By Russ Banham
In the teens of the 20th century, the middle-aged Henry Ford latched on to a revolutionary concept — vertical integration. Ford's idea was to bring together in one place all the factories needed to manufacture everything that went into the making of a car. On Ford property along the banks of the Rouge River in Michigan, steel foundries, glass and rubber factories, paint shops, and the world's largest assembly plant sprouted and teamed up to produce Model T Fords so quickly and cost-effectively that average-income Americans for the first time could purchase something heretofore reserved only for the rich — a car.
A new kind of teamwork is emerging to distinguish automobile manufacturing in the 21st century. Long ago, hundreds of automotive supply companies replaced the glass and rubber plants that Ford and other car manufacturers once owned, many spun off by the carmakers themselves. Over time, these suppliers evolved and consolidated to make ever-larger car components, from the doorknob to the whole door to the entire automobile interior. Now these suppliers are collaborating with the automakers or OEMs (original equipment manufacturers) in virtual "companies" to build cars increasingly to customer specifications. Consulting firms, network solution providers, and software application companies have erected the technology architecture supporting these virtual companies, which exist until next year's models require the start-up of a new virtual company.
While Henry Ford hated being held captive by suppliers that could hike his costs willy-nilly, today's OEMs willingly partner and rely upon top-tier suppliers to be their systems integrators, taking ever larger responsibility for the design, engineering, and production of automobiles. So pervasive is this reliance that some observers predict that companies like Ford, General Motors, DaimlerChrysler, and other automakers eventually will become brand management and marketing firms — leaving the actual manufacturing to others.
"We've said for several years that the automotive industry would deconstruct and become virtual," says George Stalk, senior vice president of The Boston Consulting Group. "There is plenty of evidence we're already there."
Indeed, it would be a stretch to continue to call some automakers manufacturers, when an outside company like Lear Corp. makes the complete car interior. Stalk cites the example of Mahindra & Mahindra, a car manufacturing concern in India, as riding the edge of change. The company's Scorpio vehicle not only was built and assembled by
suppliers like Lear, Visteon Corp., and Germany's Behr GmbH, it was designed by them. Says Stalk: "They've proven that you don't need a big car company to make a car."
Whose Car Is It?
Technology — both Web-based applications and the Internet — is the glue in virtual manufacturing. Today, suppliers no longer reside in just the Motor City or Detroit's outskirts but dot the globe, creating geographical boundaries breached only by technology. So critical is technology that Mahindra & Mahindra could not have outsourced the Scorpio a scant five years ago.
"The bandwidth needed to transfer huge volumes of data, both telecom and Internet, did not exist until recently," says Umar Riaz, a partner and head of New York–based consulting firm Accenture's global automotive practice. "Companies now can view and share data in ways heretofore unavailable. Frankly, one of the major reasons for the move toward virtual or electronic collaboration in the auto sector is simply because we can."
This collaboration extends to all facets of manufacturing a car, from the initial design through the engineering to the actual assembly process.
"New manufacturing process planning software can provide virtual simulations of the actual manufacturing assembly line," Riaz notes. "If a change is made to a car's design or engineering, the software reflects the impact it would have on the assembly line."
Virtual teams are in evidence in other industries, such as high-technology companies that outsource the making of PCs. These companies have evolved to manage the product, rather than get down and dirty making it in the plant. Riaz believes that OEMs in the auto business eventually will become like these companies or Nike, a footwear manufacturer that leaves the manufacturing to others.
There is ample evidence of this trend already. "In certain countries, OEMs like Ford and GM are brand design and marketing companies, with the actual cars being assembled by third parties altogether," says Brad Callahan, leader of product industries in the Americas for consultant Cap Gemini Ernst & Young in Minneapolis. "We're not that far away from when this becomes normal in more and more countries. There are good reasons for it."
Among the reasons are higher product quality and cost economics. By compelling suppliers to make modular car components instead of discrete car parts, OEMs are able to push their costs down into the supply chain.
"Most of the car companies want to shift their fixed costs to the suppliers," Riaz says. "There's been a lot of redundancy in the value chain, where suppliers and car companies had built the capabilities to do essentially the same work. An OEM had an interior car design team, as did the supplier, creating a duplicative process and cost."
By collapsing the supply chain, other cost efficiencies have emerged. "Consolidation of the supply chain reduces the complexity and cost for OEMs, who no longer have to mediate and negotiate with dozens of companies," Riaz explains. "Instead of 12 companies making the interior and the OEM having to deal with all of them, it now deals with one or two. Ultimately, this helps decrease the time to market, dramatically cutting costs."
There are tactical cost benefits as well.
"When you collaborate electronically with your supply partners, you reduce travel costs and can work together much more quickly, making changes to design and engineering, which also cuts expenses," explains Kevin Prouty, automotive strategies research director at Boston-based AMR Research. "But the biggest benefit of virtual teamworking is reducing the time it takes to design a vehicle. It used to take four years to take a car from the page to the showroom. Virtual collaboration with suppliers can reduce this to 18 months for a complex platform rollout, one involving several brand models."
Cutthroat competition, demanding customers, and thin margins in the auto sector have conspired to compel such cost reductions in manufacturing. With Japanese carmakers like Toyota and Honda reaping huge labor savings by manufacturing vehicles in China, the need to trim expenses through manufacturing and other non-labor costs rises further. "Honda is quoting a $1,200 cost advantage by manufacturing in China," says Stalk. "That's a huge number."
Riaz says that OEMs "are faced with increasing, unrelenting cost pressures. Customers are demanding more value for less money, forcing a need among car companies to continually decrease cost. There's only so much you can do through pure negotiating with suppliers. There must be innovation in cost reductions, and the only way to do that is by collaborating."
Through virtual collaboration — the bringing together of cross-functional work groups to tackle a project for a finite period of time via a combination of technologies — both cost reductions and quality, a best-of-the-best group effort, are achieved. "It's the 'Intel inside' concept," Callahan says. "As customers begin to associate car interior suppliers like Lear Corp. or Magna Worldwide as domain experts, OEMs not only get higher-quality interiors, but also add luster to the brand image." Ditto, suppliers making the chassis, auto body, and engine.
In this scenario, Ford, GM, and other carmakers become the puppeteers holding the strings from the catwalk.
"Hollywood is a good analogy for the auto industry," says Vishakha Radia, director of the automotive practice at San Jose, CA–based Cisco Systems Inc., which provides networking solutions. "Film producers don't do anything but bring together all the players required to make a movie. This principle is incredibly important — as important as the assembly line was in Henry Ford's day."
Free Agents
While promising cost economics and higher quality, virtual collaboration is not a slam-dunk walk in the park. Turf issues, technology barriers, supplier delivery obstacles, and customer service problems threaten the viability of building cars both virtually and collaboratively. "There are complex layers of who owns what, who is responsible for what, and who is connected to whom," Callahan says. "Basically, more outsourcing means more complicated."
When a supplier builds an entire interior, he explains, it often sources components from other suppliers, who have procured their materials from other suppliers, and so on through the tiers. "Think of all the manufacturers' warranties in such a scenario," Callahan says. "Somebody has to decipher whose fault it is — and whose warranty it is — when a car breaks down and the customer wants answers."
That somebody is likely to be the OEM, which has integrated relations with all the different suppliers.
"As OEMs give more design responsibilities to suppliers, they face the question of how much knowledge they need to maintain to retain the integrity of the product," says John Paul MacDuffie, professor of management at Wharton and the co-director of the international motor vehicle program at Massachusetts Institute of Technology. "There are valid strategic reasons to have overlap in design and engineering. It seems a bit simplistic to say that the OEMs can stay in charge of the brand but outsource the rest. Unless they keep substantial design and engineering capabilities in-house to ensure product quality, there will be struggles."
One struggle is in the area of intellectual property. "If a designer designs something and gives it to an OEM, can it then pass it on to another OEM or another supplier?" Prouty asks. This uncertainty, in part, may explain why there continues to be duplicative design and engineering staff at most OEMs and their suppliers.
"There's quite a bit of shadow engineering going on at the OEMs, even though the supplier is recognized as the expert," Prouty says. "OEMs are doing work that their suppliers are supposed to be doing for them. It's a legacy issue of culture and trust. It may take an entire generation of engineers and managers to finally realize that they no longer need to be designing seats, since their suppliers can do it better."
Trust issues are in evidence in other facets of the business. "The big car companies have decided that there's good markup and good margins in the after-markets arena," Callahan says. "So they're selling car parts provided by their suppliers. But the suppliers also want to brand themselves, and want you to purchase the parts directly from them. In effect, the OEMs are in competition with their suppliers."
That's not the real problem, though. "The question is how customers will perceive these relationships, and the impact they may have on car-buying decisions," Callahan says.
While Radia acknowledges that virtual teamworking may create conflicts, she believes that these can be overcome. "The overarching principles of networked virtual organizations have less to do with technology and applications and more to do with culture- and customer-driven orientation," she explains. "A networked organization that is virtual across companies can overcome customer service issues. For example, a customer who needs his car's suspension adjusted should be able to walk into his dealer's service depot and have the problem corrected easily — if the dealer is connected in real time to the OEM, which is similarly connected to the supplier that provided the suspension system."
Radia says that the only real impediment to virtual teamworking is technological — and that, too, is surmountable. "We need consistency in data, workflows, performance definitions, and metrics — standards between the OEMs and the tier-one suppliers," she adds. "Perhaps another barrier is psychological, determining what is core and what is context. As companies analyze this, they'll ask questions like, 'Do I really need to own that manufacturing plant in Mexico, or should I let someone else own it?'"
In effect, automakers will question the very thing that absorbed Henry Ford: whether it is better to outsource or to own the entire manufacturing process. Ultimately, Ford decided that no supplier could be trusted not to wring his wallet.
Russ Banham is a journalist and playwright, and author of the new book The Ford Century: Innovations that Shaped the World.
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