The U.S. auto industry has put the recession in its rear view mirror, emerging stronger and doing so at a faster pace than predicted. Sales are still below pre-recession highs, but car manufacturers are making money by cutting costs, managing inventory and relying on a more robust supply chain to build today’s models. These are among the findings of Booz & Company in its 2013 Automotive Industry Perspective, an authoritative white paper that was released this week.
The Booz paper took a look at how both suppliers and original equipment manufacturers (automakers) are faring as the industry continues to innovate at a rapid-fire pace. Those innovations include hybrid and electric battery packs, the use of lighter weight materials such as carbon fibers to meet higher fuel standards and new infotainment systems that are now commonplace in today’s vehicles.
Innovation is costly, with few manufacturers able to devote the resources to fund the research and development required to bring new technologies to the market. However, some suppliers have demonstrated considerable expertise in advancing originative technologies, thus OEMs may be better suited to integrate what they cannot afford to build themselves, effectively decentralizing innovation by relying on key supplier contributions.
The auto industry must rapidly innovate as the market quickly shifts and competition stiffens. Significantly higher federal fuel and emissions requirements, consumer demand for advanced electronics, vehicle platform sharing on a global scale and new and younger consumers entering the market means that no car manufacturer can go it alone.
Booz also pinned down what it sees as three areas where the industry will need to move without hesitation. These are: the innovation environment, the changing role of OEMs and suppliers, and the industry’s strategies for the future.
The importance of technological innovation has risen considerably in recent years as electric battery systems, advanced powertrains, outside equipment such as tablets and smart phones, and entertainment systems interact with today’s vehicles. Include safety systems such as collision avoidance and self-park technologies, and those costs can have an enormous impact on any OEM.
Managing innovation, however, will require that OEMs concentrate on what they do best and rely on suppliers to fill in the gaps. These suppliers are plowing their own capital into R&D and providing technologies such as diesel engines for pickup trucks, lithium-ion battery packs for electric vehicles and manual transmissions for sport coupes. Chrysler and Cummins, for instance, have a long-standing OEM-supplier relationship that has provided Dodge Ram trucks with more than 2 million turbo diesel engines since the late 1980s. OEMs will continue to rely on other companies to supply systems that could have been built in-house including from manufacturers that may not traditionally be known as auto industry suppliers.
One example of such a company is Krell Industries, a manufacturer of premium home entertainment systems. Krell has collaborated with Acura to embed a high-end audio system in the 2014 RLX. Acura, a Honda brand, has always provided technological leadership among premium brands, but the Krell collaboration underscores that even the best players may find it advantageous to seek out and forge relationships with new and untraditional suppliers.
A second example involves French automaker Renault and TomTom International BV, a builder of car navigation equipment. TomTom products are available as aftermarket plug-in navigation systems, but are now part of the embedded navigation system used in compact Renault vehicles. Renault makes use of technologies developed by an established supplier, allowing that company to assume development costs.
Booz expects that OEMs will continue to work with consumer electronic makers to develop the architecture required to enable vehicles to interact with tablet computers, smart phones and related devices. These platforms will be modular — moved around from model to model, perhaps even from manufacturer to manufacturer — and open. Much as open source software has transformed the computer industry, such technologies may do the same for in-cabin infotainment.
Car manufacturers will need to become adept at managing innovation, by focusing on proprietary technologies that must be developed in-house while overseeing technologies that are developed elsewhere and are brought in offers Booz. That challenge extends to working with partners that can deliver a superior product, on time and at a cost that can be justified. Management will need to study what innovations should be outsourced and work with partner suppliers that have the scale to accomplish these tasks.
The risk to OEMs is that as new technologies are developed and adopted, management will be “betting” on some apparent winners while dismissing other choices. Make the wrong choice and a business could suffer. Management must keep tabs on auto trends, by analyzing the market, looking for scientific breakthroughs and complying with government regulations. Those OEMs that are on top of the game will have the highest probability of long-term success in managing change notes Booz.
The challenge for suppliers is to stay on top of technological transformation, by “placing bets” on what products will shape the auto industry. Booz notes that such companies will need to adroitly analyze and project what products will be needed based on technical, market and regulatory factors. Suppliers must familiarize themselves with vehicle systems, determine what products they can provide, work with sub-suppliers or even competitors to innovate, and determine if development costs can be recovered when associating with an OEM.
Lastly, OEMs and suppliers must continue to work closely together to stay abreast of government regulations and consumer preferences. With the former, changing regulations are typically made known years before they are required. With the latter, consumers can quickly adopt or reject new technologies, making it imperative that all parties concerned understand that uncertainty is an ingredient of industry dynamics.