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The study of collaboration and its relationship to the competitiveness of South African

auto-component manufacturers

A Research Report

presented to

The Graduate School of Business

University of Cape Town

in partial fulfilment

of the requirements for the

Masters of Business Administration Degree

By

Michael Duys

Mehleli Mpofu

Erick Outa

28 November 2003

Supervisor: Professor Paul Sulcas

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Acknowledgements and Declaration

This report is not confidential. It maybe used by the Graduate School of Business and

members of the Bench Marking club.

Many individuals contributed to the completion of this report. Without their help and

patience this document would not have happened. We would especially like to thank

Professor Paul Sulcas for his willingness to take us through this Journey and Dr Justin

Barnes of Benchmarking Club for allowing us access to members of the

Benchmarking club. Professor Trevor Wegner also gave us invaluable support on the

statistical analysis. We are also grateful to MBA admin for logistics support in

sending out, following up and receiving back the questionnaires.

And of course to the respondents who have generously given of their time, experience

and intelligence.

We certify that except as noted above the report is our own work and all references

used are accurately reported in the bibliography. The group has used a recognised

convention for citation and referencing. Each contribution and quotation from the

works of other people has been attributed, cited and referenced.

Michael Duys………………………Mehleli Mpofu…………………. Erick Outa

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The study of collaboration and its relationship to the competitiveness of South African auto-

component manufacturers

ABSTRACT

This study evaluates the use of collaboration by auto-component

manufacturers as a means for achieving international

competitiveness. It is based on the Global Value Chain Framework

which asserts that competitiveness can be gained by developing

linkages with the lead firm in a production network as well as

leveraging relationships with other network partners to gain

competencies. However, this research fails to produce enough

evidence to infer that collaboration is a necessary and critical

strategy in internationalise a firm within the auto-component sector.

KEYWORDS: Collaboration, Global Value Chains, Internationalisation, Auto-

Component Manufacturers, Production Networks, Lead Firms, Vertical Integratio,

Original Equipment Manufacturer

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Abbreviations

ACM Auto-Component Manufacturer

OEM Original Equipment Manufacturer

NAACAM National Association of Auto-Component Manufacturers

GATT General Agreement on Trade Tariffs (GATT)

MIDP Motor Industry Development Program

GVC Global Value Chains

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Table of Contents

Acknowledgements and Declaration............................................................................ ii Abstract ....................................................................................................................... iii Abbreviations .............................................................................................................. iv Table of Contents.........................................................................................................v Table of Figures ......................................................................................................... vii Table of Equations ..................................................................................................... vii Table of Tables ......................................................................................................... viii Chapter 1 Introduction...........................................................................................1

Background ..............................................................................................................1 Research Problem....................................................................................................2 Research Value Add.................................................................................................3 Assumptions and Scope of Research ......................................................................4 Research Limitations ................................................................................................5 Structure of the Report .............................................................................................5

Chapter 2 Literature Review..................................................................................7 Introduction...............................................................................................................7 Definition of Internationalisation ...............................................................................7 Frameworks for Assessing Global Industries ...........................................................7 Organising Global Value Chains ..............................................................................9 Other Studies Reviewed.........................................................................................12 Research Hypothesis .............................................................................................12

Chapter 3 Overview of the Automotive Industry..................................................14 The Global Industry ................................................................................................14

Industry Structure................................................................................................14 Key Trends in the Global Auto-Component Sector.............................................15

South African Auto Components Industry ..............................................................18 Chapter 4 Research Methodology.......................................................................20

Data gathering ........................................................................................................20 Data Requirements.................................................................................................21

Success ..............................................................................................................21 Sustainability.......................................................................................................23 Collaboration.......................................................................................................24

Analytical and Statistical Methods ..........................................................................25 Data Profiling ......................................................................................................25 Chi Squared Test of a Contingency Table ..........................................................25 Discriminant Analysis..........................................................................................26

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Chapter 5 Profile of Participants..........................................................................27 Introduction.............................................................................................................27 Firm Ownership ......................................................................................................27 Company Size ........................................................................................................27 Type of Products ....................................................................................................28 Internationalization .................................................................................................29 Position in the Supply Chain...................................................................................30 Collaboration ..........................................................................................................30 Overview of Indicators of Success .........................................................................31 Overview of Indicators of Sustainability..................................................................32

Chapter 6 Hypothesis Testing .............................................................................34 Chapter 7 Conclusion..........................................................................................35

Interpretation of Findings........................................................................................35 Limitations of Findings............................................................................................37

Procedural Limitations ........................................................................................37 Theoretical Limitations ........................................................................................37

Possible Areas of Further Research.......................................................................38 Bibliography ...............................................................................................................39

Journal article .........................................................................................................39 Books......................................................................................................................40 Research Papers....................................................................................................40 Electronic Sources..................................................................................................41 Organizational Author.............................................................................................42

Appendices ................................................................................................................43 Appendix A - Participating Companies ...................................................................43 Appendix B - Covering Letter / Fax ........................................................................44 Appendix C - Email.................................................................................................45 Appendix D - Letter of Endorsement ......................................................................46 Appendix E - Thank you letter ................................................................................47 Appendix F - Questionnaire....................................................................................48 Appendix G - Data Profiling Table ..........................................................................63 Appendix H - Hypothesis Histograms.....................................................................65 Appendix I - Chi - Squared Test of a Contingency Table .......................................68 Appendix J - Chi – Squared Analysis & Results.....................................................71

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Table of Figures

Figure 1 Co-ordinating Value Chain Activities ......................................................11 Figure 2 Automotive Value Chain .........................................................................14 Figure 3 Comparison of Levels of Integration between OEMs (Jarillo,1993:5) ....15 Figure 4 Assembler - Supplier Relations 1960’s...................................................17 Figure 5 Assembler - Supply Relations 1990’s.....................................................17 Figure 6 Success..................................................................................................22 Figure 7 Sustainability ..........................................................................................23 Figure 8 Collaboration ..........................................................................................24 Figure 9 Number of Employees at Survey Companies.........................................27 Figure 10 Turnover of Participating Companies. ....................................................28 Figure 11 Length of Involvement in Export Development.......................................29 Figure 12 Market Serving Strategies ......................................................................29 Figure 13 Position in Supply Chain.........................................................................30 Figure 14 Number of Firms Involved in Collaboration ............................................31 Figure 15 Change in Total Sales and Exports ........................................................31 Figure 16 Sentiments on Success of Export Drive .................................................32 Figure 17 Growth in Firm Profits.............................................................................33 Figure 18 Sentiments on Overall Firm Profitability .................................................33 Figure 19 Sentiments of Profitability of Exports......................................................33 Figure 20 Collaboration vs. Success ......................................................................65 Figure 21 Collaboration vs. Sustainability...............................................................65 Figure 22 Vertical Collaboration against Sustainability...........................................66 Figure 23 Vertical Collaboration against Sustainability...........................................66 Figure 24 Horizontal Collaboration against Success ..............................................67 Figure 25 Horizontal Collaboration against Sustainability ......................................67

Table of Equations

Equation 1 Success ...................................................................................................22 Equation 2 Sustainability............................................................................................24 Equation 3 Observed Frequency ...............................................................................68 Equation 4 Expected Frequency ................................................................................69 Equation 5 Chi-squared Test Statistic........................................................................69 Equation 6 Test Criteria .............................................................................................69

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Table of Tables

Table 1 Distinction between a Value Chain and a Production Network .......................8 Table 2 List of the Products Manufactured by Respondents .....................................28 Table 3 Summary of Analysis ....................................................................................34 Table 4 Regional Coverage .......................................................................................37 Table 5 Participating Companies ...............................................................................43 Table 6 Data Profiling Table.......................................................................................63 Table 7 Contingency Table ........................................................................................68 Table 8 Expected Frequency Table ...........................................................................69 Table 9 Observed Frequencies..................................................................................71 Table 10 Expected Frequencies ................................................................................72 Table 11 Chi Square Sub – Total Values...................................................................73

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Chapter 1 Introduction

Background

Since 1994, the South African Auto-Component Industry has become increasingly

integrated into the global auto-industry. This integration has manifested itself in many

forms which include:

1. Increased investments by foreign firms in South Africa through acquisitions,

joint ventures, plant expansions and new plants

2. Increased exports and imports of automotives and auto-components to and

from South Africa.

Naturally such a process dramatically altered the competitive landscape that South

African firms faced. This not only included increased competition from imports but

also included the integration of the locally based original equipment manufacturers

(OEMs) into the global value chains of their parent companies.

In response to this, locally based Auto-components Manufactures (ACMs) were

forced to adopted novel strategies to ensure their survival. Dominant amongst these

was the process of internationalisation, the upgrading of local plants and operations to

meet the more stringent requirements that were been imposed by the OEM’s and the

targeting of the “after market” to avoid the power of the OEM’s (NAACAM , 2003b).

A key driver for this integration has been the Motor Industry Development Program

(MIDP) which set out to make the local motor industry internationally competitive

over a reasonable period of time. This was achieved by gradually reducing the import

duties pertaining at the time from levels of 100%, down to levels accepted by the

General Agreement on Trade Tariffs (GATT) bindings. The MIDP was promulgated

in September 1995 and in December 2002 was extended to 2012 to give the industry a

stable and predictable policy environment to facilitate long term planning

(NAACAM, 2003c)

A review of the levels of exports from the sector over the last eight years indicates

that the sector has successfully internationalised. From 1995 to 2001 total automotive

exports grew at a compound annual growth rate of 39% (TISA, 2000).

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However, a number of concerns have been raised about the sustainability of this

success. These concerns include.

• The levels of control that OEM’s have over the fate of local companies and

hence the long term viability of independent exporters.

• The ability of South African firms to compete internationally without the

benefits they receive from the MIDP.

• The price competitiveness of South African firms following the strengthening of

the Rand.

(NAACAM , 2003b).

Against this background, the authors’ interests in national and industry

competitiveness and their involvement in the automotive sector stimulated a desire to

investigate the success of South African ACMs. It is hoped that the research findings

would provide some insights into the potential drivers of competitiveness within the

sector.

Research Problem

The primary focus of this research report is to investigate whether a firm’s

involvement in collaborative relationships with either its’ suppliers, customers, sister

companies or alliance partners has led to more successful outcomes during the

internationalisation of their business.

Secondly the report assessing whether the firm’s involvement in collaborative

relationships implies that the firm’s success is more sustainable.

Therefore the following hypothesises were tested.

Hypothesis 1

a) ACMs who collaborate with other firms are more successful than firms that do

not collaborate

b) The success of ACMs that collaborate with other firms is more sustainable the

success of firms that do not collaborate.

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Hypothesis 2

a) ACMs who are involved in horizontal collaboration are more successful than

firms that are not involved in horizontal collaboration

b) The success of ACMs that collaborate horizontally with other firms is more

sustainable the success of firms that do not collaborate

Hypothesis 3

a) ACMs who are involved in vertical collaboration are more successful than

firms that are not involved in vertical collaboration

b) The success of ACMs that collaborate vertically with other firms is more

sustainable the success of firms that do not collaborate

For the purposes of this study, rather than focus on the type of contractual

arrangements that govern a collaborative relationship an emphasis was placed on the

regularity of information sharing about key value chain activities and the joint

execution of various productive activities between the parties involved in the

relationship.

Research Value Add

This research strives to answer the question “how can South African auto-component

manufacturers achieve international competitiveness within the global automotive

industry?” Due to the relative size of South African firms compared to their global

competitors, a secondary question that is addressed is the question “how do small

firms win in an industry dominated by big players?”

This research is important from two perspectives. Firstly it seeks to identify possible

strategies that South African ACMs can adopt to extend and strengthen their

businesses in markets beyond South Africa. Secondly it seeks to identify possible

responses to the changes that are occurring in the global automotive industry and the

competitive pressures that these have created in the local industry.

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Assumptions and scope of research

Key challenges faced in defining the scope of the research was in adopting an

appropriate definition of internationalisation given that

1. A number of ACMs may not export directly, but sell to OEMs who export

their products

2. Within the auto-motive sector, there is a growing trend towards single

sourcing where supplier lists for OEM plants around the world are developed

centrally from global headquarters. Consequently it has become important to

have a global presence even if it is to only win contracts to supply a locally

based plant.

Therefore the project team had to select a definition of internationalisation which does

not exclude a firm’s domestic sales as these sales may also have being affected by

changes in the global industry. To this end internationalisation was defined as “the

process of adapting firms’ operations (strategy, structure, resources etc.) to

international environments” (Calof and Beamish, 1995:116, citied in Chetty and

Campbell-Hunt, 2003:3).

To frame the analysis, the concept of Global Value Chains (GVC) was adopted. The

core assertion of this approach is that the way goods and services are produced is

shifting away from large scale Fordist-Taylorist factories where factories bought and

sold goods through arms length transactions from sources around the world to a new

emergent system where global production systems exist as a “web of independent yet

interconnected enterprises”. Thus firms succeed in these global systems by

positioning themselves strategically within a global network by developing strategies

for gaining access to the key firms in the network as well as to gain key competencies.

(Gereffi, 2001b and Fleury and Fleury, 2003).

Such an approach resulted in the focus on the number of activities that firms execute

in collaboration with other members of their networks. It is postulated that such

practices can be used to strengthen a firm’s position in a global network.

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The subsequent study was then restricted to the current members of the B&M Analyst

Benchmarking club in the Eastern Cape, Kwa-Zulu Natal and Gauteng as well as a

handful of manufacturers in the Western Cape whose contact details were obtained

from the NAACAM members directory on the NAACAM Website.

Research Limitations

The key limitations on this study were imposed by the financial and time constraints.

Consequently the sample size included in the survey was restricted. However the

assistance of B&M Analysts (BMA) played a critical role in ensuring that a high

response rate was achieved from the targeted companies.

Secondly it would have been ideal to conduct direct interviews with more survey

participants to obtain a richer picture of the issues addressed in the survey. This would

have provided an opportunity to validate and clarify some of the responses provided

by the respondents. However care was taken to mitigate these risks in the design of

the questionnaire.

Structure of the report

This report is divided into seven chapters. In chapter 2 the core concepts used in the

study are introduced and the key hypothesises tested are developed.

This is followed by an overview of both the local and global automotive industry in

chapter 3. The purpose of this chapter is to highlight some of the issues faced by

ACMs in developing countries.

Chapter 4 provides an overview of the research methodology applied in the study.

Chapter 5 provides a profile of the participating companies so as to inform the reader

of the type of companies involved in the study.

The research hypothesises are then tested in chapter 6 which is followed by an

interpretation of the findings and implications for further research in chapter 7.

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Finally a number of appendices containing the documentation that was used during

the course of the study are included.

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Chapter 2 Literature Review

Introduction

The primary purpose of this literature review is to introduce the core concepts used in

this study and to give examples of where these principles have been used. The main

outcome of this literature review was the framework for analysis and the key

hypotheses tested during the study.

Definition of Internationalisation

The term internationalisation is predominately used in discussions about a firm’s

business ventures beyond its national borders. To this end internationalisation is often

defined as processes which “involve the simple extension of economic activities

across national boundaries” (Sturgeon, 2000:5) or “increasing involvement in

international operations” (Welch and Luostarinen, 1988:36, citied in Chetty and

Campbell-Hunt, 2003:1).

Consequently a distinction is often made between internationalisation and

globalisation. The latter can be viewed to involve much more than “the geographical

extension of economic activities across national boundaries but also and more

importantly the functional integration of such dispersed activities” (Sturgeon, 2000:5).

The focus of this study is the integration of South African firms into the global

automotive industry. This industry is currently going through a process of

globalisation as defined above. Thus the distinction between internationalisation and

globalisation would not have captured the full complexity of the issues facing the

local industry. Therefore for the purposes of this study internationalisation was

defined as “the process of adapting firm’s operations (strategy, structure, resources

etc.) to international environments” (Calof and Beamish, 1995:116, citied in Chetty

and Campbell-Hunt, 2003:1).

Frameworks for Assessing Global Industries

Given that the automotive industry is fairly global with key production sites and

activities strewn around the globe, this study required a framework that assesses how

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firms in a global industry compete. The Global Value Chain (GVC) approach

provided such a framework.

The terms value chain, commodity chains, value networks, activities chain,

production chain and input-output analysis are frequently used to describe analysis

that take the entire chain of activities that bring a product to its market place into

account. Although they are often used interchangeable, a distinction between value

chains and production networks provides greater analytic rigour. (Sturgeon, 2000:6)

The production network approach allows the capturing of the dynamism and

complexity of productive activities, whilst the value chain approach focuses on the

essential steps taken to get a product to market and thus makes the role of the key

players more explicit. The relevant definitions are given in table 1 below. (Sturgeon,

2000:6)

Table 1 Distinction between a Value Chain and a Production Network

Name Definition Other Names

Value Chain Sequence of productive (i.e. value-

added) activities leading to end use

Supply Chain, Commodity Chain,

Production Chain, Activities

Chain, Pipeline

Production Network Two or more value chains that share

at least one actor (network linkage)

Value network, Input-output

matrix, Supply Base

Source: (Sturgeon, 2000:6)

A key concept in the analysis of production networks is the issue of governance. This

refers to how influence and control are exerted within the network. (Sturgeon, 2000;

Gereffi, 2001a and 2001b). Indeed global commodity chains are sometimes referred to

as “networks formed by governance structures which determine the inclusion and

exclusion of actors, the division of functions within the chain and the relationships of

the chain to the external world” (Humphrey, 1999:2).

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Within the context of understanding how firms become part of a global industry one

of the major postulates of the GVC framework is that competitive advantage can be

gained by developing linkages with distinct kinds of lead firms in global industries,

which have varying prospects for mobility in the world economy. These lead firms are

the ones that control access to major resources (e.g. product design, new technologies,

brand names or consumer demand) that generate the most profitable returns in the

industry (Gereffi, 2001b).

An alternative approach for gaining competitiveness within the GVC framework is for

a firm to leverage its relationship with other members of its network to develop its

competencies. The central idea in this approach is that participation in “an inter-

organisational network depends on the competencies built by each firm”. This

hypothesis has been developed in studies of the development of various Brazilian

industries with a special emphasis on the internationalisation of these industries.

(Fleury and Fleury, 2003;1)

If the above hypothesises hold, an understanding of how lead firms manage their

global value chains should provide South African ACMs some insight into how to

adapt to their operations to changes in the global automotive industry.

Organising Global Value Chains

Lead firms managing global value chains need to choose how to co-ordinate or

organise the productive activities within their value chain. This co-ordination can be

achieved using one of three ways.

The first approach is that of vertical integration. This generally refers to the case

where a firm chooses to take ownership and responsibility of technologically distinct

production, distribution, selling and other economic processes. In other words, a firm

chooses to integrate within its boundaries many or even most of the activities needed

to deliver the final product or service. (Porter, 1980:300 and Jarillo, 1993:13).

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The extreme opposite of vertical integration is the use of arm’s length transaction

through sub-contracting of various activities. This form of co-ordination results when

a company buys in an input from an external party. (Jarillo, 1993:13)

Within the two extremes of vertical integration and pure sub-contracting is a type of

organisation that is alternatively referred to as quasi integration, strategic networks or

collaboration.

Quasi integration is defined as “a relationship between vertically related businesses

that is somewhere between long-term contracts and full ownership” (Porter,

1980:321). Whilst strategic networks refers to “long term, purposeful arrangements

among distinct but related for profit organisations that allow those firms in them to

gain or sustain competitive advantage vis-à-vis their competitors outside of their

network ”. (Jarillo, 1993:149)

In addition to the co-ordination of activities across one’s value chain, collaboration is

also recognised as something that can happen between competitors on separate value

chains. Thus a distinction is made between horizontal collaboration and vertical

collaboration. (Stonehouse, Hamill, Campbell and Purdie, 2000: 167).

Horizontal collaboration is an arrangement involving two or more companies at the

same stage of the supply chain whilst vertical collaboration refers to relationships

with firms either upstream or downstream of the supply chain. Horizontal

collaboration can also occur across parallel supply chains in different countries.

(Stonehouse et al, 2000:167). The difference between the two types of collaboration is

shown in Figure 1 below.

Collaboration can range from focused to complex types of collaboration. Focused

collaboration refers to cases where parties only collaborate in only one activity such

as joint purchasing, research or marketing etc. In contrast complex collaboration

involves collaborating in a wider range of activities. (Stonehouse et al, 2000:350).

Most literature on collaboration as defined above focuses on the type of contractual

arrangements that firms may enter into to facilitate such relationships. These

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arrangements include the use of minority equity investments, loans or loan guarantees,

pre-purchase credits, exclusive dealing arrangement etc (Porter 1980:321) An

alternative basis for collaboration is that of trust between the participating firms

(Jarillo, 1993:127-149).

Figure 1 Co-ordinating Value Chain Activities

Regardless of the arrangement that has facilitated a collaborative relationship,

collaboration often manifests itself in a firm’s operations through the use of

1. Regular sharing of information about key value chain activities e.g.

collaborative planning systems where the emphasis is on reducing inventory

levels

2. Joint execution of various productive activities e.g. use of jointly staffed

problem solving team to address certain issues along the firms’ value chain

especially during the design of a new product (Meredith and Shafer, 2001).

The issue of regular sharing of information takes greater prominence in the

discussions about collaboration within the context of managing supply chains as

effective communication and the integration of information systems are seen as

Vertical Integration

Vertical Collaboration

123

123

123

Horizontal Collaboration

123

Material Flow Responsibility OwnershipKey

Vertical Integration

Vertical Collaboration

123

123 123

123

Horizontal Collaboration

123

Material Flow Responsibility OwnershipKey

Material Flow Responsibility OwnershipKey

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fundamental building blocks for a global supply chain strategy. (Thunderbird,

2000:186 and Horvath, 2001).

Other Studies Reviewed

A number of studies on internationalisation and the application of the global value

chain framework were reviewed to obtain an understanding of how similar studies

have been undertaken. Generally most studies on internationalisation have focused on

describing how firm’s have gone about their internationalisation. In some case

attempts have been made to link the choices that firms have made during the process

with the outcomes of their internationalisation.

Research Hypothesis

The key assumptions of the Global Value Chain framework are:

1. Competitive advantage can be gained by developing linkages with lead firms

in a global value chain; and

2. Organisations can leverage their relationship with other members of their

network to develop their competencies.

Therefore in assessing the success of the internationalisation of South African ACMs

and the sustainability of this success the researchers would like to advance the

hypothesis that collaboration in the form of regular sharing of information about key

value chain activities and the joint execution of various productive activities is related

to the levels of success that various ACMs have achieved and the level of

sustainability of that success.

To this end the following hypothesises have been developed.

Hypothesis 1

a) ACMs who collaborate with other firms are more successful than firms that do

not collaborate

b) The success of ACMs that collaborate with other firms is more sustainable the

success of firms that do not collaborate

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Hypothesis 2

a) ACMs who are involved in horizontal collaboration are more successful than

firms that are not involved in horizontal collaboration

b) The success of ACMs that collaborate horizontally with other firms is more

sustainable the success of firms that do not collaborate

Hypothesis 3

a) ACMs who are involved in vertical collaboration are more successful than

firms that are not involved in vertical collaboration

b) The success of ACMs that collaborate vertically with other firms is more

sustainable the success of firms that do not collaborate

The focus on success and its sustainability results from the primary objective of

business strategy which is to achieve sustainable competitive advantage (Stonehouse

et al, 2000, 120). Generally measures of success include above average profits, higher

unit revenues, higher market share etc.

One of the measures of sustainability is an organisation’s ability to build and leverage

core competencies which are superior to competitors’ competencies and a firms’

ability to continuously improve these (Stonehouse et al, 2000, 120). However, a firm

can only do this if it is able to generate a profit which it can re-invest in its business.

Therefore profitability is recognised as a key indicator of sustainability.

Further details of the measures used for success and sustainability in this study are

given in chapter 4.

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Chapter 3 Overview of the Automotive Industry

The Global Industry

Industry Structure

Motor vehicle production is the largest manufacturing sector in the world (Austrade,

2001), the bulk of the vehicle production is controlled by 6-8 key players with

headquarters in developed countries. These firms are primarily responsible for the

final manufacture of various vehicles and are thus referred to as original equipment

manufactures (OEMs). Due to their size and the influence they exert over their

respective production networks, these firms are generally recognised as the lead firms

in their networks.

Supporting the lead firms are a multitude of parts or auto-component manufacturers

who range in size from small shops to large multinationals. This segment of the value

chain thus tends to be fairly fragmented.

Goods and products from these manufacturers can either be sold directly to OEMs or

to other ACMs who supply complete sub-assemblies to the OEMs. Consequently a

hierarchy of suppliers can be defined.

Figure 2 Automotive Value Chain

Aftermarket

Original Equipment

Dealers

Fitment Centres

OEMs

OES

Distribution Centres

First Tier Supplier

Second Tier Supplier

Third Tier Supplier

Aftermarket Manufacturers

Original EquipmentConsumers

Aftermarket ConsumersAftermarket

Original Equipment

Dealers

Fitment Centres

OEMs

OES

Distribution Centres

First Tier SupplierFirst Tier Supplier

Second Tier Supplier

Second Tier Supplier

Third Tier Supplier

Third Tier Supplier

Aftermarket Manufacturers

Original EquipmentConsumers

Aftermarket Consumers

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An alternative market for part’s manufacturer is the replacement market (or after

market). Participants in this market make parts and components to substitute or

supplement items that were included in the original assembly of the vehicles.

Key Trends in the Global Auto-Component Sector

Historically OEMs have adopted various organisational forms depending on their

country of origin. Western based firms (i.e. from America and Europe) have tended to

be more vertical integrated than the newer firms from Japan. This is shown in Figure

3 below.

OEMs began establishing offshore plants as early as the 1920s. Generally OEMs

established new supplier networks at each new location because their local

subsidiaries were producing models specific to that particular market. Similarly, when

OEMs begun expanding into developing countries such as Brazil, Mexico and

Argentina in the 1950s and 60s, locally based supply networks were also developed.

This was further driven by the import-substituting industrialisation strategies that

were dominant at the time. These policies thus created an environment conducive for

the growth and survival of locally owned independent firms as OEMs were obliged to

sources a large part of their inputs domestically. (Gereffi, 2001b and Humphrey,

1999)

Figure 3 Comparison of Levels of Integration between OEMs

(Jarillo,1993:5)

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1 0

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3 0

4 0

5 0

6 0

7 0

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However the general shift from import-substituting industrialisation to export-

orientated-industrialisation has resulted in a second wave of internationalisation in the

industry coupled with a greater integration of functional activities around the world.

This wave has seen a number of leading OEMs establishing new production sites in

emerging markets (Austrade, 2001and Humphrey 1999). The primary reasons for this

geographical dispersion of production sites include

1. The OEMs desire to position themselves in growing markets in developing

countries

2. Access to cheap production sites

3. Attractive government policies as host governments wanted to exploit the

sectors potential to provide exports, employment and technological spill-overs.

However, changes in the OEM-supplier relationship that have occurred

simultaneously to this wave of internationalisation have created a completely different

competitive environment for local component manufacturers than in the first wave.

The changes most relevant to this study are those of follow design and follow

sourcing.

Follow design refers to the policy of using the same design at various locations that

OEMs have adopted. Whereas in the past local plants could modify or use their own

designs to suit the local market, follow design restricts this.

The transfer of the design of some parts by OEMs to first tier suppliers coupled with

the policy of follow design has resulted in the policy of follow sourcing been applied.

Thus component manufacturers are required to supply the same product to plants at

different locations. This has led to leading component manufacturers following their

customers to their new locations, hence impeding the growth of locally owned firms.

This globalisation of supply has not only impeded the growth of locally owned firms

but has also led to increased consolidation amongst component manufactures. For

example the total number of component suppliers worldwide fell from 30,000 to just

8000 over the 1990s. (Wells and Nieuwenhuis, 2001 citied in Austrade, 2001)).

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The key implications of these changes for ACMs in developing countries is that in the

era of global sourcing, they can no long compete for local contracts from the local

OEM’s subsidiaries. Thus for these firms to remain a part of the global supply

network, they need to establish relationships with a supplier with access to the OEMs

at a global level.

However, a relationship with a global supplier not only results in access to local

contracts but can also results in access to export customers with whom the global

supplier has a relationship. This is depicted in the figure below which represents the

changes in the flow of designs, contracts and materials that have occurred in the

industry over the last 30 years.

Figure 4 Assembler - Supplier Relations 1960’s

Figure 5 Assembler - Supply Relations 1990’s

(Adapted from Humphrey, 1999)

Assembler location 2

Assembler Core Site

Assembler location 3

Supplier Supplier Supplier

Assembler location 2

Assembler Core Site

Assembler location 3

Supplier Supplier Supplier

Flow of Materials

1960’s

Allocation of Contracts Flow of Design

Assembler location 2

Assembler Core Site

Assembler location 3

Supplier Supplier Supplier

Assembler location 2

Assembler Core Site

Assembler location 3

Supplier Supplier Supplier

Flow of Materials

1990’s

Allocation of Contracts Flow of Design

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South African Auto Components Industry

The South African automotive industry is recognised as one the key sectors of the

South African economy. The sector contributes 6% to GDP, accounts for 29% of the

manufacturing output and employs up to 290,000 people directly. Indeed South Africa

is now the 18th largest manufacturer of vehicles in the world (NAACAM, 2003a).

There are currently 7 OEMs with operations in South Africa, these include players

such as BMW, Toyota, DaimlerChrysler and Volkswagen who have had long term

direct representation in the South African Market.

The majority of these firms have had a presence in the South African market since the

1950s. As with the first wave of internationalisation, a strong locally based supply

network was developed under a system of protectionism and import substitution. The

local auto-component industry has up to 400 component suppliers (NAACAM,

2003a)

However, when South Africa acceded to GATT terms in 1994, concerns were raised

about the global competitiveness of the local industry. To this end the Motor Industry

Development Plan (the MIDP) was promulgated in September 1995 with the objective

of slowly re-introducing South Africa into the international motor industry and

making it internationally competitive over a reasonable period of time.

During the period, exports in the sector have increased at an average annual rate of

39% since 1995. In 2002, up to 133,900 vehicles were exported compared to 18,000

in 1997. Component exports in the same period reached R24 billion in 2002. Direct

labour costs per vehicle have reduced by 30% and productivity (vehicle per head) has

increased by 68% though still below international standards. (NAACAM, 2003a)

During this period South Africans firms have adopted various approaches to increase

their involvement in the global automotive industry. These have included merging

with foreign owned firms and seeking foreign firms that are looking for access to the

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local market, offering licensing opportunities, technology ventures and access to niche

markets.

Areas of international involvement have included:

• Reciprocal imports arising from international parents sourcing components

from South Africa

• International sourcing agreements for CBU’s, engines, seat covers,

clutches and brakes etc

• Local production for export has been the centre stage of the partnerships

However, a number of concerns have been raised about the sustainability of this

success. These concerns include.

• The levels of control that OEM’s have over the fate of local companies and

hence the long term viability of independent exporters.

• The ability of South African firms to compete internationally without the

benefits they receive from the MIDP.

• The price competitiveness of South African firms following the strengthening of

the Rand.

(NAACAM, 2003b)

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Chapter 4 Research Methodology

The primary purpose of the research methodology is to provide an accurate record of

the procedure followed to test the hypotheses. The methodology begins by exploring

the most appropriate procedure for collecting data, it then establishes the types of data

required to undertake the research, and finally it discusses the analytical and statistical

techniques used to test the hypotheses.

Data gathering

A quantitative survey and structured interviews were selected as the most appropriate

techniques for gathering the data. Please refer to Appendix F for a detailed break

down of the questions.

The target companies are located in the following 4 regions, Gauteng, KwaZuluNatal,

Eastern Cape and the Western Cape region. Please see Appendix A for a detailed

breakdown of participating companies. To reach these companies, the survey was

done in collaboration with a Durban based research company called B & M Analysts

(BMA). BMA was selected as a research partner because of their established long

term relationships with over fifty auto component firms. This lent credibility to the

survey and helped to raise the response rate to approximately 40% of BMA affiliated

firms. BMA indicated a willingness to work with the project team provided that the

team were prepared to present their findings to the participating companies.

BMA has existing relationships with companies in Gauteng, KwaZuluNatal, and the

Eastern Cape. For the Western Cape region the project identified target companies

directly.

A test survey was drafted and validated in a number of ways; firstly within the project

team, secondly with the head of BMA Dr. Justin Barnes, and finally in the field with

one test company in the KZN region and one in the Western Cape region. Following

each of these interventions the survey was refined.

Critical to the success of this survey was gaining access to the most appropriate

individual within the target firms. Typically this would need to be someone with a

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broad level of understanding of the firm’s history as well as its operational

characteristics. The ideal candidates to complete the survey were thus the firm CEO’s,

managing directors, plant managers or export managers in that order of preference.

BMA was very useful in this regard in that they were able to direct the project team to

the most appropriate individual.

The project team adopted an aggressive approach to ensure a high response rate from

the targeted companies. In regions outside of the Western Cape, companies were

firstly faxed with an introduction letter and an accompanying endorsement letter, from

the BMA. These letters are shown in Appendix B and D respectively. Firms were then

emailed a copy of the same letter with the survey attached. Finally each company was

telephoned at least once and in some cases twice to ensure that the right person had

received the survey and to gauge interest and applicability.

Firms were given the opportunity to complete the survey online, via email or to print

it out and to fax the completed questionnaire to the graduate school. Email was the

preferred method of response.

In the Western Cape, company names were sourced off the NAACAM website.

Companies were individually telephoned and interviews were set up with six

companies in this region. The benefit of the interviews in the Western Cape was to

validate the clarity and usefulness of the survey and to gain a better understanding of

the issues facing the industry.

Data Requirements

To develop a quantitative method for testing the hypotheses, variables which

accurately correlate with the key theoretical constructs of Success, Sustainability and

Collaboration (Vertical and Horizontal) were defined.

Success

Sales change, export sales change and perceptions of the firm’s export success and

were identified as drivers of success.

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Figure 6 Success

Sales Change was measured in Section B of the questionnaire, where participants

were asked “How have your total sales changed over the past 5 years?” The

participants were given a choice of 5 categories indicating different levels of negative

change in sales and 5 categories indicating different levels of positive change. This

enabled us to develop a Likert scale type measure of Sales Change Index (SCI).

Export Success was measured by asking respondents to give a rating of their

perceptions of the success of their export activities in the recent past. The respondents

were asked in Section C question 3 “How would you rate the success of your export

drive?” The respondents were given a Likert scale with 5 different categories of

answer ranging from “Very Poorly” to “Very Well”. This enabled the developed of

an Export Success Index (XSucI).

Export Sales Change was measured in the same way as Sales Change except that it

was made clear to respondents that the question was relevant only to their export

sales. In Section C the respondents were asked “How have your exports changed over

the past 5 years?” They were given the identical categories as were applied to Sales

Change. This enabled the development of an Export Sales Change Index (ESCI).

These three measures were then equally weighted to produce an overall index of

success, Success Index (SucI) such that:-

SucI = 1/3 x SCI + 1/3 x XSucI + 1/3 x ESCI

Equation 1 Success

1/3

1/3

Sales Change Index

Export Sales Change Index

Success Index

Export Success Index 1/3

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Sustainability

Three underlying variables were identified as drivers of sustainability of the firm.

These were perceptions of firm profitability, change in firm profitability and

perceptions of export profitability.

Figure 7 Sustainability

Firms were asked to rate their perception of the firm’s overall profitability on a 5

position Likert Scale. In Section B respondents were asked “How happy are you with

your current level of profitability?” Their choices ranged from “Very Unhappy” to

“Very Happy”. This response enabled the development of Profitability Perception

Index, (PPI).

In Section B firms were asked “How has your profitability changed over the past 5

years?” The respondents were given the same categories as were used in the SCI and

the ESCI. This enabled the development of a Profit Change Index (PCI).

The final measure of sustainability selected was the perception of export profitability.

Firms were asked to rank their perceptions of export profitability on a Likert scale. In

Section C firms were asked “How happy are you with the current level of profitability

of your export sales?” Their choices ranged from “Very Unhappy” to “Very Happy”.

This enabled the development of the Perceptions of Export Profitability Index

(PEPI).

1/3

1/3

Profit Index

Export Profit Index

Sustainability Index

Profit Change Index 1/3

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These three measures of sustainability were equally weighted to develop an overall

index of sustainability, the Sustainability Index, (SusI) such that:-

SusI = 1/3 x PPI + 1/3 x PCI + 1/3 x PEPI

Equation 2 Sustainability

Collaboration

Collaboration was defined as a categorical variable. A firm was classified as engaging

in collaboration if it was considered to engage in either horizontal or vertical

collaboration.

A firm was classified as engaging in horizontal collaboration if it indicated that it

collaborates with either sister companies or alliance partners on at least one of a range

of specified activities.

A firm was classified as engaging in vertical collaboration if it indicated that it

collaborates with either its customers or it supplies on at least one of a range of

specified activities.

Figure 8 Collaboration

In Section D firms were asked “Which of these activities are performed in

collaboration with other firms?” The respondents were then asked to identify with

whom they collaborate on a particular activity. The following activities were listed as

potential activities available to firms to collaborate on “Fundamental Research”,

“Product Development”, “Jig and Tool Design”, “Jig and Tool Manufacture”,

OR

OR

OR

Collaboration

Horizontal Collaboration

Vertical Collaboration

Customers Suppliers

Sister Companies

Alliance Partners

Firm’s ActivitiesOROR

OROR

OROR

Collaboration

Horizontal Collaboration

Vertical Collaboration

Customers Suppliers

Sister Companies

Alliance Partners

Firm’s Activities

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“Production Process Design”,” Manufacture”,” Marketing”, “Sales” and

“Procurement”.

To validate whether firms were in fact collaborating they were asked to indicate how

often they collaborate with the identified parties. In Section D firms were asked “How

frequent is your collaboration with a third party in the following areas?” with choices

ranging from “Never” to “On a continuous basis”. Firms that answered “Never” or

“Once or twice a year” were deemed not to engage in collaboration for that particular

activity.

Analytical and Statistical Methods

The hypotheses articulated in Chapter 2 postulate the existence of a relationship

between a series of variables. Furthermore it was postulated that these variables were

positively correlated. Thus analytical and statistical methods were used firstly to

establish whether a relationship actually exists and secondly if a relationship exists, to

establish what the direction of this relationship is.

Data Profiling

Data profiling was undertaken to achieve two objectives. The first was to provide the

reader with a profile of the companies participating in the survey as well as to

facilitate the identification of any anomalies in the data before undertaking detailed

analysis.

The second objective was to develop a series of charts displaying the relationships

between the independent and dependent variables (Please see Appendix H). These

charts were used for the preliminary analysis by inspection to asses if the plotted

variables were related.

Chi Squared Test of a Contingency Table

The Chi Squared Test of a contingency table was utilised to statistically validate the

existence of relationships between the variables. Please see Appendix Ifor a detailed

explanation of the mechanics of this test.

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If one can show that two variables are related .i.e. not independent, then it becomes

necessary to establish the direction of this relationship. Chi Squared is unable to

determine this direction. To make this judgement one can inspect the distributions

visually to establish if there is any indication of the direction of the relationship or one

can use a more sophisticated statistical technique such as discriminant analysis.

Discriminant Analysis

Discriminant analysis provides an alternative method of establishing the extent and

direction of the relationship between two or more variable. The problem with this

approach is that it requires a much larger sample size than was available for this

study. It nevertheless provides deeper insight into the relationships between variables

because it is able to distinguish between the extent, direction and relative significance

of different variables as predictors of success and or sustainability. This process is

analogous to regression analysis, the major difference being that regression analysis

requires that the underlying variables be of an interval nature.

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Chapter 5 Profile of Participants

Introduction

The objective of this section is to give the reader some indication of the characteristics

of the firms that participated in the survey. This information is drawn from selected

questions in the survey questionnaire which is attached in Appendix F. Of the 60

companies that were approached 26 companies responded.

Firm Ownership

Out of the 26 respondents, 6 were foreign owned and the balance locally owned. 17 of

the companies were privately owned and 9 are publicly listed

Company Size

0

1

2

3

4

5

6

7

8

0 to 20 21 to 50 51 to 100 101 to 200 501 to 1000 Greater than1000

Figure 9 Number of Employees at Survey Companies

The range of firm sizes in terms of number of employers and sales turnover is shown

in Figure 9 and Figure 10 respectively. Over two thirds of the respondents have

between 50 and 500 employees. 3 firms had more than 1000 employers whilst only 2

had less than 50 employees. 5 companies had employees ranging 100-200 and another

5 companies had employees between 500 and 1000 as shown in the graphs.

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0

1

2

3

4

5

6

R 5 million to R10 million

R 10 million to R20 million

R 50 million to R100 million

R 100 million to R200 million

R 200 million to R500 million

R 500 million to R1 bilion

Figure 10 Turnover of Participating Companies.

In terms of sales turnover, over 80% of the respondents had turnovers in excess of

R20m per annum. Of this 80%, half of the respondents had turnovers in excess of

R100m per annum.

Type of products

The respondents manufacture a diverse range of products. 62% of the firms

manufacture customised products only while 15 % manufacture standardised

products. The remaining 23% make both customised and standardised products. Some

of the products manufactured by the respondents are listed below.

Table 2 List of the Products Manufactured by Respondents

Engine parts, road wheels, radiators, catalytic converters, glass, tyres, wiring

harnesses, automotive tooling, hose clamps, springs and wire forms, metal sintered

products, aluminium sliding windows, hydraulic brake systems, trim, air cleaners,

bent tube, rear drive axles, mirrors and metal pressings.

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Internationalization

Figure 11 and Figure 12 show the participating companies length of involvement in

export development and the export market serving strategies adopted by the

respondents. 76% of the respondents are involved in export market development.

Three fifths of these firms have been exporting for more than three years whilst the

remainder only begun exporting within the the last three years.

0

1

2

3

4

5

6

7

8

9

less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years

Figure 11 Length of Involvement in Export Development

Figure 12 Market Serving Strategies

72%

6%

11%

11%

Direct Sales Off shore manufacturing subsidiary

Offshore Sales Office Distributor Relationship

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Position in the Supply Chain

An overview of the respondents’ position in the automotive supply chain is shown in

Figure 13 below. This shows that 14 of the 26 respondents were solely first tier

suppliers whilst 4 were solely second tier suppliers. The remainder of the respondents

classified themselves as both first and second tier suppliers. No firms classified

themselves as third tier suppliers.

Figure 13 Position in Supply Chain

Collaboration

Figure 14 shows the number of firms involved in collaboration. Of the 26

respondents, 13 indicated that they collaborate with either an alliance partner or a

sister company on at least one activity listed in Section D of the questionnaire. These

firms were said to be involved in horizontal collaboration.

Similarly 17 of the 26 respondents who indicated that they collaborated with either a

supplier or a customer in at least one activity were said to be involved in vertical

collaboration.

In total 13 firms claimed to be involved in both vertical and horizontal collaboration.

4 firms were involved in at least one form of collaboration and 9 firms were not

involved with collaboration at all.

54%

15%

0%

31%

First Tier Supplier Second Tier

Third Tier Combination

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Figure 14 Number of firms involved in Collaboration

Overview of Indicators of Success

The majority of the firms reported that they had experienced a positive growth in both

total and export sales over the last 5 years. Nevertheless only 38% of the respondents

felt that their export drive had gone “well” or “very well”. These measures of success

shown in Figure 15 and Figure 16 were then compiled together to produce the success

index which was used during the hypothesis testing.

0

1

2

3

4

5

6

7

8

9

10

Less than100%

-50 % to -100 %

-25 % to -50 %

-10 % to -25 %

-10% to0%

0% to10%

10 % to25 %

25 % to50 %

50 % to100 %

Morethan

100%

# of

Firm

s

Sales Change Export Sales Change

Figure 15 Change in total sales and exports

0

5

10

15

20

25

30

Horizontal Vertical Both

Yes No

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0

2

4

6

8

10

12

14

"Very Poorly" "Poorly" "Neutral" "Well" "Very Well"

# of

Firm

s

Figure 16 Sentiments on success of export drive

Overview of Indicators of Sustainability

The majority of the firms (76%) reported that they had experienced a positive growth

in firm profits in the recent past. However, only six firms indicated that they were

“happy” with their overall firm profitability, compared to 11 who indicated that they

were either “unhappy” or “very unhappy”. The remainder were neutral.

Similar sentiments were expressed about the profitability of the firm’s exports. Only 4

firms indicated that they were “happy” compared to 7 who indicated that they were

either “unhappy” or “very unhappy”.

These measures of sustainability, shown in Figure 17 to 19, were then complied

together to produced the sustainability index which was used during the hypothesis

testing.

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0

1

2

3

4

5

6

7

8

9

-25 % to -50 %

-10 % to -25 %

-10% to0%

0% to 10% 10 % to 25%

25 % to 50%

50 % to100 %

More than100%

# of

Firm

s

Figure 17 Growth in Firm Profits

0

1

2

3

4

5

6

7

8

9

10

"Very Unhappy" "Unhappy" "Neutral" "Happy"

# of

Firm

s

Figure 18 Sentiments on Overall Firm Profitability

0

2

4

6

8

10

12

14

"Very Unhappy" "Unhappy" "Neutral" "Happy"

# of

Firm

s

Figure 19 Sentiments of Profitability of Exports

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Chapter 6 Hypothesis Testing

The primary purpose of this section is to test the validity of the hypotheses developed

in chapter 2, following the approach outlined in the previous chapter.

Visual inspection of the histograms (Appendix H) containing the relevant variables

for each hypothesis show no indication that a relationship between the variables

exists. This was confirmed by the Chi-squared test of a contingency table at the 5 %

level of significance.

Given the above results it was not necessary to establish the direction of this

relationship or to use a more sophisticated statistical technique such as discriminate

analysis.

A summary of these findings is illustrated below.

Table 3 Summary of Analysis

Hypothesis Independent Variable Dependent

Variable

Chi Squared

Stat

Chi Squared

Crit

Chi Squared Relationship

ACMs who collaborate with other firms are more successful than firms that do not collaborate 1 a

Collaboration Success 3.47 7.81 Independent The success of ACMs that collaborate with other firms is more sustainable the success of firms that do not collaborate 1 b

Collaboration Sustainability 1.82 7.81 Independent ACMs who are involved in horizontal collaboration are more successful than firms that are not involved in horizontal collaboration 2 a Vertical Collaboration Success 2.73 7.81 Independent The success of ACMs that collaborate horizontally with other firms is more sustainable the success of firms that do not collaborate 2 b Vertical Collaboration Sustainability 4.28 7.81 Independent ACMs who are involved in vertical collaboration are more successful than firms that are not involved in vertical collaboration 3 a

Horizontal Collaboration Success 4.93 7.81 Independent

The success of ACMs that collaborate vertically with other firms is more sustainable the success of firms that do not collaborate 3 b

Horizontal Collaboration Sustainability 1.33 7.81 Independent

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Chapter 7 Conclusion

Interpretation of Findings

This research sought to add value by addressing the question “how can South African

auto-component manufacturers achieve international competitiveness within the

global automotive industry?” To this end, it was the aim of this study to provide

ACMs insight into how they extend and strengthen their business in international

markets as well as to how they can adapt their business to the changes in the global

automotive industry.

The global value chain framework provided us with a theoretical approach to how

firms can achieve the above objectives. Namely,

1. Competitive advantage can be gained by developing linkages with lead firms

in a global value chain; and

2. Organisations can leverage their relationship with other members of their

network to develop their competencies.

Based on this framework the researchers postulated that collaboration in the form of

regular sharing of information about key value chain activities and the joint execution

of various productive activities is related to the levels of success that various ACMs

have achieved and the level of sustainability of that success.

If this hypothesis was proved true, it could then be argued that collaboration as

defined above is an answer to the research question and thus a critical strategy for

South African ACMs to adopt in the internationalisation of their business.

However as shown in chapter 6 of this report, this research was unable to show any

relationship between the existence of collaboration of either a vertical or a horizontal

nature between a firm and outside parties and the firm’s level success or the

sustainability of that success. Therefore it cannot be inferred that collaboration is

necessary for South African ACMs to attain international competitiveness, nor is a

critical strategy when internationalising a business.

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Possible explanations of this result include:

• It is possible that within the sample there exist two categories of firms. A first

category in which collaboration is an essential component of success and

sustainability and a second category in which collaboration is not an important

driver of success or sustainability.

The second category of firms could be competing in an environment in which

the technology is mature and everyone has equal access to this technology and

therefore belonging to a horizontal network does not confer any material

benefit to the firm. Similarly the typical benefits of vertical collaboration of

reduced investment risk and access to process methodology may no longer be

valid.

Indeed Humphrey (1999:8) in his study of globalisation and supply chain

networks notes that locally owned firms involved in foundry and stamping

type operations in Spain proved resilient when the country went through a

similar change, albeit in the early 1990s. The same outcomes were observed in

India where similar type of locally owned firms were outlasting other domestic

firms which were been acquired by multinationals entering the Indian market.

• Another factor that needs to be taken into consideration when evaluating

collaboration is the question of the efficacy of collaboration. Certainly firms

that claim to collaborate do not necessarily capture all the purported benefits

of collaboration. It is necessary to measure the quality of collaboration to

validate the efficacy of this process.

• Finally the firms in the sample manufactured and sold a diverse range of

products into different markets. Firms that have strong relationships with

consumers in the aftermarket may be able to mitigate the effects of source

design and purchasing decisions by forcing the local OEM to customise

products to the local market conditions and are thus less likely to collaborate

horizontally with an alliance partner or a sister company. This is likely to

happen in those circumstances in which the ACM has some direct contact with

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the consumer. Examples could include external accessories like tyres, fenders,

stickers and tow bars.

Limitations of Findings

Procedural Limitations

Due to the financial and time constraints this study was forced to rely on 26

respondents out of a total possible 400 ACMs in the Southern African market. Whilst

this number is sufficient for a preliminary study of this nature it does not allow for

more detailed and sophisticated analysis such as discriminant analysis, which would

have a allowed a more textured understanding of the issues at hand.

Nevertheless the researchers were able to get adequate regional coverage with all

major automotive manufacturing centres included in the study.

Table 4 Regional Coverage

W Cape KZN E Cape Gauteng 6 9 6 5

A higher response rate from Gauteng would have been advantageous as it has the

highest concentration of ACMs.

An inability to speak to respondents outside of the Western Cape forced the research

team to take all other responses at face value. Interviews with companies in the

Western Cape helped to clarify the extent of ambiguity that may have arisen in

completing the survey. Where it was felt that questions were not sufficiently clear the

results from these questions were ignored.

Theoretical Limitations

As with any industry level study, the participating companies may not be

homogeneous in terms of firm size, product produced and market served. These

effects are amplified in the auto-component industry due to the number of parts that

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go into the final vehicle. However, it was not possible to segment the sample due to

small number of respondents.

Secondly a wide range of measures may be used as proxy for the theoretical

constructs of success and sustainability. This may imply that a different choice of

variables could have lead to a different conclusion.

Finally success and sustainability can be influenced by a multitude of variables.

Hence the presence of a single factor at one firm may not always lead to success or

sustainability because of other factors at play within that organisation. This problem

can be avoided by the use of alternative research techniques such as a case based

approach or discriminant analysis for a larger sample size if a quantitative approach is

still pursued.

Possible Areas of Further Research

Regardless of the findings this study, the quest for international competitiveness will

remain on the agenda for both policy makers and ACMs. Therefore the following

studies have been identified as potential research areas to further develop the

hypotheses advanced in this study.

• A focused qualitative study of the firms that have benefited from collaboration

to verify if their collaborative relationships have indeed strengthened their

position in the production network and facilitated the development of new

competencies.

• A repeat of the same study with greater attention being paid to the type of

technology been used by firms that collaborate and do not collaborate.

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6_-7_,00.html (accessed 17/09/2003)

Cruz-Moreira J.R and Fleury, A., 2001, “Industrial upgrading in the productive chains

in the Brazilian apparel industry”, URL:

http://www.poms.org/POMSWebsite/Meeting2001/2001/cd/papers/pdf/Cruz-

Moreira.pdf (accessed 27/11/2003).

Erwin, A (2001), “Current developments in the auto industry.”, URL:

www.thedti.gov.za/midp/automotives.htm (accessed 20/07/2003) Publication of the

department of Trade and Industry (DTI),

McCormick, D., 2000, “Value chains, production networks, and the business system.

Preliminary thoughts with examples from Kenya’s textile and garment Industry”,

URL: http://www.wiego.org/papers/mccormick.pdf, (accessed 27/11/2003)

NAACAM, 2003a, “The South African Motor Industry”, URL:

http://www.naacam.co.za/sami.htm, (accessed 27/11/2003)

NAACAM, 2003b, “Report by NAACAM President, annual report 2002/2003”, URL:

http://www.naacam.co.za/report.htm, (accessed 27/11/2003)

NAACAM, 2003c, “The MIDP”, URL: http://www.naacam.co.za/midp.htm,

(accessed 27/11/2003)

Sturgeon T. J. 2000. “How do we define value chains and production networks”. MIT

IPC Globalisation Working Paper 00-010, pp 1-22. URL:

www.ids.ac.uk/globalvaluechains/publications/Sturgeon.pdf, (accessed 15/09/2003)

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Organizational Author

Harvard Business School Research Colloquim, 1986. Competition in Global

Industries. Boston: Harvard Business School Press

The American Graduate School of International Management-2000 Thunderbird on

Global Business Strategy. New York : John Wiley & Sons

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Appendices

Appendix A - Participating Companies

Table 5 Participating Companies

Company Name Member of BMA Region

1 Spicer Axle South Africa Yes E Cape2 Precision Exhaust Systems Yes E Cape3 Guestro Wheels Yes E Cape4 Guestro Forging and Machining Yes E Cape5 Stainless Precision Components Yes E Cape6 Murray and Roberts Foundaries (Pty) Ltd Yes E Cape7 Universal Clips Yes Gauteng8 Faurecia Auto Plastics Yes Gauteng9 Widney Transport Components Yes Gauteng

10 Shatterprufe Ga Kankuwa Yes Gauteng11 Alfred Teves (SA) Pty Ltd Yes Gauteng12 Aluminium Squeeze Casters Yes KZN13 Bloxwich Industries Yes KZN14 Webroy (Pty) Ltd Yes KZN15 Technique Manufacturing Yes KZN16 Hesto Harnesses Yes KZN17 Dunlop Tyres International Yes KZN18 Duys Component Manufacturers Yes KZN19 BEHR Engine Cooling Yes KZN20 Shurlok International (pty) Ltd Yes KZN21 GKN Sinter No W Cape22 Omnigraphics No W Cape23 GUD Filiters Mann & Hummel No W Cape24 Duram Products No W Cape25 Schuurman Metal Pressings No W Cape26 Safety Transport Mirrors No W Cape

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Appendix B - Covering Letter / Fax

28th October 2003

Dear Mr A.N. Other

Auto Components: Internationalisation Strategy Study As part of the requirements of our MBA degree we are undertaking a study in association with Justin Barnes of B & M Analysts on the Internationalisation of the South African Auto-Component Manufacturers, post 1994. This project is supervised by Prof. Paul Sulcas of the Graduate School of Business (Tel. 021 406 1437) The primary aim of the research project is to investigate the relationships between the strategic choices that firms make and the overall performance of the firm with a special emphasis on their international ventures. It is hoped that the findings of this study will inform the strategic choices that South African Auto-Component Manufacturers need to make to ensure the long term sustainability of the sector in the face of competitive pressures brought to bear by globalisation. Shortly you will receive an electronic copy of this letter with an attached questionnaire that will take approximately 10 min to complete. We would greatly appreciate your support in our study by completing and returning this questionnaire by Wednesday, 12th of November by one of the following means: 1. Electronically by completing the attached word document and returning it by email to

Mehleli Mpofu at mpfmeh002@gsb.uct.ac.za 2. Electronically by completely the electronic version of the questionnaire which can be

found at http://gsbnet.uct.ac.za/projects/auto_survey 3. By hand and faxing the completed questionnaire to the Mehleli Mpofu at the Graduate

School of Business, 021-406-1070

Through our collaboration with B & M Analysts, we send a summary of the findings to the participating companies. We would like to stress that the information given will be treated with the utmost respect and confidentiality and the results of the survey will not compromise you or your organisation. Should you have any questions about the questionnaire please feel free to direct any queries to Michael Duys. Yours Sincerely Mehleli Mpofu Michael Duys Erick Outa Cell: 072 184 4861 Email: pfmeh002@gsb.uct.ac.za

Cell: 083 440 3931 Email: dysmic001@gsb.uct.ac.za

Cell: 072 607 6140 Email: otxeri001@gsb.uct.ac.za

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Appendix C - Email

Dear Mr. A N, Other, Following our recent fax which you received on 27/10/2003 please find our questionnaire attached. We would greatly appreciate your support in our study by completing and returning this questionnaire by Wesdnesday, 12th of November by one of the following means. 1. Electronically by completing the attached word document and returning it by email to

Michael Duys at dysmic001@gsb.uct.ac.za 2. Electronically by completely the electronic version of the questionnaire which can be

found at http://gsbnet.uct.ac.za/projects/auto_survey 3. By hand and faxing the completed questionnaire to the Michael Duys at the Graduate

School of Business, 021-406-1070

Through our collaboration with B & M Analysts, we send will a summary of the findings to the participating companies. We would like to stress that the information given will be treated with the utmost respect and confidentiality and the results of the survey will not compromise you or your organisation. Should you have any problems with the questionnaire please feel free to contact myself on the numbers given below. Yours Sincerely Michael Duys

MBA Class 2003

Cell: 083 440 3931

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Appendix D - Letter of Endorsement

23 October 2003

Dear Benchmarking Club member

Academic research of benefit to the Benchmarking Club Please note that whilst the accompanying questionnaire and explanatory letter

constitutes part of a research project being completed by Mr. Duys and his

colleagues as a requirement of their Masters’ programme at the UCT Business

School, the questions posed and the theoretical arguments being engaged with have

broader relevance to the automotive components industry, particularly in relation to

understanding the benefits of firm-level co-operation in structures such as the

KwaZulu-Natal, Eastern Cape and Gauteng Benchmarking Clubs.

Given its focus, I would therefore strongly encourage the participation of KwaZulu-

Natal, Eastern Cape and Gauteng Benchmarking Club members in the research, with

this entailing the completion of a short questionnaire.

On finalisation of his research, Mr. Duys has committed to presenting the findings to

Club members at our quarterly meetings in early 2004 and as such I believe there is

substantial potential benefit to be gained from participating.

If you have any queries relating to the relevance of the research, please contact me

directly on 082 7875608.

Yours sincerely

Justin Barnes (Dr.)

Managing Member

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Appendix E - Thank you letter

Dear Mr A.N. Other, Thank you for the completed questionnaire that you sent to us last week. As stated in cover letter, no firm specific details will be disclosed to a third party and any results presented will be in the form of industry averages. We are currently going through the returned questionnaires and should we have any queries we may need to call you for validation. Once again, thank you for your participation in our survey. Kind Regards Mehleli

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Appendix F - Questionnaire

Research Report Questionnaire

5th October 2003

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Questionnaire Objectives

The primary aim of the research project is to investigate the relationships between:

1. The strategic orientation of firm and the performance of the firm.

2. The market orientation of the firm and the performance of the firm.

3. The internationalisation strategies and the performance of the firm.

4. The extent of collaboration between supply/value chain partners and the

performance of the firm.

5. The extent of collaboration between supply/value chain partners and the

sustainability of this performance.

Please fill out your company name and contact details

Company Name:-

Contact Person:-

Email Address:-

Telephone Number:-

Fax Number:-

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Section A: - Demographics

1. Is your company owned locally or is it owned by an foreign entity?

South African or Foreign

If foreign, please indicate your country of origin…

2. Please indicate the ownership status of your company

Privately Held or Publicly Held (listed on a stock exchange)

3. If your company is listed, on which stock exchange is it listed?

Johannesburg Securities Exchange

or Other

If other, please indicate on which exchange it is listed…

4. Is your company a…

Subsidiary or A stand alone entity

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5. Company Size

a. Number of Local Employees

0 - 20 21 - 50

51-100 101-200

201-500 501-1000

> 1000

b. Number of production plants

South Africa Sub Saharan Africa

Off Shore

6. Product Alignment

What kind of automotive parts do you manufacture?

Catalytic Converters Tyres

Stitched Leather Components Exhaust Systems

Road Wheels & Parts Engine Parts

Wiring Harnesses Automotive Tooling

Glass Radiators

Ignition/Starting Equipment Other

If Other, please describe

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7. Do you consider yourself to be a… (please tick all applicable boxes

8. Do you customise your product to your customers needs or do you sell a

standard product to many customer or do you do both?

Please indicate whether you are in a position to answer these questions for all your

South African operations or for only your plant?

If you selected “Your plant only”, please answer all the following questions with

respect to your plant only.

First Tier Supplier A Second Tier Supplier

Third Tier Supplier Other

Standardised Customised

Both

All SA Operations Your plant only

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Section B: - Local Company Performance 1. Annual Sales coming through South African plants

R1 to R1 million R1 million to R5 million

R5 million to R10 million R10 million to R20 million

R20 million to R50 million R50 million to R100 million

R100 million to R200 million R200 million to R500 million

R500 million to R1 billion Greater than R 1 billion

2. How have your total sales changed over the past 5 years?

Decreased by Increased by

0 % to 10% 0 % to 10%

10% to 25% 10% to 25%

25 % to 50 % 25 % to 50 %

50 % to 100% 50 % to 100%

More than 100 % More than 100 %

3. How happy are you with your current level of profitability?

4. How does your profitability compare to your peers?

Very Well Well Neutral Poorly Very Poorly

Very Happy Happy Neutral Unhappy Very Unhappy

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5. How has your profitability changed over the past 5 years?

Decreased by Increased by

0 % to 10% 0 % to 10%

10% to 25% 10% to 25%

25 % to 50 % 25 % to 50 %

50 % to 100% 50 % to 100%

More than 100 % More than 100 %

6. How many regular customers do you have?

1 to 5 20 to 50

5 to 10 50 to 100

10 to 20 More than 100

7. Market Orientation

a. What is the split of the physical flow of your sales between domestic

and export sales?

Domestic sales % Export sales %

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b. What percentage of your sales derives from Original Equipment

Manufacturers vs. After Market sales vs. Original Equipment Service

Sales vs. other component manufacturers?

OEM sales % After market Sales %

OES Sales % Other component

manufacturer sales %

Section C: Internationalization

1. Is your company proactively involved in the development of export markets?

Yes No

2. If so, how long have you being doing so?

< 1

year

1-3

years

3-5

years

5-10

years

>10

years

3. How would you rate the success of your export drive?

4. What proportion of your export sales are sold to sister companies vs external

customers?

Sister Companies % External Customers %

Very Well Well Neutral Poorly Very Poorly

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5. How have your exports changed over the past 5 years?

Decreased by Increased by

0 % to 10% 0 % to 10%

10% to 25% 10% to 25%

25 % to 50 % 25 % to 50 %

50 % to 100% 50 % to 100%

More than 100 % More than 100 %

6. How happy are you with the current level of profitability of your export sales?

7. How does the profitability of your export sales compare to your peers?

8. To how many customers do you sell to on a regular basis?

1 to 5 20 to 50

5 to 10 50 to 100

10 to 20 More than 100

9. How do you rate the current profitability of your exports relative to your local

sales?

Much Better Better The Same Worse Far Worse

Very Well Well Neutral Poorly Very Poorly

Very Happy Happy Neutral Unhappy Very Unhappy

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10. Please select the best description of your export strategy?

Direct Sales Offshore Sales Office

(Representative)

Distributor Relationship Offshore Manufacturing

Subsidiary

Other If other, please describe below

11. What has been the single most important factor in driving the success of your

export activities?

12. What has been the single biggest challenge to achieving success in your

export activities?

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Section D: - Industry Alliances and Relationships

For the activities listed below please answer the following questions:-

1. Which of the following activities do you engage in? -

2. Which of these activities are performed in collaboration with other firms?

Who do you collaborate with?

Activities

Which activities do you

do?

Which activities do

you collaborate

on? Supplier Customer Alliances Sister

Company

Fundamental Research

Product Development

Jig and Tool Design

Jig and Tool Manufacture

Manufacture

Production Process Design

Marketing

Sales

Procurement

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3. For those activities where you collaborate with a third party, please

indicate how frequently you collaborate?

How frequent is your collaboration with third parties in the following areas?

Activities Never

Once or twice a

year

Once or twice a month

Once or twice a week

On a continuous

basis

Fundamental Research

Product Development

Jig and Tool Design

Jig and Tool Manufacture

Manufacture

Production Process Design

Marketing

Sales

Procurement

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4. Who controls the specifications that are applied in the following activities?

Who controls the specifications?

Activities Your

Company Supplier Customer Alliances Sister Company

Fundamental Research

Product Development

Jig and Tool Design

Jig and Tool Manufacture

Manufacture

Production Process Design

Marketing

Sales

Procurement

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Section E: - Strategic Orientation Please answer each of the following questions in the by ticking the appropriate box in

the table below:-

1. Which of the following strategic considerations do you consider to be a bare

minimum requirement to be invited to bid for work? (Please answer with

respect to your domestic customers)

2. Which of these strategic considerations are potential order disqualifiers if you

fail to deliver on them during the life of a relationship with a customer?

(Please answer with respect to your domestic customers)

3. What is the key strategic consideration which determines whether you

succeed or fail in getting new work? (Please answer with respect to your

domestic customers) Please select only one.

Question Competitive Consideration 1. 2. 3.

Price

Quality

Delivery Reliability

Willingness to invest in current and future customer needs

Product Innovation

Responsiveness to customer needs in product design

Intimacy of customer relationships

Other

If you selected other, please describe your alternative below:-

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Please answer each of the following questions in the by ticking the appropriate box in

the table below:-

4. Which of the following strategic considerations do you consider to be a bare

minimum requirement to be invited to bid for work? (Please answer with

respect to your foreign customers)

5. Which of these strategic considerations are potential order disqualifiers if you

fail to deliver on them during the life of a relationship with a customer?

(Please answer with respect to your foreign customers)

6. What is the key strategic consideration which determines whether you

succeed or fail in getting new work? (Please answer with respect to your

foreign customers) Please select only one.

Question

Competitive Consideration 4. 5. 6.

Price

Quality

Delivery Reliability

Willingness to invest in current and future customer needs

Product Innovation

Responsiveness to customer needs in product design

Intimacy of customer relationships

Other

If you selected other, please describe your alternative below:-

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Appendix G - Data Profiling Table

Table 6 Data Profiling Table

Variable CategoriesTot Email Fax Online Interview

Medium 26 13 5 2 6Tot Wcape KZN Ecape Gauteng

Region 26 6 9 6 5

Tot South Africa Foreign

Country of Origin 26 20 6

Tot Privately Held Publicly Held

Ownership Status 26 17 9Tot JSE Other

Listing 7 4 3Tot Subsidiary Standalone

Sub vs Stand 24 14 10Tot 0 to 20 21 to 50 51 to 100 101 to 200 201 to 500 501 to 1000 > 1000

Co Size (#) 26 1 1 7 5 6 3 3

Tot First Tier Supplier Second Tier Third Tier Comb

Supplier Status 26 14 4 0 8

Tot Customised Standardised Both

Product Oreintation 26 16 4 6

Tot All SA Operations

Your plant only

Plant vs Co 21 16 5

Tot R 1 to R 1 mill R 1 mill to R 5 mill

R 5 mill to R 10 mill

R 10 mill to R 20 mill

R 20 mill to R 50 mill

R 50 mill to R 100 mill

R 100 mill to R 200 mill

R 200 mill to R 500 mill

R 500 mill to R 1 bill > than R 1 bill

Sales 25 0 0 1 3 7 3 2 5 4 0Tot Yes No

Export Programme 25 19 6

Tot less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years >10 years N/A

Length Export Prog 25 2 8 6 2 2 5Tot V1 V2 V3 V4 V5 N/A ?

Export Success 23 0 4 3 7 3 5 1

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Variable CategoriesTot N/A 0 % to 10 % 10 % to 25 % 25 % to 50 % 50 % to 100 % More than

100%Export Change Negative 23 21 0 1 1 0 0

Tot N/A 0 % to 10 % 10 % to 25 % 25 % to 50 % 50 % to 100 % More than 100%

Export Change Positive 23 10 0 5 1 2 5Tot V1 V2 V3 V4 V5 N/A ?

Export Profit Happiness 24 3 6 3 4 0 6 2Tot V1 V2 V3 V4 V5 N/A ?

Export Profit Peers 24 0 0 9 3 1 6 5Tot 1 to 5 5 to 10 10 to 20 20 to 50 50 to 100 More than 100

Export Customers 18 7 6 1 4 0 0Tot V1 V2 V3 V4 V5 N/A ?

Export Profits vs Local 22 1 8 4 3 0 6 2

Tot Direct Sales Off shore manufacturi

Offshore Sales Office

Distributor Relationship N/A ?

Export Strategy 24 13 1 2 2 5 1

Tot Less than 100%

-50 % to -100 % -25 % to -50 % -10 % to -25 % -10% to 0% 0% to 10% 10 % to 25 % 25 % to 50 % 50 % to 100 % > 100%

Sales Change 26 0 1 1 2 0 4 8 2 3 5

Tot "Very Poorly" "Poorly" "Neutral" "Well" "Very Well"Export Success 26 0 4 12 7 3

Tot < than 100% -50 % to -100 % -25 % to -50 % -10 % to -25 % -10% to 0% 0% to 10% 10 % to 25 % 25 % to 50 % 50 % to 100 % > 100%

Export Sales Change 26 0 0 1 1 1 9 6 1 2 5

Tot[-100, -75) [-75,-50) [-50,-25) [-25,0) [0,25] (25,50] (50,75] (75,100]

Overall Success 26 0 0 0 4 7 9 2 4

Tot"Very

Unhappy" "Unhappy" "Neutral" "Happy" "Very Happy"Profit Abs 26 3 8 9 6 0

Tot Less than 100%

-50 % to -100 % -25 % to -50 % -10 % to -25 % -10% to 0% 0% to 10% 10 % to 25 % 25 % to 50 % 50 % to 100 % > 100%

Profit Change 26 0 0 2 3 2 3 8 1 1 6

Tot "Very Unhappy" "Unhappy" "Neutral" "Happy" "Very Happy"

X Profit Abs 26 3 6 13 4 0

Tot [-100, -75) [-75,-50) [-50,-25) [-25,0) [0,25] (25,50] (50,75] (75,100]Overall Sustainability 26 1 1 4 4 9 5 2 0

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Appendix H - Hypothesis Histograms

Hypothesis 1 a - ACMs who collaborate with other firms are more successful than

firms that do not collaborate

0

2

4

6

8

10

12

[-50,0) [0,50) [50,100) [100,150]

Success Index

Freq

uenc

y

No Collaboration Collaboration

Figure 20 Collaboration vs. Success

Hypothesis 1 b – The success of ACMs that collaborate with other firms is more

sustainable the success of firms that do not collaborate

0

1

2

3

4

5

6

7

8

9

[-100,-50) [-50,0) [0,50) [50,100)

No Collaboration Collaboration

Figure 21 Collaboration vs. Sustainability

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Hypothesis 2 a – ACMs who are involved in horizontal collaboration are more

successful than firms that are not involved in horizontal collaboration

0

1

2

3

4

5

6

7

8

9

10

[-50,0) [0,50) [50,100) [100,150]

No Collaboration Collaboration

Figure 22 Vertical Collaboration against Sustainability

Hypothesis 2 b – The success of ACMs that collaborate horizontally with other firms

is more sustainable the success of firms that do not collaborate

0

1

2

3

4

5

6

7

8

9

[-100,-50) [-50,0) [0,50) [50,100)

No Collaboration Collaboration

Figure 23 Vertical Collaboration against Sustainability

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Hypothesis 3 a – ACMs who are involved in vertical collaboration are more

successful than firms that are not involved in vertical collaboration

0

1

2

3

4

5

6

7

8

9

10

[-50,0) [0,50) [50,100) [100,150]

No Collaboration Collaboration

Figure 24 Horizontal Collaboration against Success

Hypothesis 3 b – The success of ACMs that collaborate vertically with other firms is

more sustainable the success of firms that do not collaborate

0

1

2

3

4

5

6

7

8

9

[-100,-50) [-50,0) [0,50) [50,100)

No Collaboration Collaboration

Figure 25 Horizontal Collaboration against Sustainability

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Appendix I - Chi - Squared Test of a Contingency Table

(Keller and Warrack, 2003) identify the following characteristics of an experiment

which is multinomial and which satisfy the criteria for a Chi-Squared test to be

performed:-

• The experiment consists of a fixed number of n trials

• The outcome of each trial can be classified into one of k categories, called

cells

• The probability pi that the outcome will fall into cell i remains constant for

each trial. Moreover, p1 + p2 + ...+ pk = 1

Since the outcome of each trial can must fall into each of one of the k categories, the

observed frequencies can be labelled f1 to fk, where

f1+f2+f3 + …+ fk = n

Equation 3 Observed Frequency

Thus one can draw up a contingency table of the data in which the respective

observed frequencies are recorded:-

Table 7 Contingency Table

Variable One

Variable Two Category 1 Category 2 Total

Category A f1 f2 Σ (f1,f2)

Category B f3 f4 Σ (f3,f4)

Category C f5 f6 Σ (f5,f6)

Total Σ (f1,f3,f5) Σ (f2,f4,f6) Σ (f1,f2,f3f4,f5)= n

If one inspects the contingency table one can observe that if Variable One is

independent of Variable Two one would not expect to see a great deal of variation

between the shape of the distribution defined within the categories and that defined by

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the totals of the categories. It is then possible to develop distributions for each cell

which would likely apply had the two variables been independent. These expected

frequencies can then be directly compared to the observed frequencies within the

contingency table. Thus it is possible to develop an expected frequency table.

Table 8 Expected Frequency Table

Variable One

Variable Two Category 1 Category 2

Category A e1 e2

Category B e3 e4

Category C e5 e6

Where:-

eA1 = {Row A Total x Column 1 Total} / Sample Size (n)

Equation 4 Expected Frequency

It is then possible to develop an overall measure of the distance between expected

distribution as depicted by the expected frequencies in the expected frequency table

and the actual observed distribution as depicted by the observed frequencies in the

contingency table. This measure is called the Chi-squared test statistic.

χ2 = Σi=1...k {(fi –ei)2}/ei

Equation 5 Chi-squared Test Statistic

It is then possible to test this statistic against a critical value which indicates whether

the distance between observed frequencies and the expected frequencies are

sufficiently large to infer that the variables are not independent. Thus, if

χ2 stat > χ2 crit

Equation 6 Test Criteria

This implies that the two variables are not independent. The χ2 crit is sourced from a

standard Chi-squared table with degrees of freedom equal to the number of rows

minus one multiplied by the number of columns minus one.

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Appendix J - Chi – Squared Analysis & Results

Table 9 Observed Frequencies

Actual FrequenciesTotal [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]

1 Vertical Success No Collaboration 9 0 0 0 6 2 1Vertical Success Collaboration 17 0 0 4 9 2 2Vertical Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]2 Vertical Sustainability No Collaboration 9 0 0 2 4 3 0

Vertical Sustainability Collaboration 17 0 2 6 8 1 0Vertical Sustainability Total 26 0 2 8 12 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]3 Horizontal Success No Collaboration 13 0 0 2 9 0 2

Horizontal Success Collaboration 13 0 0 2 6 4 1Horizontal Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]4 Horizontal Sustainability No Collaboration 13 0 1 4 7 1 0

Horizontal Sustainability Collaboration 13 0 1 4 5 3 0Horizontal Sustainability Total 26 0 2 8 12 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]5 Overall Success No Collaboration 6 0 0 0 5 0 1

Overall Success Collaboration 20 0 0 4 10 4 2Overall Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]6 Overall Sustainability No Collaboration 6 0 0 1 4 1 0

Overall Sustainability Collaboration 20 0 2 7 8 3 0Overall Sustainability Total 26 0 2 8 12 4 0

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Table 10 Expected Frequencies

Expected FequenciesTotal [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]

1 Vertical Success No Collaboration 9 0.00 0.00 1.38 5.19 1.38 1.04Vertical Success Collaboration 17 0.00 0.00 2.62 9.81 2.62 1.96Vertical Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]2 Vertical Sustainability No Collaboration 9 0.00 0.69 2.77 4.15 1.38 0.00

Vertical Sustainability Collaboration 17 0.00 1.31 5.23 7.85 2.62 0.00Vertical Sustainability Total 26 0 2 8 12 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]3 Horizontal Success No Collaboration 13 0.00 0.00 2.00 7.50 2.00 1.50

Horizontal Success Collaboration 13 0.00 0.00 2.00 7.50 2.00 1.50Horizontal Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]4 Horizontal Sustainability No Collaboration 13 0.00 1.00 4.00 6.00 2.00 0.00

Horizontal Sustainability Collaboration 13 0.00 1.00 4.00 6.00 2.00 0.00Horizontal Sustainability Total 26 0 2 8 12 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]5 Overall Success No Collaboration 6 0.00 0.00 0.92 3.46 0.92 0.69

Overall Success Collaboration 20 0.00 0.00 3.08 11.54 3.08 2.31Overall Success Total 26 0 0 4 15 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]6 Overall Sustainability No Collaboration 6 0.00 0.46 1.85 2.77 0.92 0.00

Overall Sustainability Collaboration 20 0.00 1.54 6.15 9.23 3.08 0.00Overall Sustainability Total 26 0 2 8 12 4 0

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Table 11 Chi Square Sub – Total Values

Chi Squared Sub Total ValuesTotal [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]

1 Vertical Success No Collaboration 9 #DIV/0! #DIV/0! 1.38 0.13 0.27 0.00Vertical Success Collaboration 17 #DIV/0! #DIV/0! 0.73 0.07 0.14 0.00Vertical Success Total 26 0 0 4 16 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]2 Vertical Sustainability No Collaboration 9 #DIV/0! 0.69 0.21 0.01 1.88 #DIV/0!

Vertical Sustainability Collaboration 17 #DIV/0! 0.37 0.11 0.00 1.00 #DIV/0!Vertical Sustainability Total 26 0 2 8 13 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]3 Horizontal Success No Collaboration 13 #DIV/0! #DIV/0! 0.00 0.30 2.00 0.17

Horizontal Success Collaboration 13 #DIV/0! #DIV/0! 0.00 0.30 2.00 0.17Horizontal Success Total 26 0 0 4 16 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]4 Horizontal Sustainability No Collaboration 13 #DIV/0! 0.00 0.00 0.17 0.50 #DIV/0!

Horizontal Sustainability Collaboration 13 #DIV/0! 0.00 0.00 0.17 0.50 #DIV/0!Horizontal Sustainability Total 26 0 2 8 13 4 0

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]5 Overall Success No Collaboration 6 #DIV/0! #DIV/0! 0.92 0.68 0.92 0.14

Overall Success Collaboration 20 #DIV/0! #DIV/0! 0.28 0.21 0.28 0.04Overall Success Total 26 0 0 4 16 4 3

Total [-150,-100) [-100,-50) [-50,0) [0,50) [50,100) [100,150]6 Overall Sustainability No Collaboration 6 #DIV/0! 0.46 0.39 0.55 0.01 #DIV/0!

Overall Sustainability Collaboration 20 #DIV/0! 0.14 0.12 0.16 0.00 #DIV/0!Overall Sustainability Total 26 0 2 8 13 4 0