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Supplier Switching Costs And Vertical Integration in the [US] Automobile Industry

Supplier Switching Costs And Vertical Integration in the [US] Automobile Industry. Kirk Monteverde & David Teece - 1982. About the Paper. Authored by: Kirk Monteverde (Stanford University) David J. Teece (Stanford University) Published:

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Supplier Switching Costs And Vertical Integration in the [US] Automobile Industry

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  1. Supplier Switching Costs And Vertical Integration in the [US] Automobile Industry Kirk Monteverde & David Teece - 1982

  2. About the Paper • Authored by: • Kirk Monteverde (Stanford University) • David J. Teece(Stanford University) • Published: • Spring 1982 by ‘The Bell Journal of Economics’ (now ‘RAND Journal of Economics’) • 1995 in The Legacy of Ronald Coase in Economic Analysis(S. Medema) • 1995 in Transaction Cost Economics, Volume II: Policy and Applications (O. Williamson & S. Masten) • 1996 in Case Studies in Contracting and Organization (S. Masten) • 1998 in Economic Performance and the Theory of the Firm: The Selected Papers of David J. Teece, Volume One • 2004 in Modes of Organization in the New Institutional Economics (C. Menard) • 2005 in Strategic Management (J. Birkinshaw)

  3. Article overview • Transactions Cost Theory and Vertical Integration • Production is internally organized when external transaction costs exceed those of internal transaction costs (Coase) • Market Imperfection(s) • ‘Know-how’ (more than a book of blue-prints) • Costs associated with transferring (production) ‘know-how’ • Theories tested using data from U.S. automobile manufacturers General Motors Company and Ford Motor Company

  4. Hypothesis • “Assemblers will vertically integrate when the production process… generates specialized, non-patentable know-how” • Why? • Ex post information sharing • Generation of high switching costs • Knowledge based rather than financial based • Possibility of opportunistic re-contracting (dependence on supplier) • Risk of economic rent appropriation due to transaction-specific know-how (dependence on supplier)

  5. Testing • Dependent Variable • 113 automotive components coded in-house / contracted • Extent of vertical integration (looked for 80% in-house) • Independent Variables • Cost of component development (applications engineering) • Component specificity (GMC vs. FMC vs. generic) • Firm identity (GMC & FMC) • Systems effects (or ‘component effect on the system’)

  6. Testing • Engineering • 1-10 scale for engineering effort • Specificity • 1 = firm specific component; 0 = otherwise • Company • 1 = GMC; 0 = FMC • Engine (engine and emissions) • Chassis (chassis, transmission, steering) • Ventilation (ventilation) • Electrical (electrical) • Body (body, fuel tank, cap)

  7. Findings • ‘Engineering’ (component development effort) is positively related to vertical integration • ‘Specificity’ is statistically significant • “Only components specific to a single assembler [firm] will be candidates for vertical integration” • Individually (except ‘Electrical’), no category indicated a significant relationship with vertical integration • All five, however, taken together showed significance in the Probit model

  8. Conclusion • “GM and Ford are more likely to bring component design and manufacturing in-house if relying on suppliers for preproduction development service will provide suppliers with an exploitable advantage.” • HOWEVER – “[GM] and Ford also have a preference for backward vertical integration when the components are firm-specific and their design must be highly coordinated with other parts of the automobile system” • This shows an efficiency-driven vertical integration policy which may operate without regard to supplier opportunism • Findings do not apply in Japan, where “the relationship between the major auto firm and its satellite suppliers is one of total cooperation” (Ouchi, 1981)

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