4_IncreasingGlobalCompetition - PRELIMINARY NOT FOR...

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PRELIMINARY NOT FOR QUOTATION Increasing Global Competition and Labor Productivity: Lessons from the US Automotive Industry MCKINSEY GLOBAL INSTITUTE Martin Neil Baily Diana Farrell Ezra Greenberg Jan-Dirk Henrich Naoko Jinjo Maya Jolles Jaana Remes November 7, 2005
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Preliminary Not for quotation 2 1. Introduction Increasing global competition is changing the environment facing most companies today. As trade barriers fall and transaction costs decline, new global competitors are entering previously more isolated domestic markets. In response to this intensified competitive pressure, local companies are pushed to enhance performance by innovating and adopting process and product improvements. This domestic sector dynamic leads to higher productivity, which, in turn, can create sustainable competitive advantages for companies, as well as being the most important driver of job creation and per-capita income growth for the economy. This link has been established in McKinsey Global Institute’s extensive country productivity research. Our new study goes further than previous research by focusing on how increasing global competition leads to productivity growth, using the US automotive manufacturing sector as a case example. More specifically, we have focused on the production of new vehicles in the US, including parts assembly. We have chosen this example because of the globally competitive nature of the automotive market and the size of the US in this market over our period of analysis. As we shall see, some of the non-US original equipment manufacturers (OEMs) had clear productivity advantages which enabled them to create significant competitive pressure in the US market. In this report, we look at how the Big Three US OEMs responded to the changed competitive environment, how they overcame barriers to compete, or failed to do so, and how their introduction of process and product innovations drove productivity growth (Exhibit 1). 1 We find that nearly half of the productivity increase over the period from 1987 to 2002 was driven by the adoption of improved process technology by the Big Three. About one quarter came from the shift to new products with higher value-added per hour worked. The remainder of the industry productivity increase came from increased features and quality in existing products, a shift within the industry to more efficient producers (including an increased share of production by high-efficiency transplants), and the process efficiency improvements that have arisen from changes in product mix. 1 Productivity is measured by real value-added per hour worked. The Big Three OEMs are General Motors (GM), Ford and Chrysler.
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