Kirk Monteverde & David Teece - 1982

SUPPLIER SWITCHING COSTS AND VERTICAL INTEGRATION IN THE

[US] AUTOMOBILE INDUSTRY

Authored by:

Kirk Monteverde (Stanford University) David J. Teece (Stanford University)

Published: Spring 1982 by ‘The Bell Journal of Economics’ (now ‘RAND Journal of

Economics’) 1995 in The Legacy of Ronald Coase in Economic Analysis (S. Medema) 1995 in Transaction Cost Economics, Volume II: Policy and Applications

(O. Williamson & S. Masten) 1996 in Case Studies in Contracting and Organization (S. Masten) 1998 in Economic Performance and the Theory of the Firm: The

Selected Papers of David J. Teece, Volume One 2004 in Modes of Organization in the New Institutional Economics

(C. Menard) 2005 in Strategic Management (J. Birkinshaw)

ABOUT THE PAPER

Transactions Cost Theory and Vertical Integration Production is internally organized when external transaction

costs exceed those of internal transaction costs (Coase)

Market Imperfection(s) ‘Know-how’ (more than a book of blue-prints) Costs associated with transferring (production) ‘know-how’

Theories tested using data from U.S. automobile manufacturers General Motors Company and Ford Motor Company

ARTICLE OVERVIEW

“Assemblers will vertically integrate when the production process… generates specialized, non-patentable know-how”

Why? Ex post information sharing Generation of high switching costs

Knowledge based rather than financial based Possibility of opportunistic re-contracting (dependence on

supplier) Risk of economic rent appropriation due to transaction-

specific know-how (dependence on supplier)

HYPOTHESIS

Dependent Variable 113 automotive components coded in-house / contracted Extent of vertical integration (looked for 80% in-house)

Independent Variables Cost of component development (applications engineering) Component specificity (GMC vs. FMC vs. generic) Firm identity (GMC & FMC) Systems effects (or ‘component effect on the system’)

TESTING

Engineering 1-10 scale for engineering effort

Specificity 1 = firm specific component; 0 = otherwise

Company 1 = GMC; 0 = FMC

Engine (engine and emissions)Chassis (chassis, transmission, steering)Ventilation (ventilation)Electrical (electrical)Body (body, fuel tank, cap)

TESTING

‘Engineering’ (component development eff ort) is positively related to vertical integration

‘Specificity’ is statistically significant “Only components specific to a single assembler [firm] will

be candidates for vertical integration”

Individually (except ‘Electrical’), no category indicated a significant relationship with vertical integration All five, however, taken together showed significance in the

Probit model

FINDINGS

“GM and Ford are more likely to bring component design and manufacturing in-house if relying on suppliers for preproduction development service will provide suppliers with an exploitable advantage.”

HOWEVER – “[GM] and Ford also have a preference for backward vertical integration when the components are fi rm-specifi c and their design must be highly coordinated with other parts of the automobile system” This shows an effi ciency-driven vertical integration policy which may

operate without regard to supplier opportunism

Findings do not apply in Japan, where “the relationship between the major auto fi rm and its satel l ite suppliers is one of total cooperation” (Ouchi, 1981)

CONCLUSION