by
John Paul MacDuffie & Fred Moavenzadeh,
Co-Directors
As the auto industry begins its second century, a confluence of technological innovations offers the promise of fundamental change in industry structure, competitive dynamics, and product architecture. However, this promise often feels elusive, given the industry's size, global reach, and complexity. IMVP is researching the seeds of change in this evolutionary period to discover whether they will shape the industry's next dominant paradigm.
Product development process advances have been more significant than changes in product architecture. Product cycles continue to grow shorter as more companies adopt the simultaneous engineering approach pioneered by Japanese automakers. Simultaneously, advances in Computer-Aided Design (CAD) and Computer-Aided Engineering (CAE) tools allow 3D models and simulations to replace physical prototypes and testing processes.
Furthermore, the new mega-suppliers created by spinoff, merger, and acquisition are taking greater responsibility for product design. These large suppliers use all three of the CAD/CAE software packages used by their customers, but the lack of industry standardization severely limits the reach of these design tools to lower tiers of the supply chain. As these design tools move to the Internet, small firms can participate more fully in co-development. When engineers at multiple locations can readily study the same 3D component design and can simultaneously observe simulated component tests, product development will become much more efficient and reliable. However, the full shift away from blueprints, manual processes, and physical prototypes will also require a shift in company mindset, given the preoccupation with legal liability, and in regulatory procedures so that simulated tests are accepted as valid.
Meanwhile, a potentially disruptive technological change in product architecture -- a move towards modules, i.e. self-contained functional units with standardized interfaces that can serve as building blocks for a variety of different products -- has made relatively little progress to date, for reasons described below.
Global Supply Networks Seek Savings
Deverticalization through the outsourcing of production and the transfer of component design responsibility from the large automakers to their suppliers was extensive during the 1990s. Other industries have demonstrated that when extensive outsourcing is combined with more modular designs, the supply chain can be dramatically reshaped. Indeed, extensive consolidation among first-tier suppliers in the U.S. and now in Europe was driven by the desire to offer a one-stop solution to automakers.
A few years ago, modularization was heralded as the next transformative innovation for the auto industry. Early interest in modularization focused on these areas:
IMVP research suggests that these potential savings are still elusive for most automakers, in part, because there are still few modules standardized across models, fewer customers, and because automakers are still heavily involved in product design through shadow engineering of suppliers.
The absence of a clear cost advantage for modules, combined with the inherent technical difficulties of changing the highly integral product architecture of an automobile, has taken the shine off modularization. Nevertheless, a number of factors could still accelerate the move towards modularity, including automaker efforts to shift investment risk to suppliers, the increasing use of information technology (often itself highly modular) within vehicles, and the possibility that consumers will show a strong interest in built-to-order vehicles
The establishment of the industry consortium Covisint to develop a gigantic B2B hub is the other major technological development in automotive supply networks. Much is still unclear about Covisint, including its governance structure, its revenue model, and how it will handle different kinds of transactions. Furthermore, the involvement of IT firms (most prominently Commerce One and Oracle) will intensify the auto industry's interaction with the high-tech sector's markedly different approach to product development and industry standards. Creating an XML overlay compatible with existing (proprietary) Electronic Data Interchange (EDI) systems used by the major automakers and their suppliers will be a major conversion effort and remains as the major incentive for Covisint's existence. Many obstacles stand in the way of achieving one standard set of XML labels throughout the industry, which is necessary to achieve the most optimistic savings estimates from information transparency during procurement and order fulfillment.
IMVP research suggests that automakers will use Covisint to pursue the most familiar modes of exchange -- ranging from short-term, market-oriented transactions to longer-term, more collaborative relationships. This will occur because the Internet offers savings in communications and transaction costs regardless of which mode of exchange is used. Put differently, some automakers will emphasize the auction capabilities of Covisint, while others will emphasize the use of collaborative design tools; this will reinforce existing patterns of supplier relations rather than leading to convergence. This raises the question of which capabilities Covisint will develop, in what sequence, and with what effectiveness. So far, it is far easier for Covisint's IT partners to write code for various types of auction. It will be much more difficult for them to understand how the automotive value chain works and how best to support collaborative product development, which is virtually required for complex components and modules.
Service Functions Create Value
It is now a strategic mantra that automakers need to shift from simply bending metal to creating value by providing services wrapped around the product. This approach may be a solution to the industry's persistently poor performance on key financial metrics (reflected in dismal market valuations) even during the recent years of record sales. The two primary technology implications are these:
The challenge to incumbent service providers by Internet B2C startups is now essentially over, given the failure to find a sustainable business model in the face of U.S. regulatory requirements that all vehicles must be purchased through retail dealerships. Auto dealers can improve the quality and scope of their service delivery while they still enjoy this protection. Also, huge inefficiencies still exist in the distribution and retail network, deriving from a push system whose forecasts frequently mismatch supply and demand. The consequences include massive inventory buildup and costly sales incentives -- coupled with a buy-now sales process that most consumers hate -- to dispose of it. As a result, the build-to-order model currently retains great appeal for the auto industry, despite the huge differences in complexity between an automobile and, say, a personal computer, and most automakers are experimenting with some aspect of a pull approach.
Telematics represent a new technological frontier in the services area, with some applications already available to early adopters. Much ambiguity exists about what services will be most popular, what revenue models will prove most successful, and whether standards will be proprietary or universal across the industry. It is here that the interaction with non-automotive technology providers will be most intense, with mobile telephony, Internet Service Providers, infotainment, and concierge-type personal service firms all potentially involved in the mix. Considerable technological challenge exists in bringing all of these pieces together under the demanding and restrictive operating conditions of a vehicle, but the search for the right strategy -- and the right alliances to sustain it -- is likely to be even more difficult and the real constraint to rapid progress in this area.
The continued diffusion of just-in-time inventory systems and in-sequence delivery of parts by suppliers to reduce complexity at assembly plants still drive much of the action in logistics. IT support of both trends continues to grow in sophistication, although these effects are still largely confined to first-tier suppliers and their automaker customers. Much of the potential impact of Covisint on logistics efficiency will come from providing firms throughout the supply chain, large and small, with rapid and simultaneous access to timely production and delivery scheduling information -- all without costly investments in proprietary EDI systems. As in the IT and electronics sectors, more and more logistics tasks are outsourced to specialized providers, and this trend is likely to continue. Both UPS and Federal Express are working in alliances with major automakers to develop order tracking and delivery management tools that can be accessed through the Internet. Some logistics providers are likely to expand their services to include inside-the-factory tasks such as inventory replenishment. New entrants are also likely in this area, particularly in the role of information integrator. Large suppliers may also bid to expand their services in the logistics area; whether they will prevail over specialized logistics firms is difficult to predict.
While innovation continues on the hardware side (most notably in drive trains), more and more innovation occurs via software. The various subsystems of an automobile increasingly depend on microprocessor control of functionality. The performance of braking systems, the feel of the suspension and steering, the visual information available to the driver can vary under various driving conditions, based on software algorithms that operate upon real-time data collected through sensors and/or expressed as a driver preference. In the future, automakers and large suppliers might give greater importance to their control of key algorithms, outsourcing more of the design and manufacturing of the physical product.
The increasing amount of information technology in the vehicle is just one source of increased demands on the automotive electrical system. In response, an industry consortium, coordinated by an MIT engineering professor, is developing new standards for a 42-volt electrical system to replace the now-overburdened 12-volt system. This pre-competitive effort has been very successful so far and may provide a valuable model for future standard-setting activities in the industry.
The consortium model has been less successful in the development of hybrid drive trains, which combine a small electrical motor run on batteries with a small and superefficient internal combustion engine. Honda and Toyota have brought the first commercially-available hybrid vehicles to market, albeit at subsidized prices, while a similar effort by G.M., Ford, and DaimlerChrysler backed by the U.S. government has not yet produced any such tangible outcome. The U.S. automakers appear to be focusing on how to bring hybrid drive trains into the larger and heavier vehicles -- trucks, minivans, SUVs -- that form the core of their product line.
Nevertheless, hybrid drive trains do seem likely to be the dominant transitional technology until such time as vehicles can be powered by fuel cells. Fuel cell technology is advancing rapidly, but major issues of cost, size/weight, operational reliability, fuel source, conversion methodology, and fueling infrastructure (in order to supply/generate the hydrogen that fuel cells need) remain. As mentioned above, the switch to fuel cells would disrupt the dominant product architecture so much that unrelated discontinuous shifts in product architecture, i.e. in the direction of modularity, might be possible.
The development of fuel cells is just the most dramatic example of a new reality about automotive R&D -- it is so hugely expensive that no automaker is able or willing to pursue these innovations on their own. Amid massive consolidation among major automakers (only 10 major automaking groups are left worldwide), there is more and more technical collaboration across these groups. As a result, new management challenges have emerged:
Increasingly, the new mega-suppliers must also face these challenges Indeed, they may take the lead in certain areas of technology development in the future.
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Email
for program updates:
IMVPmail@mit.edu
Program Leadership
John Paul MacDuffie
Co-Director
Associate Professor in Management,
the Wharton School, University of Pennsylvania
Michael
Cusumano
Co-Director
Sloan Management Review Distinguished Professor of Management
John
B. Moavenzadeh
Executive
Director
Donna
Carty
Program
Manager
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