on a week basis. The
first group is also much more consistent in
delivery, with delays kept under 1%. The
groups have had some evolution in their
results since 1993, but they still seem to
remain within the range. This suggests that
these delivery schedules would be
attached to products with different logistic
requirements.
The structure of ownership is also very different
from what was found in quality. As
seen in Figure 12, both Portuguese and foreign
firms can be found in both groups,
although the presence of multinationals in
the low responsive group is less frequent.
4.3.3. Conclusions
The overall conclusion from analyzing logistics
is that companies in Portugal have a
rather good performance in this set of indicators.
Most of them have clear logistic
strategies defined, and a substantial share
claims the use of tools and systems to
evaluate their performance in these matters.
In particular, there is a group of
national and foreign firms that works on a
daily basis with their clients, receiving
orders one day and delivering them the
next, with very low rates of delays.
The same is not true for the second tier of
suppliers. The companies delivering product
to those that were interviewed have
rather poor performance in all critical indicators.
This is probably creating additional
stress to the systems of the downstream
Global Strategies for the Development of the Portuguese Autoparts Industry
125

Figure 12: Capital Ownership and Logistics Performance
100%
90%
80%
70%
60%
50%
40%
30%
20%
Table 3: Logistics Performance for Benchmarking Groups
Year
1993
1994
1995
x1996
1997
Order Lead Time
LLC
12
9
8
8
8
HLC
2
1.75
1
1
1
LLC
3.0%
2.4%
5.6%
1.0%
3.2%
Delays
HLC
0.6%
0.5%
0.4%
0.6%
0.6%
Time between Deliveries
LLC
n.a.
n.a.
7
7
1.75
HLC
2.75
2.5
1
1
1
Unlabeled values are days; LLC: Low Logistics Capabilities; HLC: High Logistics Capabilities; n.a.: not available
10%
0%
High Logistics
Capacity
International
Low Logistics
Capacity
National
firms, which ought to be eliminated as
soon as possible. This could be eventually
done by pooling resources across those
interviewed to help these firms to improve
their logistics capabilities.
4.4. Manufacturing Capabilities
and System Characteristics
The previous sections analyzed logistics
and quality performance in isolation. No
relationships with overall company results
were discussed, and no relationships were
established with indicators or practices
outside the realms of each of the dimensions.
This is precisely the aim of this section.
Two questions will be addressed. The
first is what is manufacturing excellence
within the Portuguese autoparts suppliers
and is there pay-off to the companies leading
the group? The second question concerns
the system characteristics that support
these best practices. The study has
two steps. The first is to choose indicators
to be used in the evaluation of manufacturing
performance and identify a best practice
group based on the set of indicators.
The second step is to evaluate how the
group compares with the rest of the firms
in other performance indicators, as well as
system characteristics.
As it will be seen, this evaluation provides
some interesting results. Nevertheless, it
is important to reflect on their meaning.
The analysis will try to establish a relationship
between performance indicators such
as quality and logistics, and a set of infrastructure
indicators, such as inventories,
lot size, or self-management teams.
Because there will be aggregation across
very different firms, technology specific
analysis will be left out. This creates
severe limitations on the type of interpretations
that can be done. As a result, the values
presented should not be interpreted in
absolute sense, but rather as informative
of directions of change. The level of analysis
performed will also be limited to this
type of interpretation.
4.4.1. Identification of Manufacturing
Performance Benchmarking Groups
The method used to determine the best
practices group is cluster analysis. This
procedure attempts to identify relatively
homogeneous groups of cases based on
selected characteristics, using a specialized
algorithm. This method has an important
characteristic that works in favor of the
proposed analysis. Since it searches for
homogeneous groups without any prior con-
126

dition on the levels of the variables, there
is no guarantee that it will not generate a
group with good performance in some indicators,
while not so good in others.
Therefore, the generation of a homogenous
best practi0.4cgooait the vari icatinindi-

these companies were analyzed. These
included as the critical dimensions, the
size of the firms, measured through sales
volume and their ownership structure.
Figure 16 shows that companies in the
leading group are, on average, almost four
times larger than those in the group lagging
in performance. This relationship between
leadership and size is found in several sections
of the analysis and seems to suggest
that attaining a certain critical size may be
important for performance. While there are
several potential explanations for this situation,
one of the most likely is that companies
above a certain sales volume are probably
less resource constrained. This
allows them to have better planning, less
variability in working conditions and therefore,
better overall process control, with
evident performance gains.
The second aspect considered was ownership.
Observing Figure 16, it can be seen
that, while only an occasional foreign company
is in the low performing group, the top performers
are mostly foreigners. Nevertheless,
the presence of Portuguese companies in
the top group is important, since it confirms
the conclusions reached in the previous sections
that part of the national companies are
working at world class level.
Before relating the cluster groups with the
remaining performance criteria and system
characteristics, there are two important
remarks to be made. First, because the
complete set of observations that enable
this evaluation is limited to 17 companies,
one should be careful in drawing direct
implications of the results to the whole
population of companies present in
Portugal. The interpretation should rather
be a comparison of the characteristics of
the typical firm operating in Portugal with
good manufacturing performance, with
another typical one that is far from best
practices. Second, the limited number of
observations also prevents part of the
mean differences to be statistically significant
at desired levels. Nevertheless, there
is a belief that most of the results would
hold if there would be more observations.
Therefore, the choice was to report the
average findings, presenting also the statistical
significance level to give the reader
the ability to judge the validity of the result.
4.4.2. System Characteristics and
Practices as Enablers of Performance
Characterization of the manufacturing system
in the two clusters of companies will
be based on several types of indicators.
Figure 15: Other Relevant Quality Indicators for Cluster Groups
9000
8000
7000
6000
5000
4000
3000
2000
1000
5%
4%
p.p.m.
Percent of Revenues
3%
2%
1%
0
Internal Defects for the clusters
0%
Delays for the clusters
High Performance
Low Performance
128

Figure 16: Size and Ownership of companies in both clusters
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
80%
70%
60%
50%
40%
30%
20%
10%
1997 Sales (Contos)
0%
International Companies
High Performance
Low Performance
Some can be considered as enabling indicators.
These include aspects such as
inventory levels, product proliferation, order
size or number of suppliers. The second
group is related to workforce practices,
including, worker rotation, problem solving,
salaries, education, etc. Questions related
to the adoption of manufacturing management
tools will also be considered.
In section 4.3 it was seen that companies
were responding with extremely good order
lead times. It was also suggested that it
was uncertain the system was designed to
respond to the rapid order lead-time that
some of the companies were claiming. The
comparison presented in Figure 17 indicates
that for the companies to be able to
respond to very demanding lead times, on
the order of a day, with consistent levels of
quality, they must accumulate more to
inventory. This is true for the three types of
inventory considered: raw materials, workin-process
and finished goods.
This means that not even the better performing
companies have in place a true pull
system, capable of a fast response to
client demands, and they are responding
through the accumulation of product along
the manufacturing line. One of the critical
reasons for this situation may be the inability
of the suppliers to respond to their
requirements, which would limit the benefits
of the companies trying to enable a
lean pull system. In fact, it had been seen
in section 4.3.1 that supplier order lead
time is very long, making it difficult for the
companies researched to rely on them. The
fact that raw materials inventory levels are
much higher for the performing group
appears to confirm these limitations of the
lower tier suppliers.
A second relevant indicator is related to
product variation. Companies were asked
how many different references they had to
deal with, and how many of them were usually
being processed simultaneously. This
is a rough measure of flexibility of the system
or, to be more precise, of the flexibility
that is being demanded to the system.
The results presented in Figure 18 show
that the companies in the high performing
cluster are more focused, having fewer references
per million contos of sales.
Therefore, one can assert that it is important
to place boundaries to product proliferation
in the manufacturing system to
assure consistent levels of quality.
Given the difference in size between the
companies in the two clusters, this result
suggests that smaller companies may be
trying to handle too many products or product
variations. If the average company is
Global Strategies for the Development of the Portuguese Autoparts Industry
129

Figure 17: Inventory Levels in the Two Groups
Figure 18: Number of References in the System
3.5%
3.0%
70
60
We are associating complexity
to the number of references
Percent ot Sales
2.5%
2.0%
1.5%
1.0%
0.5%
Referencs per Million Contos of Sales
50
40
30
20
10
0.0%
Raw
Materials
High Performance
Workin
Process
Finished
Goods
Low Performance
0
Total
References
High Performance
References
Simultaneously
on the Line
Low Performance
New
References
every year
considered in both groups, simple algebra
would tell that the larger and better performing
are manufacturing 200 different
references (in absolute terms), while the
smaller one is trying to cope with 130.
Given the fourfold difference in sales
between these two average firms, it is
understandable that the smaller manufacturing
system may face more difficulties to
perform at the same level.
This situation can also be understood as
the result of an underlying strategy of the
firms. Less references per million contos of
revenues and larger absolute sales can be
read as higher sales value per each individual
reference. This means that the less
performing group is also manufacturing
less valuable goods. It is common sense
and practice that, all other things being
equal, increasing sales value of a given
good is associated with stringer performance
requirements (the cost of reject or
inventory per unit is higher). Therefore, the
situation may be that the least performing
group is self-selecting itself to manufacture
products that have less value and, therefore,
simpler quality and logistics requirements.
The reason may be that they do not
have the option to refuse any products that
come to the market.
Despite the findings that focus is associated
with better manufacturing performance,
it is important to understand that it does
not mean inability to incorporate new products
and product variations. In fact, the
right hand side of Figure 18 shows that better
performers are incorporating more references
every year. For the left and middle
sections of the graph to hold, they are also
discarding old references at the same rate.
This means that the state of the system in
terms of references in each moment is
kept simple, but the rate of entry and exit
of different references in the performing
companies is much greater than in the less
performing. This aspect is congruent with
what is found in terms of order size. Fewer
references in the system do not mean that
each order has to be larger. As seen in
Figure 19, the situation is quite opposite.
Within their confined number of references,
the high performing firms have smaller
130

order sizes, which means that they are able
to switch rapidly from one order to the
other retaining the high levels of logistics
and quality that have been demonstrated.
As in the case references, the group with
world class performance has fewer suppliers
per million contos. The focus at the
level of suppliers is of particular importance
because of some of the early findings
on their characteristics. As seen
before, the average supplier to the auto
components industry has bad performances
in terms of logistics. Therefore,
one could expect their clients, the companies
interviewed, to expend some nonnegligible
amount of effort to make sure
that they have an adequate supply. Fewer
suppliers enables better control and less
effort from the companies, with potentially
less disruptions in the supply chain.
The assertion of the last paragraph seems
to be confirmed through the relevance of
shared activities with suppliers. Figure 20
presents the results of a question that
asked firms to report on the joint development
of activities such as shared information,
logistic services, among other with
clients and suppliers. As can be seen, no
substantial difference exists at the level of
activities with clients, but there is a relevant
difference in terms of suppliers. The
better performing companies are making
an extra effort to work with their suppliers,
potentially minimizing negative performance
of their suppliers.
A different level of analysis is related to
worker practices. Figure 21 shows that
enabling workers with responsibility and
flexibility has a payoff for manufacturing
performance. The high performing group
has at least double the percentage of the
workforce involved in any of the three practices
considered. Moreover, although there
was not enough information to study the
interactions among these, one should
expect high complementary effects among
the three.
Figure 19: Number of Suppliers and Order Size
30
12000
25
10000
20
8000
15
6000
10
4000
5
2000
0
Suppliers per Million Contos of Sales
0
Order Size
High Performance
Low Performance
Global Strategies for the Development of the Portuguese Autoparts Industry
131

Demanding worker responsibility, the ability
to do multiple jobs, and to identify problems
and suggest solutions requires skills
from the workers. As shown in Figure 22, it
is not surprising to find that companies
with better manufacturing performance rely
less on uneducated workers, with up to 9
years of education. What seems to be making
the critical difference is workers with
complete high school. In these manufacturing
firms that rely heavily on uneducated
workers for the simple and repetitive tasks,
workers with more than the basic level of
education are those that take up the role of
team leaders, and are the key facilitators in
interpreting and implementing worker
improvements. The situation for the less
performing firms seems to be one of
absence of a milieu of these workers. The
structure is most likely to be of a few educated
people in key positions, that justifies
the greater share of college workers, and
then a general pool (almost 80% of the
workforce!) of uneducated people.
The result obtained in terms of the adoption
of methods to support manufacturing
activities raise some questions. As seen in
Figure 23, there are almost no relevant differences
between the two clusters of companies
in the adoption of methods that
contribute to the control of the manufacturing
process. Even when there is a difference
in the use of (SPC) Statistical Process
Control methods, this is favorable to the
low performing companies. Nevertheless,
the fact that these companies are using a
particular tool does not say much as concerns
the efficiency and effectiveness of
their use. It is obvious that having statistical
process control software in the computer
system of a firm where nobody has
training in statistics is of very limited usefulness.
While one cannot find a definitive
conclusion on the fact, a potential explanation
is that that the people, rather than the
method may be making the difference.
On the other hand, the adoption of manufacturing
planning and management methods
is associated with high performing
companies. This situation could be puzzling
given what was found regarding the adoption
of control methods and the previous
Figure 20: Activities Shared with Clients and Suppliers
Figure 21: Worker Management Practices
70%
20%
Frequency of shared activities
60%
50%
40%
30%
20%
10%
Percentage of Workforce
18%
16%
14%
12%
10%
8%
6%
4%
2%
0
Client Activites Score
High Performance
Supplier Activities Score
Low Performance
0%
Self-Managed
Teams
Task
Rotations
Workers in
Problem
Solving
High Performance
Low Performance
132

Figure 22: Education of the Workforce
Figure 23: Adoption of Manufacturing Support Methods
100 %
90 %
80 %
70 %
60 %
50 %
40 %
30 %
20 %
10 %
College Degree
Between 9th and
12th Grade
Up to 9th Grade
Frequency of method adoption
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
MRP I/IIKanban CAD FMEA SPC KAIZEN
0%
Management/Planning
Control / Improvement
High Performance
Low Performance
High Performance Low Performance
comment on their (in)efficient use.
Nevertheless, there is an important difference
that may explain the findings. The
adoption of any of the control methods
described in the graph requires only part of
the workers to be familiar with them. If
these do not use a method properly, the
company will not gain from it. It is equivalent
to not having the method at all. This is
not true for the adoption of planning and
management methods. The MRP I or II, and
particularly the kanban, require workers
across the plant to interpret and participate
in different and related procedures.
Therefore, if the method does not work, the
whole company suffers, and the negative
result is easily noticeable. So, it is not surprising
to find greater use of these tools in
a more educated environment which, as
seen before, corresponds to the high performing
set of firms.
4.4.3. Manufacturing Performance
and Growth
Until now, the results presented have mostly
addressed the relationship between
manufacturing performance and system
characteristics. Little has been said regarding
the business implications of this performance.
One of the critical issues
addressed so far has been size. Figure 16
has shown that high performing companies
have, on average, 8 million Contos of revenues,
four times the magnitude of the low
performing ones. Moreover, as Figure 24
demonstrates, both groups are growing at
the same rate in terms of sales, close to
the 17% Composite Average Growth Rate
of the industry for the equivalent period.
This means that both groups are maintaining
their relative size, and that it would
take 8 years for the smaller companies to
reach the initial size of the larger ones.
These results suggest that both groups are
adequately exploiting the business opportunities
that the development of the industry
in Portugal has brought, but that they
must be pursuing different strategies. In
fact, while 100% of the companies in the
high performance cluster supply as a 1st
tier, only 75% of those in the other cluster
do so (see Figure 25). Therefore, some of
the firms that are lagging in manufacturing
performance may be in lower tiers of the
chain where the requirements for logistics
and quality are not as demanding, while
others may be in specific segments where
there is more tolerance from the assembler
for rejections or delays.
Another aspect revealed in Figure 24 is
that companies with worse manufacturing
Global Strategies for the Development of the Portuguese Autoparts Industry
133

performance are growing much faster in
terms of productivity. Given that productivity
in this group is half of the high performance
one, this means that lagging firms
are catching up with the rest. This observation
is consistent with the findings of previous
sections, particularly in quality
issues, where firms that have been underperforming
have been the ones with greatest
improvements.
4.4.4. Conclusions
Previous sections had uncovered the existence
of different realities within the
Portuguese autoparts industry. This section
tried to characterize the key differences
in manufacturing performance of
the companies in the industry, and to identify
what was driving the difference in capabilities.
Clustering analysis was used to
characterize two distinct groups in terms of
three variables considered critical for manufacturing
performance: number of client
defects, order lead time, and frequency of
delivery.
The key characteristics of the two groups
are:
• There is a clear group of top performers
in the industry. They respond twice as
quickly than the lower performers in both
lead-time and frequency, and generate
fewer defects, on the order of 30 to 1.
Moreover, the leading companies are clearly
within world class levels for these indicators,
while the lagging ones are not;
• Companies in the leading group have on
average revenues of 8 million contos,
almost four times larger than those in the
group lagging on performance. This suggests
that attaining a certain critical size
may be important for performance.
Companies above a certain sales volume
are probably less resource constrained,
which allows them to have better planning,
less variability in working conditions and
therefore, better overall process control;
• Most of the multinational companies are
included in the group of high performers.
Nevertheless, an important number of
national companies is also present, confirming
some of the previous findings that
part of the national companies are clearly
working at world class level.
The characteristics of the groups set the
Figure 24: Sales and Labor Productivity Growth Rates
25%
20%
15%
10%
5%
Figure 25: Share of Firms in the Cluster that
are 1st Tier Supplier
100 %
90 %
80 %
70 %
60 %
50 %
40 %
30 %
20 %
0%
Sales CAGR
Labor Prod GAGR
10 %
0%
First Tier Supplier
High Performance
Low Performance
High Performance
Low Performance
CAGR: Composite Average Growth Rate
134

stage for understanding what may be driving
manufacturing performance. The analysis
identified several relevant issues:
• Responding to very demanding lead
times, on the order of a day, with consistent
levels of quality, requires more inventory.
This is true for raw materials, work-inprocess
and finished goods. This means
that not even the better performing companies
have in place a true pull system, capable
of a fast response to client demands.
One of the critical reasons for this situation
may be the inability of the suppliers to
respond to their requirements, which would
limit the benefits of the companies trying to
enable a true pull system. The higher levels
of raw materials inventory seem to endorse
this perspective;
• Limits in product variation at a given
point in time does not mean inability to
incorporate new products and product
variations, since the rate of entry and exit
of references in the performing companies
is much greater than in the less performing
ones. Moreover, the high performing firms
have smaller order sizes, which means that
they are able to switch rapidly from one
order to the other retaining high levels of
logistics and quality;
• Focus is also important in terms of suppliers.
Since the average supplier to the
auto components indw(;)T.eai Twefw(me degree of foc0.ferences in term Tw(logistics and qu,(me degree7f focfewr
• Some degree of focus seems to be an
important issue for manufacturing excellence.
Results show that companies in the
less performing cluster, often smaller, are
dealing with a relative larger number of
references, suggesting that they may be
trying to handle too many products or product
variations at the same time. A large
relative number of references could also be
the result of a strategy, in which the least
performing group is self-selecting itself to
manufacture a wide range of products that
have less value and, therefore, diminished
quality and logistics requirements;

in terms of sales, close to the 17%
Composite Average Growth Rate of the industry
for the equivalent period;
• Companies with worse manufacturing performance
are growing much faster in terms
of productivity. Since productivity in this
group is half of the high performance one, it
means that lagging firms are catching up with
the rest, confirming. This observation is consistent
with the findings of previous sections,
particularly in quality issues, where firms that
have been under-performing have been the
ones with greatest improvements;
• Both groups seem to be adequately
exploiting the business opportunities that the
development of the industry in Portugal has
brought, but that they must be pursuing different
strategies. Firms that are lagging in
manufacturing performance are likely to be in
lower tiers of the supply chain where the
requirements for logistics and quality are not
as demanding, while others may be in specific
segments where there is more tolerance
from the assembler for rejections or delays.
4.5. Engineering and
Development Capabilities
4.5.1. Development Key
Characteristics
In the past few years, the Portuguese
autoparts industry has been taking its first
(but quick) steps towards the establishment
of in-house development activities.
As Figure 26 shows, half of the companies
surveyed reported some degree of product
development capability. Most of these also
claimed the ability to develop products
from concept, the so-called black-box development
capability. As important is the
involvement of roughly 60% of the companies
in the creation and manufacturing of
the tools and dies needed for their final
products. Portugal has a tradition of mould
making, and this could in principle be an
interesting source of competitive advantage
for the national companies.
Figure 26 indicates that a number of firms
have at least minimal development capabilities.
However, it is more important to
investigate the level of these activities in
an international context. The most widely
used measure for these activities is the
ratio of expenditures in development to the
overall sales of the company. As Figure 27
shows, the companies with development
capability devote between 1% and 2% of
revenues to investment in this activity. This
figure is less than half of the average
expenditure for the top European automotive
suppliers. In addition, the typical size
of national companies is rather small, in
the order of 2.5 Million Contos, a volume of
revenues that limits the ability of these
companies to participate in very ambitious
projects.
There are two other interesting results arising
from the graph. First, the number of
companies reporting development expenditures
is growing over time, which clearly
shows that the national companies understand
the need to have development capabilities
to assure long term growth. Second,
the drop in share of revenue for development
is most likely due to the “AutoEuropa
effect”. During 1993 and early 1994, some
of the companies were heavily involved in
the development of components for the
new car being launched in the Ford-VW joint
venture plant in Portugal. Once this product
development was complete, there was a
relative drop in investment.
The level of complexity of a product can be
roughly assessed through the number of
engineering hours necessary to complete
its development. These are precisely the
values presented in Figure 27. As it can be
seen, the median value of product and
process engineering hours used in the
products developed by Portuguese companies
in the last years is rather small, on the
order of 150h (these figures do not reflect
total engineering hours of the company during
one year, as some companies reported
to be working on several products simultaneously).
Even if we add both product and
process engineering time, this is still equivalent
to having two engineers working full
time in the project during one month.
136

Despite the low average, some companies
are already generating more complex products.
Within the sample collected, four
companies reported having more than
1000 total engineering hours devoted to a
new product. The maximum values for
these two indicators were 4240 hours for
product development and 1840h for
process development.
The characteristics of the equipment used
in these companies and the characteristics
of their workforce for development purposes
confirm the assertion described in the
previous paragraphs related to poor development
capabilities. Figure 29 describes
the structure of the workforce in technical
activities in the company. As can be seen,
the fraction of workers at least with college
level of education is rather low, and almost
insignificant at a master level. These figures
mean that a company employing 300
people will have 3 college level engineers
working in development, a very low number
by any measure.
Figure 30 presents the median values for
the equipment used in development other
than dies, the tool (die) development equipment,
and the value of the tools (dies)
that these companies have produced
recently. All the values are quite low, something
to be expected from the limited number
of engineering hours associated to the
products. Even the number of two computer
stations devoted to development is
expected. If one considers that each workstation
has a potential use of 2000h per
year, then the typical company could develop
6 new products during one calendar
year with just one station, even if all the
engineering work would require the use of
the computer. As before, it is important to
point at the fact that some of the companies
are already working at a level that is
far from the simplicity portrayed before. To
accomplish their objectives, they reported
to having over ten and up to almost 30
computer stations for development.
Given the objectives of the Portuguese
companies to sustain their position as first
tier suppliers, these figures are of some
concern. The accrued responsibilities that
are demanded by the assemblers have
important requirements in terms of development.
National companies must be able
to respond through investment in higher
complexity products. This is a difficult task
because the ability to develop complex
products is both a lengthy and expensive
process. Companies must be ready to commit
important resources and this requires,
among other aspects, financial muscle,
something that the small national firms
lack. Because of its importance, this issue
Figure 26: Development Characteristics
Reported by the Companies
Figure 27: Investment in Development of the Companies
Percent of Companies in Sample
60%
50%
40%
30%
20%
10%
0%
Limited Development Black-Box
Development
Tool Development
Percent of Sales
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
6
7
Number of
Observations
9 12
Average level of
expenditures of top
European firms
11
1993 1994 1995 1996 1997 Benchmark
Global Strategies for the Development of the Portuguese Autoparts Industry
137

Figure 28: Typical and maximum engineering hours
used in products developed in the last years
Figure 29: Workers in Development Activities
200
180
160
140
34%
1%
30%
Share of
Total
Workers:
4.7%
120
100
80
60
40
20
MAX:
4240
MAX:
1840

nals. Therefore, we see that removing the
foreigners from the sample lowers the values
for development effort both at the
level of process and product development.
This situation is more important at the
process level because some of these foreign
firms do all their product development
outside Portugal, but require substantial
process development effort at a local level
to prepare their line to manufacture some
of their more complex products.
The last aspect addressed in the generic
evaluation of the companies’ development
effort was an evaluation of their sources of
innovation. The results presented in Figure
34, beyond their major source of innovation,
internal studies, provide interesting
insights. The most important aspect for
product innovation are the clients. Given
the poor internal capabilities of the firms it
is not surprising to find this result.
Competitor analysis comes second in this
category, which is also important for
process innovation. Specialized literature
and supplier proposals are the other key
process innovation source. The most interesting
category, though, is the low importance
of the participation in consortia.
Limited capabilities of the firms could lead
to cooperation for more complex products,
so that each firm can learn with the other,
or so that they can pool resources that
enable them to go beyond what each could
achieve. This is not what was found, casting
some concerns on how the industry will
evolve in an environment of poor development
cooperation.
From the analysis of raw indicators, we can
conclude that the Portuguese companies
are still in their initial stages of development
activities. Only part of the companies
surveyed report development capability.
Those who have activity are mostly developing
simple products, or adapting existing
designs to their manufacturing conditions.
Only a limited number of companies
generate more complex products. On the
other hand, we see that the majority of the
international companies present in
Portugal do not develop their products
locally. Their activity is mostly related to
engineer the necessary process conditions
for the designs supplied by their international
offices. Nevertheless some companies
have local product development.
When they engage in development, pro-
Figure 30: Equipment for Development
Figure 31: Development Tools Adopted by the Companies
Contos
45.000
40.000
35.000
30.000
25.000
20.000
15.000
10.000
5.000
0
Development
Equipment
Tool
Development
Equipment
Tool Average
Value
Number of
Computer Stations
devoted to Development
2.5
2.0
1.5
1.0
0.5
0.0
Frequency of Adoption
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CAE: Computer Aided Engineering
CAD: Computer Aided Design
CAPP: Computer Aided Process Planning
CAPM: Computer Aided Machining
FMEA: Failure Modes Effects and Analysis
VA/VE: Value Analysis/Value Engineering
1997
1996
1995
1994
1993
1992
1991
1990
1989
FMEA CAD Cross CAPP/CAM CAE VA/VE Simultan.
Functional
Teams
Frequency
Year
Average Year of Adoption
Global Strategies for the Development of the Portuguese Autoparts Industry
139

Figure 32: Development Lead Time
Figure 33 : Comparison Between National Companies and the Whole Sample
16
14
14
180
12
12
160
10
8
6
4
MAX:
MAX:
104
104
MAX:
MAX:
52
52
Weeks
10
8
6
Hours
140
120
100
80
2
0
Weeks
4
2
60
40
20
Product
Development
Lead Time
Process
Development
Lead Time
0
0
Prod Lead Time Proc Lead Time Prd Eng Proc Eng
National Whole Sample National Whole Sample
ducts are as complex as those developed
by leading national firms.
4.5.2. Drivers of Development
The previous section presented the overall
development conditions in Portugal, where
most companies are at an early stage in
promoting development capabilities. It is
also important to understand what is being
done to successfully promote development.
An aspect that is important to
explore is what makes a difference in promoting
development. While it may be
straightforward that human resources are
a fundamental part of it, it is not clear
whether aspects such as equipment, the
adoption of certain development methods
such as value engineering, or the level of
relationship with clients, make a difference.
This section explores these aspects
and proposes priorities for the companies
aiming at enhancing their development
capability.
Figure 34: Factors of Innovation in the Companies
Participation in Consortia
Use of Specialists
Suppliers Proposals
Use of Competence Centres
Participation in Trade Shows
Specialized Litterature
Competitor Analysis
Client Proposals
Internal Studies
Organizational Innovation
Process Innovation
Product Innovation
1 1.5 2 2.5 3 3.5
1: Insignificant -- 5: Critical
140

Seventeen companies provided data on
product and process engineering hours for
55 different products. For each of these
products we had relevant company information
that allowed us to study the relationship
between firm characteristics and
engineering capability. A regression of
total engineering hours on relevant indicators
was used. The generic model we analyzed
is the following:
Engineering Hours = f (Human Capital,
Physical Capital, Methods, Client
Interaction, Control Vars)
Where the explanatory dimensions are:
• Capital: We considered both human capital,
through the number of workers in
development activities, and physical capital,
through the number of computer stations;
• Methods: The adoption of tools or methods
known to have a potential facilitation
role in the development process was
considered. These included design tools,
computer aided software tools and organizational
practices;
• Client Contact: We wanted to assess to
what extent closeness of relationship with
clients made a difference in the company
capability;
• Die Development: Given the important
involvement of national companies in internal
development, we wanted to control this
effect in the engineering capability;
• Size: It is widely known that larger companies
have greater resources available
for development activities. This variable is
used to control for these size effects.
The variables used to account for the five
aspects described are presented in Table 4.
The results of the regression analyses are
presented in Table 5. The key conclusions
from the results can be summarized as follows:
1. There is a 1 to 1 relationship between
human resources in development and
engineering hours. This means that a proportional
change in workers devoted to
development yields an equivalent change
in engineering hours. The value of this
coefficient is conditioned by the characteristics
of our sample. In fact, it is not realistic
that this 1 to 1 relationship should
hold regardless of the number of people.
As the number increases, coordination
issues will start bringing this relationship
down. But, because the sample of products
analyzed only includes products that
are not complex, coordination issues do
not arise;
Table 4: Variables considered in the analysis of drivers of development
Dependent Variable
Total Engineering
Independent Variables
Workers in Development
Computer Stations
Design Tools Score
Computer Tool Score
Organization Score
Die Development
Client Relations Score
Sales
Description
Sum of Product and Process engineering hours
Description
Number of workers involved in development activities
Number of computer stations devoted to development
Score where the use of each of the following design tools
yields a point: FMEA, VA/VE, QFD
Score where the use of the following computer aided tools
yields a point: CAD, CAE, CAPP/CAM
Score where the adoption of the following organizational practices
yields a point: Simultaneous Eng., Multidisciplinary Teams
Dummy variable indicating if the company has internal
development of dies
Percent adoption of activities shared with clients (see general
indicators for details).
Volume of Sales of the Company in Contos
Mean
979.42
18.61
4.65
1.60
1.24
0.98
.51
43%
4,430,368
Median
320.00
12.00
2.00
2.00
1.00
1.00
1.00
40%
3,091,117
Global Strategies for the Development of the Portuguese Autoparts Industry
141

Table 5: Regression Results for Total Engineering Hours as Dependent Variable
Variable
Coefficient
St. Error
Approximate Interpretation
Workers in Development ^
Computer Stations
Design Tools Score
Computer Tool Score
Organization Score
Die Development
Client Relations Score
Sales ^
1.16
-0.02
1.19
-1.35
0.14
0.16
0.06
0.44
0.25***
0.06
0.39***
0.64**
0.37
0.48
0.03**
0.30*
10% change in people : 10% change in engineering hours
Not Significant
1 additional tool doubles engineering capacity
1 Additional tool halves engineering capacity
Not Significant
Not Significant
10% change in relationship : 5% change in engineering hours
10% change in sales volume : 4% in engineering hours
^ Values in Log Scale; Dependent Variable also in Log Scale; * ** Significant at 99%; ** Significant at 95%; * Significant at 85%
2. The use of computer stations is not
explaining engineering capability. This
could sound surprising, but it is not if we
look at the mean and median values of our
independent variable and do some simple
math. A computer station with an operator
has roughly 2000h of work available per
year. Companies report a median value of
2 stations per company. Given the fact
that the median value of engineering hours
per product is 320 and companies are not
developing more than 3 or 4 products
simultaneously, it becomes reasonable
that we do not find a statistical relationship.
If our sample included higher complexity
products, we would expect this
value to be positive and significant;
3. A company that has adopted any of the
design tools we considered will have on
average an engineering capability that is
double of an equivalent one who does not
uses the tool. This result supports the
assertion that using design methodologies
enables the company to tackle more complex
design problems;
4. Contrary to the previous result, the
adoption of organizational practices
geared towards facilitating development is
not significant. The explanation for this
may again be related to the characteristics
of our sample. The use of multidisciplinary
teams and simultaneous engineering is
pertinent in large design projects, as a way
to enhance communication between
teams with separate tasks, and reduce
overall project lead time. If the size of the
project is 1000 hours, these practices
become almost irrelevant, as the team
may be 2-3 persons;
5. The coefficient on the adoption of computer
aided tools has sign opposite to our
expectations. We would expect it to be
positive and significant or not statistically
significant. Although we do not have very
good explanations for the result, we could
advance a potential interpretation. The
adoption of CAE and CAPP presupposes
the use of formal software tools. Some of
the companies that are not familiar with
the tools may have had a loose interpretation
of the terms and answered positively,
although they are not using them in their
everyday work. This is more likely to happen
with companies with less engineering
ability. If this is the case, it would generate
a bias in the sample, that could lead to the
observed result;
6. The internal development of dies does
not enhance engineering capability. The
142

interpretation is that this activity is, to a
large extent, independent of the characteristics
of the products the companies are
developing. Some of the companies decided
to have that capability inside, but that
decision is not associated with the complexity
of the products the company develops;
7. Closeness in client relationship is
important. Activities such as sharing of
planning and technical information, joint
use of equipment and services, among
others, are associated to greater development
capability;
While results presented here may have
important implications for the companies,
they should be taken with care. Given the
limited set of our sample, 17 companies
and 55 products, it is hard to draw conclusions
for the whole set of national companies.
It would be important to extend the
analysis to include more firms and products,
particularly those with greater complexity,
to gain a better understanding of
these relationships.
4.5.3. Engineering Capability and
Company Performance
BENCHMARKING DEVELOPMENT
This section addresses the relationship
between company performance and level
of investment in development activities.
Once again, engineering hours will be used
as a proxy for development capability,
which will then be compared with other
indicators.
indicators for performance benchmarking
were chosen and their means compared in
the two sub-samples.
To assess the relationship between development
capability and other characteristics
of the firms we considered two main
aspects. The first was manufacturing capability,
including quality, logistics and flexibility.
The second were general company
indicators such as growth, and productivity.
Table 6 presents the results of a comparison
of the chosen indicators between
benchmarking groups. The result can be
summarized as:
8. Size makes a difference. Although with
limited statistical significance, there
seems to be a scale effect associated with
engineering. As companies become larger
they have greater than proportional engineering
ability.
The methodology used is similar to what
has been presented in other parts of the
study. The first stage is to generate the
benchmarking groups. We ranked the sample
according to total engineering effort
and created two sub-groups: the top 4
companies in terms of average engineering
effort, and the rest of the sample.
Because the leading group has clearly
entered a different level of development
capability, this comparison enables a good
understanding of the potential premium
that a serious commitment to development
by leading Portuguese autoparts
firms is enabling. Figure 4 illustrates the
procedure we used. In a second, relevant
• There is no direct relationship between
commitment to the development of more
complex products and manufacturing performance.
When we compare critical manufacturing
indicators across benchmarking
groups we see that greater involvement in
product development is not associated with
overall better levels of quality and logistics.
When comparing the groups, we find some
indicators that are worse, others that are
better, and still several that are not statistically
significant 5 . This means that companies
that decide not to focus on development
can still excel in manufacturing. This
could indeed be a strategy for some of the
smaller Portuguese companies;
5 One of the four companies biases substantially the quality results of the Top 4 development firms. Therefore, these numbers should be seen with some discount
Global Strategies for the Development of the Portuguese Autoparts Industry
143

Figure 35: Benchmarking Development
based on engineering effort
Table 6: Differences in Means of key
performance indicators in four sub-groups
Top 4 vs Rest of Sample Eng.
Indicator
Sample +
Median 97
Top 4
Tot. Eng
Rest of
Firms
Indicator
Mean D
Top 4
Product and Process
Engineering Hours
Rest of
Sample
Total Engineering (h)
Client Defects (ppm) ^
Delivery Freq (h) ^
Order Lead Time (h) ^
New References (pMS)
Total References (pMS)
Simultaneous Refs (pMS)
Sales Growth 96-97
Sales CAGR 94-97
Labor Prod. Grwth 96-97
Labor Prod. GAGR 94-97
Sales (Contos) ^
320
600
24
72
9
56
10
25%
13%
12%
9%
3,077,127
-
3363
2871
27
152
7
68
11
29%
46%
33%
48%
4,874,210
A
314
1572
51
83
15
147
10
18%
19%
9%
14%
2,396,034
B
1299
-25*
69
-8*
-80*
1
11%*
27%*
24%*
34%*
2,478,177*
A – B
*Significant at 90%; pMS: per Millions Contos of Sales; ^ Original calculations in log scale; + Complete 43 firms
• Companies that work on products with
more engineering tend to have greater
focus in terms of the number of products
going through the line. In the comparison,
we can see that the number of new and
total references is lower and statistically
significant. This is a reasonable result that
could be interpreted as companies focusing
on less but more value added products;
• Leading companies in development
show a sales and productivity growth substantially
above the sample average. They
are also on average larger than those
working in less engineered products. This
would confirm that there is an important
industry premium for companies that have
meaningful development capabilities.
The two main conclusions from this analysis
are that there seems to be some
degree of independence between engineering
capability and company manufacturing
performance throughout, and that
growth performance would be associated
to substantial differences in the number of
engineering hours of the products. We can
also see that the pattern we found in the
previous section of having larger companies
associated with products with more
engineering repeats itself here.
Nevertheless, because we only have data
on four companies that detach themselves
from the rest of the group in our benchmarking
variable, it seemed important to
further investigate this issue. This is precisely
the focus of the next section.
PRODUCY COMPLEXITY AND SIZE IMPLICATIONS
In several steps of the analysis presented
in the previous sections, we encountered
some degree of relationship between
development capability and company size.
We believe this is a crucial aspect upon
which the Portuguese companies should
reflect. First we qualify more precisely the
notion of simple vs. complex products that
was mentioned on several occasions.
Then we explore how size may condition
the development of the Portuguese industry.
Figure 36 describes several types of products
in terms of the engineering effort
associated with each of them, both in
terms of time, and resources. As we can
144

see, developing a high-end screwdriver is
a rather simple task, which occupies two
persons for part of their time during a
year, involving less than 2000h of engineering.
A product like a pair of roller
blades or a custom microfilm case
requires as an order of magnitude more
resources, with engineering ranging from
8000 to 15000 hours. The same happens
if we move up the scale of complexity
towards something like a jet printer or
even a car. While these values are merely
indicative, they provide a reasonable
notion of the several levels of engineering
complexity.
What we claim is that the ability of the
firms to engage in increasingly sophisticated
products is severely constrained by
their size. Given that most of the
Portuguese companies are small, this limits
their ability to move up the level of
complexity. To further understand how
size influences firms development capabilities,
we analyze four levels of complexity
in terms of product and process development
(disregarding products like a
whole car). These are:
1. Simple Products: Total of 1,500h of
Engineering;
2. Fair Complexity Product: Total of
8,000h of Engineering;
3. Average Complexity Product: Total of
20,000h of Engineering;
4. Very Complex Product: Total of
150,000h of Engineering.
Table 7 presents a simulation of size implications
on product complexity. The objective
was to calculate what revenues were
needed to have the company focus on one
major product with varying levels of complexity,
while assuring complementary
development of existing products. For this
simulation, we considered Portuguese
industry conditions 6 , and estimated sales
considering that two percent of the revenues
were used for development.
Table 7 presents the results of this simulation.
For simple products, those requiring
around 1500h of product and process engineering,
500,000 Contos of sales are sufficient
to assure the development of the
product. If we consider that a company
would be working in several of these products
simultaneously, we would easily
reach 2 to 3 Million Contos. On the other
hand, to work in one product with a fair
level of complexity, sales requirements
rapidly reach 3 million Contos; for one product
of average complexity, they climb to
7.5 Million Contos. If instead of one product,
several would be considered, the
numbers would have to be adjusted accordingly.
To have a better understanding of the
implications of both revenues and percent
of sales devoted to development on the
level of product complexity, we varied
these two conditions and plotted the graph
presented in Figure 37. As it can be seen,
a company with, for example, sales of 1.5
Million Contos would need to devote over
3% of its revenues to be involved in the
development of a single product of fair
complexity, while a company with sales of
4 Million Contos could commit the same
percentage of sales, and yet enter the
development of a product with average
complexity. If we consider that, on average,
a company devotes 2%-5% of sales
to development, then developing more
complex products require that companies
have sales of at least 15 to 50 Million
Contos. This is an important challenge for
the Portuguese companies, most of them
limited in size. These firms need to gain
size if they wish to enter the development
of products with more complexity and higher
value added. This could mean ente-
6 See appendix 3 for a description of these conditions
Global Strategies for the Development of the Portuguese Autoparts Industry
145

Figure 36: Product Complexity and Development Effort
Table 7: Simulation of Size Implications of Product Complexity
Jobmaster
Microfilm DeskJet Mid-Size
Screwdriver Rollerblades Case Printer Car
Simple Product
Fair Complexity
Average Complexity
Great Complexity
Number of
Unique Parts
Development
Time
Size of Team for
Development
3
1 year
2 people
35
2 year
3 people
35
1 year
10 people
200
1.5 year
65 people
10,000
3.5 year
500 people
Engineering Hours
Product Devel. Cost
Other Devel. Cost
Total Devel. Cost
% Sales in Devel.
Revenues Required
All non-labeled values in Contos
1500 h
7,000
4,000
11,000
2.0%
560,000
8,000 h
38,000
22,000
60,000
2.0%
3,000,000
20,000 h
95,000
55,000
150,000
2.0%
7,500,000
150,000 h
710,000
410,000
1,120,000
2.0%
56,000,000
Engineering
Hours
1800 h
8500 h
14000 h
140000 h
2.5 million h
Development
Cost
$150,000
$750,000
$1.5 million
$50 million
$1 billion
ring in partnerships, merging or simply
acquiring other firms, either in Portugal or
abroad.
Gaining size to be able to free enough
resources for development is particularly
relevant because there are important cost
advantages of having development in
Portugal. Traditionally low labor costs are
seen as an advantage for tasks and
processes where labor costs matter, in
particular manufacturing. However, labor
cost advantage has often been overlooked
at the complementary level, which is
human capital. Portugal has low cost of
highly qualified labor relative to Germany
of France. This means national companies
have a potential advantage in comparison
with a rival from one of these countries
when developing similar products.
Figure 38 shows how important these
gains from employing lower cost human
capital can be 7 . The estimation presented
indicates that to develop products of similar
complexity, a Portuguese company, or
the subsidiary of a foreign company
employing Portuguese engineers, would
have to commit between a third to half
less than a firm of the same size operating
in Germany. Conversely, two firms investing
the same percent of revenues in
development and working on similar products,
the Portuguese firm could be half to
a third the size of the German.
We are aware that development is also a
matter of having the right expertise and
close relationships with assemblers, so
that they can trust the firm to be responsible
for the development of components.
Therefore, potential savings may not be
materialized. Moreover, we have heard
from companies about additional costs
they face to have engineers working with
assemblers abroad. Nevertheless, promoting
Portugal as a place to locate engineering
centers, where companies can
find low cost human capital and excellent
living conditions seems to be a longer-term
policy worth pursuing.
7 See appendix 3 for a description of these conditions
146

Figure 37: Company Size and
Commitment to Development
Figure 38: The Portuguese Development Advantage
Percent of Sales in Development
8%
7%
6%
5%
4%
3%
2%
1%
0%
500
2,000
3,500
5,000
8,000
11,000
14,000
17,000
20,000
Sales (10 3 Contos)
Great Complexity
Fair Complexity
Average Complexity Simple Product
27,500
35,000
Percent Sales
10%
8%
6%
4%
2%
0%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Sales (10 3 Contos)
40,000
45,000
50,000
P: Simple
P: Fair Complexity
P: Average Complexity
P: Great Complexity
G: Simple Product
G: Fair Complexity
G: Average Complexity
G: Great Complexity
P: Portugal
G: Germany
BENCHMARKING DIE DEVELOPMENT
The final aspect explored in this chapter is
the relationship between internal development
of dies or tools and company performance.
Previous results had already
shown that internal die development was
not related to greater engineering ability.
In this section we compare companies
with and without internal die development
and evaluate manufacturing and growth
indicators.
To establish the comparison we use a procedure
similar to what has been used
before. The objective is to compare subsample
differences in relevant variables.
In this case, the variable deciding our
benchmarking groups is simply the dummy
0-1 that indicates whether the company
does internal die development or not.
Table 8 presents the results of the comparison.
As it can be observed, companies
developing dies are under performing in
terms of quality, and potentially in leadtime
(not statistically significant). More
important is the fact that they are doing
much worse in terms of sales and productivity
growth.
The general analysis indicates that internal
die development is either unrelated or negatively
associated with internal capabilities as
well as manufacturing and growth performance.
Therefore, companies should make
a clear assessment if they are realizing the
benefits they expect from internal die development.
One of the potential justifications,
which we did not focus on, is cost.
Companies may find that there are substantial
cost benefits from having this activity
internally. The case studies showed that this
is potentially true but only for more complex
parts where the die may account for 15-20%
of the part cost. In the more simple compo-
Global Strategies for the Development of the Portuguese Autoparts Industry
147

Table 8: Difference between Companies
with and without die development
Indicator
Die
No Die
Delta
Client Defects (ppm) ^
Delivery Freq (h) ^
Order Lead Time (h) ^
New References (pMS)
Simultaneous Refs (pMS)
Total References (pMS)
Labor Prod. Grwth 96-97
Sales (Contos) ^
Sales Growth 96-97
Sales CAGR 94-97
4243
54
107
37
31
264
19%
1,438,748
27%
17%
806
61
91
69
11
160
26%
3,051,232
44%
22%
3437*
-7
15
-33
20*
104
-7%
-1,612,485*
-17%**
-5%
*Significant at 90%; **Significant at 85%;pMS: per Millions Contos of Sales;
^ Original calculations in log scale
nents, where the die accounts for 3-7% of
the cost, a reduction of 10-20% in die cost
yields up to 1% difference in final cost.
4.5.4. Conclusions
• The Portuguese companies are now
building development activities. Part of the
companies surveyed report development
capability, although simple products, or
the adaptation of existing designs is still
important. Nevertheless, some companies
are already involved in the generation of
more complex products, and this number
is expected to go up;
• The analysis showed no positive relationship
between product development
activity and manufacturing performance.
This means that we could find companies
with no development capabilities, but still
excellent in manufacturing. This could
indeed be a strategy for some of the smaller
companies;
• Leading companies in development
capability do show a sales and productivity
growth substantially above the sample
average, confirming that there is an important
industry premium for companies that
have meaningful development capabilities;
• Portuguese companies are heavily
involved in the internal development and
manufacturing of the dies and tools needed
for their products. Our analysis
shows that there are no obvious benefits
from this activity. Companies developing
dies are not growing faster, and do not
have better performance in terms of quality
or logistics. Moreover, for simple components
the die cost represents only a
small share of total manufacturing cost.
Therefore, potential cost savings from
internal development is very small, and
dispersion of resources may have a negative
impact that is as important as the savings;
• Increasing the development capability of
the companies is mostly a problem of size.
Higher complexity products demand important
engineering resources from the company
that are only possible if the company
is above certain critical levels of sales. In
isolation, very few Portuguese companies
will be able to achieve the necessary size;
• Human resources and the adoption of
engineering tools drive engineering in early
stages of the development of this capability.
Close relations with clients also make
a difference. The number of Computer
Stations does not;
• The vast majority of the international
148

companies present in Portugal do not
develop their products locally. Their activity
is mostly related to engineer the necessary
process conditions for the designs
supplied by their international offices.
Nevertheless, there are exceptions, and
some companies did report local product
development;
• The lower cost of Portuguese qualified
labor make it very attractive to do development
in Portugal, whether the companies
are developing simple or complex products.
For equivalent levels of complexity,
a firm in Portugal would have to commit
half to a third less financial resources to
development than an equivalent firm in
Germany. Attracting development centers
to locate in Portugal could be an interesting
strategy to be pursued by the government
and local companies.
Global Strategies for the Development of the Portuguese Autoparts Industry
149

4.6. Appendices
APPENDIX 1: DETAILED CLUSTER CHARACTERISTICS
Inital Cluster Center
Number of Cases in each Cluster
Q CLDF L
RC FRQ L
RC OLT L
Cluster
1
2
3.40 10.55
3.18 3.18
4.28 6.51
Cluster
Valid
Missing
1
2
9.000
8.000
17.000
20.000
Final Cluster Center
Distances between Final Cluster
Center
Q CLDF L
RC FRQ L
RC OLT L
Cluster
1
2
5.36 8.71
3.32 4.24
3.67 4.78
Cluster 1
1
2
3.647
2
3.647
ANOVA
Cluster
Error
Q CLDF L
RC FRQ L
RC OLT L
Mean Square
47.511
3.588
5.223
df
1
1
1
Mean Square
1.467
.561
1.305
df
15
15
15
F
32.396
6.399
4.001
The F test should be used only for descriptive purposes because the clusters have been chosen to maximize
the differences among cases in different clusters. The observed significance levels are not corrected for
this and thus cannot be interpreted as tests of the hypothesis that the cluster means are equal.
Sig.
.000
.023
.064
All variables considered are in log scale because of their skewed distribution. The original values (before logs are applied) for order lead-time
and frequency of delivery are in hours. The original values for client defects are parts per million.
150

APPENDIX 2: DETAILED REGRESSION RESULTS
The full model specification is: EH_l ip = HC_l i + CAD i ,+ D i + O i + C i + Clt i + S_l i + Die i + ε ip
This model has important assumptions: no product effects, i.e. variations in engineering hours per product in each firm are just deviations from
the expected value; no firm fixed effects. If these assumptions do not hold, then our coefficients may be biased. Still, the general results should
hold. Future work: test product random effects; firm fixed effects.
Dependent
Variable
TOTENG_L
Unstandardized
Coefficients
Standard.
Coefficients
t
Sig.
Model
1
(Constant)
WRKDVN_L
DESIGNSC
ORGZSCR
RL_DS_CL
COMPSCR
D_INTDIE
SALE_C_L
D_NCADST
B
-6.034
1.16094
1.18871
0.14137
0.05848
-1.3477
0.15718
0.44492
-0.018
Std. Error
5.39388
0.24613
0.38895
0.37344
0.02747
0.63768
0.48234
0.30184
0.06142
Beta
0.90562
0.87562
0.08914
1.12126
-1.1454
0.05837
0.24105
-0.0477
-1.1187
4.71669
3.05621
0.37856
2.1293
-2.1134
0.32587
1.47402
-0.2926
0.27112
4E-05
0.00434
0.70737
0.04055
0.04198
0.74652
0.14968
0.77162
Model
1
Observ. N
42
R
0.90841
R Square
0.8252
Adjusted R Square
0.78408
Std. Error of Estimate
0.63292
APPENDIX 3: ASSUMPTIONS FOR PRODUCT DEVELOPMENT CALCULATIONS
Category
Inputs Portugal
Inputs Germany
Monthly Salary (Contos)
Benefits
Yearly Salary (Contos)
Eng Hours /Year
Percent Salary/Total Dev. Costs
Eng Hours Cost (Contos)
Dev % Workers Development
No Dev. Cap % Workers in Development
233
60%
5219.2
1840
60%
4.7
4.50%
2%
932
60%
20876.8
1800
60%
19.3
4.50%
2%
Global Strategies for the Development of the Portuguese Autoparts Industry
151

Chapter 5
Manufacturing Case Studies
5.1. Introduction
The stamping and injection molding industries
form the backbone of the modern
autoparts industry. Both manufacturing
processes are mature and prevalent worldwide.
This case study intends to investigate
actual Portuguese production operations
for both processes. Both of these
processes are established to the point
where they are very economical. The investigation
entailed the use of technical cost
models to analyze the sources of inefficiency
in the production operations. Each
model helped point to areas of improvement
or refinement in these manufacturing
processes. An understanding of factors
common to a variety of manufacturing
situations can only be obtained through the
investigation of actual production operations.
Though stamping and injection molding are
worldwide industries, there are several reasons
why cost differences exist between
the same parts produced in different countries.
First, countries do not have the same
uniform levels of infrastructure. The disparity
between the quality of roads, the
power-grid, the suitability of real estate, the
human resources, in part, accounts for
cost differences among countries.
Second, government regulations relating to
the trade of steel and stamping equipment
into or out of a country may prevent companies
from obtaining the world prices for
these goods. The policy of government tariffs,
quotas, value-added taxes, and local
content requirements on these goods limit
the cost competitiveness of companies
due to the increased prices that these
regulations cause. Fourth, national factor
conditions contribute to differences in
manufacturing cost. These factor conditions
are macroeconomic indicators such
as energy cost, interest rate and social
indicators of wage, work ethic, and skill
level. Thus, cost differences between countries
can be difficult to pinpoint because
these sources contribute in distinctly different
ways and in unequal magnitudes for
the stamping process.
Several reasons exist for cost differences
between the same parts made in different
companies. First, companies do not have
equal access to raw material and equipment
in the world marketplace as others
do. Access limitations to resources can
result from government policies as mentioned
above and economic limitations.
Additionally, economic restrictions can
result from the limited business opportunities
and foreign business connections in
order to obtain world prices for steel and
stamping equipment. Second, factors relating
to internal company organization and
management structure affect the way the
business is run. The manner in which
Global Strategies for the Development of the Portuguese Autoparts Industry
155

managers implement planning decisions
and utilize human resources can dramatically
alter manufacturing costs. Third, companies
are limited by the amount and type
of manufacturing resources that they have
on hand. The adequacy of the particular
equipment can affect manufacturing efficiency.
Thus, systematic cost differences
between different companies can be difficult
to ascertain because of qualitative
business decisions within companies.
In analyzing these manufacturing processes
for Portugal, several important questions
concerning company plants are studied.
This portion of the study will investigate
companies from a manufacturing perspective
rather than a business organization
standpoint. The examination of cost
differences between countries will be evaluated
by using a stamping process cost
model which uses national factor condition
averages. The breakdown of cost differences
between companies will be
assessed by comparing actual company
data in the stamping cost model. With
stamping industry benchmarks, companylevel
comparisons can be made regarding
the operational efficiencies and the use of
appropriate equipment. The difference
between manufacturing process efficiencies
and the benchmark is usually characterized
in terms of these manufacturing
process efficiencies. However, in the cost
model, the relative importance of process
changes is measured, not according to
manufacturing process efficiency, but by
the change in cost.
In analyzing manufacturing operations
between countries, key questions emerge
concerning the level of competitiveness
Portugal has in the industry. This part of
the study will focus on the differences that
contribute to cost-variations between countries.
Again, some national characteristics
contribute more greatly than other characteristics
to the manufacturing cost of a
stamped part. Additionally, Portugal is
faced with “new” low labor-wage competitors
in other countries. The cost model will
estimate the extent to which this trend is
important. Furthermore, Portugal’s historical
experience in precision tool building is
a source of possible national advantage.
The extent to which this ability provides a
cost advantage for stamping operations
may be important. Often, national factor
conditions play an important role for cost
competitiveness between nations. Thus,
the role of nations and, therefore the government
can be significant in determining
an industry’s viability within the country’s
borders.
The manufacturing studies cover the major
considerations the industry in Portugal is
facing or will face in the future. The cost
models investigate the reasons for cost differences
between plants and the effects on
manufacturing cost due to the existing
national factor conditions. The assembly
study also includes an initial analysis of
injection molding assembly operations
which could provide a perspective on how
value-adding processes could augment
some of Portugal’s strengths and offset
some of Portugal’s inherent weaknesses.
These improvements may come able if
Portugal utilizes its inexpensive engineering
talent. Adding engineering capability will
be explored also. Embarking on these fundamental
changes may permit Portuguese
companies to increase its quality and
manufacturing performance to levels comparable
with the OEM automakers.
Portuguese manufacturing reputation and
market penetration may depend upon it.
5.1.1 Methodology
A Cost model was developed which model
each of these manufacturing processes
and estimates the cost drivers based upon
standard practice regressions and engineering
principles. These models are used
to analyze the sources of cost differences
between companies and between nations.
Technical cost modeling is a powerful tool
in analyzing cost elements for manufacturing.
TCM considers a wide range of factor
inputs for a process technology to understand
aggregate costs. A seemingly complex
calculation with uncertain engineering
and economic decisions is reduced to a
156

single, comprehensive process model in
which each input is controllable. Other cost
estimation techniques do not adequately
cover all factor inputs and production-floor
trial and error has been the usual way of
implementing improvements and proceeding
down the learning curve. In addition
to being an intelligent approach for analyzing
alternative processes, TCM is an
excellent tool for comparing a broad range
of manufacturing choices. Complex
processes simplify to a series of calculations.
TCM places a monetary value on
every contributing element in the process.
By summing the estimated values of each
step, TCM gives manufacturing costs for a
specific product. Allocation decisions in
such a model include fixed versus variable
costs, and dedicated versus non-dedicated
investments. Variable costs include, material,
energy, and direct labor costs. Labor
costs must include wages and benefits and
must account for downtimes. In Portugal,
for example, the government mandates a
company to pay 14 months wages for 12
months of work. Fixed costs are directly
associated with the processing of a part.
Allocation is thus straightforward upon
deciding on an allocation rule. Fixed costs
include, among others, tooling, machinery,
indirect labor overhead, and engineering
personnel. Further, building costs and capital
costs are treated as having an opportunity
cost associated with them and are
discounted according to its age. These cost
elements are considered fixed costs.
TCM models are flexible and adapt easily
to cost allocation decisions. However,
because of the uncertain data for some of
the fixed cost variables, such as overhead
and maintenance, TCM is better used for
estimations of cost trends and comparisons
than as an absolute costing tool.
Nevertheless, it does single out limiting
process parameters. Further, it emphasizes
the relative importance of factor
inputs. TCM attempts to give an accurate
description of costs and incorporates a
number of engineering concepts into calculations
of parts costs. Line balancing and
the number of parallel production streams
have significant impact on costs, but the
models assume that it is optimal. The
more streamlined operations have little
downtime and therefore optimize run time.
Again, this is not an obvious approach as
there will more often than not be rate-limiting
steps that may hinder optimal use of
all the machines. Nevertheless, using TCM
to estimate optimal combinations of
machines is far more productive than
engaging in production-floor trial and error
experiments.
5.2 Stamping Case Study
5.2.1 Portuguese Company Analysis
The stamping analysis was conducted
upon the basis of stamped part information
received from Portuguese manufacturers.
In order to preserve data privacy and company
confidentiality, stamped part sizes
were chosen which were representative of
parts in the study. The manufacturing operations
of Portuguese companies and other
companies worldwide were used to provide
a cost estimate for the representative
stamped part. This assembly includes a
medium-sized stamping and a small stamping
which are spot-welded and painted.
This assembly represents a typical assembly
the Portuguese companies in this study
Table 1: Stamping Assembly Data for Cost Estimation
Medium
Stamping
Small
Stamping
Assembly
Mass
Max Part Length
Max Part Width
Thickness
Production Volume
2 kg
500 mm
400 mm
1.5 mm
400,000
0.1 kg
100 mm
200 mm
0.9 mm
400,000
Mass
Size
Welds
Cycle time
2.1 kg
0.5m x 0.4m x 30mm
10 spot-welds
20 seconds
Global Strategies for the Development of the Portuguese Autoparts Industry
157

Figure 1: Portuguese Cost Estimates for
the Medium Stamping
Figure 2: Portuguese Cost Estimates for
the Small Stamping
$2.40
$2.20
$2.00
$1.80
$1.80
$1.60
$1.40
$1.20
Costs in US $
Costs in US $
$0.50
$0.40
$0.30
$0.20
$0.10
$1.00
Plant A Plant B Plant C
$0.00
Plant A Plant B Plant C
Operating
Inefficiency
Equipment
Inefficiency
World Best
Operating
Inefficiency
Equipment
Inefficiency
World Best
produce. The specifications of the assembly
and the relevant production volume are
given in Table 1.
In analyzing the sources of cost in the manufacturing
of stamped parts, three scenarios
are considered. First, the world best
cost is the minimum cost for a part produced
with the most optimal operating conditions
on the most appropriate press line.
The deviation of the actual cost from world
best cost is the result of two types of inefficiencies
the use of sub-optimal equipment
and inefficient operating practices.
From this, the two additional scenarios can
be defined; one which considers “equipment
inefficiencies” and the other which
considers “operational inefficiencies.” The
“equipment inefficiencies” scenario
involves additional costs over that of the
world best due to the use of older, less reliable
presses or inadequate presses for the
part characteristics. The “operational inefficiencies”
scenario involves further costs
that are associated with the inefficient use
and operation of the pre-existing equipment.
Sources of these costs include
decreased line rates and long die change
times. These three scenarios will be quantified
for the cost estimates calculated for
the companies’ particular stamping operations.
From the stamped assembly described
above, the medium stamping was analyzed
for three plants in Portugal. The cost estimates
using actual manufacturing data for
the medium stamping were calculated. If
each plant were to improve using optimal
equipment and optimal operating conditions,
then the cost estimate would be the
world best for that plant. These world best
costs are shown in Figure 1. Plants A and
C have much larger operating and equipment
inefficiency costs and therefore cannot
compete on a cost basis with Plant B in
the production of the medium stamping.
For the small stamping, the three
Portuguese plants exhibited significantly
different cost inefficiencies. As shown in
Figure 2, Plant A and C have lower cost
estimates than plant B. Plant A exhibits a
moderate amount of operating inefficiency,
while the equipment used is very appropriate
for the small stamping. Plant B has
higher operating inefficiencies and even
greater equipment inefficiency, which
account for a large cost difference and
reflect a high cost estimate. Plant C maintains
excellent operating efficiency for the
small stamping given the fair equipment for
production.
Thus, all three plants possess differing levels
of operating and equipment inefficien-
158

Table 2: Plant Analysis of Operating and Equipment Efficiency
Plant A
Plant B
Plant C
Medium Stamping
• Moderate line rate improvements
• Oversized presses
• Minor line rate improvements
• Minor press size change
• Moderate line rate improvements
• Oversized press
Small Stamping
• Moderate line rate improvements
• Appropriate progressive die press
• Moderate line rate improvement
• Wrong press size
• Excellent operating conditions
• Minor press size change
cy, depending upon the available resources
and the efficiency of those resources. The
following is a general discussion and is
summarized in more detail in Table 2. Plant
A has moderate operating inefficiencies
due to the sub-optimal line rate for both the
small and medium stamping. While the
equipment in plant A is well suited for the
small stamping, the press used for the
medium stamping is oversized. Plant B has
much well suited equipment and operations
for the medium-sized stamping with
room for minor improvements in line rate
and press size. However, the small stamping
is simply made on the wrong press
size and, consequently, the line rate should
be faster. Consequently, plant B’s cost
estimate for the medium stamping is better
than the other plants, but plant B also has
the worst cost estimate for the small
stamping. Plant C has inappropriate equipment
for either size stamping. However,
plant C operates its existing equipment
very well for the production of the small
stamping, while the operating conditions
for the medium stamping are far from optimal.
Thus for these three Portuguese
stamping companies, a wide variation in
cost estimates exist depending on the suitability
of the equipment for the particular
part and the conditions under which the
manufacturing operations occur. This
analysis is not to show which company is
better, but rather that different inefficiencies
give rise to different costs. Thus,
plants are generally capable of producing
very efficiently for some types of parts, but
not all. This is due to the limited set of
equipment the plant has and it should,
therefore, try to focus only on parts well
suited to its equipment in order to minimize
the equipment inefficiency. Following this
rule will also help the stamping operations
proceed at their optimal speeds.
5.2.2 Worldwide Stamping Analysis
The analysis will now focus on comparing
worldwide stamping processes using representative
national factor conditions. The
regulatory and economic conditions in different
countries shape the ability of autoparts
industries to be cost-competitive. These
national factor conditions are a major reason
for cost differences for the same part
produced in different countries. Important
competitive or potentially competitive countries
of interest to Portugal are Brazil,
Germany, France, Spain, England, Hungary,
Czech Republic and Poland. This study
chose to compare Portugal against Brazil
because it is a potential expansion market
for Portugal, France to represent western
European countries, and the Czech Republic
to represent the emerging Eastern European
countries. The baseline assumptions for
these countries, shown in Table 3, are
based upon typical costs and conditions
found in each country. These values depend
upon infrastructure (such as energy cost and
building costs), national market conditions
(energy cost and interest rate) and societal
norms (working days per year and wages).
The best cost estimates for these coun-
Table 3: National Factor Conditions
Portugal
France
Brazil
Czech Republic
Days / year
Wage
Energy Cost
Interest Rate
Building Cost
Material Cost
230
$ 6
$ 0.05
10 %
$ 300
100 %
240
$ 25
$ 0.08
7 %
$ 1500
100 %
260
$ 6
$ 0.08
30 %
$ 500
120 %
260
$ 3
$ 0.05
10 %
$ 500
100 %
Global Strategies for the Development of the Portuguese Autoparts Industry
159

Figure 3: Best Cost Estimates by Country
for the Medium Stamping
Figure 4: Best Cost Estimates by Country for
the Small Stamping
$0.40
$2.60
$2.40
$2.20
$2.00
$1.80
$1.60
$0.30
Costs in US $
Costs in US $
$0.20
$0.10
$1.40
$1.20
Portugal
Czech R.
Brasil
France
$0.00
Portugal Best Czech R. Brasil France
Building Cost Main machine Cost Tooling Cost
Maintemnance Cost
Energy Cost
Labor Cost
Building Cost
Labor Cost EnergyCost Overlay Labor Cost
Material Cost
Overhead Labor
Cost
Maintenance
Cost
Main
Machine Cost
Tooling Cost
Material Cost
tries, shown in Figure 3, were calculated for
the medium stamping. The main source of
cost difference for Brazil is the material
cost due to the scarcity of resources.
Between the other countries, the main
machine cost provides the bulk of the cost
differences. The press hourly expense is
determined from the opportunity cost of the
investment in presses amortized over their
lifetime. Thus, high interest rates increase
the opportunity cost and increase the main
machine cost attributable to this part.
Despite the differences in wages, labor
does not usually contribute significantly to
the capital-intensive stamping process.
Surprisingly, the energy cost, tooling cost,
maintenance cost and building costs are
not the predominant sources of cost or
cost differences. These are factors that are
used in the decision-making process about
where to locate, but they may not be as
important as the proximity to the market.
Providing the expansion facility can achieve
full utilization of the expensive equipment,
this result supports the trend to expand
abroad where the market is located.
The best-cost estimates for these countries
were calculated for the small stamping
shown in Figure 4. The trend concerning
material cost is still a large source of
cost differences. Again, the effect of interest
rate on machine costs is accentuated
for the small part and consequently is
responsible for the large variation in cost.
However, when the part is extremely small,
differences between the minor sources of
cost are amplified. In particular, French
labor and labor overhead costs contribute
significantly compared to the other countries.
These factors lead to significant cost
differences between the best-cost estimates
of these countries.
5.2.3 Stamping Improvements
The sources of cost differences can be
explained by evaluating the efficiency of the
stamping process. The stamping line
improvements are broken into two categories
as mentioned above, operational
improvements and equipment improvements.
The analysis from the Portuguese
stamping companies shows that roughly
half of the cost improvement comes from
improvements in manufacturing operations
while the other half comes from changes in
the choice of press equipment. The following
discussion is intended to illustrate
some of the consequences of stamping
cost inefficiencies and suggestions for
manufacturing change.
5.2.4 Impact of Equipment Adequacy
The primary factor for equipment improve-
160

ment that makes a stamping press appropriate
is the precision with which the press
is suited for the production of a particular
part. By closely fitting the part to the production
press, extra press capability is
minimized. Press capabilities such as bed
size, tonnage, and automation level determine
the press cost. Press cost is amortized
over the press lifetime and parts are
charged for the press time that they
require. Thus, machine costs for the part
are a minimum when press capability is not
wasted. Using the optimal equipment
means the parts fits the press exactly in
size and tonnage, and the press has exactly
the right features and capabilities to
make the part. However, a larger press can
always be used as necessary. In stamping
facilities, production should be matched to
the best-fit presses available and operate
under optimal conditions in order to minimize
cost.
Fitting a press for the job requires selection
of the correct press type for production.
Each type of press has slightly different
capabilities and has slightly different costs
associated with those capabilities. The
study investigated the medium stamping
for both progressive and tandem die presses.
The use of transfer presses was studied
also. However, parts typical of the
Portuguese companies that were studied
were not suitable for large transfer presses.
Therefore, transfer presses were left
out of this analysis. For the two press technologies,
the process variables were
ranked according to their effect on cost.
The results of this sensitivity analysis
inform the decisions about the sort of parts
that should be produced on each type of
press.
5.2.5 Progressive Die Press Sensitivity
The progressive die press sensitivity in
Figure 5 shows the factors ranked according
to their effect on cost. These production
variables typically vary between the values
given to the right of the cost bar. The
production variables that affect cost the
greatest are those that have a significant
impact on the hourly expense, as described
above, of the progressive die press. The
most significant factor in determining the
hourly expense is the local interest rate.
Interest rate affects the opportunity cost of
the capital outlay for the machine. The next
most significant factor is the line rate,
which affects the production throughout
per hour. When the line rate is increased,
the hourly expense of the machine cost is
divided among more produced parts and
the average cost per part decreases. The
third most sensitive factor contributing to
cost is the cost of the main press itself.
Progressive die presses tend to be very
expensive due to the high level of automation.
Therefore, the press time must be
Figure 5: Progressive Die Press Sensitivity for the
Medium Stamping
Labor Wage
Tool Cost
Production Volume
% Breakdowns
Die Change Time
$5-$10 / hour
150%
400K-100K
1-10%
30-120 minutes
Machine Cost
150%
Line Rate
1000-600 / hou
r
Interest Rate
8-30%
$1.90 $1.95 $2.00 $2.05 $2.10 $2.15 $2.20 $2.25 $2.30
Cost in US$
Global Strategies for the Development of the Portuguese Autoparts Industry
161

Figure 6: Tandem Die Press Sensitivity for
the Medium Stamping
Figure 7: Cost Penalty for Inappropriate
Equipment
Breakdowns
Die Change Time
Labor Wage
Tool Cost
Machine Cost
Line Rate
Interest Rate
Production Volume
$1.80 $1.90 $2.00 $2.10 $2.20 $2.30
Cost in US$
400k - 100k
8 - 30%
600 - 300 / hour
150%
150%
$5-$10 /hour
5-90 minutes
1-10%
Costs in US $
$2.40
$2.75
$2.30
$2.20
$2.10
$2.00
$1.90
$1.80
1100 x 1200 1500 x 2000 2000 x 3000
250 T Progr 400 T Progr 250 T Tandem 400 T Tandem
well utilized in order to operate the progressive
die press productively.
The other factors are sensitive to the
extent that they consume time on the
press when it could otherwise be in production.
Consequently, die change time
and breakdown time become significant
factors when press time is wasted. The production
volume is not a sensitive factor
because the press line is assumed to be
filled with other parts. Tooling costs are
generally quite reasonable when compared
to tandem die tool and do not contribute
greatly to the overall cost as seen in Figure
3 and Figure 4. In this highly capital-intensive
process, labor input is not a large proportion
of the total cost and therefore the
cost quite insensitive to the labor wage.
This analysis implies that progressive die
press operation should focus on the time
management of production because of the
high hourly machine expense that the
press incurs.
5.2.6 Tandem Press Sensitivity
The tandem press sensitivity in Figure 6
shows the factors ranked according to their
effect on cost. The production variable sensitivity
tests were the same as those of the
progressive die press, including the same
range of variable variation. However, the
cost sensitivities for the tandem die are in
general about half the variation of the progressive
die press. The production variables
that affect cost most greatly are those that
have a significant impact on the ability to
pay for the tooling expense rather than the
press. The tandem die tools are considerably
more expensive than a progressive die
for the same part. This is evidenced by the
tooling cost moving up in the sensitivity ranking.
The tooling costs are calculated differently
than press costs. The tooling cost is
not a time dependent expense like press
usage, but rather tooling cost is divided
according to the production volume and
product life. This is the reason why production
volume contributes the largest cost sensitivity.
While the production volume is the
most important factor for cost sensitivity,
the factors of secondary importance are
those that contribute to the utilization of
press time to minimize the hourly press
expense. These factors are the interest rate,
line rate and machine cost that hold the second,
third and fourth positions respectively.
Labor wage, die change time and breakdown
time do not vary greatly in the sensitivity
analysis for the same reasons as mentioned
for the progressive die press.
This sensitivity analysis implies the factors
that should come into the decision concerning
the press type. The cost penalty
162

due to inappropriate equipment can be substantial.
Besides choosing the appropriate press
type, the appropriate size press must be
chosen. The suitable press size for the
medium stamping should be made on a
250-ton progressive die press with bed
dimensions of 1100mm x 1200mm assuming
full capacity utilization as shown in
Figure 7. If the medium stamping were to be
made on a 250-ton progressive die press
with a larger bed size of 1500mm x
2000mm, the press would be more expensive
and hourly press expense would be larger.
Therefore a larger bed size than needed
is not an advantageous capability of the
press and it contributes to a higher cost.
The same argument can be made for presses
with larger bed-sizes and greater tonnages.
Even a tandem press of the same
tonnage and bed size is more expensive.
Despite these added costs due to the extraneous
equipment capability, companies
have a limited array of press lines. In order
to make the best use of their existing presses,
a company may pursue two different
strategies. First, the company could diversify
their press lines by purchasing a variety of
tonnages, sizes, automation and special
capabilities. This would necessitate the production
volumes to fill all of these presses.
Second, a company may choose to specialize
its business and limit orders to parts
that are appropriate to the press lines the
company possesses. In these ways, a company
may limit its exposure to production
equipment inefficiencies.
5.2.7 Impact of Operational Changes
The largest operational improvements in
the stamping press line are the result of
increased line rate, shortened die change
time and high capacity utilization. Line rate
is the speed of the press throughput. The
ability to improve line rate is determined by
the press type, press age and part complexity.
In general, progressive die presses
can run at high speeds, upwards of 1000
parts per hour. Tandem die presses run at
lower speeds, around 600 parts per hour.
These speeds decrease as press age, part
complexity increase and part tolerances
decrease. However, a detailed discussion
of line rate would require specific detailed
knowledge of the part geometry and specifications,
the press and the overall manufacturing
environment. The improvement of
line rate could be seen as tweaking the
manufacturing operations to optimize the
part throughput performance. In addition,
reduced downtimes improve the amount of
Figure 8: The Die Change Time on Capacity
Figure 9: Definition of Capacity Utilization
Maximum Line Capacity
800,000
700,000
600,000
500,000
400,000
300,000
200,000
Decreasing
Die Change Time
3% Percent of line
9% Capacity lost
because of die
18$ Change time
37% (10 Components)
• Constant Production Volume
• A second part fills the line to the desired utilization
• The remaining capacity is wasted as idle time and charged
to the parts produced in the line
Desired Part
Other Part
100,000
0
1 2 3 4 5 6 7 8 9 10
Components Produced on a Line
5 min DCT
30 min DCT
1 Hr DCT
2 Hr DCT
0% 25% 50% 75% 100%
Capacity Utilization
Global Strategies for the Development of the Portuguese Autoparts Industry
163

Figure 10: Cost versus Capacity Utilization
Figure 11: Press Choice Feasibility Map
$2.10
$2.08
$2.05
$2.03
$2.00
Plant B
Plant A
Plant C
Production Volume
600,000
500,000
400,000
300,000
200,000
100,000
Tandem Die Press
Feasibility Region
Progressive Die Press
Feasibility Region
$1.98
$1.95
50% 60% 70% 80% 90% 100%
Capacity Utilization
Press Choice Crossover
50% 60% 70% 80% 90% 100%
Capacity Utilization
Progressive Die Press
Tandem Die Press
up-time the machine has to produce parts.
However, as seen on the sensitivity charts
for the operational parameters in Figure 5
and Figure 6, nearly all of the operational
cost improvement comes from line rate
increases.
Though the operational cost improvement
or penalty associated with die change time
is not substantial, the die change time can
play an important part in freeing up non-production
time. The benefit of reduced die
change time is additional line capacity and
flexibility to increase product mix. As mentioned
above, the hourly expense of the
press is a large factor for part cost.
Therefore, time spent changing dies is time
not spent producing parts. When this time
becomes substantial, due to frequent die
change times of multiple products on one
stamping line, the theoretical line capacity
decreases. Or put differently, as product
mix increases dies must be changed more
frequently and the capacity available for
producing parts diminishes as shown in
Figure 8. In Figure 8, if one product is produced
on the line, then the line capacity is
nearly the same, regardless of the die
change time. However, as products are
added to the line, the number of die
changes increases so that less time is
available to produce and the line capacity
drops. In the extreme case, a die change
time of 2 hours for 10 products on the line
drops the line capacity by 39%. This is
acceptable if the 10 products require less
than 61% of the capacity. Thus, attention
to die change time may not be crucial for
relatively unfilled lines. If the production
lines are relatively full, then extra line
capacity can be bought by automating the
die changes. This can effectively delay purchasing
decisions for the large capital
investment of a new press.
As discussed above, the ability to fill the
line to full capacity is important for choosing
the right equipment and operating
with high manufacturing efficiency.
Capacity is the theoretical or the measured
practical limit for the production of parts on
a press line. Utilization is the ability to fill
a press line with production up to the line’s
capacity. The reason capacity utilization is
used in this study is to account for unused
idle time on the press. Part 1 is assumed
a constant production volume, while Part 2
fills the line to the desired utilization as
illustrated in Figure 9. The remaining
capacity is wasted as idle time and
charged to the parts produced on it, the
proportions given by the production volumes.
Thus, if 400,000 of Part 1 are produced
and 100,000 of Part 2 are produced,
they fill the line to 25% capacity utilization,
then the remaining 75% of the
remaining idle time is charged both parts.
Part 1 is charged (80%)(75%)=60% of the
remaining idle time while Part 2 is charged
164

(20%)(75%)=15% of the remaining idle
time. Therefore, Part 1 is responsible and
charged for 75% + 5% = 80% of the press
time. The proportion of machine time that
is charged to Part 1 diminishes from 100%,
if it is the only part on the line, down to the
percent of actual production time, if the utilization
is 100% between Part 1 and Part 2.
This concept is important for explaining the
cost tradeoffs for filling progressive and
tandem die press lines.
When analyzing cost versus capacity utilization,
costs should decrease as the idle
time burden decreases also. Thus at
100% capacity utilization, the cost is a
minimum. These costs were evaluated for
the three Portuguese plants examined earlier
in the study. Each plant has a different
cost associated with full capacity utilization
because of differences in line rate, die
change time, equipment fit, etc. as shown
in Figure 10. Plant C had the lowest cost at
full capacity utilization, for the progressive
die press. At only 90% capacity utilization,
Plant C can match the best cost of Plant B
at full capacity utilization. At only 81%
capacity, Plant C can match the best cost
of Plant A at full capacity utilization.
Because Plant C produces more efficiently,
it does not need to fill its line to full-capacity
utilization to be cost-competitive with
Plant A and Plant B. Inversely, when Plant
A and Plant B fill their press lines to fullcapacity
utilization, they cannot achieve
Plant C’s cost at full-capacity utilization
with their current manufacturing conditions.
From this perspective, Plant C is more
effectively spreading the hourly expense of
the press over more parts and product
mixes.
In Figure 10, Plant C’s most cost-effective
press choice is the progressive die press.
However, as the capacity utilization drops
to 84% on the progressive die press, the
cost of using a tandem die press is
reached. At capacity utilizations lower than
the 84%, using a tandem die press
becomes a more cost-effective decision.

Businesses are small and might not have a
full breadth of stamping presses with which
to make parts. Businesses might not have
the production volumes necessary to fill
the stamping lines. Businesses might not
need high levels of efficiency to complete
orders in a timely fashion. Nevertheless,
there are several factors that need to be
considered when selecting a stamping line
to minimize inefficiency and cost. These
factors are:
• Part weight and complexity;
• Availability of appropriate press equipment;
• Production volume and capacity utilization;
• Product mix on the press line.
These are considerations that manufacturing
personnel may already have good experience
and understand the cost implications
of these tradeoffs. They know the
Figure 12: Cost Drivers of Injection Molded Parts
100%
90%
pros and cons of using different press technologies
for production of a given part for
example. The importance of personnel who
have these skills are crucial for high manufacturing
performance within a company.
5.3 Injection Molding Case
Study
5.3.1 Portuguese Company Analysis
The injection molding analysis was performed
from plastic injection molded part
information received from Portuguese manufacturers.
In order to preserve data privacy
and company confidentiality, the identities
of the companies are not revealed
and their parts are obscured. This data is
used to analyze the cost drivers within the
injection molding process.
In analyzing the sources of cost in the manufacturing
of injection molded parts, two
scenarios are considered. First, the world
best cost is the minimum cost for a part
produced with the most optimal operating
conditions on the most appropriate injection
molding machine. The deviation of the
actual cost from world best cost is the
result of an inefficient use of existing
equipment. The “equipment inefficiencies”
scenario involves additional costs over that
of the world best due to the use of older,
less reliable presses or inadequate presses
for the part characteristics. Sources of
inefficient operation could not be well
determined because all cycle times were
better than the regression data available in
the study. It may be true that these companies
possessed very little operational
inefficiency. From the information available
in the cost model, this source of inefficiency
was not detectable. This could be due to
outdated model information and highly
Figure 13: Cost Increase Due to Improper Injection
Molding Machine Size
120%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Part A Part B Part C Part D
Maintenance Cost
Building Cost
Overhead Labor Cost Auxiliary Equipment Cost
100%
80%
60%
40%
20%
0%
Plant A Plant B Plant C
Material Cost
Main Machine Cost
Energy Cost
Labor Cost
Existing Equipment
Predicted Equipment
166

automated injection molding operations.
Therefore, the focus of this study will be on
the equipment inefficiency.
In analyzing the cost breakdown of the
injection molded parts for which data was
received in Figure 12, the cost drivers varied
greatly depending on the shape, size
and complexity of the part. Parts B and C
have a much smaller proportion of material
cost than the other two components. With
the die cost playing a substantial role in driving
the cost in Parts B and C, this points
to higher part complexity given the overall
size. The machine cost also seems to be
correlated with the die cost. A high die cost
would seem to necessitate either a larger
cross-head area of the machine because
the part is large, or a higher tonnage of the
machine because the part is complex.
Thus, an expensive die requires to an
extent a more expensive machine.
Choosing the proper machine size is crucial
for quality control of more complex parts.
Choosing the right sized machine for simpler
parts is more important and affects
the overall manufacturing cost adversely.
For example in Figure 12, Part A appeared
to have equipment cost as a relatively
small cost driver. But in Figure 13, the
equipment inefficiency of Part A is the
worst of all. While Parts B and C seem to
be more complex, these parts are better
matched to the machines on which they are
produced. Therefore a higher than required
machine capability, in terms of cross-head
area or tonnage for example, lead to a larger
machine cost than is necessary. Part
C’s machine cost was substantial, but the
part is made on the appropriately-sized
machine and therefore it incurs no extra
inefficiency cost due to machinery.
This analysis is not to show which machine
produces the least cost part, but rather
that machine inefficiencies give rise to different
costs. Furthermore, these inefficiencies
do not necessarily occur on the most
expensive machines or most complex
parts. Thus, plants are generally capable of
producing very efficiently for some types of
parts, but not all. This is due to the limited
set of equipment the plant has and it
should, therefore, try to focus matching all
parts carefully to the available equipment
so that it minimizes equipment inefficiency.
5.3.2 Worldwide Injection Molding
Analysis
The manufacturing operations of Portuguese
companies and other companies
worldwide were used to provide a cost estimate
for the representative injection molded
parts. This assembly includes three
Figure 14: Injection Molding Assembly Data
for Cost Estimation
Mass
Dimensions
Wall Thickness
Cost
Cycle time
Setup time
Production Vol.
200 g
200 x 100 x 50 mm
2 mm
$1.00 / kg
35 seconds
100 minutes
Cycle time
3 similar parts
fastened together
Costs in US $
Figure 15: Cost Estimates by Country
for the Injection Molded Part
$0.50
$0.40
$0.30
$0.20
Parts
Mass
Dimensions
Assembly
3
600 g
200 x 120 x 100 mm
Fasteners 20
Cycle time 40 seconds
$0.10
$0.00
Czech R.
Brasil
France
Energy Cost
Overhead Labor
Cost
Labor Cost
Maintenance
Cost
Main
Machine Cost
Tooling Cost
Building Cost
Material Cost
Auxiliary Equipment
Cost
Global Strategies for the Development of the Portuguese Autoparts Industry
167

parts which are fit and fastened together.
This assembly represents a typical assembly
that the Portuguese companies in this
study produce. The specifications of the
injection molded assembly and the relevant
production volume are given in Figure 14.
Best cost estimates were calculated for the
generic injection molded part in Figure 15
for countries given in Table 3. As in stamping,
the main source of cost difference for
Brazil is the higher material cost due to the
cost of shipping. For France, the labor cost
is the source of the main cost difference.
Portugal, the Czech Republic and France all
have nearly the same interest rate for
assessing the opportunity cost of the tooling
and machinery. While Brazil contributes
a larger tooling and machine cost
due to a higher amortizing interest rate.
Not surprisingly, the energy cost, maintenance
cost, and building costs are minute
sources of cost or cost differences.
Therefore the main sources of cost difference
include the material cost, labor
wage, tooling and machine cost. These
cost drivers can be used in the decisionmaking
process about where to locate, but
they may not be as important as other factors,
such as the proximity to the market.
5.3.3 Injection Molding Improvements
The injection molding sensitivity in Figure 16
shows the factors ranked according to their
effect on cost. These production variables
typically vary between the values given to the
right of the cost bar for this particular part.
The production variables that affect cost the
greatest are those that have a significant
impact on the hourly expense of the injection
molding machine. As described earlier,
the most significant factor in determining
the hourly expense is the local interest rate,
because it affects the opportunity cost for
the machine. This is a major factor that
hurts the production cost in Brazil. The next
most significant factor is the material cost
which can vary greatly depending on availability
of polymers and plastics from the
local petroleum industry. The third most sensitive
factor is the tooling cost which is also
interest rate dependent. Because the tool is
so expensive relative to the speed with
which parts are made, this cost tends to be
large. The fourth most significant factor is
the cycle time, which affects the production
throughout per hour. When the cycle time is
decreased through the use of automation,
the hourly expense of the machine cost can
be divided among more produced parts,
which decreases the average cost per part.
The fifth most sensitive factor contributing
Figure 16: Injection Molding Manufacturing Sensitivity
Overhead Labor Rate
50%-125%
Wage
$5-$10 / hour
Reject Rate
1-10%
Equipment Cost
100%-150%
Cyde Time
30-40 seconds
Tooling Cost
100%-150%
Material Cost
$1.00-$1.25
Interest Rate
$0.35
$0.37 $0.39 $0.41 $0.43 $0.45
10%-30%
Cost in US$
168

to cost is the main machine cost. The
machine time must be well utilized in order
to use the injection machine productively.
Reject rates plays a role in contributing to
cost in which the production cost of bad
parts must be spread across the remaining
good parts. Finally, labor costs can contribute
significantly as evidenced by the
French labor cost. The total cost responds
most sensitively to changes in the national
factor conditions, such as interest rate
which cannot be changed. However, operating
factors contribute to hourly tooling and
machine expense are still sources of company
inefficiency that degrade manufacturing
performance. Thus, companies should
focus efforts to streamline manufacturing
operations and to improve performance by
more carefully considering the use of the
proper machine and the use of the
machine’s time.
5.3.4 Assembly
It has been shown that production of simple
stamped or injection molded parts can
be performed relatively inexpensively with
good manufacturing performance. These
economical components can only be sold
for a small profit. The real source of profit
growth is in the assembly of these components.
The production of subsystems is
becoming ubiquitous with the trend
towards modularization. With Portugal’s
relatively low wage, there is little reason to
ship simple components to higher wage
locations to assemble them.
Figure 17 shows the cost breakdown for
the assembly of the three part injection
molded components. Labor cost and the
overhead burden associated with labor
form the overwhelming majority of the
assembly costs. Portugal is ranked closely
with other emerging markets in the Czech
Republic and Brazil. Having the assembly
performed locally in these places is much
more cost effective than shipping the lowprofit
components to an assembler located
in France. These same tasks cost much
more to perform in France than in Portugal.
Additionally, the value-added profit from the
resulting subsystem is redistributed from
the customer to the Portuguese company.
Figure 18 shows the total cost breakdown
of the generic injection molded assembly
described above. The figure shows the
three component costs plus the associated
assembly costs. This shows that Portugal
must compete with emerging east
European countries such as the Czech
Republic in terms of cost. Furthermore,
Eastern Europe is closer to central
European customers than Portugal.
However, Portugal still maintains the cost
Figure 17: Injection Molding Assembly Costs
by Country
Figure 18: Total Assembly Costs by Country
$0.70
$0.60
$2.00
$1.80
$1.60
$0.50
$1.40
Costs in US $
$0.40
$0.30
Costs in US $
$1.20
$1.00
$0.80
$0.20
$0.60
$0.40
$0.10
$0.20
$0.00
Portugal
Czech R.
Brasil
France
$0.00
Portugal
Czech R.
Brasil
France
Energy Cost
Labor Cost
Part 3
Part 2
Overhead Labor
Cost
Material Cost
Assembly
Part 1
Global Strategies for the Development of the Portuguese Autoparts Industry
169

advantage over countries such as France
and Germany where the labor costs are
several times higher. Utilizing this advantage
is a key for future growth in Portugal.
5.3.5 Conclusions
The injection molding case study analyzes
Portuguese plastic injection molding operations.
Technical cost modeling is used to
evaluate the injection molding performance
of Portuguese companies using cost as a
benchmark. This study shows that the cost
of injection molded parts is highly dependent
on manufacturing efficiency.
Portuguese manufacturing performance
can be good in some instances and poor in
other cases for both stamping and injection
molding. Portuguese companies must pay
closer attention to the sources of inefficiency
within their manufacturing operations.
There exist both operational inefficiencies
that engineering capability could
improve, and equipment inefficiencies that
a better choice of parts production could
improve given the existing equipment. If a
company is to expand beyond Portugal’s
borders, then national factor conditions
should be taken into consideration.
Portugal needs to improve its manufacturing
performance up to world-class level
and reallocate labor to assembly processes
that can add considerable value to
automotive products. By improving profits
through value-adding assembly, companies
can start to afford higher levels of engineering
capability. In so doing, engineering
can reinforce manufacturing improvements
and focus on increasing the amount of
assembly operations. Thus, the process is
a positive feedback loop, continuously
improving the competitive position of the
Portuguese company. In this way, Portugal
can succeed in enough growth to follow the
emerging worldwide automotive paradigm.
5.4 Conclusions and Recommendations
170

PART II
The Portuguese
Autoparts Industry
Chapter
6
Logistics and Internationalization

Chapter 6
Logistics and
Internationalization
6.1. Introduction
This section of the report analyzes the
operations of the Portuguese industry outside
national borders. Two common situations
for the companies located in Portugal
were considered. The first addresses the
logistic strategies for sending products
from a national plant to a client located in
a foreign country. The second explores the
possibilities of expansion abroad and internationalization.
The first sections of the chapter conduct a
synthesis of the responsiveness and logistics
questionnaire data in a cost model
framework. Following an overview of important
aspects of the logistics cost model,
the model’s results are divided into several
logistics strategies. Next, these strategies
are compared to the discussion earlier in
Chapter 5. Then the reasons for differences
in absolute cost and strategy are
compared between countries and within
Portugal between companies. The countries
that were explored outside of Portugal
are Western European countries, Eastern
European countries, and Brazil.
A second part this chapter explores the
possibilities of expansion abroad and internationalization.
A special effort is made to
characterize the business operations in
Brazil. The analysis includes both a generic
assessment of the challenges and opportunities
to conduct business in Brazil, as
well as a detailed evaluation of alternative
decisions based on the logistics cost
model presented earlier in the chapter.
6.2. Logistics Cost Modeling
6.2.1. The Value of Logistics
Logistics functions usually take a back
seat in the daily operations of a company.
However, logistics plays an important role
in ensuring that orders are accurate and
deliveries are on-time. Suppliers need to
manufacture the right product, transport it
in a timely fashion and store the product in
the right place for prompt delivery in order
to have a competitive price for the customer
as represented in Figure 1. These
are qualities that any customer would
expect for the receipt of an order.
Customers notice when logistics does not
meet this minimum level of expectation.
Therefore, logistics functions balance the
assurance of meeting this expectation versus
the costs of doing so. Accurate orders
and on-time deliveries can be assured by
maintaining extra product inventory and
redundant transportation resources for
uncertain order disruptions that would jeopardize
the manufacturer’s reputation for
service. The extra product inventory, addi-

Figure 1:The important role of logistics
in a competitive market
1. Direct
Figure 2: Logistics Cost model Shipping Scenarios
Customer
Mfg. Site
Manufacturing
Right Product
2. JIT
Right Place
Right Time
Transport
Storage
Result in
Competitiveprice
for the customer
Customer
3. DC
Customer
JIT
Distribution Center
Mfg. Site
Mfg. Site
Additional sources of cost.
4. DC to JIT
Customer JIT Distribution Center
Mfg. Site
transportation arrangements add flexibility
to assure delivery, but they also add costs.
Therefore, though logistics cost contributes
moderately to the final cost of the product,
however, the worth of the company’s reputation
for accurate and timely service may
not be easily quantified.
6.2.2. Overview and Shipping
Scenarios
A logistics cost model was developed that
takes into account the implications for
logistics cost, time and flexibility of the
logistics operation. The model analyzes the
logistics constraints faced by the suppliers
due to their location, facilities, and access
to resources. The analysis explores different
logistical strategies and the balance of
uncertain risks versus logistics cost
through different lengths of disruption time.
Furthermore, if conditions change then the
appropriate strategy can be tested for its
robustness. How much do the conditions
need to change in order to change the
invested logistics strategy? These investigations
were made by analyzing four different
shipping scenarios shown in Figure 2:
direct shipping, JIT shipping, distribution
center shipping, and distribution center to
JIT shipping. In addition, these cost implications
for Portugal were examined for
other countries in order to see the conditions
under which Portugal might have a
competitive advantage.
6.2.3. Shipping Scenario Descriptions
SCENARIO 1:
Customer
Mfg. Site
The direct shipping scenario involves loading
an order into a truck and shipping it
straight to the customer according to their
specified demand. This is the most straight
forward shipping scenario, so it has the
advantage of simplified scheduling of shipments.
Other advantages of this scenario
are minimal manufacturing site warehouse
inventory and minimal transportation time.
As soon as an order is completely manufactured,
it can be shipped immediately.
The truck drives directly to the customer
without any other warehousing detour.
However, there are several disadvantages
of direct shipping. First, manufacturing
must be flexible; it must respond quickly to
changes in demand or problems with delivery.
Second, partially full trucks are expensive
to send because the transportation
cost will be the same if the truck is full,
empty, or somewhere in between.
SCENARIO 2:
Customer JIT Mfg. Site
A partially-filled truck ship from the JIT
warehouse according to the specified
demand of the customer factory. The justin-time
shipping scenario involves loading a
full truck and shipping it to the just-in-time
warehouse and then using the cheapest
176

Figure 3: Logistics cost model overview
Figure 4: Schematic of logistics pull system
used in the cost model
Packaging costs
Boxing materials
Customer Demand
2500 products every 5 days
JIT shipment size
and frequency
JIT inventory
levels
Warehousing costs
Centralized distribution center
Just in time warehouse
FIFO or LIFO
Mfr shipment size
and frequency
DC inventory levels
DC shipment size
and frequency
Transportation costs
Three truck sizes plus shipping
containerDiesel prices included
Manufacturing Production Cycle
3000 products every 6 days
Inventory carrying costs
Logistics time calculated
truck to deliver the order locally. This scenario
has the flexibility to supply immediate
changes in customer demand without disrupting
the manufacturing schedule.
Another advantage is that full trucks travel
most of the distance to the customer, helping
to reduce the transportation cost.
However, the disadvantage of the just-intime
constraint of shipping only full trucks
to the warehouse is that safety stock is
required at the warehouse. Furthermore,
the cheapest JIT alternative uses medium
or large trucks, but this may be unrealistic
because of infrequent JIT deliveries. This
alternative is nearly as inexpensive as the
direct shipping. However, the safety stock
and more frequent deliveries drive the
logistics costs up a few percent.
SCENARIO 3:
Customer Distribution Center Mfg. Site
A filled truck with multiple products delivers
to a centrally located distribution center.
Then using the least expensive truck the
order is shipped the remaining distance
according to the specified demand of the
customer. There are several advantages for
use of this scenario. First, frequent deliveries
are made to an inexpensive distribution
center. Second, the distribution center
can respond to changes in demand or delivery
problems without disrupting the manufacturing
schedule. Third, frequent, full
trucks travel part of the distance to the customer
helping to reduce the transportation
cost. However, one disadvantage of this
scenario is that partially full trucks travel
the remaining distance to the customer.
This is closer than the distance partially full
trucks travel in the direct scenario, but further
than the JIT distance. Also, sending
large, full trucks require higher inventory
levels at the distribution center.
SCENARIO 4:
Customer JIT Distribution Center Mfg. Site
A filled truck with multiple products delivers
to a centrally located distribution center. A
filled truck ships to a JIT warehouse.
Partially filled trucks ship from the JIT warehouse
according to the specified demand
of the customer factory. The distribution
center to just-in-time shipping scenario
Global Strategies for the Development of the Portuguese Autoparts Industry
177

uses full trucks to travel from the manufacturing
site to the distribution center, full
trucks from the distribution center to the
JIT warehouse, and then local delivery
trucks to the customer. The first advantage
is that frequent deliveries are made to an
inexpensive distribution center, like the
plain distribution center scenario. Second,
JIT warehouse costs are low due to minimal
inventory levels. Third, full trucks deliver
from the distribution center to the just-intime
warehouse to help keep transportation
costs low. The disadvantages include
multiple loadings and unloadings, two
warehousing costs, longer transportation
distance, and additional time from manufacture
until delivery to the customer.
Four different sources of cost included in
the model are packaging, warehousing,
transportation, and carrying costs are
shown in Figure 3. The packaging costs
that are included assume the box purchase
price is proportional to the surface area of
the box material. The box can have parts
simply dumped into it or the box can have
compartments for packing of individual
parts. Warehousing costs are based primarily
on the rental of space and handling
costs. Average inventory time in the warehouse
is calculated by an inventory
accounting policy, either First In-First Out
(FIFO) or Last In-First Out (LIFO) methods.
Then the average daily number of parts is
determined for each warehouse and used
for the calculation of the warehouse costs.
The transportation costs depend on the
size of the truck, how full the truck is and
how far it is travelling. The destination distance
input is already described above. The
filling of a truck depends on the order size
and truck size. Truck filling helps determine
the transportation cost per part for each
particular truck size. The size of a truck
chosen on the minimal cost of shipping the
particular order size. Carrying costs are
minimal because of the low-value parts production.
Between these four costs, the predominant
sources of logistics costs are
warehouse inventory and transportation.
Therefore, these factors are the main focus
of the logistics analysis.
In the logistics model, customer demand
determines the shipments leading up to its
delivery. Thus products are pulled through
the logistics network according to the customer
demand shown schematically in
Figure 4. Customers determine the
demand schedule for the delivery frequency
and the amount of each delivery. This
demand schedule, in scenario 4, determines
the release of trucks from a JIT
warehouse to the customer. The JIT warehouse
needs to receive shipments store
products until the shipment should be
sent. The release of trucks from the JIT
warehouse triggers shipments from the distribution
center to the JIT warehouse. The
distribution center release of product triggers
shipments to the distribution center
from the manufacturing site. The shipping
of inventory spurs the next production
cycle. In this way, demand is drawn through
the supply chain given the input of the customer
demand.
6.3. Logistics Results
6.3.1. Model Variables
The primary logistics analysis performed
from the cost model used Lisbon, Portugal
as the origin of the product and Stuttgart,
Table 1 : Select Logistics Input Variable
Product variables
Production rate
Discount rate
Three trucks
Warehouse rent
2.1 Kg, 0.01 m 3 , $ 2.30
150 parts per hour
10%
Lengths are 3m, 8.5m, 16m
$ 250 /m 2 /month
178

Germany as the destination. Later in the
analysis, logistics costs were calculated for
shipping from other countries. For use in
the model, order size is broken into two
components, a daily demand rate and
demand schedule (or delivery frequency).
The demand rate is determined by the customer
demand input, which varied from
250 parts per day to 1250 parts per day.
These demand rates correspond to production
volumes of about 60,000 products to
about 300,000 products. The delivery frequency
or demand schedule is the number
of days between customer delivery. Thus, a
short demand schedule corresponds to
more frequent deliveries. Therefore, shipment
sizes can vary widely. The smallest
order size, or shipment, studied is 250
products / day * shipment every day = 250
product shipment size. The largest order
size studied is 1250 products / day * shipment
every 10 days = 12,500 products.
The smallest truck can fit 1500 products,
while the largest truck can carry up to
12,800 products. Additionally, some other
pertinent modeling parameters are listed in
Table 1.
6.3.2. Model Results
For each of the shipping strategies, the
logistics cost is broken down in Figure 5 by
sources of the expense. For direct shipping,
the predominant source of cost is
transportation. The only warehousing necessary
at the manufacturing site is only to
fill the next truck for shipment. The packaging
and carrying costs never account to
any significant amount under any strategy.
The products do not require individual packaging
and the carrying cost is minor
because of the low value of the stamped
assembly. For JIT shipping or distribution
center shipping, transportation cost is significantly
reduced compared to direct shipping
because less expensive, full trucks
are always shipped from the manufacturing
site to the JIT warehouse or to the distribution
center respectively. The addition of
inventory time at another warehouse
accounts for the higher warehousing cost
for both the JIT and distribution center
strategies. For the distribution center to JIT
strategy, the addition of another storage
site only accentuates the warehousing cost
relative to the transportation cost.
Figure 6 on the following page shows the
logistics costs from the four scenarios of
shipping from Lisbon to Stuttgart at typical
demand rates and delivery frequencies.
The plots in this figure show four daily
demand rates between 250 parts per day
and 1,000 parts per day. For each particular
plot the daily demand rate is kept constant
so that the production volume is constant.
Furthermore, each plot shows the percent
logistics cost versus demand schedules
from once every day to once every
Figure 5: Average Percent
Breakdown of Logistics Costs
100%
Percentage of Logistics Cost
80%
60%
40%
20%
0%
Direct JIT DC DC+JIT
Carrying Costs
Packaging
Transportation
Warehousing
Global Strategies for the Development of the Portuguese Autoparts Industry
179

Figure 6: Logistics Costs Shipping at 4 Demand Rates and 10 Delivery Frequencies
Shipping Strategies for 250 parts per day
Shipping Strategies for 500 parts per day
70%
70%
Percent Logistics Costs
60%
50%
40%
30%
20%
Percent Logistics Costs
60%
50%
40%
30%
20%
10%
10%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Direct JIT DC DC+JIT
Direct JIT DC DC+JIT
Shipping Strategies for 750 parts per day
Shipping Strategies for 1000 parts per day
70%
70%
Percent Logistics Costs
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10
Percent Logistics Costs
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Demand Schedule (days)
Direct JIT DC DC+JIT
Direct JIT DC DC+JIT
ten days. These results show that the best
shipping strategy is determined by the particular
circumstances of the automaker’s
production volume and by the frequency
with which orders are needed.
Starting with the daily demand rate of 250
parts per day, several trends are immediately
noticed. First, as the demand schedule
lengthens the logistics costs decrease.
This effect is simply due to putting more
parts in the same-sized truck. As the truck
fills, the cost is spread among more parts.
The second trend involves the difference in
cost between the four scenarios. For daily
deliveries, the direct shipping scenario is
by far the most expensive, while the JIT
shipping scenario is the least expensive.
As explained above, the direct shipping
scenario would necessitate a virtually
empty truck traveling daily from the manufacturing
site to the destination. However,
the JIT scenario permits trucks traveling to
the JIT warehouse full. This is the greatest
source of logistics cost difference at this
demand frequency. This cost difference
continually diminishes until the range of 6
180

Figure 7: Logistics Strategy Feasibility Map
Figure 8: Logistics Costs at a
Demand Rate of 500 Parts per Day to Two Destinations
Demand Schedule (days)
10
9
8
7
6
5
4
3
2
1
0
250
Direct Shipping Region
JIT Shipping Region
Percent Logistics Costs
70%
60%
50%
40%
30%
20%
10%
500 750 1000
Daily Demand Rate (parts/day)
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Direct JIT DC DC+JIT
to 8 days between deliveries. Within this
range, the distribution center and DC closely
match the logistics cost for direct shipping
to JIT scenarios. However, the best
strategy within this range is still JIT shipping.
The third trend is the decrease in
logistics costs as the daily demand rate
increases. This could be seen as more
easily filling a truck due to “economies of
order size.”
For the second trend concerning the comparison
between shipping scenarios,
another interesting observation appears.
As the daily demand rate increases, the frequency
at which the least expensive strategies
switch shortens. The daily demand
rate of 250 parts per day switched shipping
scenarios when the frequency approached
every ninth day. However, for a demand
rate of 1000 parts per day, the change in
logistics strategy is on the fourth day. By
assembling these scenario crossovers, a
feasibility map is constructed in Figure 7
showing the conditions under which the
less expensive shipping scenario will prevail.
The feasibility map gives an indication of
the circumstances that justify a JIT shipping
strategy or a direct shipping strategy.
The direct shipping scenario is advantageous
when an order size approaches that
of a truckload. So for the combination of a
high daily demand rate and a long demand
schedule, direct shipping is a more feasible
option than JIT shipping. As order size
increases to fill up the truck, the average
cost decreases. With a full truckload, the
timing and loading circumstances of the
shipping for the two scenarios are similar.
The advantage of direct over that of JIT is
that no extra inventory storage is incurred
in the direct scenario.
Just-in-time shipping prevails when the
daily demand rate is low and the demand
schedule is frequent. The advantage that
JIT shipping has in this situation is that full
trucks do not leave the manufacturing site
as frequently as orders are needed.
Rather, trucks leave the manufacturing site
only when full to travel to the JIT warehouse.
Thus, one truckload can carry many
orders to the JIT warehouse. Then smaller,
partially full trucks can make frequent local
deliveries to the final destination. These
are the advantages that make the JIT shipping
strategy less expensive than direct
shipping under these circumstances.
Therefore, the main tradeoff is using the
most inexpensive truck versus storing huge
truckloads at JIT warehouses.
In the middle ranges of the demand schedule
in Figure 6, however, the scenarios
that include the distribution center come
close to being cost-effective alternatives.
Between demand schedules of 4 to 6 days
for a daily demand rate of 250 parts per
day, distribution center to client or distribution
center to JIT become nearly as good as
the direct or JIT only strategies. These distribution
center scenarios only become
more cost effective when shipping to multi-
Global Strategies for the Development of the Portuguese Autoparts Industry
181

ple destinations. The reason is that going
through the distribution center reduces
total truck travel distance, while in the JIT
scenario, trucks must be sent the entire
distance to each destination. Figure 8 is an
example of shipping to two destinations
with a demand rate of 500 parts per day.
Here, shipping to the Paris distribution center
and then to the automaker is less
expensive than the other three shipping
scenarios for every demand schedule
except daily delivery. When the same product
must be shipped to multiple locations,
the overall use of a distribution center is a
less expensive option. When many foreign
market destinations exist, the distribution
center scenarios might be cost-effective.
Thus, a distribution center shipping scenario
is probably the best option for a larger
market presence.
6.3.3. Logistics Disruptions
Though the best alternatives seem to be
direct or JIT delivery at high demand, there
are other intangible factors to consider
before going with this decision. These
other intangible factors include the certainty
of the demand size, delivery frequency,
the reliability of timely, accurate orders, the
possibility of stock-outs and the flexibility
of the manufacturing operations. Tradeoffs
must be weighed for the low logistics costs
on one side versus the possibility of paying,
or not being able to pay, for an intangible
factor. Though these tradeoffs have
Figure 9: Logistics Costs at 4 Demand Rates and 10 Delivery Frequencies
Shipping Strategies for 250 parts per day
Shipping Strategies for 500 parts per day
70%
70%
Percent Logistics Costs
60%
50%
40%
30%
20%
10%
Percent Logistics Costs
60%
50%
40%
30%
20%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
10%
0%
1 2 3 4 5 6 7 8 9 10
Direct JIT DC DC+JIT
Demand Schedule (days)
Direct JIT DC DC+JIT
Shipping Strategies for 750 parts per day
Shipping Strategies for 1000 parts per day
70%
70%
Percent Logistics Costs
60%
50%
40%
30%
20%
Percent Logistics Costs
60%
50%
40%
30%
20%
10%
10%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Direct JIT DC DC+JIT
Direct JIT DC DC+JIT
182

always been present, the past surge in
interest in approaches such as kanban and
materials requirements planning has made
the tradeoffs more critical. Now, a customer
has the power to demand service: on
time, perfect deliveries according to its
specified schedule. The manufacturer must
be prepared to do this. Though the best
cost solution is followed, safety nets are
put into place to ensure this level of service.
The level of assurance of service
depends on the amount of money invested
in production flexibility, delivery contracts
with trucking companies, warehousing of
inventory, and alternative transportation
provisions.
This analysis studies only the costs needed
to prevent a failed delivery? Studying
the costs of accurate orders and reliability
are more intangible factors that were evaluated
in depth in Chapter 5. When the supply
chain is unexpectedly disrupted, the
logistics system must be prepared to still
ship products so that the problem does not
propagate to the customer. Stock-outs,
missed shipments and incomplete orders
Figure 10: Added Logistics Cost Due to Safety Stock to Protect Against Undelivered Shipments for the 4 Shipping Scenarios
Increase in cost for direct shipping scenario
Increase in cost for JIT shipping scenario
AddedLogistics Costs from Disruption
12%
10%
8%
6%
4%
2%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
AddedLogistics Costs from Disruption
12%
10%
8%
6%
4%
2%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
1 Shipment
2 Shipments
1 Shipment
2 Shipments
AddedLogistics Costs from Disruption
12%
10%
8%
6%
4%
2%
0%
Increase in cost for distribution center scenario
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
AddedLogistics Costs from Disruption
12%
10%
8%
6%
4%
2%
0%
Increase in cost for DC +JIT scenario
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
1 Shipment
2 Shipments
1 Shipment
2 Shipments
Global Strategies for the Development of the Portuguese Autoparts Industry
183

Table 2: Best Truck Size and Logistics Cost from Lisbon Based on
Customer Demand (parts/days) and Shipping Scenario
Figure 11: The Influence of Product Value on Direct
Shipping Logistics Costs
Scenario Low Demand Medium Demand High Demand
Best truck Logistics Best truck Logistics Best truck Logistics
Size Cost Size Cost Size Cost
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
Direct Medium 30% Large 15% Large 12%
Just-in-time Medium 20% Medium 14% Large 11%
Distribution center Medium 25% Large 17% Large 14%
DC to JIT Medium 28% Medium 21% Large 18%
Percent Logistics Costs
Average logistics cost reported in direct questionnaires
0%
$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0 $16.0 $18.0 $20.0
Product Value ($ per Kg)
Product value range in logistics case study
are bad business and do not promote good
customer service. Therefore, the logistics
system should be prepared for uncertainties
such as production problems, truck
procurement, truck delays, strikes, weather
and many others. The cost of being prepared
for these eventualities vary with the
type of shipping strategy and the demand
schedule that is followed. The cost of such
preparedness usually results in added
buffer inventory at the downstream warehouse.
This is also how the logistics model
protects against disruptions.
Figure 9 shows the costs when accounting
for the added costs of inventory to protect
against one undelivered order. It is difficult
to tell how the costs change due to the disruption
of one shipment. With a close look,
least cost strategies remain the same, JIT
for high delivery frequencies and direct for
low delivery frequencies, despite the
increase in logistics costs overall.
It can be seen that under certain combinations
of demand rate and delivery frequency
the optimal shipping scenario for one
missed shipment is close to switching
strategies. At low demand rates, 250 to
750 parts per day and at a demand schedule
of about 4 days, the strategies that
include the distribution center are as competitive
as the direct and JIT strategies.
These distribution center strategies
become feasible when the safety stock is
several shipments. For small order sizes,
the safety stock could be easily more than
two shipments, while for large order sizes
the amount of safety stock would be unreasonably
large. When situations arise that
require safety stock of multiple shipments
for multiple destinations, the above effects
are combined to make the distribution center
strategies become more cost effective.
In Figure 10, it is seen that the incremental
increase in logistics cost greatly increases
as the need to protect against disruptions
grows. With one shipment of safety stock
guaranteed, the additional cost can be
seen due to keeping extra inventory on
hand. For the direct, JIT and distribution
center to JIT strategies, the added logistics
costs roughly by a factor of 100%.
However, for the distribution center strategy
the increase in cost to maintain the
extra second shipment of stock is roughly
only 50% more. Therefore, a further
increase in safety stock would make this
strategy cost effective. The high level of
stock can have two reasons mentioned
above, protection and service multiple locations.
This conclusion indicates how possible
growth into Europe could occur. For a limited
customer base outside Portugal, the
best options are to ship via the direct or JIT
strategies as shown in Table 2. However,
as Portuguese market penetration grows in
184

Europe, the low cost strategy should
change to a distribution center based logistics
plan. A distribution center allows for
the most cost-efficient transportation of
multiple products to multiple destinations
in central Europe. Then regional shipments
to customers can be accomplished with little
extra cost. Additionally, the distribution
center strategy also allows for better management
of disruptions by removing some
pressure on manufacturing to make up for
the lost shipments. Shipping directly to
many customers in the same region
becomes too costly and too dangerous to
manufacturing operations with a large
European presence.
The logistics cost percentages in this study
seem to be fairly high. The direct shipping
scenario calculates a logistics cost of
roughly 12 % for the stamping assembly.
This stamping assembly was used in
Chapter 5 and represented an average of
the types of assemblies that were reported.
The total cost for this assembly is low,
approximately $2.30, and $1.10 on a
mass basis. However, the indication given
by companies interviewed is that logistics
only contributes to about 3 % to 4 % of the
overall cost.
This can mean several things. First, the
input parameters used for modeling the
cost could either be too high or simply not
correct. Second, the companies could be
inaccurately reporting their logistics costs.
Figure 12: European Logistics Costs
Direct Strategy for 500 parts per day
JIT Strategy for 500 parts per day
60%
60%
Percent Logistics Costs
50%
40%
30%
20%
10%
Percent Logistics Costs
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Lisbon Zaragoza Paris Prague
Lisbon Zaragoza Paris Prague
Distribution Center Strategy for 500 parts per day
DC to JIT Strategy for 500 parts per day
60%
60%
Percent Logistics Costs
50%
40%
30%
20%
10%
Percent Logistics Costs
50%
40%
30%
20%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Lisbon Zaragoza Prague Paris
10%
0%
1 2 3 4 5 6 7 8 9 10
Demand Schedule (days)
Lisbon
Zaragoza / Prague
Paris
Prague
Global Strategies for the Development of the Portuguese Autoparts Industry
185

Third, the representative assembly is not
representative of the types of products
these companies produce. Rather the products
these companies produce have more
value-added than this study analyzed. For a
logistics cost of 3 % to 4 %, the product
value would approach roughly $ 5.00 per
kilogram as shown on Figure 11.
6.3.4. International Comparisons
In trying to determine the degree to which
Portuguese firms have an advantage or
disadvantage for location in logistics, the
costs were analyzed for three other countries.
The logistics costs for shipments
from Zaragoza, Paris, and Prague were analyzed
along with Lisbon. The results are
shown in Figure 12. The cost differences
that result from the geographic distance to
the destination are approximately 20% of
the logistics cost. This cost does not
account for changes in the logistics infrastructure,
but rather only geographic differences.
This significant cost difference cannot
be removed. This cost disadvantage
could potentially be made up for, by other
cost-efficient business activities, such as
assembly. The bulk of the other differences
are the result of higher than optimum truck
costs due to unfilled trucks and warehousing
costs. Thus, the direct strategy has
greatest cost differences and the distribution
center to JIT strategy has the lowest
cost differences between the shipping
countries. Thus, companies should try to
minimize use of warehousing where possible
and arrange for the shipment of full
trucks. Though, this ameliorates the cost
for Portuguese shipping, however, it cannot
overcome all differences in cost.
6.3.5. Logistics Strategies
Logistics systems can be used to gain competitive
advantage by implementing the
appropriate logistics policies that correspond
to a chosen competitive strategy. As
Table 3: Competitive Logistics Strategies
Mode of Competition Product Innovation Customer Service Cost Leadership
Goals of Logistics
Availability
Rapid delivery
Minimum cost
Volume and product
flexibity
Ability to handle
irregular order sizes
and infrequent
shipments
Consistent delivery
Availability
Flexible to customer
changes
Minimal acceptable
customer service
Inventory Policy
Tradeoff between high
safety stock for
availability and low
stock for flexibility and
to prevent
obsolescence
Local inventory for
market presence and
fast, consistent delivery
Minimal inventory
levels
Transportation Policy
Rapid transportation
(air freight)
Less-than-truckload
shipments
Less-than truckload for
customer delivery
Truckload for warehouse
restocking
Low cost (rail)
Truckload shipment only
Private fleet to have
better control and lower
costs
Facilities
None, direct delivery
Leased warehouses
when required
Possibly local,
regiona, and national
warehouses
Centralized,
consolidated,
automated warehouses
186

discussed in Chapter 5, the concept of
appropriateness of the manufacturing strategy
also applies to the logistics strategy.
In order to follow a chosen competitive
strategy, the entire firm must be focused
on its objective. Thus, the optimal logistics
strategy is dependent on how well the current
logistics system conforms to the
manufacturing operations and the overall
business plan.
There are three readily discernible strategies
that can be utilized for competitive
advantage. Logistics strategies based on
innovation, customer service and low-cost
place different demands on a firm’s logistical
infrastructure. These demands are
often contradictory between the different
logistics strategies, but the demands
should be self-consistent with the manufacturing
strategy as mentioned before. A
company needs to be clear about which
strategy they are following and implement
the actions necessary to carry it out.
The innovation-based strategy requires
flexibility within the logistics system. The
requirements of such a logistics strategy
are high safety stocks to prevent stockouts,
guaranteed rapid and consistent
delivery, reliance on air freight when necessary,
the ability to handle small orders,
and the ability to manage irregular shipping
schedules. The goals of this strategy are
clear for the transportation of goods.
However for the inventory policy and warehousing,
the goal is not so clear. On one
hand, the product should be close to the
customer for quick availability and rapid
delivery. But on the other hand, manufacturing
operations often switch to new
products so inventory obsolescence is a
potential problem. Therefore, this situation
needs a compromise between the market
forces for availability and the product
changing. The innovation-based strategy
corresponds to the direct shipping scenario.
The customer service strategy is several
different strategies all with the focus of
providing some sort of service. There are
several modes of business, which tailor the
logistics operation in certain ways. The first
service strategy is full service, which provides
a broad product line. With many products,
the manufacturing operation
requires frequent die changes and smaller
lot sizes which raise production costs. The
high level of many different products
increases the inventory costs, a necessary
fact in order to provide the full service. This
strategy can be subdivided according to
whether delivery time or cost is more important.
A company following this strategy can
be sluggish in response time to ensure that
the cost will be kept low, or the company
can be more responsive with a moderate
cost. The full customer service strategy is
most closely aligned with the distribution
center to JIT shipping scenario. The next
service strategy is the narrow product line,
which limits the products the company produces
in order to provide a low cost and
rapid delivery. A company following this
strategy specializes according to the products
it offers to streamline the manufacturing
operations and logistics systems of
the company. The narrow customer service
strategy corresponds to the JIT shipping
scenario.
The low cost strategy offers neither product
customization nor rapid delivery. This strategy
is not for companies wishing to differentiate
its products or services. In this
case, the logistics is optimized to be costefficient
with little flexibility in manufacturing
and logistics. Thus, this position is
incompatible with short lead times and
responsiveness. Table 3 shows a summary
of strategies described above for logistics
operations.
6.3.6. Conclusions and
Recommendations
The results were used to compare the different
shipping alternatives and to choose
the strategy that is optimal given the situation.
Because the analysis is based on relative
comparisons, the results are valid
although the reported logistics costs are
lower. The strategies outlined in the previous
section outline some the important
Global Strategies for the Development of the Portuguese Autoparts Industry
187

considerations when choosing a shipping
system.
This study points to two primary logistics
strategies based upon good market penetration.
Furthermore, these strategies must
fit into the overall manufacturing and business
strategy in order to achieve good costefficiency.
The first is a broad customer
service strategy with only a centralized distribution
center closer to the heart of
Europe. In this strategy, manufacturing performance
would be high to allow more flexibility
to produce what is needed at the
time. The second is a narrow customer service
strategy that contains only a JIT network
that requires full truck transportation
out of Portugal. This strategy would require
a more disciplined, precise high performance
manufacturing operation with rigid
shipping dates. These recommendations
require substantial changes to the way
some businesses currently operate within
Portugal.
6.4. Internationalization
6.4.1. Introduction to Strategies for
Internationalization
Given the trends described in Chapter 1, 2
and 3, Portuguese firms that want to continue
to grow need to consider looking beyond
Portugal’s borders for business. A firm decision
to expand may vary depending on the
market circumstances and business climate.
There are many different opportunities
and possibilities for expansion into other
countries. The difficulty is to try to determine
which opportunity will reap a competitive
advantage and where the best locations are
to accomplish/achieve an advantage. There
are two ways to gain an advantage or to offset
domestic disadvantage through internationalization.
The first is to spread business
operations among countries to serve the
market. The second is the ability of a multinational
company to coordinate among the
distributed operations.
The location of activities most related to the
customer, such as marketing, physical distribution,
and after-sale service is usually
tied to where the customer is located. The
location of other activities may also be tied
to the customer’s location because of high
transportation costs or the need for close
business dealings. In many service industries,
the production, delivery, and marketing
of the service must take place near the customer.
Usually a firm must physically locate
the capability to perform these activities in
each of the nations in which it operates. In
contrast, activities such as manufacturing
and in-bound logistics as well as support
activities such as technology development
and engineering innovation can be separated
from the customer’s location.
The important choices about internationalization
can be summarized as positioning
and coordination. First, positioning choices
are whether to concentrate business activities
in one or two countries, or to spread
them among many countries. The second is
the choice of countries in which to locate the
particular business activities. Successful
competitive advantage can come about from
concentrating activities in Portugal and
exporting components or finished goods to
foreign markets in Europe or overseas. This
occurs in the autoparts industry because
there are significant economies of scale in
manufacturing and there are advantages in
locating related manufacturing activities in
the same place to allow better coordination.
Another way to gain an international position
is to spread activities out among several
nations. Distributed business operations
involves direct foreign investment. This internationalization
strategy is favored in industries
where there are high transportation,
communication, or storage costs that make
it inefficient to operate from one central
location. The Portuguese firm can benefit
from this strategy when there are risks in
performing a business activity in one location,
such as exchange rate risks, political
risks, and risks of supply interruption.
Distributed activities are also favored where
the foreign needs differ substantially from
the local needs. Another important motivation
for spreading activities among countries
is to enhance local marketing in a foreign
country. This signals commitment to local
188

customer and provides greater local responsiveness.
Furthermore, this strategy can
also allow a firm to collect expertise in their
operations due to information gained from
several foreign locations.
Government usually uses its power by applying
tariffs, quotas, and local content requirements.
In order to create benefits within a
country, a government typically wants a company
to locate entirely within it because this
is seen as creating benefits and spillovers
to the country beyond contributing local
products. Also, distributing some activities
may sometimes allow the benefits of concentrating
activities to be gained. For example,
by obliging a government’s local content
requirement the final assembly of a product
may allow the import of components from a
large-scale, centralized manufacturing operation
located elsewhere.
Locating activities is important for internationalization
strategies. The following is a
list of reasons why location is so important
in an internationalization decision:
• A powerful benefit from having several different
locations is that a company has the
ability to spread its business activities
among the various locations;
• A standard reason for locating an activity
in a particular nation is a favorable factor
condition costs;
• A company can tap into local factor costs,
perform R&D, gain access to specialized
local skills, or develop relationships with crucial
customers;
• A company locates activities if the government
makes it a condition for operating
there;
• Locating assembly, marketing, or service
activities in a country is important to effectively
sell to and provide services for local
customers.
These potential advantages can also have
negative consequences if not handled carefully:
• Multiple locations are difficult to integrate
and coordinate with the home base;
• Local managers may want to retain some
level of autonomy from the home base;
• Difficulties in transforming the company
into an international one can cause the company
to lose the potential advantage.
The second important consideration in a
company’s internationalization decision is
the ability to coordinate and organize a dispersed
company. With international locations,
the benefits include accumulated
knowledge and expertise acquired at the
additional locations. A company coordinating
all its marketing departments around the
world can receive an early warning of industry
changes by spotting industry trends
before they become broadly apparent.
Furthermore, if distributed manufacturing
operations are coordinated, a firm may be
able to react to shifting exchange rates or
factor costs. Coordination can also improve
and increase a company’s ability to locally
differentiate its products with other multinational
customers. Coordination can also
improve the relationships with local governments
and can add flexibility for responding
to competitors. Even with significant benefits
to coordination, achieving coordination
among various locations in a global strategy
involves enormous organizational challenges
because of organization redundancy,
scheduling complexity, linguistic differences,
cultural differences, and reliable information
exchange.
These internationalization factors should be
carefully considered when making a decision
about expansion into another country.
Therefore, the following sections will focus
on a particular case of interest to the
Portuguese companies: Brazil. Based on
exiting literature and direct interviews in the
Country, the overall business conditions for
the autoparts industry in the region will be
explored. The opportunities and challenges
for potentially investing companies are discussed,
and several internationalization
scenarios are considered. These are then
Global Strategies for the Development of the Portuguese Autoparts Industry
189

Table 4: Major Areas of Brazilian Autoparts Suppliers
Speciality Number of Companies Percentage
Stamped parts 74 14.20
Engines and components 48 9.21
Screw machined parts 37 7.10
Seats and coverings 25 4.80
Electric material 25 4.80
Electromechanical 24 4.61
Rubber devices 22 4.22
Plastic parts 22 4.22
Screw and nuts 21 4.03
Finish parts 21 4.03
Source: SINDIPEÇAS; Only categories with more than 20 firms are presented
evaluated based using the cost models
described in Chapter 6 and the previous sections
of this chapter. Finally, conclusions
and recommendations are presented.
6.4.2. The Brazilian Autoparts
Industry
OVERVIEW OF THE AUTOPARTS MARKET
The approximately 1,300 autoparts companies
manufacturing in Brazil generated
total revenues of US$ 17 billion in 1996,
and employ more than 200,000. Of the
total, 530 represented 85% of the production
volume. The Brazilian auto parts market
is supplied 82% by local manufacturers
and 18% by imports. While Brazilian based
vehicle assemblers have always been
mostly multinational companies, the
autoparts manufacturers principally have
been small and mid-sized Brazilian familyowned
companies. About 70% of the companies
established in Brazil are locally
owned manufacturers. Within these, 400
have more than 150 employees. Slightly
more than half of the sales (60%) are
directed to the assembly market, while
20% go towards replacement and 15% for
exports. The major areas of operation of
the firms are presented in Table 4.
With the opening of the Brazilian market,
the industrial landscape is undergoing a
dramatic change. The Brazilian autoparts
industry is undergoing an extensive transformation
due to increased competition
from foreign companies together with
upgraded standards of the locally-based
assemblers. From 1997 to 2002, new and
existing companies in the sector are
expected to invest over US$ 6 billion in the
country. In order to compete against the
surge of foreign competitors, local companies
need to invest in new production techniques
and plant as well as invest in world
class management practices. One of the
major problems for Brazilian suppliers is
the extremely high cost of capital, due to
the monetary policies associated with currency
stabilization after the recent financial
crisis. Moreover, the fall in demand associated
with high interest rates makes matters
even worse. With the exception of the
year of 1994, the average net profit margin
of the suppliers registered in SINDIPEÇAS
has been negative since 1991.
With reduced turnover and profits and high
interest rates, many local Brazilian companies
are forced to look for foreign investors
or risk closing. Therefore, although some of
these family owned autoparts firms have
been able to upgrade their capabilities,
most are being acquired by multinational
companies, forming joint-ventures with
them, or simply being replaced by foreigners.
SINDIPEÇAS, the national association
of autoparts producers, estimates
that 40% of the national owned companies
will not be able to survive the market opening
and increased competitiveness and
190

most are likely to shut down operations
within the next three years. The survivors
will be technologically advanced companies
with strong links to international partners.
The strongest Brazilian-owned autoparts
manufacturers will also have become global
players. Some of the more dynamic are
pursuing an aggressive acquisition strategy
in South America, but also in Europe and
the US.
Local manufacturers supply over eighty two
percent of the total Brazilian market for
auto parts. However, OEM’s high demand
for quality, price and prompt delivery at a
competitive price, cannot yet be met by the
local autoparts manufactures in all categories
because they lack adequate
resources to invest and modernize. The
remaining share of the local market that is
supplied by imports was estimated by
SINDIPECAS to be $3.6 billion in 1996,
and is concentrated in higher technology
based products that compete strongly
against local products.
Many international firms are exporting
parts and vehicles manufactured between
Brazil and Argentina, to maximize tariff benefits
from Mercosur as well as close geographic
proximity for sourcing between the
two manufacturing sites. Brazilian and
Argentinean firms are also developing
strategic partnership to maintain and
expand market shares. Where components
manufactured in either Brazil or Argentina
are inadequate, inputs are being sourced
from European suppliers, which more and
more are establishing manufacturing facilities
in Brazil to better supply the market.
Foreign firms are investing heavily in the
Brazilian autoparts sector through acquisition
of new plants and joint ventures with
Brazilians firms. The long established foreign
autoparts manufacturers in Brazil
such as Lucas, Bosch, Dana, Magnetti
Marelli, are expanding their presence with
new investments and acquisitions of companies.
These multinational companies are
also relying on the fact that international
assemblers are drawing their original suppliers
to manufacture in the Brazilian market,
in particular the European ones. Ford
alone has attracted 30 suppliers to develop
the Fiesta project, and Chrysler has
lured Detroit Diesel to Brazil for their new
manufacturing operation in the southern
state of Paraná.
THE POLICY REGIME
In mid-1995 the Government installed its
current policy for the automotive sector,
called “The Brazilian Automotive Regime”.
The program described in Chapter 2 benefits
local manufacturers of vehicles, agricultural
machinery and autoparts who have
an export plan approved by the Secretariat
of Industrial Policy (SPI) of the Brazilian
Ministry of Industry. The Brazilian regime
will expire on December 31, 1999 as well
as a comparable regime in Argentina.
Beginning on January 1, of the year 2000
all Mercosul countries (Brazil, Argentina,
Paraguay, and Uruguay) will adopt the
same rules in dealing with imports and will
have adopted a common external import
tariff of 16% for autoparts. Recent difficulties
in the negotiations regarding a common
automotive regime after January 1,
2000 may result in the keeping most of the
actual program framework.
The National Bank for Economic and Social
Development (BNDES) has put in place a
number of programs to foster the development
of the industry:
• The “Support Program for the Autoparts
Industry” is a long term loan program specially
created to help the local auto-part
industry become competitive and expand
production capability. This credit program
offers financing for up to 8 year term for:
the introduction of new administration techniques;
modernization of production
processes; introduction and development
of quality control systems; improvements
in logistics; development and upgrade of
technology systems; development of technology
agreements; training; mergers and
acquisitions; development of new suppliers
and development of partnerships for productivity
upgrades. Nevertheless, even sub-
Global Strategies for the Development of the Portuguese Autoparts Industry
191

sidized interest rates in Brazil can be quite
high unless the supplier carries significant
clout;
• The credit program Finame, finances up
to 100% of the purchases of domestic
manufactured plant. BNDES has been giving
a particular emphasis in generating
larger and more competitive suppliers
through mergers and acquisitions.
For the day-to-day business, companies
have to deal with the Brazilian complex tax
systems. There are two major types of
taxes in Brazil, reimbursable taxes that are
similar to a Value Added Tax (VAT) and nonreimbursable
taxes, which are viewed as a
social tax:
• The non-reimbursable ‘social’ tax of
2.65% is due on each sale of goods
between companies, from raw material
sourcing through final sale to the end user.
Therefore, having multiple stages in the
supply chain structure can have substantial
impact in the final product cost. There are
two reimbursable taxes;
• The reimbursable ICMS States sales tax
affects all “goods under transport” as it is
calculated on the invoiced sales price of all
goods produced, manufactured or assembled.
The rate varies by State and by application,
ranging from 2% to 18%. The ICMS
is 18% in São Paulo, but is much lower, on
the order of 10 to 12% in some Brazilian
states;
• The reimbursable IPI tax affects all industrial
goods and the rate ranges from 0% to
30%. The average IPI charged against
autoparts for cars and light commercials is
16% whereas the average IPI against
autoparts for trucks is 4%. An important
aspect of both these taxes is that the rate
can be negotiated with the state.
The objective of the Government has clearly
been to promote local manufacturing,
either through national or multinational
companies. Therefore, the overall policy
regime creates very adverse conditions to
imports of autoparts. Overall, the import of
a particular component has a direct penalty
on the order of 35% of the FOB price of
the product. This charge is imbedded in a
Table 5: Hypothetical Cost Buildup for Imported Autoparts
vs. Price of Locally Manufactured Autoparts
Imported Locally Imported
Charge Item Autopart Produced Automotive
Regime
FOB Price of Product $ 10,000.00 $10,000.00 $10,000.00
Freight (12% of FOB) $ 1,200.00 $ 1,200.00
Insurance (2% of FOB) $ 200.00 $ 200.00
CIF Price of Product $ 11,400.00 $10,000.00 $11,400.00
Import Duty (16%; 2% FOB price) $1,600.00 $960.00
IPI (16%: CIF Price + Import Duty) $ 2,080.00 $ 1,600.00 $1,977.60
ICMS (18% CIF price + Import duty + IPI) $ 2,714.40 $ 2,088.00 $2,580.77
Charges Merchant Marine Tax (25% Freight) $ 300.00 $ 300.00
Warehouse at Port (0.5% of CIF price) $ 57.00 $ 57.00
Foremanship ($ 10.84 per metric ton) $ 10.84 $ 10.84
Warehouse Tax (20% foremanship + warehouse) $ 13.57 $ 13.57
Service Tax (5% of foremanship + warehouse) $ 3.39 $ 3.39
Warehouse tariff ($ 0.42 per ton) $ 0.42 $ 0.42
Bank tariffs (0.2% of CIF) $ 22.80 $ 22.80
Other taxes for unrestraint cargo (2% CIF) $ 228.00 $ 228.00
Other tariffs (1% of CIF) $ 114.00 $ 114.00
FINAL COST $ 18,544.42 $13,688.00 $ 17,668.39
Source: US Trade Department. FOB value, insurance, freight, bank charges, IPI and duties are all assumed numbers
192

Table 6: Examples of State Incentives in Brazil
Paraná
Minas Gerais
Rio de Janeiro
Santa Catarina
Rio Grande do Sul
Incentives on repaying VAT contributions, free land, infrastructure connections and
reductions in municipal taxes
Strategic industrial investment fund (Fundiest) used to attract automotive, agribusiness
and electronics companies
Incentives on repaying VAT contributions, free land, and infrastructure connections.
Note, PSA suppliers are also eligible to claim credits of up to 60-65% of total planned
plant value
Credit line based on amount of VAT owed (Proauto) specific to the auto industry
Tax incentives through the Fomentar (promote/stimulate) programme where the
state finances VAT payments
Source: Highfield Associates
complex tax and fee system, which is
accrued to the regular tax system. Some of
it is mitigated by the 40% reduction in
import duty that the companies registered
in the Automotive Regime benefit.
Nevertheless, the cost gap is still important.
The critical differences in the situations
are illustrated with the example presented
in Table 5.
Importers are also forced to pay on delivery,
effectively eliminating 180 day supplier
credit. If suppliers extend credit for more
than 180 days, full payment in Reais to the
Central Bank must be made no later than
180 days after delivery. The result is a
squeeze on working capital for the local
customer and higher financial cost.
In addition to cost issues that are directly
pressed through imports, there are also
important time and logistic issues that
have an indirect impact on cost.
Coordinating and expediting imported components
from a foreign origin to the manufacturing
and assembly plants of destination
are complex, costly and fraught with
time delays at each stage. Issues include
implicit time delays in traditional shipment
by boat, cost effective container shipment
sizes, customs clearance delays, among
many others. Moreover, imported components
typically carry a much higher stock
cost due to the unit volumes that must be
maintained as protection against logistics
delays. Provided that technology, quality
and price meet OEM requirements, locally
manufactured components therefore have
a competitive logistics advantage from the
OEMs’ perspective.
Besides the grants negotiated directly with
the federal government, often through
BNDES, most the states are offering some
form of incentive for local investment. For
the most part there are no specific rules
governing incentives and the package is
negotiated based on the company’s business
plan, in particular job creation forecasts.
Table 6 presents some examples of
incentives provided by states in Brazil.
6.4.3. Factor Conditions and Location
Issues
GENERAL FACTOR CONDITIONS
Car manufacturing is often seen to be more
expensive in Brazil than in some regions of
Europe. One of the critical issues determining
this difference is volume. Until
recently, the demand levels for each model
was extremely modest. Therefore, manufacturing
of these vehicles in smaller scale
naturally implied lower costs. Volume
increase in the past half decade has
helped lower costs, but it has not yielded
the anticipated reductions.
High manufacturing costs have the obvious
explanation of smaller than expected productivity
of the plants. Nevertheless, there
Global Strategies for the Development of the Portuguese Autoparts Industry
193

Table 7: Raw Materials Relative Prices
Raw Material
Comparison with
European Union Prices
Steel for Suppliers 100% - 120%
Steel for Assemblers 85% - 100%
Plastic for Suppliers 100% - 120%
are other important reasons. One of the
key reasons is raw material cost. The same
way that the Brazilian Government has protected
the auto industry, it also has enacted
legislation to protect the local steel or
the plastics sectors. There are important
taxes and tariffs associated with imports of
these raw materials. These eventually
could be of minor importance if there were
fierce competition in the local market. The
problem reported by the local parts suppliers
is that the situation is exactly the opposite.
Two or three large players control
steel and plastic. Moreover, according to
the interviews, they exercise their monopoly
power pushing prices up to the equivalent
of importing these raw materials.
The result, illustrated in Table 7, is that
local prices are often higher than those
practiced in Europe. This situation is not so
relevant for the assemblers because they
threat the supplier that they will import at
penalty rather than pay more. Given that
they are one of the top clients to the steel
and plastic producers, the threat is credible,
and they are able to have the normal
price. The problem is for suppliers. This is
valid for the small suppliers trying to gain
Source: Interviews
contracts, but also for those supplying the
assemblers in multiple regions of the world
and that do not have enough bargaining
power to counter the behavior of the raw
material supplier.
Another critical factor that has been having
severe implications to the supplier industry,
in particular the smaller national suppliers
is the interest rate. To fight the
recent devaluation of the Real, the
Government pushed the interest rates to
extremely high levels. The problem is that
this happened in a context of strong industry
shake-out where local companies have
to invest to keep up with the new market
requirement set by the foreign companies
entering the market, both assemblers and
suppliers.
Market interest rates for buying new equipment,
or upgrading facilities is as high as
3-5% per month. Even if companies apply
to the subsidized credit lines that BNDES
has in place, the interest rate is still on the
order of 20-24% a year. This means that
small companies without contacts or
dimension to use foreign credit are competing
with foreigners that invest in Brazil
using the European or American credit market
and having to pay 7-9% rates on the
money they borrow. Therefore, it is not surprising
that some of the smaller suppliers
state that their sole and clear objective to
enter a joint-venture, or even being
acquired by a foreign company is access to
cheap capital.
FACTOR CONDITIONS AND LOCATION
The factor condition issues addressed so
far affect firms regardless of where they
are located in Brazil. The remaining
aspects that will be addressed are related
to the relationship between location and
factor conditions. Supplier site location is
mostly determined by customers location.
In Brazil, the vast majority of the assemblers
are located in São Paulo state and
most of those are within the São Paulo
metropolitan area (VW, Ford, GM,
Mercedes Truck, Scania, Toyota, Honda,
Isuzu). The remaining four states with significant
automotive industry concentrations
are Paraná (Renault, Audi, Chrysler), Minas
Gerais (Fiat, Iveco, Mercedes), Rio Grande
do Sul (GM, Ford, Navistar/International)
and Rio de Janeiro (VW truck & bus,
194

Table 8: Total Wages in Selected Regions of Brazil
Type of Worker São Paulo City Curitiba Other Regions
(Reais) (Reais) (Reais)
Shop Floor Entry 700 400-600 200-500
Experienced Shop Floor n.a. 700-1000 300-700
Engineer Entry 2000-3400 1200-2000 n.a.
Experienced Engineer 3000+ 2500+ n.a.
Source: Interviews; n.a.: not available
Peugeot-Citroën). Despite this actual context,
as seen in the description of the
assembler perspectives, the tendency is
for new plants to be located outside the
São Paulo or Curitiba industrial area.
The critical reason for proximity to the customer
in Brazil is transportation. Most of
the goods are transported via roads in
Brazil. Because distances in Brazil are
large and road conditions are poor, journeys
are long and not without perils. Even
in regions like São Paulo, massive traffic
makes moving product around a complex
endeavor. Coastal shipping, which was
deregulated in 1995, is starting to be used
more for long distance distribution. For
these reasons, supplier bidding effort, and
in particular green-field investment decision
are often discussed with clients on the
basis of location. If the objective of a
potential supplier is to work as a first tier
supplier, then location often becomes the
critical issue.
Since most of the suppliers are also concentrated
where the current assembler
base is located, the vast majority of the
Brazilian component manufacturers are
based in and around the city of São Paulo.
Therefore, these areas also have the major
concentration of skilled labor. Establishing
a significant base outside of that area may
mean relocating a labor workforce and providing
initial housing incentives, etc.
This could be seen as a factor deterring
plants from locating outside the industrial
areas of the assemblers. The experience of
Curitiba seems to demonstrate that this
situation may not exactly be true. Before
Renault investment there was virtually no
local auto industry, and some workers had
either to be trained or recruited in São
Paulo. Both situations have worked well,
and in particular, workers tended to be
receptive to the issue of getting better quality
of life outside crowded and polluted city
centers. However, for small suppliers, the
extra costs may not be justified, and the
retention of management should be
addressed with particular care.
Recent decisions of the supplier have tried
to balance access to client, recruitment of
skilled labor and wages. Labor rates vary
quite a lot between the different automotive
regions within Brazil, and are particularly
high in the São Paulo area. Low labor
rates, combined with tax incentives may
off-set the transportation and management
issues of being close to the customer.
Table 8 presents a comparison of some of
the critical cost differences between São
Paulo and Paraná, to illustrate the impact
of location differences. As can be seen,
there are substantial differences in the
labor costs, which will have a definitive
impact in the final product cost, particularly
if it is labor intensive. Curitiba is presented
as a comparison because recent
experiences from assemblers and suppliers
alike have demonstrated that the city
can attract very good professionals, which
accept to move from São Paulo and still
earn less than they did there.
6.4.4. Manufacturing Conditions
GENERAL MANUFACTURING CONDITIONS
The recent wave of assembler investment in
Brazil has certainly attracted a large number
of multinational firms. It has also prompted
new contracts with local firms, particularly
through new contracts as 2nd tier supplier.
Nevertheless, the large majority of new con-
Global Strategies for the Development of the Portuguese Autoparts Industry
195

tracts are being established with companies
that were already in the auto business. Few
new entrants were able to make it. This fact
becomes extremely salient in the Paraná
region. In four years, three major assemblers
established operations in the region. Each of
them has at least 200 direct suppliers,
although some of them are shared among
the companies. The problem is that only
about 20-25 companies of the region either
directly or indirectly supply the automakers
present there. Moreover, most of these are
the companies that were already supplying
the truck assembler that existed in the
region before these new assemblers started
their operations in the region.
There are three major reasons why there
has been limited incorporation of locallyowned
companies:
• Assemblers have strongly encouraged
their traditional suppliers, either foreigner,
or local but established elsewhere to follow
them to new locations, eventually sharing
with them the Government incentive package.
The suppliers have responded well,
leaving little room for local companies;
• The initial perception of automaker and
large suppliers was that there were no local
companies with capabilities to supply them.
They were concerned with starting operations
and did not want to risk too much in terms of
getting unknown suppliers in the loop;
• They had limited ability (logistics, time
and resources) to do the search for efficient
suppliers;
• Some suppliers were incorporated
because the local content regulation made
them needed to achieve the necessary 50-
60%. When this was the case, the obvious
companies were those already supplying
for the auto.
Now, as assemblers and first tier adapt to
local conditions and get to know the companies,
the general perception is that local
purchases will increase. This trend has
been helped to a great extent by the devaluation
of the Real, that made imports
(including those from Argentina) less
attractive for cost and local manufacturing
much more interesting. Local companies
are also being more proactive in terms of
presenting their capabilities and trying to
qualify for supply.
Therefore, although 60% LCR have been
important to assure that those small items
that could either be imported or produced
in Brazil are staying, the legislation is not
so important at this time since devaluation
would mitigate potential negative effects of
relaxing LCR.
QUALITY, PRODUCTIVITY AND COST
During recent years, manufacturing capabilities
of the firms in Brazil has been greatly
improved. The increase in volume and
the accrued competitiveness arising from
the influx of foreign investment has certainly
had a positive impact on quality and
delivery of the components produced locally.
However, there is still significant room
for improvement, as assemblers claim that
actual supplier performance is 2 to 4 times
below target levels. For steel stamped
parts, for example, clients have been
demanding rejects on the order of 500-
1000, and average suppliers haven’t been
able to go below 1500-2500.
Quality problems identified by the OEMs
are mostly associated with local suppliers,
but may be as serious with established
branches of multinational companies. The
major reason cited for the poor quality performance
from foreign satellite locations
was lack of commitment from home office
to truly supporting Brazilian production supply.
This lack of commitment is evidenced
by poor adherence to quality systems and
lack of local engineering support.
Table 9 presents a review of a survey done
by SINDIPEÇAS regarding knowledge and
adoption of manufacturing practices. As
can be seen, companies are quite aware of
the major quality tools and systems.
Moreover, the majority of the companies is
already adopting those directly related to
process control or planning. Of particular
196

Table 9: Manufacturing Practices of the Brazilian Autoparts Industry - 1997
MATTERS KNOWLEDGE IMPLANTATION - USAGE
QUALITY SYSTEM 10% 20% 30% 40% 50% 60% 70% 80% 90% 90% 80% 70% 60% 50% 40% 30% 20% 10%
ISO 9000 88 78
QS 9000 68 46
Qualification of Suppliers 82 74
Quality Costs Control 88 62
Self-Evaluation of Quality 76 66
System
QUALITY TOOLS
Failure Mode & Effect Analysis 81 68
Statistical Control of Process 82 66
Quality Function Development 58 34
Benchmarking 64 46
Methodology of Analysis & 74 64
Solution of Problems
Use of Taguchi Experiments 58 34
SPECIAL TOOLS
Kanban-Just In Time 74 58
Celular Lay-Out 74 62
Total Production Maintenance 66 46
Engineering/Value Analysis 61 42
Geometric Dimensioning 56 42
& Tolerance
Parts Production Approval 81 80
Process
Advanced Plan. of Qual. Prod. 66 56
Source: SINDIPEÇAS; Only categories with more than 20 firms are presented
importance is the high rate of adoption of
QS9000 in 1997. Companies are behind in
the use of tools that are more related to
the development of product and process.
Quality problems identified by the OEMs
are mostly associated with local suppliers,
but may be as serious with established
branches of multinational companies. The
major reason cited for the poor quality performance
from foreign satellite locations
was lack of commitment from the home
office to truly supporting Brazilian production
supply. This lack of commitment is evidenced
by poor adherence to quality systems
and lack of local engineering support.
Suppliers, both national and multinational
claim that one of the leading causes for
poor quality and logistics performance is
related to demand fluctuations. The major
reason for the fluctuations is the responsiveness
of the consumers to the frequent
changes in the auto tax structure determined
by the government and the country’s
financial conditions (interest rates – as the
cars are bought with credit). Because the
end market is so responsive to these
changes, multiplying the volume demanded
for one month, or dividing it by two in the
next, is a common practice in the relationships
between assemblers and suppliers.
This situation generates high variability in
manufacturing conditions that result in
poor quality rates.
Volume fluctuations also have other important
side effects:
• Most companies are not prepared to
respond directly to high fluctuations and
they needs to keep high inventories, which
creates additional costs;
• Because of these high volume fluctua-
Global Strategies for the Development of the Portuguese Autoparts Industry
197

tions, automakers also keep the contracts
very flexible (no volumes or set timelines),
which creates additional uncertainties for
the supplier;
• Variability also generates idle capacity.
Although the average free capacity reported
by the companies is on the order of
25%, companies may have as much as
50% of their capacity idle for part of the
year, and then be working at full capacity
the rest of the months. This has severe
implications for the financial health of the
companies, particularly when they have to
invest in new equipment to respond to the
demands of their clients. Having idle
equipment that is being paid through a
loan demanding up to 5% interest rate a
month leaves limited survival possibilities
for these companies.
DEVELOPMENT CAPABILITIES
As seen in Table 9 the knowledge and utilization
of tools related to product development
such as value analysis/engineering,
quality functional deployment or geometric
dimensioning is rather limited. This
information is consistent with a perception
of the assemblers and suppliers of poor
development capabilities of companies in
Brazil. This seems to be true not only for
firms with local ownership, but also to
many of the foreign owned local suppliers
that have not yet invested in local engineering
and design staff.
The common practice seems to be, either
to subcontract some design whenever
needed or, if it is a multinational company,
to send changes back to the home office to
address them. Companies that have started
to focus their attention on the subject
have focused mostly on process, working
with client’s product development centers.
The typical firm at this stage has 3-10 engineers,
2-10 CAD stations and the willingness
to take upon them more development
responsibilities.
This is clearly an issue where there will be
disputes and tensions between assemblers
and suppliers. Brazilian low volumes
make development extremely expensive.
Assemblers have resolved this by adopting
designs used elsewhere, mainly in Europe.
The problems are now at the level of the
supplier. If it is the same company working
in the part in Europe and Brazil, this makes
things easier, since it can spread development
cost across a larger volume. The
problem is if it is a local supplier that has
to start from scratch.
As seen in the chapter analyzing assembler
strategy, some of the OEMs are addressing
this problem by inviting suppliers that are
not present locally to enter into agreement
with European company that supplies part
design to a local firm, that would pay some
royalties. This is an interesting strategy,
but it is bound to have a number of problems
related to supplier proprietary technologies
that are not easy to solve.
6.4.5. Strategic Issues
The issues described in the previous paragraphs
provide a context for strategic decisions
in the industry. This section details
specific options that local firms are pursuing,
trying to derive lessons for the
Portuguese industry as companies consider
their entrance in the local market. Two
key levels of strategic issues were considered.
The first deals with what are the
strategies being pursued by local companies
as regards their current day-to-day
operations. The second are growth strategies.
Before entering the discussion, it is important
to note that most companies interviewed
stated that the auto sector is undergoing
a period of restructuring following the
financial turmoil and waiting for the renegotiations
of the Mercosur automotive
regime. Most referred that they needed 6
months to a year to understand the patterns
of the market for the next years.
Therefore, some of the perceptions presented
here may have to be readjusted if
significant issues of the industry change
(e.g. a radically different Mercosur agreement).
198

STRATEGIES TOWARDS EXISTING OPERATIONS
Most of the local companies that are now
first tier believe they will be able to
remain as such in the next few years.
Most of them have been working in particular
niches of the car (e.g. fuel tank) and
believe that will be able to leverage on
that in the next few years. They are pursuing
a number of strategies to remain
working at that level:
• Combine several technologies, for example,
stamping, painting and assembly;
GROWTH BEYOND EXISTING CAPABILITIES
Growth strategies also have some distinct
features, some of them fit well with some
of the key issues that Portuguese firms are
facing, either in Portugal or when moving to
Brazil. The first area where the local companies
are working is the establishing of
links between themselves. This is done
first at an informal level, but also through
joint ventures. The second area of investment
is links, once again formal and informal,
to foreign companies, in particular
European.
power in what concerns the raw material
suppliers monopolistic behavior.
Informal Cooperation with foreign firms has
also been pursued. The two major objectives
are:
• Exchange designs and technical information
between firms supplying the same
component to an assembler in Brazil and in
Europe;
• As a first stage before the establishment
of a joint venture.
• Increase the share of assembled components
to be able to command higher margins
and integrate further complexity in the
product step by step. The objective is to
develop the ability to supply modules;
• Develop good partnerships with suppliers
of complementary products to their core
technologies (e.g. the stamper of a fuel
tank with non-stamped components of the
tank such as the fuel pump).
These small and medium companies do
not feel threatened by medium sized companies
coming from Europe or the US and
taking their business because of what they
believe are the difficulties associated with
doing business in Brazil (informal networks,
trust issues, contract enforcement).
The biggest challenge that is recognized by
these companies is the global sourcing of
automakers. Strategy is to have alliances
with other companies to be able to respond
simultaneously in Europe and Brazil. Links
to Europe are crucial because 85% of the
cars manufactured in Brazil are designed in
Europe.
One of the levels at which companies are
working is informal cooperation:
Cooperation groups among national companies
have two complementary objectives:
• Geographically disperse companies are
able to provides a wide response capability
to the needs of the automakers;
• Joint purchasing increases purchasing
Perhaps the most common strategy pursued
by both Brazilian firms and foreigners
are the establishment of joint ventures in
Brazil. Companies have merged, acquired
others or simply invested in a joint venture
with several objectives:
• To match technology and supply experience
of a foreigner with local market knowledge
of a Brazilian;
• To access complementary technologies
that enables the group to manufacture
more complex assembled components,
which can be supplier at a 1st tier level;
• To reach new geographic areas, mostly in
Brazil, but the reverse movement to Europe
has also been observed. New investments
in Brazil have been motivated by respon-
Global Strategies for the Development of the Portuguese Autoparts Industry
199

siveness issues, and not cost, since volume
considerations surpass logistic cost
issues;
• To access cheaper capital, either
through the foreigner partners, or through
BNDES, which is particularly interested in
supporting mergers, acquisitions and JV
between local companies or with foreigners.
Although the establishment of joint ventures
has been one of the favorite mechanisms
to link foreigner and local companies,
these are not without perils. It is
important to make a detailed study on the
partner to avoid ex-post surprises. There
are important issues that could have
deemed several of these initiatives to failure.
Among them:
• Culture clashes between practices can
happen, as low-tech cheap wage practices
face new technologies and methods.
• New technologies can be seen as a
threat to existing technologies rather than
complementary.
The issues and strategies described above
do not mean, and are not only applicable,
to first tier supplier. Most of the issues
highlighted are as valid for a second or
third tier supplier. Another issue that has
not been mentioned with great detail is
development. Most companies are aware
of the need to invest more in development
capabilities. Nevertheless, those who have
a more realistic perception of the market
believe that it is difficult to do it alone.
6.4.6. Internationalization Case Study
Internationalization decisions are based
upon many factors that cannot be completely
captured simply by estimating the
cost of production and shipping. However,
these cost models can give a first order
approximation for the economic feasibility
of a decision. This case looks at the costs
of producing from several different countries
in Europe that are representative of
two typical economic conditions that currently
exist. First, France is used to represent
the European countries with a strong
economic base. Second, the Czech
Republic is used to represent countries
that have been starting to improve economically
and have been receiving many
foreign investments. Brazil is also chosen
because it is a natural expansion opportunity
for Portuguese business. However, it is
treated separately because of the import
tariff that is imposed. The factor conditions
and locations of these countries form the
basis for observed differences in cost.
Figure 13: Cost Breakdown for a Stamped
Assembly Delivered to a German Customer
Figure 14: Manufacturing, Assembly and
Logistics Cost for the Stamped Assembly
Delivered to a German Customer
$3.50
$6.0
Cost in US$
$3.00
$2.50
$2.00
$1.50
Total Cost (US $)
$5.0
$4.0
$3.0
$2.0
$1.0
$1.00
$0.50
$0.0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
$0.00
Portugal France Czech R.
Portugal
France
Czech R.
Production Volume
logistics
assembly
stamped part #2
stamped part #1
200

Figure 15: Cost Breakdown of the Injection
Molded Assembly Delivered to a Brazilian Customer
Figure 16: Affect of Shipping Components from Portugal
versus Importing Capital for Brazilian Operations
$0.60
$0.50
$0.40
Cost in US$
$0.30
$0.20
$0.10
$0.00
Brazilian Porduction Imported Capital Portuguese Production
Tariff (35%) Logistics Costs Variable Costs Fixed Costs
The stamping, injection molding and logistics
cost models used for this analysis have
been also previously described in detail.
These scenarios analyze the changes in
total cost as manufacturing, assembly, and
logistics conditions change due to location
of the operations. The inputs that affect the
manufacturing costs are factor conditions in
the country of production. These factors
include wage, working days per year, interest
rate, energy cost and building costs.
The manufacturing operations are modeled
after best stamping practice and equipment
for these particular stamped parts. The
assembly costs of putting these two components
together are predominantly labor. The
costs of bolts, nuts and welding operations
are minor in comparison. Finally, the logistics
cost is based, in part, upon how the
manufacturing site is geographically related
to the German customer. The least expensive
shipping strategy is typically JIT for frequent
deliveries and direct shipping for larger,
less frequent deliveries.
The cost breakdown is calculated in Figure
13 for Portugal, France and the Czech
Republic. The primary cause of cost difference
is assembly not manufacturing cost.
This is not surprising given the large disparity
in wages between the countries, $17
in France, $5 in Portugal and $2.50 in the
Czech Republic. This is why assembly is
typically performed in Taiwan and in
Singapore where an educated, motivated
workforce is inexpensive. Logistics shipping
results in secondary cost differences.
The close proximity of France to the
German customer cannot make up for the
assembly cost difference with Portugal and
the Czech Republic. The Czech Republic
gains these advantages due to factor conditions
despite a stamping cost that is
slightly higher than the other countries.
The relative cost differences between them
persist, regardless of the production volume
as shown in Figure 14. Therefore,
expansion into countries similar to the
Czech Republic make the best economic
sense. These eastern countries represent
the new low-cost leaders in Europe.
Additionally, the close proximity to a higher
tier customer makes the Czech Republic
and other comparable countries ideal candidates
for expansion. However, as discussed
in Chapter 3 and Chapter 4, there
is a need to develop more robust engineering
capability within Portugal. Sources
of this knowledge are not likely to reside in
the Czech Republic because of low cost,
low development strategies, but rather in
countries like France. Thus, any interna-
Global Strategies for the Development of the Portuguese Autoparts Industry
201

tionalization decision to France should
tradeoff an increase in manufacturing cost
against the gain in engineering knowledge
gleaned from local French companies.
Possible expansion into Brazil must consider
the effects of government policies as
imports are charged an import tariff equivalent
to 35%. Brazil’s protectionist measure
tries to help promote Brazilian business
growth within the country. Expansion
into Brazil is not an easy decision given
this disincentive for importation and the
higher factor conditions that exist in Brazil.
However, the use of capital raised in
Portugal for a possible subsidiary in Brazil
might justify its presence because
Portuguese capital is available on better
terms. These possibilities are evaluated by
estimating the injection molding assembly
costs in three scenarios: local Brazilian
production with the local interest rates,
local Brazilian production with imported
capital at a Portuguese interest rate, and
importation of Portuguese production with
economies of scale.
producing the same components for another
customer outside of Brazil, then the
Portuguese manufacturing operation will
gain economies of scale, reducing the cost
of shipping low production volumes to Brazil.
In fact, as shown in Figure 16, it is more
economically suitable to ship the injection
molded assemblies to Brazil and pay the
high tariff than it is invest in a new Brazilian
facility immediately. However, once the production
volume fills to capacity, an additional
machine and die must be bought in
order to continue production. When the
new equipment and die are bought the
average cost increases above the cost of
producing in Brazil with inexpensive capital.
Thus, it now makes sense to expand the
new machine and die set into a Brazilian
facility to produce and to stop shipping
from Portugal. The costing of a product
helps determine when it is best to expand
abroad. This specific example demonstrates
the cost tradeoffs that occur and
how the cost can inform part of the decision.
As the first example suggested, cost motivation
may not lead the company towards a
desired internationalization path.
Additionally, many other elusive factors
must be considered. On the other hand,
the Brazilian example demonstrated that
market penetration by shipping may be a
better alternative until the appropriate production
scale is evident, then expand the
operation with a new facility. Thus, this
study shows that the national factor conditions
play an important role in internationalization.
However, expansion decisions
need to be informed by the tradeoffs
between manufacturing costs, logistics
costs, and trade policy.
6.5. Conclusions and
Recommendations
In order to gain a foothold outside Portugal,
companies need an advantage, such as
engineering capability, product differentiation,
or sub-system assembly, at home that
allows them to penetrate foreign markets.
Once foreign market business is established,
the company can seek out locations
for expansion that complement
Portuguese advantages and improve or offset
Portuguese disadvantages. Through formation
and coordination of a network of
facilities, advantages are gained by the
cumulative rate of learning in all its facilities.
Figure 15 shows Brazilian production is very
costly. Without the tariff, Portugal and
undoubtedly many others would export to
Brazil. The logistics costs and tariff associated
with shipping 400,000 components
per year to Brazil, puts Portuguese production
at the same cost as Brazilian production
and capital. However, if Portugal already is
Small and medium-sized companies tend to
use export-based strategies with only moderate
foreign direct investment. With limited
resources, smaller companies face challenges
in gaining foreign market access,
understanding foreign market needs, and
providing after-sale support. One solution for
smaller Portuguese companies is to deal
202

through agents, importers, distributors, or
other trading companies. Another approach
for Portuguese companies might be to use
industry associations to create a common
marketing infrastructure, to organize trade
shows and fairs, and to develop strategic
coalitions.
mechanisms. These agreements can be
unstable; when it starts well, the partnership
can fall apart or evolve into an acquisition.
In the long term, global leaders
rarely rely on an alliance for assets and
skills essential to competitive advantage in
their industry.
Strategic alliances and coalitions, are a
important tool in carrying out internationalization
strategies. These are usually longterm
agreements between companies that
go beyond normal competitive dealings but
fall short of a merger. This term can include
arrangements like joint ventures, licensing
agreements and long-term supply contracts.
Portuguese companies could benefit
through economies of scale or learning,
joint marketing, production or assembly of
specific components. Other benefits are
access to foreign markets, access to
improved skills, and new and different technologies.
Alliances can also work to spread
risk for a new product. Alliances are also
used for licensing technologies widely in
order to promote standardization.
Therefore alliances are useful to help lagging
companies catch up with the competition.
However, alliances can carry substantial
costs in strategic and organizational terms.
The problems of coordination are difficult
because of different or conflicting objectives.
Alliances are frequently transitional
Global Strategies for the Development of the Portuguese Autoparts Industry
203

Chapter 7
Conclusions and
Recommendations
7.1. Introduction
The previous chapters have provided a
detailed examination of the current, and in
some cases, the expected future position of
the Portuguese autoparts industry. A wide
range of issues facing the automotive
industry, including issues of manufacturing
capabilities and product quality, logistics
and responsiveness considerations, engineering
and development capabilities, and
the possibility for an increased global presence
have all been investigated in some
detail. The individual results, conclusions
and recommendations for each of these
analysis have been presented throughout
this report. However, there are a number of
considerations that have been common to
most or all of these analysis. These will be
the focus of this chapter. The first section
highlights the main findings of the study,
and the second summarizes the key recommendations
to both government and companies
on how to leverage on the strengths
and improve some of the limitations of the
Portuguese autoparts industry.
7.2. Conclusions
There are four major themes for the results
from the analysis of the Portuguese
autoparts industry:
1.Company size is a crucial factor;
2.Low wages are not always the key to
competitiveness;
3.Geographic location is an important consideration,
which has mixed consequences
for the Portuguese industry;
4.Manufacturing competence in Portugal is
improving, and in some cases can already
be considered “world class”.
COMPANY SIZE
Company size is an important issue
because it enables firms to participate in a
range of activities which would otherwise
be impossible. Take for example the issue
of product development. Small firms usually
have insufficient revenues to support
the number of qualified engineers required
to develop products of even limited complexity.
The analysis of product development
capabilities indicated that companies
must have at a minimum 6 Million Contos
in revenues in order to be able to support
even modest product development capabilities.
With regard to manufacturing, it is vital to
be able to achieve minimum efficient
scales, particularly in highly capital intensive
industries such as sheet metal stamping.
Poor equipment utilization rates,
which are usually associated with low product
demand, lead to large cost premiums.
The only solution available to small firms is
Global Strategies for the Development of the Portuguese Autoparts Industry
207

to produce as many different products on a
given piece of equipment as possible in
order to minimize costly idle times.
However, this solution is at best of limited
benefit, since it requires that the firm maintain
the most flexible possible set of equipment,
which usually involves some cost
premium.
The growing trend towards internationalization,
and the demands from the OEMs that
suppliers have a global presence, also
favors larger firms. Investments in new
regions require considerable financial
strength, both in terms of the ability to
finance overseas investments, and to
weather potentially unstable periods during
which revenues may drop considerably.
This is particularly true for operations in
Brazil where issues such as demand and
currency fluctuations can create significant
financial demands for the firm.
These particular findings contrast with the
average size of the nationally owned companies,
where as much as 80% of the firms
have revenues below 2.5 Million Contos.
This small size creates difficulties for the
firms to handle the challenges highlighted
in the paragraphs above. The recommendations
will explore some of the strategies
to minimize the negative impact of this
situation and eventually change the existing
scenario.
LABOR MARKET
Traditionally, Portuguese industry has
relied on relatively inexpensive labor as a
means of achieving cost competitiveness.
However, this approach can only be of limited
success. Increasingly, high technology
or capital intensive manufacturing processes
drive the autoparts industry. In these
cases, labor costs constitute only a very
small percent of the total, and thus the
access to a low cost labor market is relatively
unimportant. However, there are still
some sectors of the autoparts industry for
which low cost labor is important. In particular,
labor considerations play a role in
the manufacturing cost for higher value
added products that require both capital
intensive technologies and significant levels
of assembly. In these cases,
Portugal’s substantial labor cost advantage
over the majority of the European Union is
important.
Finally, labor cost considerations should
not be limited to factory workers.
Engineering and development costs are
largely driven by the costs of qualified personnel.
In this area Portugal offers a
strong advantage due to its surplus of inexpensive
highly skilled labor. The cost
advantage in regard to engineers makes
product and process development two to
three times less expensive than it is in
Germany.
GEOGRAPHICAL CONSIDERATIONS
Geographical considerations are of growing
importance in the overall automotive industry.
The changing nature of the relationship
between automakers and their suppliers
have pushed the responsibility for products
and their delivery increasingly onto the suppliers
themselves. For the Portuguese companies,
this is of particular importance due
to their location at the edge of Europe.
Portugal’s position in Europe provides it
with easy access to the major European
markets, certainly providing an advantage
over some of the lower cost importers from
outside of Europe. However, within Europe,
Portugal suffers from a logistics cost penalty
arising from its peripheral location.
Beyond the cost penalty, issues of delivery
responsiveness may also be perceived negatively
by Central European automakers
due to the long supply distances from
Portugal. This concern is of special importance
for subassemblies or other higher
value added components that may cause
significant disruptions in the assembler
operations in the event of a delivery problem.
On the upside, there is a significant
automotive manufacturing industry in place
in Spain, for which Portugal provides easy,
inexpensive access.
In terms of internationalization, Portugal
again may have some limited advantages
208

1.The need to foster cooperation;
2.Promote the development of higher value
added products;
3.Improve human resources levels;
4.Balance internationalization;
5.Promote excellence in manufacturing
management;
6.Deepen the supply chain;
7.Be clear regarding the overall strategy.
COOPERATION
The only way to address the critical issue of
the small company size identified before is
to have the national companies working
closer among each other. At a first stage
this could mean cooperation programs
among companies with complementary
business objectives. Trying to jointly pool
resources into projects that neither of them
could do alone is a first step, particularly if
geared towards development activities.
Another possible area is specialization
according to specificity of equipment. It has
been seen in the study that making the
appropriate choice of equipment for the
product has significant implications for
cost. Therefore, better allocation of products
among companies could have very
good results in terms of the overall cost
competitiveness of the national firms.
Although cooperation may work, problems
related to trust and “giving business to the
competitor” are widely acknowledged in the
industry, in Portugal and abroad. Moreover,
even if formal agreements between companies
exist, it is difficult to convince an assembler
to hand the development of a relevant
component to a consortium where accountability
and responsibility are diffused.
Therefore, companies should seriously consider
mergers and acquisitions among themselves,
as well as of foreign companies,
especially if they are committed to remain at
the higher levels of the supply chain. This is
probably the only way to remain a strong
competitor in an industry where global consolidation
is increasingly prevalent.
These company recommendations have a
counterpart in terms of government policy.
The enactment of policies that facilitate or
even induce the establishments of consortia,
and in particular foster the existence of
mergers and acquisitions between companies
is seen as crucial. Competent authorities
ought to consider the development of
credit instruments that facilitate and promote
these activities.
DEVELOPMENT
As seen in the report, most companies
have been involved in the development and
manufacturing of very simple products,
which generate poor learning opportunities.
Associated to these simple products are
very limited resources in terms of people,
hardware and systems. A critical step in
the development of the industry requires
entering into higher value added products.
Therefore, development capability has to
be a core priority of the firms.
Nevertheless, it has been pointed out by the
assemblers and shown in the study that having
‘real development capabilities’ is clearly
not equivalent to having a couple of engineers
and associated CAD stations. It
requires a quantum leap increase in
resources devoted to this activity, which will
not be possible for most companies to do in
isolation. This reinforces the issue of working
together discussed in the previous
item.
In any research and development activity,
there are important aspects that are of difficult
appropriation by the companies, may
generate spillover, or may not justify the upfront
investment. For example, high levels
of worker mobility make it difficult for a company
to reap the benefits of investing in the
training of the required technical people, or
a systematic analysis of the logistic conditions
of supplying from Portugal with potential
benefits all the companies located here.
Therefore, the government ought to consider
deploying, together with the companies,
a research center to support this important
activity of the national economy.
210

Given the usually constrained resources on
the government side, the center ought to
focus on areas of more relevance to the
national industry. Among several candidates
that ought to be discussed between
all the parties, the area of car interiors
should be looked at with particular attention
because of the magnitude it has
reached in the past few years in Portugal.
A complementary perspective would be to
attract engineering and research centers
from major auto components corporations
to be located in Portugal, trying to promote
the country as a center for auto component
excellent low cost engineering. This could
be achieved by promoting the low costs of
high skilled labor that would reduce overall
development costs, together with all the
rest of the attributes in terms of living conditions
that Portugal has.
Generic research like research in logistics
from Portugal should also be performed
with the support of government funds. A
continuation of the existing study through
the enactment of an auto industry observatory
is also something that could benefit
the national industry overall.
been seen in the study that one of the crucial
differences between larger companies
working in higher value added companies
and smaller ones, manufacturing simpler
products, is the level of the workforce education,
particularly at the secondary education
level. Therefore, it is important for
companies aiming at entering these new
levels to be prepared in terms of their workforce
education and empowerment.
Companies cite as a critical difficulty for
their development the access to these
workers with the appropriated level of qualifications.
While some divergence between
company needs and school offerings
always exists, regardless of the corner of
the world that is considered, this problem
seems to be particularly acute in Portugal.
Therefore the relevant government agencies
should evaluate with detail the potential
creation of a technical vocational
school for the auto, that would train workers
with the necessary skills to work in the
industry. This school would be developed
with the support of the companies, which
would help determine the skills that the
students have to acquire at the end of the
12 years of education.
and the overall company strategy (discussed
below). For low value added parts,
concentrate particularly on the Iberian
Peninsula, especially as firms in Eastern
European countries develop better capabilities
in the industry.
If considering higher value added components,
then retain in Portugal those that
have important share of assembly in them,
and invest in other locations for the rest.
Access to customer is ever more important,
making this the only solution for the
national companies. The possibility to
invest in Eastern Europe through joint ventures
with local companies ought to be seriously
considered.
The need to invest abroad should be seen
by the government as a positive evolution
of the local industry. In fact, given the high
risks associated with direct investment of
these companies in some of the foreign
regions (Brazil in particular), enabling of
credit schemes that reduce the level of risk
by lowering the premium on borrowed
money, could have a positive impact on the
decisions of the companies and overall
benefits to the country.
HUMAN RESOURCES
INTERNATIONALIZATION
MANUFACTURING MANAGEMENT
Moving into higher value added products
that reduce dependency on low wages also
requires a better-qualified workforce. It has
The perspective of the companies regarding
internationalization depends greatly
on the type of components being produced
Leading firms in terms of manufacturing
capabilities in Portugal, both national and
foreign owned, follow a world pattern of
Global Strategies for the Development of the Portuguese Autoparts Industry
211

excellence in this subject. What is clear is
that consistent sales growth in large companies
manufacturing higher valued products
implies a joint set of practices that
includes:
• Narrow product range;
• Higher levels of worker education and
responsibility;
• A balanced and adequate use of methods
for manufacturing planning and control;
• Careful equipment time management;
• Choice of the appropriate equipment for
the product being manufactured.
While competition for smaller companies
has different implications on how to manage
their manufacturing systems, those
who aim at becoming large competitive
players ought to look at these requirements
when evaluating their own systems.
SUPPLY CHAIN
Despite the positive evolution of the capabilities
of the suppliers to the automotive
industry present in Portugal, a wide gap in
terms of manufacturing exists to the lower
tiers of supply. When asked about their
own suppliers’ capabilities, the firms questioned
ranked them very low. This is
undoubtedly affecting the whole supply
chain capabilities in Portugal, and preventing
it from going even further in their overall
quest to be among the better performing
in Europe.
To address this issue, companies and
government should work together to disseminate
the best practices that already
exist in Portugal at these lower tiers, helping
them to understand the importance and to
return to good manufacturing practices.
OVERALL STRATEGY
Despite their encompassing perspective,
most of the issues described above are
linked to what is the strategy of the firm.
For example, investing in development
may actually not be the best solution if
the objective of the company is to remain
as a small second or third tier supplier of
simple components to the industry.
Therefore, it is important to place some of
the aspects described in the previous
Figure 1 : Company Strategies
Small
Company
4
Group
of Firms
3
Product
Focused
Process
Focused
Not Attainable
Small
Process
Focused
Company
Large
Product
Focused
Company
1 2
Large
Process
Focused
Company
Higher Complexity
Higher Growth
212

chapters in a strategic framework.
Figure 1 summarizes the core types of
strategies that companies can follow
according to key characteristics of the companies:
whether they are product or
process focused, and whether they are isolated
or part of a group. Each of them has
important implications for systems and
priorities that firms follow. Therefore, they
will be described in detail in the next paragraphs.
The first quadrant describes the small
process-focused company. This is the actual
position of most of the national firms. If
this is the strategy that companies want to
continue pursuing, then they should focus
on the following issues:
• Very broad array of low value products;
• Small facilities in one or two locations;
• Lean business structure;
• Direct shipping logistics strategy;
• Few or no engineering;
If firms want to move into being larger
process-focused companies, then the firm
has to acquire size, and actually become
part of a group, either by merger, acquisition
or internal development. Moreover, the
characteristics have to change. The new
focus is:
• Moderate array of low value products;
• Larger plants in multiple locations;
• Focus on manufacturing performance;
• JIT or distribution center logistics strategy;
• Full process-engineering team.
If the aim is to enter into product, then the
current conditions are such that only larger
companies can have a role in the industry.
The time of the small local supplier of a
battery or a radiator is now almost lost,
leaving the fourth quadrant not attainable.
The large company competing at these levels
should focus on:
• Narrow array of high value products;
• Larger plants in multiple locations;
• Focus on integration of technologies;
• Full product engineering;
• JIT shipping logistics.
A clear strategic focus is key for the development
of the autoparts companies. The
importance of critical issues described in
the previous paragraphs, such as size,
development, internationalization or any of
the others depend fundamentally on where
the company is heading. In any of the quadrants
described above, one can find both
extremely competitive firms, as well as very
inefficient units operating in Portugal. In
the latter group, the lack of sense of direction
often leads to inadequate structures
and practices that contribute to poor
results. Good strategic and appropriate
judgment is also extremely valued and
rewarded by automakers, whether they are
dealing with a small injection molder or the
large supplier of interiors.
The government plays an important role in
fostering good strategic direction. It cannot,
and should not, define strategy for the
companies. But it can certainly demand precise
and detailed strategic plans, and
matching tactical schemes, when more
than often is asked to contribute to the
development of the sector. A strong cooperative
environment between local industry
and public sector, grounded in clear strategy
and common purposes has brought the
Portuguese auto industry a long way. This
shared approach can also play a major role
in establishing the Portuguese auto industry
of the new century.
Global Strategies for the Development of the Portuguese Autoparts Industry
213

Bibliography

International Motor Vehicle Program papers
Finding a Place in the Automotive Supplier
Hierarchy in the Year 2000 and Beyond, Felix
Pilorusso. 1997
Globalization and Jobs in the Automotive
Industry: A research note, Tim Sturgeon and
Richard Florida. 1999
Leaving Home: Three decades of
Internationalization by American Auto Firms.
Teresa Lynch. 1998
Modeling Methods for Complex Manufacturing
Systems: Studying the Effects of Material
Substitution on the Automobile Recycling
Infrastructure. Randolph Edward Kirchain Jr.
Doctor of Philosophy, MIT School of
Engineering. 1999
A technical and economic analysis of
structural composite use in automotive bodyin-white
applications. Master of Science, MIT
School of Engineering Paul J Kang. 1998
Wards' Automotive Yearbook, several years
> Bibliography
A Practical Road to Lightweight Cars, Frank
Field and Joel Clark. 1997
Strategic Supplier Segmentation: A model
for Managing Suppliers in the 21st Century,
Jeffrey H. Dyer, Dong Sung Cho and Wujin
Chu. 1997
Other references
Automotive News, several issues
Europe's Automotive Components Business,
The Economist Intelligence Unit, several
issues
World Automotive Business, The Economist
Intelligence Unit, several issues
Global Strategies for the Development of the Portuguese Autoparts Industry
217

Participating
Institutions

IAPMEI
INSTITUTO DE APOIO ÀS PEQUENAS
E MÉDIAS EMPRESAS E AO INVESTIMENTO
Rua Rodrigo da Fonseca 73,
1269-158 Lisboa
Portugal
Tel: + 351 21 383 60 00
Fax: + 351 21 383 62 08
e-mail: info@iapmei.pt
http://www.iapmei.pt
IAPMEI is a specialized public agency within
the Portuguese Ministry for the Economy,
created to provide technical and financial
support to enterprises, in particular to SMEs.
Along its 25 years' experience, IAPMEI has
developed into a stable, efficient and wellknown
organization with a staff of around
600, 14 regional offices and a wide range
of controlling interests in associate
organizations (both private and state-owned)
involved in SME support schemes in Portugal.
IAPMEI's main mission is to actively
participate in the design and implementation
of integrated strategies for the support of
Portuguese corporate activity, with a special
focus on SMEs and with a view to
modernization, innovation and international
competitivity in the industrial, trade and
services sectors.
MAIN GOALS:
several national, regional and sector-oriented
support programs. Recent European Union
examples include PEDIP, PROCOM, SIR,
SIMIT, RETEX, IC-PME, PRATIC and
PRODIBETA;
• To obtain, process and disseminate relevant
technical and legal information for
entrepreneurial use - IAPMEI provides
Portuguese SMEs with "processed"
information on various areas of company
management and the business environment,
through its technical publications - IAPMEI
makes full use of its Internet web page. It
includes an inter-active letter-box for queries,
entrepreneurial information and sign-posting
for all its "clients" - IAPMEI also developed
the SinMPE Information System, a network
of front-desks where entrepreneurs and
prospective investors can obtain all the
information they need concerning their
entrepreneurial activity;
a business start-up in only 2-3 weeks. With
BFCs, entrepreneurs benefit from a single
location, practical help and advice from
specially-trained front-office attendants,
speeded-up procedures (ICT-based) and a
"client-oriented" pro-active philosophy. By
the end of 1999, 36% of all companies set
up in Portugal were being incorporated through
the BFC network;
• To manage financial assistance programs
and to promote SME access to the stock
market and to alternative sources of financing
- IAPMEI has developed an integrated Financial
Engineering Program to encourage SMEs to
expand and diversify their sources of finance
through Venture Capital, Participating Bonds
(EIB Credit Line) Mutual Guarantees, Fixed-
Asset Management Funds (FUNGEPI) and
access to the "Second Market" (LSEA +
EASD).
• To design, implement, control and assess
SME support strategies - IAPMEI provides
financial support to corporate investment
through the operational management of
• To develop administrative facilitation -
Since late 1997, IAPMEI has set up a regional
network of six Business Formalities Centers,
where prospective entrepreneurs can register
Global Strategies for the Development of the Portuguese Autoparts Industry
221

MIT
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
77 Massachusetts Avenue
Cambridge, MA 02139-4307
U.S.A.
Tel.: + 1 617 258 5515
http://www.mit.edu
The Massachusetts Institute of Technology
is an independent, coeducational, endowed
university committed to the extension of
knowledge through teaching and research.
Founded in 1861, MIT has teaching and
research programs of distinction in
engineering, the physical and life sciences,
architecture and planning, management, the
humanities, and the social sciences, with
scientific and quantitative methods at the
core of its approach to learning.
MIT is organized into five academic Schools
- Architecture and Planning, Engineering,
Humanities and Social Science, Management,
and Science - and a number of interdisciplinary
groups and activities. Current enrollment is
about 9,950 students; 5,500 are studying
for graduate degrees and about 4,450 are
studying for undergraduate degrees. The
campus is located on 154 acres along the
Charles River in Cambridge, Massachusetts,
facing the city of Boston
THE MATERIALS SYSTEMS LABORATORY
AT MIT
The MIT Materials Systems Laboratory is
internationally recognized for its innovative
work on the competitive position of materials
and products in automotive, aerospace,
electronic and environmental applications.
It fosters a unique combination of knowledge
of design and production processes used in
industry with managerial economics.
The Materials Systems Laboratory has been
particularly successful in developing an
understanding of the cost of using new
materials in a wide range of applications and
contexts. Researchers in the Laboratory have,
over the last 15 years, developed over 60
"technical cost models" that project the cost
of using alternative technologies to
manufacture products such as electronic
circuit boards and automotive structures
under various conditions of labor productivity,
raw material prices and volumes of
production. This information is crucial to the
development of coherent industrial policies
for the investment and use of new materials
and materials intensive products.
THE INTERNATIONAL MOTOR VEHICLE
PROGRAM AT MIT
The International Motor Vehicle Program
(IMVP) at Massachusetts Institute of
Technology is a multidisciplinary research
enterprise that performs comprehensive
studies of the automobile industry worldwide,
as well as its effect on society. A primary
objective of the IMVP has been to create a
knowledge base that allows us to better
understand what constitutes superior
industrial performance and competitive
advantage in the automobile industry. Our
research results have indicated that there is
a fundamentally different approach to
manufacturing products, called lean
production, in comparison with the traditional
mass production system. This concept was
explained in the book, The Machine That
Changed The World, which has had a major
impact on the automobile industry.
222

INTELI
INTELIGÊNCIA EM INOVAÇÃO
Estrada Paço do Lumiar,
Campus INETI
1600-038 Lisboa
Tel.:+351 21 7116000
Fax: +351 21 716 6008
http://www.inteli.pt
To Promote Intelligence in Innovation,
through:
Example: inteli's competencies and activities in the automotive sector
•The fostering of the development of the
industrial structure, with focus on the
immaterial dimension of knowledge, in a
network led strategy;
•The generation of competitive intelligence
systems concerning markets, technologies
and products;
•The conception and evaluation of industrial,
technological and innovation programmes,
strategies and polices;
•Promotion of an environment favourable to
innovation and the creation of synergies
between all actorsin the system.
Investments in regions such as Eastern
Europe, China and Brazil and the
emergence of African markets post-
2005
The use of common parts,mainly
platforms, as a major driver for
the dynamics of Automotive
Industry and product development
in particular.
Promotion and supportto
structural Direct Foreign
Investment, in co-operation with
national supplier networks.
Creation and development of cooperation
networks and supportto the
internationalisation of Portuguese firms
Creation of technological competence units
at the level of existing Technological
Infrastructures.
Strategies of product
standardisation,simplification and
vertical aggregationof the supply
chain by OEMs.
Establishment of global key
suppliers.
Promote the development of
national suppliers'required
critical dimension in order to
compete in global markets.
The evolution of suppliers along the
supply value chain.
Strategic Competencies:
Technology and Market Intelligence
The creation of competitive intelligence systems concerning markets, technologies and products, based on the information and knowledge provided by
the assessment and forecasting activities. Examples: GlobalStrategies for the Development of the Portuguese Autoparts Industry study, in
partnership with theMassachusetts Institute of Technology and Engenharia e Tecnologia 2000, in partnership with Ordem dos Engenheiros.
Policy
Diagnosis and evaluation of local, regional and national innovation systems and studies of the conceptionand impact of industrial, technological and
innovation programmes, strategies and policies. Examples: study for the implementation of CEIIA, in partnership in the Ministry of Economics, and
the Programme for the Promotion of Enterprise Co-operation with IAPMEI.
Technology and Market Assessment
Market, product and technological diagnosis, evaluation and benchmarking. Example: AUDITEC - Technology and Innovation Audit Programme,
in partnership with D. G. de Indústria and the network of Technological Infrastructures.
Global Strategies for the Development of the Portuguese Autoparts Industry
223

FEUP
FACULDADE DE ENGENHARIA DA UNIVERSIDADE
DO PORTO
Rua dos Bragas
4050-123 Porto
Portugal
Tel.: + 351 22 204 16 00
Fax: + 351 22 200 08 08
http://www.fe.up.pt
Derived from the Polytechnical Academy
established in 1837, the Faculdade de
Engenharia da Universidade do Porto (FEUP)
is today a prestigious institution on the
international stage in terms of the quality of
its teaching and research in the field of
Engineering.
STATISTICS
Teaching Staff: 433
Professors (Teachers holding doctorates):
261
Undergraduate students: 4.800
Students Graduating per year: 520
Graduate Students (studying for Masters
degrees): 425
Students Studying for Ph.D.´s: 334
Administrative, Technical and Ancillary Staff:
188
The Faculty of Engineering is structured into
the following areas: Civil Engineering;
Electronic and Computer Engineering;
Mechanical and Industrial Management
Engineering; Metallurgical Engineering; Mining
Engineering and Chemical Engineering.
FIELDS OF ACTIVITY
Teaching
Comprises the organization of 8 first degree
courses, 21 Masters degree (MSc) courses,
along with Ph.D.s in 8 fields of Engineering
as well as other post-graduate courses and
courses in further training.
Research
FEUP is currently involved in more than a
hundred research projects, many of these
on an international basis and in co-operation
with industry.
Services
FEUP provides significant support to the
Portuguese community, particularly in close
co-operation with the national industry. This
involvement includes a wide variety of
services, namely: production of software,
prototype development, consulting,
technical/economic feasibility studies,
chemical analysis and other laboratory
support services.
224

CABELAUTO
CABOS PARA AUTOMÓVEIS, S.A.
Address: Lugar de SAM - Ribeirão
4760 Vila Nova de Famalicão
Portugal
Telephone: +351 252 499 120
Fax: +351 252 499 167
E-mail: flobato@cabelauto.cabelte.pt
Contact: Mr. Folgado Lobato
General Managing Director
Brief presentation: Cabelauto manufactures
automotive cables according to the main
European and Japanese technical
specifications. Situated near the Braga-
Oporto-Lisbon highway, the company has
excellent conditions to provide national and
international just-in-time services.
Year founded: 1992
Capital Share: 1.750.000.000 PTE
Annual Turnover: 6.400.000.000 PTE
No. Employees: 120
Products Manufactured: Automotive cables
Main Markets: Portugal; Spain; Hungary;
Turkey; Morocco; Poland
Main Clients: Delphi; Yazaki Saltano; Lear
Corporation; Sylealadinal Group
Quality Assurance Certificates: QS 9000;
ISO 9001; ISO 14001
Global Strategies for the Development of the Portuguese Autoparts Industry
229

COURO AZUL
INDÚSTRIA E COMÉRCIO DE COUROS, S.A.
Address: Apartado 70
Ponte de Peral - Gouxaria
2384-909 Alcanena
Portugal
Telephone: +351 249 891 729
Fax: +351 249 881 451
E-mail: pedro@ancarvalho.pt
Contact: Mr. Pedro Carvalho
General Manager
Brief presentation: Couro Azul, the group's
most recent division, was created to meet
the increasing demand in leather production
for the automotive sector. The company has
created a team of specialist technicians with
qualifications in tanning and chemical
engineering, as well as a laboratory for
research and development. This allows the
company to present innovative leathers, such
as Ecolys, a chrome-free bio-degradable
leather for car seats, gear box levers and
steering wheels.
Year founded: 120
Capital Share: 500.000.000 PTE
Annual Turnover: 2.372.000.000 PTE
No. Employees: 120
Products Manufactured: Leather production
for car seats, gear box levers and steering
wheels
Main Markets: Portugal; Spain; Germany;
France; Sweden
Main Clients: PSA Group; VW Group
Quality Assurance Certificates: ISO 9002;
EAQF/94 (PSA Group); VDA 6.1 (VW Group)
230

DVA
DAVID VALENTE DE ALMEIDA, S.A.
Address: Raso de Alagoa
Apartado 59
3754-909 Águeda
Portugal
Telephone: +351 234 644 212
Fax: +351 234 645 065
E-mail: dva@mail.telepac.pt
Contact: Mr. João Valente de Almeida
General Manager
Offering a range of products that satisfy the
standards of quality and demand of the
modern automotive industry, DVA obtains
total client satisfaction.
Year founded: 1966
Capital Share: 175.000.000 PTE
Annual Turnover: 1.050.000.000 PTE
Brief presentation: Founded in 1966, David
Valente de Almeida, Lda was at its start a
small company belonging to a family that
has dedicated over 30 years to the
manufacturing of metallic components.
Throughout its activity and following a rhythm
of growth and consolidation, in 1997 it
became a company limited by shares.
Today it holds a solid market position, due
to its rigorous commitment to the
development of mechanisms for quality
implementation and adequate staff training,
where specialization has a primordial role.
No. Employees: 376
Products Manufactured: Metal components
and metal groups of components
Main Markets: Germany; Spain; France
Main Clients: AutoEuropa; Volkswagen;
Faurecia; Mitsubishi Trucks; Renault; Bosch;
Philips
Quality Assurance Certificates: ISO 9002;
Renault - Level A - EAQF 94; Ford Q1; QS
9000
Global Strategies for the Development of the Portuguese Autoparts Industry
231

IBER-OLEFF
COMPONENTES TÉCNICOS EM PLÁSTICO,
S.A.
Address: Parque Industrial Manuel da Mota
Lotes 10 e 18
3100 Pombal
Portugal
Telephone: +351 236 209 150
Fax: +351 236 209 151
E-mail: iber.oleff.p@mail.telepac.pt
Contact: Mr. José Valente
Brief presentation: Iber-Oleff was founded in
1993 and started production in 1995,
supplying ventilation systems and cockpit
components as its core business. Today,
using a wide range of injection machinery,
modern painting and decoration equipment,
as well as state-of-the-art technologies and
highly trained professional teams, the
company supplies technical plastic products
to automotive and other industries.
Year founded: 1993
Capital Share: 1.000.000.000 PTE
Annual Turnover: 3.000.000.000 PTE
No. Employees: 160
Products Manufactured: Plastic technical
components for the automotive industry
Main Markets: Portugal; Germany; Spain;
U.K.; Belgium; Denmark
Main Clients: AutoEuropa; Ford; Volkswagen;
Mitsubishi; Sommer Allibert; Philips;
Blaupunkt
Quality Assurance Certificates: ISO 9001;
QS 9000; Ford Q1
232

IETA
INDÚSTRIA DE ESTOFOS E TRANSFORMAÇÃO
DE AUTOMÓVEIS, LDA
Address: Rua do Pinheiro
Apartado 2032
4431-601 Oliveira do Douro
Vila Nova de Gaia
Portugal
Telephone: +351 22 786 50 00
Fax: +351 22 783 50 48
E-mail: geral@ieta.pt
Contact: Mr. Armando Soares
Commercial Director
Brief presentation: IETA produces metal
component parts for the automotive industry,
exporting 75% of its production, in the areas
of: metal pressing; tube bending; welding
construction; surface treatment. The company
has implemented an integrated information
system and is equipped with test and
metrological laboratories. Its constant
investment in human and technical resources
is a proof of a commitment to total quality.
Year founded: 1969
Capital Share: 300.000.000 PTE
Annual Turnover: 1.900.000.000 PTE
No. Employees: 165
Products Manufactured: Metal component
parts
Main Markets: Portugal; Germany; France;
Switzerland; Spain; Belgium; Sweden; U.K.;
Canada; U.S.A.
Main Clients: John Deere; Robert Bosh; Uldry;
Metzler; Kirchoff; Sommer Alibert; AutoEuropa;
Efacec
Quality Assurance Certificates: NP EN ISO
9002; QS 9000
Global Strategies for the Development of the Portuguese Autoparts Industry
233

INTEPLÁSTICO
INDÚSTRIAS TÉCNICAS DE PLÁSTICO, S.A.
Address: Zona Industrial do Casal da Lebre
Apartado 360
2431 Marinha Grande Codex
Portugal
Telephone: +351 244 545 260
Fax: +351 244 541 010
E-mail: inteplastico@mail.telepac.pt
Contact: Mr. Jorge Martins
Chairman of the Board
Brief presentation: Inteplástico was founded
in 1992 by Iberoplás, Sociedade Ibérica de
Plásticos, Lda., following more than 15 years
of experience in the injection moulding
business. It is located in Marinha Grande,
the heart of the Portuguese mould making
industry. With a rich industrial tradition, a
skilled workforce and an important industry
of auxiliary equipment, Marinha Grande is
close to the A1, Lisbon-Oporto-Braga highway
and one hour away from Lisbon's International
airport.
Inteplástico is an organization with a flexible
and efficient company structure that
maximizes its human and technical resources
through the use of advanced computer
systems and modern management concepts.
Year founded: 1992
Capital Share: 400.000.000 PTE
Annual Turnover: 1.200.000.000 PTE
No. Employees: 70
Products Manufactured: Plastic injection
components
Main Markets: Portugal; U.K.; France;
Sweden; Spain
Main Clients: S.A.I. - Automotive Portugal;
Sharp Manufacturing U.K.; Lever; Opel;
AutoEuropa; EuroMolde
Quality Assurance Certificates: Ford Q1; ISO
9002
234

IPETEX, S.A.
Address: Apartado 68
2070 Cartaxo
Portugal
Telephone: +351 243 779 151
Fax: +351 243 779 977
E-mail: ipetex@mail.telepac.pt
Contact: Mr. A. J. Lavrador
Managing Director
Brief presentation: The company's automotive
components division produces mainly floors,
roofs, sound-proofing and instrument panels.
All the front line European suppliers are
amongst IPETEX's "non-woven fabrics"
customers. In 1997 the company formed
and alliance with other suppliers of parts for
automotive interiors under the name of
ACECIA.ACE.
Year founded: 1964
Capital Share: 897.000.000 PTE
Annual Turnover: 1.500.000.000 PTE
No. Employees: 130
Products Manufactured: Technical textiles
Main Markets: Portugal; U.K.; Spain
Main Clients: Salvador Caetano; VANPRO;
Johnson Controls; Sommer Allibert; Ligier;
Catensa
Quality Assurance Certificates: ISO 9002
Global Strategies for the Development of the Portuguese Autoparts Industry
235

JOÃO DE DEUS & FILHOS, S.A.
Address: Estrada Nacional 10, Km 107
Arados
2135-113 Samora Correia
Portugal
Telephone: +351 263 650 240
Fax: +351 263 654 217
E-mail: jdeus@mail.telepac.pt
Contact: Mr. João Neves
Commercial Management
Brief presentation: João de Deus & Filhos,
S.A. produces radiators, intercoolers and
heaters for passenger cars, trucks, industrial
and agriculture machinery. Using an
advanced technology, the Nocolock process,
and its own R&D capacities the company
produces both to the OE and After markets.
Year founded: 1914
Capital Share: 1.204.000.000 PTE
Annual Turnover: 3.892.000.000 PTE
Nr. Employees: 376
Products Manufactured: Copper/brass
radiators; Copper/plastic radiators; Brazed
aluminum/plastic radiators; intercoolers;
heaters
Main Markets: Europe; U.S.A.
Main Clients: Audi; Volkswagen; Fiat; Iveco;
Lancia; Mitsubishi; Ligier; Alfa Romeo;
Maserati
Quality Assurance Certificates: ISO 9001
236

MANUEL DA CONCEIÇÃO GRAÇA, LDA
Address: Rua Castelo Melhor 6
2580 - 470 Carregado
Portugal
Telephone: +351 263 856 710
Fax: +351 263 855 926
E-mail: mcgraca@mail.telepac.pt
Contact: Mr. Melo de Carvalho
Managing and Financial Director
Brief presentation: Manuel da Conceição
Graça, Lda, situated in Carregado, is involved
in the manufacture of pressed sheet metal
articles, assembly work and the treatment
of surfaces for the automobile and other
industries, as well as the respective moulds
and tools.
The company has made significant
investments in recent years, especially in
tridimensional machinery for quality control,
electro-erosion equipment, high-speed
presses, transfer presses, automatic feed
pressing lines, an automatic retraction and
extraction system, product re-engineering,
improved environmental conditions and a
new integrated information system within the
bounds of the AICIME project.
Year founded: 1979
Capital Share: 500.000.000 PTE
Annual Turnover: 2.372.000.000 PTE
No. Employees: 332
Products Manufactured: Pressed sheet metal
articles, moulds and tools
Main Markets: Portugal; Spain; U.S.A.;
Germany; U.K.; France; Netherlands
Main Clients: Opel; Ford; AutoEuropa;
Benteler; Volkswagen; Westfalia; Acushnet;
Bosch; Blaupunkt
Global Strategies for the Development of the Portuguese Autoparts Industry
237

PEREIRA, BARROSO & OLIVEIRA, LDA
Address: Zona Industrial dos Arcos do Sardão
4431-601 Oliveira do Douro
Portugal
Telephone: +351 22 7860 700
Fax: +351 22 7860 701
E-mail: pbol@mail.telepac.pt
Contact: Mr. Rui Soares
Brief presentation: PBOL has more than forty
years of experience in the field of stamped
parts for the automotive industry. Due to its
significant investments, since the 1980's,
in the areas of production management and
EDI communication, PBOL is able to achieve,
through a skilled and qualified workforce and
the use of state-of-the-art equipment, high
levels of customer satisfaction and overall
productivity.
Year founded: 1954
Capital Share: 180.000.000 PTE
Annual Turnover: 2.464.000.000 PTE
Nr. Employees: 135
Products Manufactured: Stamped parts
(brackets, support bumpers, panels, support
wheels)
Main Markets: Portugal; Spain; France;
Germany; Brazil; U.K.
Main Clients: Adam Opel; Meritor;
Volkswagen; Visteon; Peugeot; Citroen;
Benteler; Ford
Quality Assurance Certificates: QS 9000; NP
ISO 9002; Q1 Ford; EAQF-A
238

PLASFIL
PLÁSTICOS DA FIGUEIRA, LDA
Address: Zona Industrial da Gala
Apartado 51
3081-85 Figueira da Foz
Portugal
Telephone: +351 233 401 200
Fax: +351 233 401 204
E-mail: plasfil@telepac.pt
Contact: Mr. Manuel Gameiro
Managing Director
Year founded: 1956
Capital Share: 430.000.000 PTE
Annual Turnover: 3.714.611.000 PTE
No. Employees: 310
Products Manufactured: Clips; Fastners;
Retainers; External Parts; Grilles; Scuff Plates
Main Markets: Portugal; Germany
Main Clients: Volkswagen AG; Ford Werke;
Sommer Allibert; Yazaki Saltano; Siemens;
Mitsubishi Trucks Europe
Quality Assurance Certificates: ISO 9002;
ISO 9001; Q101; Q1; QS9000; VDA 6.1;
ISO 14000
Global Strategies for the Development of the Portuguese Autoparts Industry
239

SONAFI
SOCIEDADE NACIONAL DE FUNDIÇÃO
INJECTADA, S.A.
Address: Rua Santos Dias 1052
Apartado 1017
4466-901 S. Mamede de Infesta
Portugal
Telephone: +351 22 9050 700
Fax: +351 22 901 7018
E-mail: sonafi.sonafi@ip.pt
Contact: Mr. Bernardo Macedo
General Manager
Brief presentation: Sonafi, established in
1951 by Société Générale de Belgique, was
the first die casting company in Portugal,
specializing in pressure die casting of
aluminum and zinc alloys, production of tools
for its own use and finishing of castings to
customer specification, mainly for automotive,
gas appliances and electrical/electronics
industries.
Year founded: 1951
Capital Share: 405.000.000 PTE
Annual Turnover: 3.300.000.000 PTE
Nr. Employees: 284
Products Manufactured: Pressure die casting
of aluminum and zinc alloys
Main Markets: Portugal; Germany; France;
U.K.; Spain; Brazil
Main Clients: Ford; Opel/GM; Renault;
Daimler Chrysler; Robert Bosch; Lucas Diesel;
VDO
Quality Assurance Certificates: ISO 9002;
EAQF-Level A; QS9000
240

SIMOLDES PLÁSTICOS, LDA
Address: Apartado 113
3721-909 Oliveira de Azeméis
Portugal
Telephone: +351 256 661 000
Fax: +351 256 661 010
E-mail: dop@simoldesplasticos.pt
Contact: Mr. Manuel Alegria
General Manager
Brief presentation: Simoldes Plásticos is a
young, dynamic and innovative company. In
its 20 years' existence, it has grown
substantially in a very demanding market
place, due to its quick response, lead-times
and the performance of a well-trained,
competent team, fully acquainted with the
latest technical developments.
Year founded: n.a.
Capital Share: 400.000.000 PTE
Annual Turnover: n.a.
Nr. Employees: n.a.
Products Manufactured: n.a.
Main Markets: n.a.
Main Clients: n.a.
Quality Assurance Certificates: n.a.
Global Strategies for the Development of the Portuguese Autoparts Industry
241

SUNVIAUTO
INDÚSTRIA DE COMPONENTES
DE AUTOMÓVEIS, S.A.
Address: Apartado 8
4416-901 Pedroso
Vila Nova de Gaia
Portugal
Telephone: +351 22 786 52 00
Fax: +351 22 786 52 01
E-mail: correio@sunviauto.pt
Contact: Mr. Filipe Moutinho
Chairman of the Board
Brief presentation: Sunviauto develops its
activity in the area of components for the
automotive industry, its "core business"
being the production of seats for cars, buses
and trains. Today, Sunviauto is one of the
main Portuguese companies in this sector,
its products are incorporated in major
worldwide brands and the company's
commitment to total quality stands proof of
Sunviauto's main goal of continually
surpassing the increasing expectations of
its clients
Year founded: 1969
Capital Share: 480.000.000 PTE
Annual Turnover: 6.816.000.000 PTE
No. Employees: 800
Products Manufactured: Seats and its
components
Main Markets: France; U.K.; Germany; Spain
Main Clients: Renault; Peugeot; General
Motors; AutoEuropa; Iveco; Aixam; Ligier;
Microcar
Quality Assurance Certificates: ISO 9000;
QS 9000
242

TAVOL
INDÚSTRIA DE ACESSÓRIOS
DE AUTOMÓVEIS, LDA
Address: Rua Indústria
Nogueira - Cravo
3700 - 138 S. João da Madeira
Portugal
Telephone: +351 256 861 100
Fax: +351 256 866 450
E-mail: tavol@mail.telepac.pt
Contact: n.a.
Year founded: 1988
Capital Share: 1.500.000.000 PTE
Annual Turnover: 6.000.000.000 PTE
No. Employees: 300
Products Manufactured: Impact beams;
Control arms; Fuel tanks
Main Markets: Portugal; Spain; Germany;
Argentine; Mexico; China
Quality Assurance Certificates: QS 9000;
ISO 9001
Global Strategies for the Development of the Portuguese Autoparts Industry
243