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Auto Industry
Abstract
This is the first book on the global auto industry viewed through the lens
of technology. We start by tracing how innovation shaped the first century
of its history. We then examine the industrys shifting footprint in Europe
and North America, and the rise of new producers, particularly China.
Succeeding chapters emphasize the role of suppliers in what is now a
high-tech industry. We describe new forms of collaboration that c hallenge
traditional supply chain relations, analyzing regulation as a driver of
innovation, and the enabling role of the materials science revolution, such
as the shift of steel from a commodity to a highly engineered product.
We cover innovations in management, from computer-aided e ngineering,
roadmapping, and just-in-time methods to the evolving role of workers
and public policy. We finish with an overview of electric vehicles, shared
mobility, and autonomous vehicles, concluding that they will not prove
disruptive.
Keywords
Automotive, Environment, Industry, Innovation, Supply Chain, Technology
Contents
Preface...................................................................................................ix
Acknowledgments..................................................................................xiii
Chapter 1 Introduction: The Global Auto Industry Through
the Lens of Technology......................................................1
Chapter 2 History 1: The Rise of Oligopoly.......................................7
Chapter 3 History 2: The Collapse of Oligopoly...............................23
Chapter 4 Changing Economic Geography......................................33
Chapter 5 China and the Rise of New Producers..............................47
Chapter 6 Automotive Innovation Model and the Supply
Chain: PACE Awards.......................................................67
Chapter 7 How Companies Innovate: Intellectual Property
and Roadmaps.................................................................79
Chapter 8 CAFE Standards and Materials Competition...................95
Chapter 9 The Rise of Digital Manufacturing and the
Boundaries of the Firm..................................................111
Chapter 10 New Technologies: Productions Systems,
Management, and Labor................................................127
Chapter 11 New Technologies: Disruptive or Evolutionary?.............143
References............................................................................................151
Index..................................................................................................153
Preface
We both are fascinated by the interaction of technology and industry.
Warrian has followed the steel industry for a half century witnessing the
transformation from the introduction of the basic oxygen process and
electric arc mini-mills. Automotive is today steels biggest customer.
Smitka has been visiting automotive suppliers for 30 years, primarily
in Japan and the US, while focusing on research and teaching on the
Japanese and more recently the Chinese economies. The auto industry
looms large in our respective home areas, the Greater Toronto area in
Ontario, and Detroit Michigan, though after a series of plant closings it
is no longer important in rural Virginia, where Smitka resides. Through
encounters at the Industry Studies Association, we coauthored a paper on
technology in the auto industry. That led to this book.
Viewing the industry through the lens of technology is unique, and
pulls together an array of themes. In the beginningthe late 19th and
early 20th centurythe auto industry was high-tech, replete with
thousands of startups, and the contemporary equivalent of venture capital. Within 20 years, a dominant product architecture emerged, as did
new production technologies, management methods, and distribution
strategies. By the 1920s in the US, and with different timing, in Europe
and Japan, dominant players emerged. By the late 1930s, the role of labor
was being restructured, with the rise of unions and personnel departments. High profits eventually attracted entry, abetted by management
that had come to focus on internal competition for power and not on the
market. This is a familiar industrial dynamic where technology is central.
Over the past 30 years, the industry has returned to its high-tech origins,
in which new vehicles are built using steels and other materials that did
not exist in 1980, with the drivetrain and safety systems replete with sensors and other electronics, all controlled by 100 million lines of software.
We pick up that thread in our conclusion: will electric cars, autonomy,
and new mobility models (Uber and others) prove disruptive?
x PREFACE
PREFACE
xi
Acknowledgments
Mike Smitka wishes to acknowledge and thank Gerpisa Conference and
Industrial Studies Association workshop participants as well as sabbatical funding from Washington and Lee University and research assistance
from Reem Kandil and Gyung Jeong. Peter Warrian thanks the ISA, colleagues at the Innovation Policy Lab, University of Toronto and the Automotive Policy Research Centre, McMaster University.
We both must also thank our wives, Gloria and Margret, for their support, patience, and endurance through too many pedantic conversations.
CHAPTER 1
local marketing and the financing of inventory and sales handled through
independent dealerships. Assemblers provide only 20 percent of the industrys total value added. Given this web of firms and function, will new technologies result in incremental change to existing vehicle architectures and
product market segmentation? Or will we see a reorganization of the value
chain, with for example new suppliers for electrical components displacing
piston and transmission suppliers, while new business models for vehicle
ownership and transportation services undermine the role of dealerships?
Our answer is definite: change will be incremental, as we elaborate in
Chapter 11. To develop that case, we analyze the historical development
of the industry from its inception in the late 19th century through today
using technology as a running theme. Inventions and breakthroughs
including new business models, such as the electric car sharing of Autolib
are the stuff of headlines. From the perspective of real businesses, however,
the process of innovationdeveloping ideas into commercial products,
that is, putting better cars on the roadis a slow process, moving from
an initial implementation to commercially meaningful products through
a gradual process of learning by doing.
A set of simple models provides a framework for our analysis. First is
industrial organization, using the concepts of monopoly, oligopoly, and
monopolistic competition to illustrate long-run change in the competitive structure of the industry. A second is an emphasis on typologies of
technology that emphasize its embodiment in the knowledge and working practices of teams of people. Invention may capture headlines, but
bringing a product to market entails complementary innovation of many
interrelated systems to enable such inventions, and then their refinement
via good engineering. Technology, however, is not only limited to physical products and their production, but also to how products are conceived
and configuredmarket niches and commercial strategyand how they
are distributed and used. To use basic economics jargon, how organizations are internally organized, the employment of novel business strategies and improved marketing, and alternate ways of coordinating across
the value chain change the production possibilities frontier. Third and
finally, transportation systems are embedded in a complex array of institutions that include roads and regulations, and how we organize around
mobility. Of particular concern are regulations regarding safety, fuel
efficiency, and emissions, which we analyze from a technology perspective in Chapters 6-8.
These abstract ideas can be linked to concrete issues. First, over the
past 50 years entry into the industryincluding the creation of new
brands and product segments such as minivans and more recently crossover vehiclesexpanded the number of new vehicle models available to
consumers three-fold. In the process, both margins and per-vehicle sales
volumes shrank. Can new vehicle producers obtain acceptable returns,
sufficient to fund operations on a continuing basis? Even worse for incumbents, will the reliance of car companies on suppliers for key technologies
batteries, power controls, radar, transmissionsfacilitate the entry of
new players? Think here of Great Wall, the leading producer of SUVs
and crossovers in China, which is now the worlds largest motor vehicle
market. Similarly, will improved simulation-based engineering tools and
more flexible manufacturing technologies allow firms to develop new
models more quickly and cheaply? The start-up Local Motors takes this
to its logical extreme, proposing to sell crowd-sourced designs with the
body printed to customer specifications using additive manufacturing
technologies. These changes make earning profits even more challenging.
New technologies often prove disruptive. Will the development of
electric vehicles undermine existing players, and facilitate the entry or
growth of relatively new firms, such as Tesla in the United States or BYD
and Chery in China? Innovations are not limited to hard technology:
ride sharing and autonomous vehicles, lumped under the catch-phrase of
Mobility 2.0, could reduce the need for individual vehicle ownership.
Yet one more set of issues lie in the nitty-gritty details of how the value
chain is structured. What drives innovation? Here there are both enablers,
the material science revolution and digital engineering, and new regulatory
pressures, in competing demands for energy efficiency, low emissions, and
enhanced safety. How do firms reorganize internal operations and interfirm
coordination to meet these new demands with new business models including global design and production? This also has the potential to shift
the locus of core functions, from where manufacturing locates, particularly
assembly plants, to where engineers reside. For example, will this lead to a
recentralization of functions with Detroit at the center of engineering for
a global manufacturing footprint, or will engineering be dispersed across
multiple regions including the North American auto alley, the European
auto corridor and some as yet unnamed counterpart in China?
We believe the presentation of these issues is enhanced by taking a
stand. In Chapter 11 we sketch why we believe the industry is not undergoing a transformative revolution. Key is our understanding of technology
as the knowledge of how to do things, embedded in complex structures
from how production is organized across firms to perceptions of cars as
symbols of status and enablers of personal independence. Blueprints may
capture the hard components of a finished vehicle, but the know-how
required to develop the next model resides in teams of engineers backed
by specific digital tools and their ability to work with leading suppliers.
Manufacturing likewise consists not only of a particular layout of specialized machinery, but also in the tacit knowledge including trade secrets for
how to utilize and improve that layout to produce high-quality parts in
volume and on time. How dealerships are organizedwho controls the
customer interface, who sells the finance package and warrantiesand
how the sales operation responds to the ebb and flow of demand for specific models is also a form of technology. The idea that this is simple and
that assemblers can sell the vehicles they produce directly to consumers
has been disproved time and again and in multiple countries since the
franchised dealership system developed a century ago.
Critical to our view is that new technologies are generally expensive
in their first implementation. Moving toward the autonomous vehicle,
for example, entails increasing costs. At the same time, the normal economists argument points to diminishing returns from expanding the set
of product attributes. Keeping in your lane in good weather, and automatically braking as necessary to maintain a safe following distance on
an expresswaythose technologies are already on the road, and bring
clear safety benefits. How valuable is extending that capability to all sorts
of inclement weather, or for downtown driving where construction,
double-parking and pedestrians require much more expensive technologies? Although there are niche applications, at present the business case
for greater vehicle autonomy is unclear. While vehicle-to-vehicle (V2V)
communication and smart infrastructure can help overcome such obstacles, implementing that would require a wider social commitment
to finance such improvements. Likewise Mobility 2.0 points to the low
utilizationperhaps 4 percent of the dayof a very expensive asset, encompassing a range of proposals to monetize this parked capital good.
However, to be viable, vehicle sharing and other ideas require shifts in
long-standing habits of not needing to wait, social attitudes where vehicle ownership is a powerful communicator of status, and institutional
changes in licensing, insurance, and so on. In sum, increasing costs for
new technologies run into diminished marginal benefits. The incentive to
make any single change in isolation is thus weak, while benefits require
multiple simultaneous innovations. Existing systems are well-adapted to
the status quo. The coordination issue is thus a very real barrier to revolutionary change.
In summary, our historical approach will suggest why we do not believe that we are seeing a revolution in the automotive industry. It will also
provide a framework that offers insights into topics from the process of
globalization and related shifts in the geography of the industry, to the organization of R&D, and the shift in the structure of the value chain that
is enhancing the role of suppliers while continuing to improve productivity. Even if there is no revolution, cumulative change does matter. As illustrated in Figure 1.1, gradual improvements in labor productivity mean
that despite a return of output to its peak of the late 1990s, manufacturing employment remains one-third below pre-2008 levels. Furthermore
this is in a market where vehicles are larger and far more complicated than
a quarter century ago. Worse, and not specific to the automotive sector,
manufacturing compensation no longer moves in line with productivity.
But the industry remains important: the sector employs 900,000 workers
in the United States alone, and the numbers are similarly large in other
producing countries.
We trust you will find the story as fascinating as we do.
Index
Accountability, 20
Acura, 32, 105, 108
All-steel auto body, 9899
American Business Abroad: Ford on Six
Continents (1964), 18
American Motors (AMC), 2324
Amino, 117118, 125
ArcelorMittal, 65, 104108, 110
S-In-Motion project, 121125
ASEAN, 44
Assemblers, 2, 4, 10, 13, 1516, 20,
43, 45, 49, 56, 58, 63, 68,
127, 136138
Audi, 10, 3334, 4445, 52, 87, 140
Auto Pact (2005), 43, 136
Automobile industry
business model, 19th century,
1217
early years, 711
engineering operations, 36
initial ventures, 1112
innovation diffusion, 116117, 125
learning by doing, 49
oligopoly market, 1821
Automotive News PACE Awards
BorgWarner, 8789
criteria, 6970
Delphi, 8487
examples, 7072
Federal-Mogul, 8284
innovation analysis, 7278
Bacon, Roger, 7
Battery electric vehicles (BEVs),
5657, 62, 97
Beijing Auto Show 2016, 57
Beijing Automotive Industry
Corporation (BAIC),
52, 56,60
Benz, Karl, 7, 1112
Big Three. see GM (General Motors,
Chrysler and Ford Motor
Company)
154 INDEX
INDEX
155
GATT, 40, 42
Geely, 46, 56, 5961
Germany, 7, 10, 12, 29, 34, 36, 41,
45, 54, 70, 88, 119, 137140
Global markets, 3334, 4446, 93
Globalization, 5, 4243
GM (General Motors), 10, 2021, 25,
28, 3031, 3840, 43, 45, 50,
5456, 5859, 6163, 84,
112113, 117, 131, 134, 136
vertical integration, 135
Graham-Paige, 23
Hino, 27
Honda, 1, 2627, 32, 45, 65, 87,
95, 10406, 108109,
123124, 130
Horch, August, 10
Hudson, 23
Husky Injection Molding, 119
Hyundai, 27, 32, 35, 87, 124
Import Substitution Industrialization
(ISI), 4749, 55, 62
Innovation, 23, 5, 12, 20, 60, 65,
6778, 79, 8393, 99100,
105, 110, 116117,
125126, 129
Insurance, 5, 17, 34, 64, 107, 124,
133134
Insurance Institute of Highway Safety
(IIHS), 124
Internal combustion engines (ICEs),
7, 1112, 2021
International Motor Vehicle Program
(MIT), 27, 127
Invention, 2, 8, 13, 67, 70, 73, 77
inventory, 2, 1617, 129
Isuzu, 2627, 138
Italy, unionization, 7, 10, 46,
140141
Japan, 12, 1516, 19, 2528, 31,
3436, 38, 4042, 4445,
4748, 55, 5859, 64, 72,
92, 96, 107, 117, 119, 124,
140142
lean production, 128133
unionization, 137139
JCI, 35, 58
JD Powers Initial Quality Survey,
130131
Job One, 131
John Deere, 87
Joint ventures, 4950, 5261, 6466
Just-in-time manufacturing, 17
Krafcik, John, 127
Lean production/manufacturing,
130132, 138, 140141
role of labor, 127128
Leapfrogging, 62
Levassor, 12
Lexus, 32, 34
Licensing, 5, 28, 40, 52, 59, 89, 93
Lincoln, 32, 118
Local marketing, 2, 16, 41
Local Motors, 3
Luxury brand, 32
The Machine that Changes the World,
26, 127
Malaysia, 55, 59
MAN, 87
Management revolutions, 127142
Manual labor, 128
Manufacturing for Design (MfD), 123
Manufacturing jobs, 1, 93
Manufacturing process management
(MPM), 115
Market integration, 4243
Market niches, 2
Market structure, 2829
Mass production, 14, 18, 9899,
127, 133
Materials competition, 95104
Maxwell, 10
Mazda, 26
McDonnell Douglas aircraft, 119
Mercedes, 29, 32, 38, 42, 45
Metallurgy, 102, 104, 107, 121
Mexico, 3839, 4243, 47, 136, 140
labor costs, 34
Mitsubishi Motors, 2627, 59
Mobility 2.0, 34
Model proliferation, 2932, 35,
37, 127, 132
156 INDEX
INDEX
157
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