Results of field research

According to the Grounded Theory conceptual framework, results of field research are shown in terms of the categories built during the study. In this paper, the categories that are relevant for analysing the impact of PD on subsidiary strategy are: Products Developed in Brazil, Subsidiary-Supplier Relationship, National Competitive Advantage of Brazil in the Automotive Industry, Organisational Structure and Processes, and Subsidiary-Headquarters Relationship.

Products Developed in Brazil

GMB Meriva was a project focused on the Brazilian market in cooperation with the German GM subsidiary (GME), which was also interested in a similar model for the European market.

The Brazilian team went to headquarters to ask for approval for the model business plan in order to substitute the Corsa Station Wagon (a derivative developed in Brazil from the global hatchback Corsa model) with a minivan. GME, in turn, had asked approval for a smaller version of Zafira, the GM global family van. The interests coincided and they decided to run a cooperative project.

The Meriva project was developed by the Brazilian team in close cooperation with the German team because the German subsidiary would have to manufacture the model afterwards.

The general idea was a modern car, with a mono-bloc structure, high seats (“G point” elevation or “King-of-the-Road” structure), and a flexible configuration for the rear seats and the trunk.

This product catalysed the objective and subjective conditions of innovation capability of the Brazilian subsidiary and matched the international restructuring needs of GM, which was being pressed by international competition and financial problems.

The VW Fox, on the other hand, provided a solution for a stagnant Polo production line. Polo was the VW global model and huge investments were made at the VWB plant in order to locally produce the project. However, it was overpriced for the Brazilian market, and VWB devised the Fox project as a solution.

The Fox is a compact mono-volume car focused on the Brazilian “operational scenario” (infrastructure conditions, fuel mix, price sensitive consumer behaviour), which produced some innovative features, such as larger internal spaces (“projected around the passengers”), and elevated seats, like in the Meriva. 

The Fox had a design that was more adapted to the Brazilian market. It was not a Polo derivative, but a completely new model.

The idea was originally an initiative of the subsidiary in 1998-1999 and was approved by VW headquarters in 2001, a very short time in VW culture. The vice-president of PD, a German expatriate in Brazil, used his political influence to sell the idea of taking the car to Europe via export from Brazil, which is what indeed happened later. VW needed an entry-level car in Europe, mainly in Eastern Europe markets. The model became a market success in Brazil and Europe and is currently the fifth-most globally produced car for VW.

The role played by the vice-president of PD was crucial. He foresaw the Polo’s weak sales performance in Brazil and convinced the parent company of the need for local development, which was not in headquarters’ original plans. The planned role for the Brazilian subsidiary was only adaptation of global models. The strategy of the subsidiary was to rapidly develop ideas and obtain headquarters approval through early prototype deployment and assessment.

According to Consoni and Quadros (2002; 2003; 2004), Brazilian subsidiaries built PD capability through a gradual process of adaptation of global models to local conditions. Amatucci and Bernardes (2007; 2008) listed other elements for this competence-building, namely, local factors, such as Porter’s diamond in the automotive business, local tax policy, operational scenario, and subsidiary links to sources of competence, and global factors, such as the decline of the global car concept, the infeasibility of centralised development of all local models, headquarters initiative, and investment in the subsidiary.

Subsidiary-Supplier Relationship

Automakers currently cannot independently develop all the innovation needed to launch a competitive model and need to rely on the supplier’s deep involvement in the project. Suppliers have been deploying their own innovations and solutions to new concepts in the new models. They are called on to cooperate with a new project early in the development process, and they perform a good share of the intelligence required for the models. Some parts of the prototype are often pre-produced by the supplier.

Automakers currently order entire module projects and production from first-level or “tier-one” suppliers. Tier-one suppliers in turn sub-contract subsequent levels of suppliers upstream (tiers two and three). Thus, automakers share technology and responsibility for quality and distribution with high-level suppliers in the industry. The “upgrade” of Brazilian car manufacturing to modular production is very well documented in the literature (Kotabe, Parente, and Murray, 2007). In addition to the modular production in conventional plants, GMB and VWB have innovative, cooperative plants. The GM Gravataí facility and the VW trucks Rezende facility are world-class manufacturing plants. Suppliers are physically embedded inside the plants, assembling modules real-time to feed production lines.

National Competitive Advantage of Brazil in Automotive Industry

Due to the crowd-in phenomena (BRESSER PEREIRA, 1978), Brazil has one of the highest number of automakers in the world. Initially attracted by the development policy of President Juscelino Kubitschek de Oliveira in the 1960s, the number of players in this industry rose dramatically with the economic opening of the 1990s, jumping from four to seventeen from 1994 to 2005. Part of this policy has always been a tariff barrier to protect local players from imported cars. The huge number of players provoked an intensity of rivalry that pushed automakers towards quality and productivity. This competitiveness also turned the country into a test-field for automakers worldwide. The supply industry became highly developed, globalised, and competitive, and supported the innovation process of the auto industry through co-development. Finally, the education system at both the technical and academic levels has provided a highly qualified workforce for the industry.

Brazil currently has an internal market that is important to global automakers. In 2006, VW sold 440,000 vehicles in Brazil (not including trucks) and exported 202,000 from Brazil (265,000 in 2005). Before the current global financial crisis, the total Brazilian market was estimated at two million cars (2007). Even today, forecasts project a 3.5 million vehicle market in 2009 (including busses and trucks). The local market thus justified the size of investments and the existence of an engineering core in Brazilian subsidiaries as well as autonomy to adapt global platforms to fit local market needs.

Altogether, these factors represent all of Porter’s “diamond” conditions for a competitive industry. Production factors are mature in this industry now that national competitiveness has evolved from basic to advanced factors (PORTER, 1990). Therefore, Brazil is no longer maintaining direct investments in the auto industry because of a less expensive workforce, but because of a specialised workforce with an efficiency advantage.

The competence for PD and the globalisation of the supply industry has eliminated the technological gap typical of product life-cycle management. There is still a market gap, mainly due to the lower buying power of local customers, which pushes the industry to produce less expensive models.

Organisational Structure and Processes

Globally, GM has manufacturing facilities for every market it serves; that is, around 60 countries. There are, however, only five engineering centres, divided by regions: Detroit, Germany, Australia, South Korea, and Brazil. Brazilian engineering responds to Latin America, Africa, and the Middle East.

VW global operations are separated into four regions: European Union, United States, South America/South Africa, and Asia/Pacific. This regional organisation is related to international logistics and market similarity.

VW indistinctly refers to the areas that perform adaptations to global models or full development as “global centres for vehicle development”. There are centres in headquarters (Germany), Mexico, Brazil, South Africa, and China. However, there is no information about centres that undertake full development other than in reference to Germany and Brazil.

GMB has approximately 20,000 employees in Brazil (2006), in São Caetano do Sul and São José dos Campos in the state of São Paulo, and in Gravataí in the state of Rio Grande do Sul. The technological centre (engineering and design) accounted for 900 employees in 2006. The subsidiary planned to grow to 1,200 employees before the current global financial crisis. The design section has 200 designers.

VWB has a product engineering department divided into product management and product planning, construction, evaluation, engine engineering, and “package design” groups, totalling 1,000 engineers.

GMB engineering is structured by vehicle modules –System Management Teams or SMTs, which are: engine, powertrain, chassis, structure enclosure, exterior (lights, mirrors etc.), interior, electric-electronic equipment, and “others”. The content of the systems vary between automakers (for instance, the Fiat powertrain includes the engine), and some automakers have as few as three system teams. Each team has employees exclusively dedicated to the internal market, employees exclusively dedicated to international markets, and employees exclusively dedicated to solving international adaptation problems, including service for models that will not be manufactured or marketed locally – for example, engineering the right-sided steering wheel for the Hummer H3. In VWB, technical structure is structured by a global matrix where engineering and manufacturing organise by car parts – “sets” – responding to local set managers and to the corresponding global set managers in headquarters. In VWB, the sets are chassis, finishing, electricity, motorisation, and structure enclosure.

Subsidiary-Headquarters Relationship

GMB has had a high degree of autonomy to adapt global products to the Brazilian environment. Apparently the corporation as a whole understands the need for adaptation in commercialising global models for specific markets. On the other hand, GMB financial performance is respected by headquarters (GMB had the best financial performance of GM in 2006), and GMB has headquarters authorisation to maintain and expand an engineering team of the proportions mentioned earlier.

In the process of the global restructuring carried out by GM vis-à-vis the financial problems it has been facing since 2005, the PD capabilities of GMB are, after Meriva development, incorporated into the GM group. Therefore, GM has begun to assign global tasks to GMB engineering teams, recognising a new role for the subsidiary in the multinational network – the role of designing and engineering GM’s small and medium-sized pick-ups worldwide, on top of traditional global model adaptations.

Competition between subsidiaries to site global developments in GM occurred until the moment before global restructuring of engineering areas. GMB was one of the winners, grabbing an important share of the company value-chain when it was promoted to one of the five engineering centres of GM. The myth of product development “against headquarters will” does not apply to the GMB Meriva case (contrary to the VWB Fox case, which may contain some elements). GM headquarters approves every step of the project and its respective investment. Everything is clearly communicated and transparently discussed, including former competition between subsidiaries to site global projects. According to the interviews, the known criterion in GM is financial performance and subsidiary size, which why local market size is relevant to the power relationships between subsidiaries.

After Meriva development and the establishment of one of the five PD centres in GMB, the relationship between subsidiary and headquarters and the relationship between GMB and sister subsidiaries changed. Being responsible for a project also meant that the subsidiary had a mandate over global sourcing that extended to every plant that was planned to manufacture the projected model because the parts and modules were tied to respective suppliers, most of which were also multinational companies. The subsidiary then strongly influenced what sister subsidiaries would buy anywhere the model was being manufactured.

In the case of Fox development, many tools and moulds were developed in a definitive way since prototype development because VWB had a short budget to develop the new model. There has been no headquarters investment. Traditionally, VW headquarters mainly relies on local management in issues such as Brazilian financial and work relationships because German managers find these relationships very difficult to understand.

Apart from this project, VWB had an experience of very substantial autonomy from headquarters policies, particularly during the local Autolatina joint-venture with Ford. According to data, headquarters left VWB on its own during this period, afraid of sharing global models with a Ford subsidiary. Therefore, the Autolatina locally developed its own models for Latin America during the entirety of its existence. In this period, the engineering capability for complete development of both subsidiaries (VWB and Ford) were consolidated, but apparently not fully recognised by VW. The end of the joint-venture brought the local subsidiary back to a dependent position in relationship to headquarters, which apparently had lost touch with the local reality. VW headquarters had invested €3 billion in plant remodelling to receive the Polo global project, despite local managers forecasts about its low sales potential in the Brazilian market.

Thus, despite investing in Polo manufacturing against local opinion, headquarters did not invest in the Fox project, which in was developed against headquarters recommendation. When the local VP of PD forecasted poor Polo market performance for the Polo, headquarters did not listen. When he proposed the idea of the local model Fox, he had no support. At that time, local development was clearly out of step with headquarters strategy. After the success of the Fox, he was promoted to global VP of compact cars development and VWB became a global centre for compact cars development.

Therefore, contrary to the Meriva case, Fox development had clear subsidiary initiative characteristics, which were very important in helping the subsidiary overcome the problems it had at the time.

VWB currently exports popular vehicles to countries such as Mexico and Angola. After Fox development and its consequences, VWB was promoted to Centre of Development of Compact Cars for the global corporation. This new role is clearer in comparison with the Mexican subsidiary of VW (VWM). Although the Mexican market has a similar structure to the Brazilian market regarding to the operational scenario and consumer behaviour, VWB and VWM specialised in different ways. VWM specialises in producing for the US market, exploiting advantages in basic production factors and imports models to be commercialised in local market from Brazil.