Automotive
Fundamental changes in the structure of the automotive industry are, as Jeff Daniels reports, the driving forces that will determine its future.
They are still great names, the leaders of the motor industry, but some of them are in trouble. One of the reasons is that the range of policy choices open to its leaders has become very wide, and the chances of a major mistake much greater. Those who inherit the industry, the next generation of designers, engineers and managers now emerging from universities, will need a firm grasp of reality, and of the real situation, if they are not to repeat some of the mistakes we have seen major players commit in the last decade or so. Once upon a time, the industry very logically set its sights on designing and building vehicles that customers would want to buy, and selling them at a profit. Remaining competitive was always a challenge. Sometimes a competitor would announce an outstandingly attractive model and reap a harvest of sales, at the expense of others.
However, during the 1970s a new concept began to emerge. A more reliable profit was to be made not on the vehicle itself, but on the process of selling it. Why leave the provision of hire-purchase finance to a specialised company, when the manufacturer could have a slice of the action? What about the selling of insurance, of extended warranties and all the other ancillary aspects of car purchase? The early results of such policies were encouraging for those involved. The largest vehicle manufacturers created finance divisions, which quickly began operating like companies in their own right, and with good results. It was during the 1990s that the financial tail began wagging the manufacturing dog. The problem with vehicle manufacturing, as one very senior Ford manager once put it to me, is that it's a highly geared business - when things are good we make lots of money, when things are bad we lose lots of money. More specifically, in lean sales years, factories have to be run below capacity, even shut down for days or weeks, at vast and unavoidable cost.
The finance divisions, however, can easily turn their energies and their reserves to other products - to property mortgages for example. Thus the motor industry emerged into the 21st century with a large part of it falling into a situation where overall (group) profits were achieved through the money the finance divisions were making, selling deals that enabled customers to lease-purchase vehicles which the manufacturing divisions were often making at a loss. The one more than compensated for the other. But is it really a sensible way for a major industry to go? It is one of several questions that future managers will have to resolve. Are there others? Indeed there are. Take apart any modern car and you will find that in essence, it consists of a beautifully made steel box onto, and into which a great many high-tech components and systems have been assembled. Most of these components and systems have been delivered by what the industry calls its Tier-one suppliers (the Tier-two suppliers supply the Tier-ones, and so on down the scale).
This is a huge contrast to the earlier days of the industry when vehicle manufacturing was 'vertically integrated'. Ford in Detroit used to boast that it took raw materials in at one end of its huge River Rouge plant and rolled complete cars out of the other, buying-in only its tyres and (for some strange reason) its carburettors. It is no longer so. More than half the value (or value-added) in a modern car comes from the Tier-ones. The vehicle manufacturers are in danger of becoming assemblers of expensive (especially electronic) components and systems into the bodies they press and weld together. Would you argue that they also make the engines? And where do the castings come from, to make the block and the head? Where does the fuel injection system, the ignition system, the alternator come from? From the Tier-ones. The largest American manufacturers actually compounded the situation by 'spinning off' their internal component divisions as completely independent businesses to make their own way in the world: General Motors created Delphi and Ford went the same way with Visteon. Outsourcing became the name of the game, even if it meant casting-off large and vital chunks of the organisation. Now it seems that the results have not been happy and that some rethinking has been done. But the long established Tier-ones, like Bosch and Denso and Valeo, continue to do very well, thank you, and are increasingly responsible for the technical developments that keep the industry on the advance. Is it time for the balance to be re-struck? The next generation will have to decide. Then again, there is the whole question of how cars are best manufactured.
For the moment, the production line still rules, and earlier experiments with 'unit manufacture' with entire vehicles assembled by small teams, largely failed. Now there is great interest, most of all perhaps in the USA, in the concept of 'micro-factories', partly reflecting the huge success of the micro-breweries which provide for such a wide range of public tastes. Could car-building micro-factories, making perhaps a few thousand cars a year through the skilled combination and finishing of bought-out parts, achieve the same result where vehicles are concerned? The smart advice from the western USA is not to bet against it - but again, it is the next generation which will have to make the idea work. The future is full of challenges...
The author, Jeff Daniels, is a busy freelance motor industry analyst and writer whose work appears regularly in reports published by the Economist Intelligence Unit and the Financial Times, in Automotive Engineer, and in other professional, industry and consumer titles. He received the Mercedes-Benz Award for the Montagu of Beaulieu Trophy for Motoring Journalist of the Year 2003 for his book "Driving force - The evolution of the car engine" from the Guild of Motoring Writers. Photo: Toyota CS&S Concept Car. Copyright Toyota.
