Chapter 16 Global industry profiles

1. Chapter 16 Global industry profiles

2. Lecture plan Sectoral trends and prospects for three global industries: • grain • automotive • telecommunications

3. Historical overview Production and consumption Industry structure Grain traders Government role Grain trade and investment Prospects for the grain market Grain industry

4. The world grain production • Wheat & feed grain production dominated by about 8 major suppliers, mostly developed countries (around 75% of world’s grain production). • Rice production is dominated by Asian countries (China, India, Indonesia, Philippines, and Bangladesh). • Long periods of oversupply interrupted by brief periods of shortage. • Accumulation of stocks by protectionist policies (e.g. EU, US)

5. World grain consumption • Strong population growth (+2 m. over 1971–97) • Changing diets in developing countries favour grain-intensive foods. • Income growth (income elasticities in low-income countriestend to be > than in high-income countries). • Overall, world demand for grain has slowed down over last 2 decades, mainly due to slow down in population.

6. Grain importers • Chronically food deficient countries: Singapore, Japan, Middle East • Import requirements reasonably stable and predictable • Countries whose import requirements are small and confined to specialist needs (UK) • Countries relying on imports to close gap between production and consumption (China, ex-USSR, Saudi Arabia)

7. World grain exports* in 2003 by main grains (%). Total value: US$37.2b * SITC 041–045 Source: ITC UNCTAD/WTO

8. Grain prices • Prices are volatile; reasons: • weather • oil prices (influencing costs for farmers) • value of US dollar • government policies (EU, US) • political events (wars, nuclear accidents) • Not necessarily volatile incomes for farmers, or large price fluctuations for consumers • Long-term decline in real grain prices (Engel’s law)

9. Trade policies • Trade dominated by private firms, but governments have major role • Protectionist policies in exporting and importing countries • Uruguay Round committed major exporting countries to liberalisation

10. Major grain trade players • Private traders– Cargill (Tradax), (Continental), Louis Dreyfus, Andre (Garnac in US), Bunge & Born • State/farmers trading organisations – Canadian Wheat Board, Australian Wheat Board (privatised), Middle East Trade Boards • State importing organisations – Iran, Egypt, Iraq

11. Futures contracts • Standard quantity and quality • Future month for delivery • Traded at central exchanges (Chicago, Kansas) • ‘Sell’ contract can be settled by a ‘buy’ transaction, and by delivering the commodity against the contract. • Enables users of futures to protect their cash positions by hedging (e.g. taking equal and opposite positions in cash and futures markets)

12. Futures traders • Business men who produce, market and process various commodities • Speculators who voluntarily risk their capital with the expectation of making profits

13. Marketing policies • Traders cannot significantly influence international prices, but they ‘make money’ at any level of price. • Price is the most important factor in the marketing mix programs. • Futures and options used—does not eliminate risks • Promotion: seminars, investment in processing facilities or storage capacities

14. Prospects of the grain market • More stable prices • growing population • trade liberalisation (Uruguay and Doha Rounds) • global warming • low productivity growth • Biotechnology? (may increase supply) • China prospects? • Food security? (good prospects)

15. The automotive industry 27% Tariffs Quotas Standards

16. Brief automotive history • Early 1900s: Henry Ford’s company brought standardised parts, mass production and use of a continuous assembly line into operation • Through strategies of foreign direct investment, Ford and GM obtained strong market positions in Europe and North America. • Assembly of passenger motor vehicles (PMVs) commenced in Australia in 1925. • Post-World War 2: boom in European production by such companies as Fiat (Italy), Renault (France), and Volkswagen (Germany). • Further economies of scale brought about by European economic integration.

17. Brief automotive history cont. • Japanese automotive expansion • 1960s: < 1m units • 1970: 3m units • energy crisis: assault of small/medium cars; US market share reaches 23% • voluntary export restraints (VERs in 1994: 4.2m cars in US market) • Japanese FDI in US: 2m cars by 1990 • South Korean automotive expansion

18. More motor vehicles on the roads • Manufacturing in the world’s GDP declined from 27% in 1970 to only 20% in 2001. • In 1950 only 70 million cars, trucks, and buses on the world's roads. • By 1994, about nine times that number (630 million). • Since about 1970, global fleet growing at rate of about 16 million vehicles per year. • By 2025 there will be well over 1 billion vehicles on the world's roads.

19. Share of world production of motor vehicles by country group, 1997, 2002 Source: adapted from OICA.net and author calculations

20. Importance of the automotive industry • Significant employer of both capital and labour • Employs 2.5 million people worldwide • Three times as many are employed in garages and by car component suppliers • ‘Barometer’ of the economy • Provided 9.9% of the world’s merchandise exports and about 13.3% of exports of manufactures in 2003

21. Oversupply and declining profitability • 1996: automotive industry working at 73% capacity. Reasons: • old markets have matured; no net growth • Rush for overseas investment • ‘build where you sell’—‘market orientation’ • tariff protection; local content rules • overcapacity in developing markets of Asia and Latin America

22. World trade in automotive products World trade in automotive products • 2003 value: US$723b (9.9% of total world merchandise exports) • High concentration: 10 exporting countries/groupings held in 2003 about 94% of world exports (comparative indicator in world imports is about 84%) • Top import markets are EU (43% of world imports, including intra-EU imports); US (about 25% of world ‘s imports); China’s share (1.7%) • 2003 Australian auto imports: US$11.1b (1.5%) • Regional concentration • Growing intra-firm (MNEs) trade

23. Car market in East Asia, 2003 Source: adapted from Automotive Resources Asia http://www.auto-resources-asia.com/m_newsrelease.php#123 (accessed 23 September 2004)

24. Protection in the car sector • Generally, protection is higher in NICs(e.g. Thailand) • import duties (42–68.5% for CBU cars and 20% on CKD) • 7% VAT; excise tax (27–45%) • municipality tax (3.25–4.5%) • local content requirements for cars are 54% • ban on imports of buses with 30 seats and over • import ban on used motor vehicles

25. Protection in the car sector cont. • In developed countries tariff protection generally replaced by non-tariff barriers(e.g. VER) • Very sensitive sector; powerful lobby groups and unions • Australia: decision to freeze tariffs at 15% for 5 years after 2000

26. 90 50 45 80 40 70 35 60 Locally produced 30 50 PMV tariff (%) Market share (%) 25 Imports 40 20 PMV tariff 30 15 20 10 10 5 0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Australian PMVs market (% share of locally produced vs imports) and tariffs, 1988 to 2001

27. Australian automotive exports by destination, %, 1996, 2001 Source: Compiled from Industry Commission Inquiry Report, The Automotive Industry, 1997 and Commonwealth Department of Industry, Tourism and Resources, Key Automotive Statistics 2002, 2003, viewed 15 May 2004, <http://www.industry.gov.au/assets/documents/ itrinternet/ automotive_keystats2003.pdf>

28. Australia’s automotive trade with regional groups, A$m, %, 2003 Source: adapted from DFAT, Composition of Trade

29. Future MNEs’ business strategies • Manufacturing flexibility • Being profitable at lower volumes • More production alliances and joint ventures • Rationalisation of components supplies • Emphasis on design and marketing

30. Future of independent automotive suppliers • More opportunities in supply of parts • Rationalisation and specialisation • Subcontracting to big companies • Direct investment in areas of growth(East Asia and Latin America) • Impact of new technologies: the electric car; the hydrogen-fuelled car

31. Telecommunications industry

32. Composition of global telecom trade(total 1996: US$115b)

33. Telecom privatisations,1984–1996% share by region Total value: US$158.5b Source: based on ITU

34. Global telecom market revenue (US$ billion), number of main telephone lines vs mobile cellular subscribers (millions),1991–2002 Source: adapted from ITU

35. Traditional mode of operation of telecom monopolies • Accounting rate = the price agreed upon by two national carriers • Settlement rate (1/2 the accounting rate) • Collection rate = what the national carrier charges customers) • System expected to break down with deregulation

36. Comparative performance of the top 22 telecom and 25 automotive firms (1999)

37. Comparative performance of the Fortune top global telecom and automotive firms (2003) Source: adapted from Fortune,July 26, 2004

38. TELSTRA’s ranking in 2003 • 23th largest telecom company in the world with revenues of US$2.6b • Profits: US$2.0b (rank 120/500) • Profits as % of revenue: 16% (rank 6/24) • Profits as % of assets: 5 (rank 5/24)