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November 2007

Share the road … to success

Automotive alliances forge new industry hurdles: trust, innovation

By Ellen Fussell Policastro

Ford is using Toyota’s hybrid engine. Daimler Chrysler, Mitsubishi, and Hyundai developed a four-cylinder engine they could share between all platforms. When GM was building a new vehicle and needed a seat, instead of designing a new seat, they used one Toyota had used in one of their vehicles.

What is with all this sharing of technologies? It is all part of a bourgeoning concept in the automotive industry called coopetition (a hybrid word merging competition and cooperation) among chief purchasing leaders in the auto industry. Companies such as GM, Ford, Chrysler, Toyota, and Honda are embracing the concept, which is really about working together and sharing information in healthy competition, “because if you just compete for a bigger slice of pie, you’re not making the pie bigger,” said Jane Barrett, research director in the value chain strategies team at AMR Research in Boston. “With coopetition, you’re figuring out how you can make the pie bigger to increase opportunity, and everyone gets a bigger piece.”

Take China for instance. “If GM wants to go into China, they have to have a joint venture with a Chinese company; it’s a requirement in China and other countries,” Barrett said. The partnerships and alliances for automotive manufacturers in various regions differ slightly. Indian auto manufacturers do not have the same engineering skills as the U.S., “so it’s useful for them to partner with GM or Ford. And GM and Ford like to partner with India because it helps them understand the culture and market,” she said.

Another reason for the influx of alliances is the old adage, time equals money. “In this competitive world, you don’t have the luxury, money, or time,” to develop something slowly, said Craig Resnick, ARC Advisory Group’s research director of manufacturing advisory services in Dedham, Mass. The whole “we needed it yesterday” syndrome forces manufacturers to “find a way to make something world class in quality, but at the same time, in a cost structure that allows them to maintain profitability,” he said.

“Everybody has a ‘sweet spot’ or something they do particularly well, Resnick said. “It’s hard today for a midsized company to build a full-model portfolio of cars and trucks and be the best and do it in a world-class fashion. It’s better to focus on what you do well and partner with people who are complimentary to you. If you do a good job building trucks, and others build small fuel-efficient cars, with parts for example, you might be in a situation where it doesn’t apply for you to manufacture big engines. If Honda (who doesn’t make anything bigger than a V-6 engine) needed a V-8, they could build their own or partner with some-one who can build one as a world-class manufacturer,” he said.

After Ford bought Volvo and introduced their sport utility vehicle, they needed a lightweight 8-cylinder engine to fit under the short hood of their SUV. “Even Ford, with many engines in Lincoln town cars, didn’t have anything that small and light. So Volvo partnered with Yamaha, the motorcycle company, to sell the 311 horse power Yamaha engine as its 8-cylinder offering. Instead of spending the R&D it takes to build a separate product for a lower-selling vehicle, they looked to see who in the marketplace may have the capacity to do that,” Resnick said. “And it’s happening with more and more companies, such as Nissan, who is working with Toyota to purchase hybrid components rather than develop everything themselves.”

Innovation station

Another phenomenon boosting alliances is electronics built into cars. Automotive companies are collaborating with suppliers of navigation systems. “You have cars now with a camera at the back to tell you how far you are when parallel parking,” Barrett said. “So the view of the camera is integrated with the navigation system. With all the new features coming up in vehicles, whether they’re safety features or GPS and navigation systems, there is a lot of partnering around innovation of new features.”

On the horizon, Barrett said, “we’ll see Microsoft partner-ing with automakers, so the interior of your car will be like a home office. Currently you have all this data in a car, so it’s like a computerized vehicle,” she said. “How can that be pulled together for monitoring historical analysis, trying to predict something going on, or a needed service?”

Suppliers like Vince Carioti, global automotive manager at Phoenix Contact in Detroit, said supplying the connection technology through complete automation systems has “helped us in some ways. We’ve been able to reap some reward from what’s going on with BMW in Germany and gain sales in the U.S. because of that.”

Down the road, the more technical and electronic vehicles become, the more companies will have to partner, Barrett said. “Companies need to standardize their vehicles and components a lot more. Toyota and Honda are really way ahead in the way they standardize the components of vehicles, not just in North America, but globally. After an earthquake in Japan shut down manufacturing, Honda could ship parts from Michigan to keep manufacturing going, even though they were different manufacturers and names.”

Trust me

The biggest challenge with collaboration and partnering is the element of trust, Barrett said. “There has to be a benefit, either a growth in revenue or reduction in the cost and improvement in profit margins,” she said. But even if there’s a dollar benefit for both partners, just as in any relationship, the key element to make it work is trust. “Toyota shares everything—hybrid engine, seat—they’re so open about sharing their information, and yet they’re the most successful company,” Barrett said. “This proves the point, when companies hang on to their knowledge, it is not to their benefit.”

The question then is how do you overcome the trust issue? There are a number of principals that can make or break trust. “You have to have reliable performance, and if you’re going to have a relationship, you have to live up to your agreement,” Barrett said. “Beyond that, there’s security of data. Companies have to be able to know they can trust their intellectual property. There has to be a transparency of information. There also has to be sharing of risks. Companies won’t partner if one is taking all the risks. They have to share risks and share rewards.”

And finally, the trust has to come from leadership first, Barrett said. Then the new culture will perpetuate itself in a new set of people skills. “People have to level with other organizations. If you think of engineers partnering with other companies (integrating a camera with a navigation system), those engineers have to have the culture and skills to be able to work with other organizations with another product and another set of technologies,” she said. “It’s expanding what they need to do. (See Executive Corner, “Global partnering: Find a common ground” in the August 2006 issue of InTech.) Now they’re taking on innovation and engineering with partners.” The industry will start to see a “whole other culture and skill set needed.”

Green scene

Environmental issues are becoming more important as more countries are bringing up regulations for reducing carbon emissions. However, stricter regulations are a challenge to the auto industry. “Let’s say you were to buy a new Honda Accord in 2008,” Resnick said. “It’s a gasoline engine, but almost a zero-emissions car. If you buy it in Massachusetts, you can get it with zero emissions, or in California, New Hampshire, Vermont, Maine, Connecticut, Rhode Island, and New York,” he said. The bottom line is these cars are more expensive to build. So they will typically sell those lower emissions cars in states with tougher emissions laws, which creates a geo- graphical difference in models. “If you’re at an Accord plant in Ohio, you have to make modifications to cars that go to different regions with stricter laws. It would be a lot easier if all cars met the same standard,” Resnick said.

The other issue of course with auto manufacturers is the E85 (Ethanol at 85%). It’s a certain automotive manufacturer’s modified engine run on E85 fuel, and it’s not universally available.

“In the Mid Atlantic and Eastern part of the country, you rarely see a gas station with E85 fuel. But in the Midwest, with more corn and ethanol production, you’ll see more of it. So it’s not being able to make a product that can be universally distributed across the U.S. or the world. The reason isn’t driven by regulations but by the availability of the fuel,” he said.

It gets challenging because you cannot ship the same vehicle for the entire country. In one case, the reason is based on regulations, and in another, it is based on availability of different fuels. “This just adds another deviation to the engine and makes it more expensive to build a car with tighter emissions standards,” Resnick said. “It would be easier if all of North America adopted a universal emissions law, so all cars would have to ascribe to general standards.”

Job one, raising the bar

The competition between all these companies is becoming fierce, but it does level the playing field, Carioti said. With so much shared technology, so many automakers are interconnected globally. “Ford and Toyota shared hybrid technology because they didn’t have time, money, or knowledge at the time they developed it. One of the main reasons is time to market. It’s crucial to be able to share these technologies and get products to market quick enough to level the playing field.”

The good news is “Honda and Toyota are making a huge impact, which has forced U.S. automakers out of their comfort zone to step up quality,” Carioti said. It also means manufacturers will need to share proprietary technologies more on a global basis. “The benefits are they can get vehicles to market quicker; there’s an immediate penetration. Chrysler is looking at bringing vehicle manufacturing in China into the U.S. market so the Chinese market now has an immediate benefit of being able to step right into the U.S. market.”

Another aspect in the industry forcing alliances is “some of the end-user automotive companies would rather just do the design and have someone else manufacture the vehicles for them,” Carioti said. “It makes you wonder when they ask other companies to do the manufacturing, if they really want to stay in the manufacturing business, or if they just want to do the design and engineering and subcontract the manufacturing out and get away from having to pay the wages of united auto workers,” he said. “A lot of contract talks are going on in Detroit, trying to get these wages on a level playing field.”

For manufacturers in general, the good thing is “they don’t have to have as many manufacturing sites and employees,” Carioti said. “They can shrink some manufacturing costs by sharing one assembly line for three automakers, so they share costs,” he said. “It can be a good thing, but they do lose the proprietary technology. They lose being independent.”

At the end of the day, it is all about the “whole flat-world syndrome,” Resnick said. “It puts continued downward pricing pressure on the auto markets. “As with the Korean cars in 1986, when Hyundai came to the U.S., there were problems with quality and durability. But they got their act together. Now you’re buying full lines of cars and SUVs that are price-competitive. They are popular in the U.S. and even built in the U.S. now. But as you introduce even lower cost cars down the road and in global markets, it keeps putting the pressure on to compete,” Resnick said. The question remains, though: “Do U.S. and European companies play in that low-end space, or do they decide to let the Chinese or even Koreans stay in the lower-end space, when others stay in middle end? It raises the competition bar.”

ABOUT THE AUTHOR

Ellen Fussell Policastro is the associate editor of InTech. Her e-mail is efussellpolicastro@isa.org.