. "The Changing Nature of Engineering in the Automotive Industry--John Moavenzadeh." The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press, 2008.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
The Changing Nature of Engineeringin the Automotive Industry
John Moavenzadeh
Executive Director
International Motor Vehicle Program
Massachusetts Institute of Technology
Engineering has always been essential to the global automotive industry, which spends more on research and development (R&D) than any other industry except the pharmaceutical industry (Figure 1).1 Ranked by R&D spending, four of the top 10 global firms are automotive companies (Figure 2). The vast majority of the $55 billion spent on R&D in the automotive industry is on development, rather than basic or applied research,2 and most steps in the vehicle-development process require engineers and technicians. A typical new-vehicle development program costs between $500 million and $1 billion and takes two to three years from concept to customer. A new-engine development program costs roughly $100 million to $500 million, and a new-transmission development program costs roughly $50 million to $250 million. Thus corporate engineering capability is a key competitive differentiator for vehicle manufacturers.
PRODUCT ENGINEERS
There are two basic types of automotive engineers—product engineers and manufacturing engineers. In general, product engineers design cars and trucks and their components. Individual product engineers focus on specific systems (e.g., braking, steering, or interiors) or specific components within those systems (e.g., antilock braking controllers, steering columns, or instrument clusters). Product engineers can also be development engineers who evaluate prototype vehicles and tune vehicles in the preproduction phase (e.g., calibrating the power train to meet the customer profile for a vehicle). Product engineers can also be test engineers responsible for performing durability, stress, thermal, or noise and vibration testing.
Although product engineers have traditionally been grounded in mechanical and industrial engineering, as the software content of vehicles has increased, the industry has increasingly hired electrical, electronics, and software product engineers. Many vehicle manufacturers also operate advanced engineering departments to search for new ideas and develop new technologies for future vehicles.
MANUFACTURING ENGINEERS
Manufacturing engineers, who tend to be trained as industrial and mechanical engineers, are responsible for determining the most efficient way to produce vehicles. Some manufacturing engineers are part of a central engineering staff dedicated to production. However, most are located in offices at production facilities, such as vehicle-assembly plants and component-manufacturing plants.
Most firms encourage close coordination between product and manufacturing engineers. Design for assembly, design for manufacturing, and value engineering require that product and manufacturing engineers work together to engineer excess cost and waste out of a vehicle.
SUPPLIERS
The importance of the supply base cannot be overstated. A typical automobile is made of 20,000 to 30,000 indi-
1
If information and telecommunications technology industries are lumped together, the automotive industry ranks third in R&D spending.
2
Not all of the companies could estimate the precise split, but the three that provided data spent less than 10 percent for research and more than 90 percent for development.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
The Changing Nature of Engineering in the Automotive Industry
John Moavenzadeh
Executive Director
International Motor Vehicle Program
Massachusetts Institute of Technology
Engineering has always been essential to the global automotive industry, which spends more on research and development (R&D) than any other industry except the pharmaceutical industry (Figure 1).1 Ranked by R&D spending, four of the top 10 global firms are automotive companies (Figure 2). The vast majority of the $55 billion spent on R&D in the automotive industry is on development, rather than basic or applied research,2 and most steps in the vehicle-development process require engineers and technicians. A typical new-vehicle development program costs between $500 million and $1 billion and takes two to three years from concept to customer. A new-engine development program costs roughly $100 million to $500 million, and a new-transmission development program costs roughly $50 million to $250 million. Thus corporate engineering capability is a key competitive differentiator for vehicle manufacturers.
PRODUCT ENGINEERS
There are two basic types of automotive engineers—product engineers and manufacturing engineers. In general, product engineers design cars and trucks and their components. Individual product engineers focus on specific systems (e.g., braking, steering, or interiors) or specific components within those systems (e.g., antilock braking controllers, steering columns, or instrument clusters). Product engineers can also be development engineers who evaluate prototype vehicles and tune vehicles in the preproduction phase (e.g., calibrating the power train to meet the customer profile for a vehicle). Product engineers can also be test engineers responsible for performing durability, stress, thermal, or noise and vibration testing.
Although product engineers have traditionally been grounded in mechanical and industrial engineering, as the software content of vehicles has increased, the industry has increasingly hired electrical, electronics, and software product engineers. Many vehicle manufacturers also operate advanced engineering departments to search for new ideas and develop new technologies for future vehicles.
MANUFACTURING ENGINEERS
Manufacturing engineers, who tend to be trained as industrial and mechanical engineers, are responsible for determining the most efficient way to produce vehicles. Some manufacturing engineers are part of a central engineering staff dedicated to production. However, most are located in offices at production facilities, such as vehicle-assembly plants and component-manufacturing plants.
Most firms encourage close coordination between product and manufacturing engineers. Design for assembly, design for manufacturing, and value engineering require that product and manufacturing engineers work together to engineer excess cost and waste out of a vehicle.
SUPPLIERS
The importance of the supply base cannot be overstated. A typical automobile is made of 20,000 to 30,000 indi-
1
If information and telecommunications technology industries are lumped together, the automotive industry ranks third in R&D spending.
2
Not all of the companies could estimate the precise split, but the three that provided data spent less than 10 percent for research and more than 90 percent for development.
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FIGURE 1 Estimated R&D spending for top industries, 2006. Source: Schonfeld & Associates, 2006. Reprinted with permission of Schonfeld & Associates. Note: Industry SIC Codes are: Software: 7372; Telecom Equipment: 3663 and 4812; Semiconductor: 3674; Automotive: 3711 and 3714; Pharmaceutical: 2834.
FIGURE 2 R&D spending for top 20 global companies, 2004. Sources: Corporate R&D Scorecard, Technology Review, 2005; Industrial Research Institute, 2005; company annual reports. Note: Siemens includes Siemens VDO automotive business, which accounted for 12.7 percent of 2005 revenue.
vidual parts engineered into hundreds of components and subsystems. Vehicle manufacturers purchase one-half to three-quarters of these parts from their suppliers. All of the major vehicle manufacturers spend at least 50 percent of their revenue on components from suppliers.3 Vehicle manufacturers increasingly specify overall system requirements and give suppliers free rein to engineer and design a component or vehicle subsystem to meet those requirements. This contrasts with the traditional business model (which still exists for some components),4 in which vehicle manufacturers give suppliers detailed technical specifications for components. Supplier engineers, who frequently work closely with engineers at the vehicle manufacturers, play a critical role in introducing technology into vehicles.
Many of the hundreds of firms that primarily supply the automotive industry have consolidated into global enterprises that employ thousands of people in facilities spread across the planet. In theory, the industry supply base is divided into tiers. A tier-one supplier sells directly to the vehicle manufacturer (e.g., BorgWarner may sell a transmission to General Motors [GM]). Tier-two suppliers sell to tier-one suppliers (e.g., Timken may sell roller bearings to BorgWarner). In practice, however, the distinctions are often blurred, and some very small firms may sell directly to vehicle manufacturers (although these should not be considered tier-one suppliers for the purposes of analysis). Some firms, such as Freescale (formed when Motorola spun off its automotive semiconductor business), Siemens, Sumitomo Electric, DuPont, and even Microsoft), are not thought of as automotive supply firms, although they have large automotive businesses. In addition, many firms supply production equipment to the automotive industry (e.g., stamping presses or robotics systems) or test equipment (e.g., dynamometers and road simulators). All of these firms employ product and manufacturing engineers.
PRODUCT ARCHITECTURE
Product architecture, the relationship between the functions and structures of the vehicle, greatly influences how a vehicle is engineered. The terminology developed by Clark and Fujimoto (1991) provides helpful distinctions:
3
Some vehicle manufacturers and suppliers have significant equity relationships. In the Japanese keiretsu system, for example, Denso and Aisin Seiki, two large Japanese suppliers, are partially owned by Toyota. In France, PSA Peugeot Citroën and Faurecia have an equity relationship; and Hyundai-Kia and Mobis in South Korea have a similar relationship.
4
For more on the rise of the “black-box parts ratio” in automotive product development, see Clark and Fujimoto, 1991.
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Modular architecture is based on a one-to-one correspondence between functional and structural elements.
Integral architecture is based on a many-to-many correspondence between functional and structural elements.
Open architecture is based on a mix and match of component designs across firms.
Closed architecture is based on a mix and match of component designs within one firm.
Figure 3 illustrates where some typical products fall in a product-architecture matrix based on this terminology. Lego, the children’s toy, is an example of a perfectly modular, closed architecture. The bicycle and PC system are examples of products with modular, open architectures. PC components, such as printers, displays, and other devices, are interchangeable among many manufacturers and are mapped closely to specific features (e.g., printers are used for printing).
Automobiles have traditionally had integral, closed architectures (although in the past few years, vehicle manufacturers have attempted to reduce costs through modularization). The many internal parts of a vehicle are not interchangeable among manufacturers, even though the same suppliers may make very similar parts for different vehicle manufacturers. The integral architecture of the vehicle often forces close, coordinated interaction among teams of engineers from vehicle manufacturers and suppliers.
The product architecture for heavy trucks is significantly more modular and open than for cars (e.g., trucks can be ordered with engines from different engine manufacturers).
ENGINEERING EFFICIENCY AS A DRIVER OF CHANGE
From a financial perspective, most vehicle manufacturers and many tier-one suppliers destroy value, meaning that their real market value is lower than the real value of capital put into the firm by investors. Most American and European automotive firms have lost value in recent years, while most Japanese automotive firms have returned value to their investors (Marcionne, 2006).
Although some original equipment manufacturers (OEMs) (e.g., Toyota, Honda, Nissan, BMW, and more recently Hyundai) are profitable and create value, the rest have not created value for several years. In addition, the fortunes of the winning firms and losing firms are diverging. For example, in 2006 the value of Toyota, the most valuable automotive firm in terms of market capitalization, was more than 10 times that of GM. Almost every manager and executive in the industry—even at profitable firms—reports tremendous pressure to reduce costs and improve performance, reflecting the fiercely competitive nature of the current automotive market.
In light of the extraordinary R&D costs for a typical vehicle manufacturer (Figure 2), firms that can engineer a vehicle at lower cost and bring the vehicle to market faster have an extraordinary advantage over their competitors. Fujimoto and Nobeoka (2004), who have studied automotive product development for many years, found significant differences in efficiency among vehicle manufacturers. Their data show that differences in engineering efficiency—as measured by engineering hours adjusted for comparison—are actually increasing between American, European, and Japanese automakers. Figure 4 shows the product-engineering hours
FIGURE 3 Product architecture matrix for cars, heavy trucks, and other products.
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FIGURE 4 Adjusted product engineering hours for vehicle manufacturers in three regions. Source: Fujimoto and Nobeoka, 2004. Reprinted with permission.
required for a typical vehicle program averaged for vehicle manufacturers from three regions and for four time periods. (The data are presented as regional averages to mask the identity of individual firms; so, for example, an individual Japanese OEM may be less efficient than an individual American OEM.).
Note that product-engineering loads in the United States and Europe increased in the last five-year period (1995–1999) as a result of significantly more stringent regulatory requirements. Fujimoto and Nobeoka (2004) argue that in Japan, regulatory requirements cancelled out improvements in engineering efficiency; as a result, the number of engineering hours remained about the same. Indeed, returning to Figure 2, it is entirely unclear whether vehicle manufacturers that spend more on R&D than their competitors have an advantage or disadvantage. To evaluate R&D output, one must also consider the efficiency of the engineering operation.
One vice president of engineering reported that his single greatest challenge is the pressure “to do more with less.” This manager had been asked to meet a corporate target of increasing engineering efficiency by 30 percent in three years—a remarkably ambitious objective. This particular manufacturer measures engineering efficiency by dividing engineering output by total engineering costs; engineering output is measured by a point system that assigns various weightings to the company’s new vehicle programs, significant vehicle redesigns (known in the industry as product freshenings), and new power trains.
The drive to improve efficiency (i.e., to increase engineering output while lowering engineering costs) has led to several interrelated developments:
pressure to manage a firm’s global footprint more effectively across the enterprise
changes in the working relationship between vehicle manufacturers and their suppliers
a shift toward a more open model to accelerate innovation
The first item, managing the global engineering footprint, is the subject of this paper. Items two and three are discussed below.
Relationship between Vehicle Manufacturers and Suppliers
One of the most significant trends in the automotive industry in the past two decades has been the emergence of mega-suppliers capable of designing and developing large portions of the vehicle and, in some cases, manufacturing entire vehicles. The focus of the largest tier-one suppliers has been shifting from components to full-vehicle systems, or “modules.” Their customers, the vehicle manufacturers, have granted them greater engineering responsibility and have announced plans to work more closely with fewer suppliers.
Contract Manufacturing
The increasing importance of suppliers in the global automotive industry is reflected in the emergence of contract manufacturers. For example, Magna Steyr, a wholly owned subsidiary of Magna International, builds complete vehicles for several OEMs. In 2005, Magna International declared more than $20 billion in automotive sales, making it the third largest automotive supplier in the world.5 Magna Steyr’s production volumes have increased steadily; in 2005, the company sold 230,505 units representing $4.1 billion in sales to OEMs. The company’s manufacturing complex in
5
2005 revenue of the top three automotive suppliers: Robert Bosch GmbH, $28.4 billion; Denso Corporation, $22.9 billion; Magna International, $22.8 billion (Automotive News, 2005).
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Graz, Austria, includes two assembly plants that build about 1,000 vehicles a day, including the BMW X3, Mercedes E-class and G-class cars, Saab 9-3 convertible, Jeep Grand Cherokee, Chrysler 300, and Chrysler Voyager.
Magna has also moved into the upstream business of contract engineering for automakers, and the company now employs 2,300 engineers in 10 locations around the world. The largest engineering center, in the Graz complex, employs 1,000 people. Magna Steyr says it not only completely engineered the 9-3 Cabriolet, G-class; BMW X3; and Audi TT coupe and roadster, but also performed engineering projects for Alfa Romeo, Audi, Iveco, Lancia, Lincoln, Pontiac, Smart, and VW. These projects range from adding a body derivative to creating a four-wheel-drive version.
The blurring of the lines between OEMs and suppliers is reflected in DaimlerChrysler’s Toledo Supplier Park in Toledo, Ohio. The 2007 Jeep Wrangler is manufactured at this facility with the significant involvement of a variety of suppliers. Kuka Flexible Systems, a German company, runs the body shop; Magna-Steyr runs the paint shop; and Mobis, a Korean company, supplies chassis modules. This arrangement is in sharp contrast to traditional assembly plants, where vehicle manufacturers are responsible for all of these functions.
A More Open Innovation Process
Another result of the tremendous pressure to engineer vehicles more efficiently is a migration toward openness in the innovation process. Vehicle manufacturers have historically looked inward for new ideas and better ways to engineer vehicles. In the previous section, we described how vehicle manufacturers are working more closely with suppliers. They are also turning to their competitors, universities, and even customers to improve their products through joint programs, technology alliances, online technology brokers, and university research programs.
Vehicle manufacturers have always shared programs among their internal brands; for example, a Buick and Oldsmobile product from GM might have been given different names although they were nearly identical. In addition, manufacturers with an equity relationship, such as Ford and Mazda, have shared vehicle platforms. However, in the past 10 years collaborations on vehicle programs have increased among manufacturers that do not have an equity relationship and that are otherwise fierce competitors in the marketplace; examples include the Toyota Aygo and the Peugeot 107, or the Pontiac Vibe and the Toyota Matrix.
Vehicle manufacturers that do not have equity relationships are also increasingly entering into technology alliances. The alliance of most interest in the industry currently is an agreement announced in September 2005 among GM, DaimlerChrysler, and BMW to develop a new hybrid electric power train to surpass the one developed by Toyota for its Prius vehicle. GM and BMW have been collaborating on the development of hydrogen refueling systems since May 2003, and Ford and PSA Peugeot Citroën have been working on small diesel engines since March 2000.
Vehicle manufacturers and suppliers have increasingly leveraged the Internet to solicit new ideas and technical solutions to specific problems. Online technology brokers, such as NINΣ, Yet2com, and InnoCentive, are like eBay for technology. Automakers and suppliers describe a problem in detail and request proposals (sometimes anonymously). Researchers from all over the world can offer solutions at various stages of development, from vague ideas to well tested technology. BMW has taken the search for outside solutions directly to its own website, where anyone can point out a problem or need and offer a solution.
Automakers have reached out to universities for decades, but the volume of research funding and depth of collaboration seem to be increasing. GM’s collaborative research laboratories (CRLs) program, which was established in 2002, includes 10 long-term strategic relationships with professors or teams of professors at specific universities to focus research on specific technical areas. An electronics and controls CRL, with Carnegie Mellon University, is one of the largest; others include an engine technology CRL at the University of Aachen and a lightweight-materials CRL at the Indian Institute of Science. Ford and MIT have also established a multiyear, multimillion dollar research relationship. Toyota has pledged as much as $50 million to the Stanford University Global Climate and Energy Program.
THE ENGINEER’S PERSPECTIVE
At the working level, most automotive engineers interviewed reported that the single greatest change since 1990 has been the introduction of remarkable new tools that have changed their daily work routines. Most of these tools were enabled by tremendous advances in information and communications technologies. At first, in 1990, computer-aided design (CAD), which enables engineers to fit components together in a virtual three-dimensional space, and computer-aided engineering were specialty areas, and just a few engineers were taught to understand the software. Since then, design engineers have had far more exposure to these powerful systems. Today, every Ford product engineer either has a dedicated UNIX workstation at his or her desk or shares a UNIX machine with a neighboring engineer.
Access to information has also greatly improved. From the company intranet, engineers can access assembly plant quality data in real time and call up engineering prints, engineering specifications, and engineering test procedures. They can also assess critical data from suppliers.
The changing knowledge boundary between OEMs and suppliers has had a significant impact on both OEM engineers and supplier engineers. The role of engineers at vehicle manufacturers and suppliers has changed as the structure of the industry has changed. When Ford spun off many of its
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automotive-parts businesses to form Visteon, engineering work that had been done in house (e.g., axle engineering) was moved to the new company. The same thing happened when GM spun off Delphi. Several OEM engineers described the change as shifting from a designer of components and subsystems to a systems integrator. Several supplier engineers noted that their customers now grant them greater autonomy to design components (or even full-vehicle systems)—although the degree of autonomy varies by vehicle manufacturer.
Finally, some engineers stated that they are much more aware of potential legal liabilities related to their daily work than they were 10 years ago, which has changed the way they document information. Many engineers also mentioned that they feel pressured to work more efficiently today than they did 15 years ago, because fewer engineers seem to be doing more of the work.
Requirements for Entry-Level Engineers
The general requirement for entry-level engineers in the United States is a bachelor’s degree in engineering or physics. However, some interviewees noted that the number of entry-level hires with master’s degrees has increased.
The Supply of Qualified Engineers
Several press reports have suggested that the United States is losing its technological lead by graduating fewer engineers than India and China. Typical reports state that the United States graduated roughly 70,000 undergraduate engineers in 2004, while China graduated 600,000 and India graduated 350,000 (Figure 5). However, these numbers may be misleading. Duke University researchers determined that the data were not comparable. The numbers for China and India include graduates of three-year training programs and diploma holders, whereas the numbers for the United States include only graduates from four-year accredited engineering programs.
GLOBALIZATION
Historical Context
The automotive industry has been international since its earliest days. Daimler vehicles were produced under license in France in 1891, England in 1896, and America (New York City) in 1907.6 Proximity to customers—wealthy individuals in the early days of craft production and mass markets in the days of mass production—has always been a key determinant for the location of vehicle-production facilities. The development of Henry Ford’s system of mass production around 1910 was a key enabler of offshoring of vehicle-production facilities. Mass production, with its interchangeable parts, greatly reduced the amount of labor required to assemble a motor vehicle (and reliance on craft assembly skills). This led to a proliferation of automotive assembly plants around the world to gain access to new markets.
American automotive firms were pioneers in the early age of globalization. Both Ford and GM established their first production facilities outside the United States only one year after each company was founded. The early development of the “build where you sell” philosophy was driven by the high costs of shipping finished vehicles and later by increases in trade tariffs in the 1930s. To reduce transport costs, most early offshore assembly plants were based on the assembly of completely knocked down (CKD) kits. Ford could ship eight unassembled Model T CKD kits in the same amount of space that it could ship one completed vehicle. Table 1 shows the tremendous investment in offshore assembly plants made by Ford, GM, and Chrysler prior to 1929.
The appeal of CKD kits gained traction during the 1930s when higher tariffs and other trade restrictions were implemented by governments around the world. CKD kits were assessed at a lower tariff rate in exchange for the investment and employment provided by local CKD facilities. Eventually, offshore CKD plants began to procure components locally, especially in Europe where tariffs were high and markets were large.
Ford and GM followed different paths in Europe. Ford established wholly owned subsidiaries that were initially tightly controlled by Detroit. GM increased its European operations through acquisitions. In 1926, GM bought Vauxhall in England, and in 1929 the company bought Adam Opel AG in Germany; Opel was seized by the German government in 1940 and reclaimed by GM in 1948.
By the 1950s, both Ford and GM’s European operations were largely autonomous; each had its own engineers who designed vehicles specifically for the European markets (and, in the case of GM, its own European brands). Each had developed extensive local supply chains and no longer relied on CKD units shipped from America. In fact, Ford and GM’s operations in the United Kingdom and Germany were largely autonomous and organizationally distinct. The creation of Ford of Europe in 1967 by Henry Ford II, which forced the integration of Ford’s German and British units, is considered one of the most significant reorganizations in the company’s history.
The automotive industry in the mid-1960s was dominated by two large markets—America and Europe—and one emerging market—Japan. At the time, interregional trade in vehicles was insignificant. For the most part, Americans purchased vehicles manufactured by GM, Ford, Chrysler, and American Motors. In Europe, where national markets were far more distinct than they are today, the French bought French vehicles, the British bought British vehicles, and so on. A firm like Adam Opel, although it was owned by GM,
6
For an excellent historical account of globalization in the automotive industry, see Sturgeon and Florida, 2000.
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FIGURE 5 Engineering, IT, and computer science degrees awarded in the United States, India, and China (2004). Note: Subbacculaureate degrees refer to associate degrees in the United States, short-cycle degrees in China, and three-year diplomas in India. Source: Gereffi and Wadhwa, 2005.
TABLE 1 Ford, GM, and Chrysler Offshore CKD Assembly Plants as of 1928
Company
Number of Plants
Location of Plants (Year Opened)
Ford Motor Company
24
Canada (1904); England (1911); France (1913); Argentina (1915); Argentina (1919); Spain (1919); Denmark (1919); Brazil (1919); Belgium (1919); Sweden (1922); Italy (1922); South Africa (1923); Chile (1924); Japan (1924); Spain (1925); Germany (1925); France (1925); Australia (1925); Brazil (3 locations, 1926): Mexico (1926); India (1926); Malaysia (1926)
General Motors
19
Canada (1907); England (1908; not a CKD plant); Australia (1923); Denmark (1923); Belgium (1924); England (1924); Argentina (1925); England (1925); Spain (1925); Brazil (1925); Germany (1926); New Zealand (1926); South Africa (1926); Uruguay (1926); Indonesia (1926); Japan (1927); India (1928); Poland (1928); Sweden (1928)
Chrysler
3
Germany (1927); Belgium (1928); England (1928)
Sources: Rhys, 1972; Maxcy, 1981.
was largely managed and operated like a German company. The next big automotive production powerhouse—South Korea—had not yet appeared on the scene; Hyundai Motor Corporation was founded in 1967.
The automotive industry underwent a second wave of globalization starting around 1970, when international trade in motor vehicles—especially fuel-efficient Japanese vehicles—increased in response to the oil shocks of the 1970s. In the 1980s, foreign direct investment in manufacturing facilities increased. Honda opened the first transplant7 in Ohio in 1982, beginning a wave of investment that continues today. Japanese manufacturers followed a similar pattern of investment in transplant production facilities in Europe a few years later. Beginning in the late 1980s, but greatly accelerating throughout the 1990s and the first few years of the 2000s, the world’s automotive firms—both OEMs and suppliers—underwent a wave of mergers, acquisitions, and various kinds of strategic alliances.
Today, the level of business integration among vehicle manufacturers varies greatly. The list below is organized from the most integrated to the least integrated:
Merger/Acquisition: Daimler Benz and Chrysler Corp. (until August 2007); Ford and Jaguar; Ford and Volvo; Volkswagen and Seat; Volkswagen and Skoda
Controlling Equity Stake: Ford and Mazda; DaimlerChrysler and Mitsubishi Motors (until July 2005)
Non-controlling Equity Stake: GM and Fiat Auto (until February 2005); GM and Fuji Heavy (until October 2005); DaimlerChrysler and Hyundai (until July 2005)
Product-Development Agreements/Shared Platforms: GM Pontiac Vibe and Toyota Corolla (shared platform); Peugeot 107 and Toyota Aygo (small-car program)
Technology Alliances: Ford and PSA on diesel engines; GM, BMW, and DaimlerChrysler on dual-stage hybrid vehicles; PSA and BMW on small gasoline engines
This evolution has blurred the distinction between domestic and foreign automakers in all countries, including the United States. Ford owns Jaguar, Volvo, and Land Rover and a controlling stake in Mazda. GM owns Saab and Daewoo and has only recently divested itself of equity stakes in several Japanese manufacturers. At the time this was written in
7
A transplant is a foreign-owned manufacturing facility, such as a Toyota or BMW assembly plant, located in the United States.
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2006, Chrysler was owned by DaimlerChrysler AG, a company based in Germany; 74 percent of DaimlerChrlysler’s capital stock was owned by European investors, and the single largest shareholder was the Kuwait Investment Authority (DaimlerChrysler, 2005). Some of these international relationships are considered great successes (e.g., Renault-Nissan), but many are considered failures that have destroyed shareholder value (e.g., GM-Fiat, Ford-Jaguar).
Current Level
Although traditional global business relationships in the industry are breaking down (e.g., the GM-Fiat relationship has been terminated), the automotive industry today is more globally integrated than ever. Figure 6 shows the percentages of employment, sales, and production outside the home country for the top 10 vehicle manufacturers (in terms of 2005 global sales). Because these 10 vehicle manufacturers account for about 83 percent of global sales, we can draw some conclusions from these data:
All 10 automakers sold more vehicles outside their home markets than in their home markets. In 2005, for the first time, GM sold more than half of its vehicles outside the United States; the average for both U.S.-based automakers, Ford and GM, is slightly more than half. For the other eight manufacturers, the percentages range from about 70 to 80 percent.
Among these 10, the lowest percentage of sales, production, or employment outside the home country was about 38 percent, but the percentages for all of them are increasing. While GM and Ford sales are declining in their home market (USA), their competitors’ share in the U.S. market is growing.
We can also look at globalization from the market perspective—how open major national and regional automotive markets are to foreign-brand or foreign-made products. Figure 7 shows 2005 sales in the U.S. market divided into four-categories: foreign-owned foreign-brands (e.g., Honda); foreign-owned domestic brands (e.g., Chrysler); domestic-owned foreign brands (e.g., Volvo); and domestic-owned domestic brands (e.g., Chevrolet). In 2005, 54 percent of the vehicles sold in the United States were sold by foreign-owned firms.
Table 2, which compares U.S. data with data from Western Europe, Japan, and Korea, shows that the U.S. market is the most open, but penetration of foreign brands and foreign-owned domestic brands in other developed markets is increasing. Japanese automakers are following a similar pattern of building transplants in Europe.8 The 26.6 percent penetration of foreign brands in Western Europe includes Chrysler vehicles, but not Opel vehicles (owned by GM). The 38.2 percent penetration of foreign-owned vehicles includes Opel vehicles, but not Chrysler vehicles. The 9.0 percent figure for Japan includes Mazda vehicles (controlled by Ford), and the 26.2 percent for South Korea includes Daewoo vehicles (controlled by GM).
The U.S. Market
Competition from foreign automakers in the United States has steadily increased providing more choices for U.S. consumers:
Since 1980, several foreign brands have entered the U.S. market or dramatically increased their share. Foreign automakers have attacked their U.S. competitors on all fronts. In 1986, Honda made a strong move to attract upscale consumers when it introduced the Acura brand in the United States. Toyota followed suit with the introduction of the Lexus brand in 1989, the same year Nissan launched the Infiniti brand.
New market segments are being created. Toyota moved toward the downscale/hip-youth segment with the introduction of the Scion brand in 2004. DaimlerChrysler introduced the Maybach, a new super luxury car that costs more than $300,000.
Manufacturers are offering more models to cover all market segments. Low-end producer VW tested the U.S. market with the high-end Phaeton, while high-end producers Audi and BMW have introduced lower cost models, such as the Audi A3 and the BMW 1-series.
The threat of reentries also looms large. Speculation is rampant that both French automakers—Renault and PSA Peugeot Citroën—will soon reenter the U.S. market.
The Koreans have also entered the fray. In 1986, Hyundai entered the U.S. market but retreated in the early 1990s because of problems with quality. Over the past five years, however, U.S. sales of Hyundai vehicles have come roaring back as quality has greatly improved. Hyundai also acquired majority ownership in Kia Motors in 1998, and by 2005, Hyundai/Kia U.S. market share had increased to 4.3 percent.
Figure 8 shows the increases in sales of foreign-brand vehicles, at the expense of domestic brands, in the United States in the past 25 years. The combined U.S. market share of the traditional Big 3 automakers since the mid-1980s steadily declined to 58.5 percent in 2005. In 1985, GM’s market share was slightly more than 40 percent; that figure had dropped to 25.8 percent in 2005. In 1985, Ford was number two with about 22 percent of the market. Ford’s share crept up to about 26 percent in the mid-1990s but had dropped back to 18.2 percent by 2005. DaimlerChrysler’s 2005 U.S. market share of 14.5 percent is nearly identical to the 1985 market share
8
Japanese automakers operated 16 transplants (assembly plants) in European Union member countries in 2006, producing over 1.5 million vehicles (more than double the production for 1995). Japanese automakers operated 13 R&D centers in European Union member countries in 2006 (JAMA, 2007).
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FIGURE 6 Percentage of employees, sales, and production outside home country for the top 10 global automakers. Source: Compiled from annual reports and market literature and Automotive News, 2005.
FIGURE 7 U.S. vehicle sales by category, 2005. Source: Automotive News, 2005.
FIGURE 8 Foreign-brand market share in the United States, 1986–2005. Note: Includes domestic-owned foreign-brands, such as Volvo (Ford) and Saab (GM). Source: Automotive News data, 2005.
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TABLE 2 Foreign Penetration in Four Developed Markets, 2004
Country or Region
Penetration by Foreign Brand (%)
Penetration by Foreign Ownership (%)
United States
41.3
51.2
Western Europe
26.6
38.2
Japan
4.2
9.0
South Korea
2.3
26.2
Data sources: ACEA, 2004; JAMA, 2004; KAMA, 2004.
for Chrysler Corporation. The combined share for Japanese brands steadily increased from about 20 percent in 1985 to almost 34 percent in 2005.
As shown in Figure 9, U.S. sales of foreign-brand vehicles were driven by imports through the mid-1980s, when they were supplemented by transplant-produced vehicles. Figure 10 shows the 17 transplants now sold in the United States—14 from Japanese OEMs, one Korean OEM (Hyundai), and two German OEMs (Mercedes Benz and BMW).
As of early 2005, transplants employed about 65,000
FIGURE 9 U.S. sales of foreign-brand vehicles transplant-produced and imports, 1982–2005. Source: Adapted from Center for Automotive Research study prepared for Association of International Automobile Manufacturers Inc.; Automotive News data; U.S. Department of Commerce; IMVP.
FIGURE 10 Transplants in the United States. Source: IMVP, 2004; JAMA, 2004.
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TABLE 3 North American Assembly Plant Footprint as of October 2006
Manufacturer
United States
Canada
Mexico
North America
Total
GM
17
1
3
21
Ford
10
2
2
14
DaimlerChrysler
8
2
2
12
Other OEMs
14
3
7
24
Totals
49
8
14
71
Notes: Locations that include two assembly plants, such as Honda in Lincoln, Alabama, and Toyota in Princeton, Indiana, counted only once above. Mercedes plant in Alabama included with DCX USA. This accounts for the difference between 14 U.S. transplants shown above and 17 cited previously. Other OEMs USA includes NUMMI Toyota-GM facility and AutoAlliance Ford-Mazda facility. Other OEMs Canada includes CAMI GM-Suzuki facility.
Sources: Automotive News, 2005, and company reports.
people and accounted for a cumulative investment of more than $27 billion, and these figures have rapidly increased since then. In April 2006, Toyota announced a major expansion of its Indiana plant. In June 2006, Honda announced it would build a new assembly plant in Indiana to begin production in 2008. Kia (a brand of Hyundai) broke ground for a second assembly plant in Georgia in October 2006.
During that same period, Ford closed its St. Louis and Atlanta assembly plants, and GM closed its Oklahoma City plant. The assembly plant footprint in North America as of October 2006 is shown in Table 3.
Figure 11 shows light-vehicle production for domestic plants and transplants in the United States since 1982. Overall U.S. production has hovered around 12 million vehicles since 1994, so in a sense, the industry remains relatively healthy. However, Figure 11 shows a gradual, but relentless shift from domestic plants to transplants, which produced a record 3.58 million vehicles in the United States in 2005. By 2006, when the new Hyundai plant in Alabama and the new Toyota plant in San Antonio had ramped up production, the figure had risen to almost 4 million units. Thus roughly one of every three vehicles built in the United States is from a foreign company.
Following the “power train is core business” mantra, all major vehicle manufacturers engineer and manufacture engines and transmissions. However, OEMs are increasingly sharing engine and transmission programs or obtaining them from other manufacturers. A report by the Center for Automotive Research estimated that the engine-production capacity of foreign-brand automakers in 2003 was 3.5 million units, 30.5 percent of the overall capacity in the United States (Center for Automotive Research, 2005). Honda has major engine-manufacturing facilities in Anna, Ohio, and Lincoln, Alabama; Nissan has an engine plant in Decherd, Tennessee; and Toyota has engine plants in Georgetown, Kentucky; Huntsville, Alabama; and Buffalo, West Virginia. In 1996, a similar report had estimated the total engine-production capacity of foreign-brand automakers at 1.5 million units. Hence, over an eight-year period, foreign engine-production capacity increased by 133 percent.
Although globalization in the United States has been disruptive for automakers and parts suppliers, it has generated tremendous benefits for U.S. consumers: (1) Americans have more vehicle-model choices than ever before; (2) manufacturing productivity and quality levels have improved and converged among all automakers; (3) vehicle prices have fallen in real terms; and (4) significant product enhancements in safety, environmental impact, and performance have been made.
The Automotive-Supplier Industry
Since the 1990s, suppliers of components—a critical link in the automotive value chain—have also undergone relentless globalization. Nowadays, vehicle manufacturers “shop at the global mall”—that is, they purchase components
FIGURE 11 U.S. light-vehicle production (domestic and transplant), 1982–2005. Source: Automotive News data.
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Just as manufacturing labor costs are not the primary determinant for locating production facilities, engineering labor costs are not the primary determinant for locating the product-design function. The following factors must also be considered:
Low labor rates may not provide a sustainable advantage, because engineering labor rates can increase over time.
Engineering labor accounts for roughly one-third to one-half of the engineering cost of vehicle development.10 Other major costs are for vehicle prototypes, testing equipment and laboratories, buildings/office space, software licenses, and so on. Engineering software licenses for products like CATIA are very expensive regardless of where they are used. As of June 2005, a CATIA license cost roughly $5,000 per user, regardless of the location of the user.
Low productivity can effectively increase the cost of engineers in “low-cost countries.” The same executive who estimated the annual loaded cost of an engineer in Shanghai at $10,000 per year noted that, after training and adjusting for output, the cost was easily $20,000 per year. Many interviewees cited the lack of domain knowledge as the key reason for lower productivity of engineers in countries like India and China.
In conclusion, cost is a critical factor in location decisions, and labor costs (both manufacturing labor and engineering labor) are important components of overall costs. It makes sense to manufacture certain vehicles or certain vehicle components in a low-cost country—but not all of them. It makes sense to engineer certain vehicles and vehicle components in a low-cost country—but not all of them. The dilemma facing manufacturers was summed up by one CEO of a European manufacturer, “No one has the solution to this problem. If you don’t move some jobs away from your home base, you could be overwhelmed by competitors who are willing to do this. On the one hand, your family loses jobs. On the other hand, if you don’t shift jobs to places like India and China, we’re all dead.”
The Capability Factor
Capability has little impact on the production footprint strategy for vehicles or components because, for production, the capability of the local manufacturing workforce and local manufacturing engineers is less important than customer location, government policy, and cost. However, capability has a high impact on the footprint strategy for product engineering. For a firm to shift a product engineering function offshore, there must be, at a minimum, qualified engineers available to perform the required tasks. This implies an engineering-education infrastructure that produces an adequate supply of qualified engineers.
Vehicle manufacturers can offshore product engineering in two ways: (1) offshore the full vehicle-engineering program for a specific vehicle or a family of related vehicles (e.g., large, rear-wheel-drive cars); or (2) offshore part of the vehicle-engineering process, such as a particular task or area of expertise. (Offshoring of full-vehicle programs is discussed in the next section.)
With respect to offshoring certain engineering functions, several interviewees noted that low-cost countries are best suited for certain types of engineering work:
repetitive or routine tasks that require technical skills but not innovation or creativity, such as documenting an engineering bill of materials, performing a failure modes effects analysis (FMEA), certain types of routine stress analyses or heat-transfer calculations, and generation of a tool design from a part specification
specialized functions that leverage local expertise or capabilities, in effect creating an offshore R&D center of excellence in a particular technology or capability, such as computational fluid dynamics
localization tasks, that is, taking a vehicle (or component) designed in one part of the world and modifying it to comply with local regulations or customer preferences in a different part of the world
A study by Booz Allen Hamilton also concluded that higher value-added engineering tasks are more difficult to offshore. More demanding tasks, such as the full engineering responsibility for a vehicle program, are more difficult to outsource or offshore. Almost all interviewees for this report agreed that more complex engineering tasks were more difficult to offshore, although there was some disagreement about the level of complexity for some tasks. Routine tasks that require relatively low skills, such as creating a mesh for a finite-element model, are the easiest to outsource or offshore (Figure 24).
Two overarching messages emerged from interviews of automotive executives in the United States. First, many managers expressed concerns about the lack of automotive domain knowledge among engineers in low-cost countries. As the Asia-Pacific managing director of a North American tier-one supplier said, “I don’t use my engineers in China for innovation. The culture is imitative, not innovative. They are great for reverse engineering, and so we use Chinese engineers for many of our aftermarket applications.” Others noted that some automotive engineers in China had never even driven a car, much less owned one; thus they do not have a basic familiarity with the product.
A second concern expressed by some automotive managers was the shortage of engineers in the United States,
10
To determine engineering labor costs, the overall engineering head count is multiplied by $100,000 per engineer and divided by overall R&D budget.
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FIGURE 24 Complexity and difficulty of engineering tasks suitable for outsourcing/offshoring. Notes: CAD = computer-aided design; FEA = finite element analysis; FMEA = failure mode effects analysis; VA/VE = value analysis/value engineering; CAE = computer aided engineering. Source: Jackson et al., 2005.
particularly of engineers with certain skills. A CEO of a U.S. tier-one supplier cited this problem, “In Mexico, an engineer costs 10 times a manufacturing employee. In the United States, an engineer costs about the same as a manufacturing employee. Think about that. The issue is not cost; the issue is supply [of capable engineers]. We have a big problem with engineering in this country: it’s called ‘where’s the talent?’ My view [for my firm’s engineering footprint] is that growth will occur overseas, and engineering in the U.S. will remain flat.”
The value of electronics content in automobiles has increased steadily for the last two decades. Thus electrical and software engineers have become as important as the traditional mechanical engineers who have historically been associated with the automotive industry. Several interviewees indicated that electronics and software engineering functions are easier to outsource or offshore than mechanical engineering functions. Software engineers across an ocean can more easily discuss a few lines of code than mechanical engineers can discuss the modification of the design of a component. Software and electronic systems also tend to have a more modular product architecture than mechanical systems, making it easier to offshore both low- and high-value added functions. Figure 25 shows a conceptual model of transportability (i.e., ability to offshore) for the capability of performing mechanical engineering tasks compared to electrical and software engineering tasks.
GLOBALIZATION OF RESEARCH AND DEVELOPMENT
Coordinating Global R&D
Engineering managers at Ford, GM, and DaimlerChrysler report that their top priority is improving coordination among their engineering functions around the world, rather than further offshoring of engineering. Despite many attempts to improve coordination, at the beginning of this decade Ford, GM, and DaimlerChrysler each had several regional
FIGURE 25 Conceptual model of trade-offs between capability and transportability versus engineering disciplines.
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The Quest for the World Car
The quest for a world car has proved to be very difficult. The industry has several times tried and failed to produce a vehicle that could be sold in markets around the world with minor modifications. Ford tried to engineer the Escort of the early 1980s as a world car, but at launch time the American and European versions had little in common. The Ford CDW27 vehicle program of the early 1990s (which produced the Ford Mondeo, Contour, and Mystique) cost more than $5 billion (including new engines and transmissions) and took an agonizing seven years to bring to market. The tremendous expense of the CDW27 program (“W” indicated a “world” program) was a driving force behind the creation of a highly ambitious reorganization, the Ford 2000 program, announced in 1994, to merge Ford’s European and North American vehicle development programs.
One great challenge of the world car program is that markets around the world are different. Americans have a preference for light trucks, large vehicles, and comfort-enhancing features ranging from cup holders to video displays for children. Europeans prefer smaller vehicles with better vehicle dynamics (ride and handling characteristics). Europeans have also embraced the diesel engine; nearly half the vehicles sold in Europe have diesel engines.
Many Japanese consumers prefer on-board information features, such as navigation systems, and minicars—a market segment all but unknown in the United States and still rare in Europe. Minicars are remarkably small vehicles (5 feet wide and less than 11 feet long, by Japanese law) powered by engines typically in the range of 60hp. Led by Suzuki, minicars accounted for 35 percent of new car sales in Japan from January to October 2006, compared with 24 percent a decade ago.
engineering centers that primarily supported their respective regional markets and did not work together. Product planning—making critical decisions about which vehicles are brought to market and at what level of funding—was also relatively decentralized, with regional executives exercising relative autonomy. As GM Vice Chairman Robert Lutz joked in 2004, “up until a few months ago, GM’s global product plan used to be four regional plans stapled together” (Hawkins, 2004).
Ford and GM (and Volkswagen) had adopted a multinational business model with distributed, and (mostly) independent, regional R&D centers supporting mostly autonomous regional operations.11 GM and Ford’s highly decentralized global network of R&D centers reflected the history of their development. Both companies had developed significant European operations during the twentieth century selling distinct European vehicles engineered by European engineers built in Europe by European workers with parts supplied by European suppliers. Ford’s engineering centers near Cologne, Germany, and in England supported Ford of Europe. GM’s European engineering centers were aligned by brand; for example, Rüsselsheim, Germany, supported Opel, and Millbrook, UK, supported Vauxhall.
Ford and GM’s acquisition of European brands during the 1980s and 1990s further complicated the picture. For example, Ford acquired Volvo’s engineering center in Gothenberg, Sweden, when the company purchased Volvo in 1999, and GM acquired the engineering center in Trollhättan, Sweden, when it purchased Saab.
Ford and GM are now trying to integrate their regional engineering centers so that engineers across the globe can coordinate on global programs. The objective is not to engineer the same vehicle for different markets (the “world car” vision) but to engineer a family of vehicles with the same underlying structure that can be very easily modified to meet local customer and (environmental and safety) regulatory requirements. Achieving this objective will require more centralized product planning and more coordination among global product development centers. Thus both GM and Ford are changing from their multinational business model to a transnational business model.
GM has transitioned from brand-specific engineering to regional engineering and is now transitioning from regional engineering to global engineering. For example, GM headquarters declined requests from its Daewoo subsidiary to build an SUV for the Korean market rather than leverage an existing GM vehicle program already under development. GM uses the term architecture to describe a family of vehicles that may appear very different to customers but have basic engineering commonality.
For example, the Chevrolet Malibu, the Saab 9-3, and the Opel Vectra are all products of GM’s midsize-vehicle architecture, developed at the Rüsselsheim engineering center, although these vehicles appear very different outwardly. GM is trying to reduce the number of vehicle architectures while making sure that the right engineers among GM’s 13 global engineering centers are working to support the appropriate vehicle architecture. Table 14 shows which engineering centers have the lead responsibility for current vehicle architectures.
Toyota and Honda are also adopting a transnational business model, but from a much different starting point than
11
Although Ford and GM conducted vehicle development in Europe for their European vehicle lines, both firms conducted the majority of their basic and applied research in the United States through the 1990s.
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TABLE 14 GM Engineering Centers Responsible for Various Vehicle Architectures
Architecture (vehicle family)
Home Engineering Center
Architecture (vehicle family)
Home Engineering Center
Luxury RWD Car
Warren, Michigan
International Mid-Size Truck
São Paolo, Brazil
Compact Crossover
Warren, Michigan
Compact Car
Rüsselsheim, Germany
Performance Car
Warren, Michigan
Mid-size Car
Rüsselsheim, Germany
Full-Size Truck
Warren, Michigan
Small Car
Seoul, South Korea
Mid-Size Truck (regional)
Warren, Michigan
Mini Car
Seoul, South Korea
FWD Truck
Warren, Michigan
RWD Car
Melbourne, Australia
Vans / Commercial Truck
Warren, Michigan
Source: General Motors, 2006.
Ford and GM. Toyota, established in 1937, sold almost all of its vehicles in the Japanese home market for the first two decades. Toyota Motor Sales USA was established in 1957, the Toyota Technical Center in Ann Arbor was opened in 1977, production in the United States (at the NUMMI joint venture with GM) began in 1984, and production in Europe (in the UK) began in 1987. Although Toyota has operated the Ann Arbor Technical Center for nearly 30 years, engineers in that facility have only recently been given program-level responsibilities.
Toyota has about 20,000 engineers in Japan; however, nearly 40 percent are contract employees or “guest engineers” from suppliers. Like many Japanese firms, Toyota is about to face a shortage of engineers in Japan as the first baby-boom generation there reaches the mandatory retirement age of 60. The Japanese call this the year 2007 problem.12 Thus Toyota is being forced to look beyond its borders for engineering talent, one reason the company plans to dramatically expand employment at the Ann Arbor center in the next few years.
Honda’s evolution has been similar to Toyota’s, although Honda shifted more engineering responsibility to America earlier than Toyota did. Honda, founded in 1948, opened American Honda Motor as a sales operation in 1959. The company began producing the Honda Accord in Ohio in 1982, and Honda R&D Americas center in Ohio was established in 1984. The Ohio facility concentrates on product engineering, development, and testing. A newer facility in California concentrates on market research and vehicle styling. Honda R&D Americas has full-vehicle engineering responsibility for the Acura TL and MDX and the Honda Element, Pilot, and Civic Coupe.
Both Toyota and Honda started out by following an international business model with strongly centralized R&D (very little of it outside the home country) and regional operations with strong reporting lines to the home-country headquarters. As Honda migrates toward a transnational business model, the company must first shift more of its R&D to new or existing R&D centers outside Japan. Second, it must ensure that R&D is coordinated throughout its international network. Figure 26 illustrates how two groups of companies (Ford and GM; and Toyota and Honda) are migrating toward the same model.
The automotive industry was globalized first by brand (through imports and exports), then by production (through foreign direct investment in assembly and manufacturing plants), and now by changes in management of R&D operations. U.S. companies have expanded their R&D footprint outside the United States and decreased their R&D footprint in the United States. At the same time, foreign companies have increased their R&D footprint in the United States.
Offshoring of R&D by U.S. Companies
GM operates 13 engineering and design (styling) centers in 13 countries (Figure 27). While GM has maintained a strong market, production, and R&D presence in Europe and Latin America for decades, it has only recently entered into China (1997), South Korea (2002), and India (2003). Ford reports that it spent $8 billion on engineering R&D in 2005, distributed among seven engineering, research, and design centers located in Dearborn, Michigan; Dunton, U.K.; Gaydon, U.K.; Whitley, U.K.; Gothenburg, Sweden; Aachen, Germany; and Merkenich, Germany (Ford Motor Company, 2005b).
GM considers its technical center in Bangalore, India, a center of excellence for the development of math-based tools and electronic-control systems. Work in Banaglore includes the development of modules and systems; human modeling for predicting crashworthiness; development of vehicle structures; and development of control software, embedded systems, software validation and calibration tools, voice recognition and communications systems, electrical-system simulation, and electromechanical simulation. In short, the rationale for opening the Bangalore center was to develop a specialized engineering capability that might be in short supply in the United States. According to a top GM executive, “Electronics and software content will account for 40 percent of the value added in the vehicle over the next 10
12
Toyota recently changed its re-employment system so its retirees can work up to the age of 65. The limit had been 63.
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FIGURE 26 Evolution from the international and multinational models to the transnational model.
years. There’s a shortage of software, electronics, and control engineers in the U.S.—that’s part of why I opened our [overseas] R&D center. I think we will see a shortage of engineers in the United States.”
Onshoring of R&D by Foreign Companies
Foreign-brand automakers have built product-development and design facilities in the United States, in addition to manufacturing plants. Total employment for technical and design functions by foreign-brand automakers in the United States is currently estimated at approximately 4,000 people (Table 15). This figure does not include sales and marketing staff located in the United States, which accounts for thousands more employees. Table 15 shows that foreign R&D facilities are spread across the United States; however, the majority of engineers are in Michigan and Ohio.
The number of engineers and designers employed by foreign-brand vehicle manufacturers in the United States has increased rapidly. In 1987, the Japan Automobile Manufacturers Association (JAMA) estimated that Japanese automakers employed about 200 engineers, scientists, technicians, and designers in the United States. By 2004, JAMA reported that 3,065 engineers and designers were employed at a growing number of technical R&D and design facilities. In the latest report, issued in September 2006, the number had risen to 3,593 (Figure 28).
The number of U.S. engineers employed by foreign automakers is expected to increase substantially in the next few years. Toyota plans to invest $150 million to expand its Ann Arbor, Michigan, facility and add at least 400 engineers to the current staff of roughly 950. One Toyota executive stated that Toyota plans to expand the Ann Arbor facility to 2,000 engineers in the next five years. Also in Ann Arbor, Hyundai is investing $117 million to expand its technical center from
FIGURE 27 Locations of General Motors global engineering and design facilities. Source: GM Europe, 2006.
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TABLE 15 Foreign-Brand R&D and Design Facilities in the United States, 2006
Company
Location(s)
Established
Employees
BMW
Spartanburg, N.C.; Woodcliff Lake, N.J.; Oxnard, Calif.; Palo Alto, Calif.
1982
150
Honda
Torrance, Calif.; Raymond, Ohio
1975
1,300
Hyundaia
Ann Arbor, Mich.
1986
150
Isuzu
Cerritos, Calif.; Plymouth, Mich.
1985
100
Mazda
Irvine, Calif.; Ann Arbor, Mich.; Flat Rock, Mich.
1972
100
Mercedes-Benz
Palo Alto, Calif.; Sacramento, Calif.; Portland, Ore.
1995
50
Mitsubishi
Ann Arbor, Mich.
1983
130
Nissan
Farmington Hills, Mich.
1983
1,000
Subaru
Ann Arbor, Mich.; Lafayette, Ind.; Cypress, Calif.
1986
30
Toyotaa
Gardena, Calif.; Berkeley, Calif.; Ann Arbor, Mich.; Plymouth, Mich.; Lexington, Ky.; Cambridge, Mass.; Wittmann, Ariz.
1977
1,000
aToyota and Hyundai are currently undergoing significant expansions. BMW included approximately 50 engineers assigned to BMW-DCX-GM hybrid project in Troy, Michigan.
Sources: Automotive News, 2005; company reports and interviews; JAMA, 2004.
150 to 550 employees. The Detroit metropolitan area has an abundance of automotive engineering talent, and in the past few years, scores of engineers have left domestic OEMs to take jobs with foreign OEMs. This trend is expected to continue (Shirouzu, 2005; Vlasic, 2004).
Discussion
Many industry executives say that asking if offshoring is occurring is framing the issue the wrong way. They are quick to point out that the automotive industry has been a global industry since its inception and that the real question is how to optimize and reallocate existing resources, that is, how to develop an effective footprint strategy.
GM acknowledges that it has increased its engineering head count overseas and reduced its engineering head count in the United States. However, the company contends that offshoring, defined as the replacement of U.S. engineering jobs with equivalent jobs overseas, has not occurred. According to GM’s executive director of global engineering processes, the main driver for increasing the engineering head count overseas is to support the growth in overseas markets in China, India, Korea, and other countries. He says the main reason for the decrease in engineering employment in the United States is a 10 percent increase in engineering productivity per year in the past five years attributable to better tools and information technology, more sharing of components among vehicles, and better coordination of R&D (Cohoon, 2006).
Many interviewees also felt that there was a great deal of hype and misunderstanding about offshoring. As one senior vice president of a North American tier-one supplier said, “I laugh about the notion of a 24/7 product-development process—the idea that engineers in Europe will hand off a project to engineers in North America, who, in turn, will pass it on to engineers in Asia. That’s a myth. Handoffs don’t happen for sophisticated [development] programs.”
Nevertheless, some data indicate that some U.S. engineering jobs are being replaced with engineering jobs overseas. In 2003, Helper and Stanley surveyed 615 small and
FIGURE 28 U.S. technical employment by Japanese automakers, 1982–2005. Source: JAMA, 2006.
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medium-sized enterprises that produce components in the U.S. Midwest. The sample firms were second-tier suppliers that sell largely, though not exclusively, to the automotive industry. Eighty-seven percent of respondents answered “yes” to the question: “In the past three years, have any of your significant customers awarded your traditional jobs to competing suppliers in Mexico, Central or South America, Eastern Europe, or Asia?”
AUTOMOTIVE ENGINEERING IN CHINA
Automotive engineering activity is clearly increasing in India, China, and Eastern Europe for different reasons. India is seen as an emerging knowledge hub in automotive electronics, and Eastern Europe as having a low-cost, technically advanced workforce. In October 2006, Renault announced that it would invest €500 million to build a new engineering center in southern Romania. The company plans to hire 1,600 engineers and technicians by 2009.
The Rise of the Automotive Industry
As recently as 1985, the automotive industry in China was insignificant from a global perspective (total production of passenger cars was 5,200). In the early 1980s, three foreign automakers were allowed to enter the Chinese market through joint-venture agreements with Chinese partners: American Motors Corporation (subsequently bought by Chrysler), Volkswagen, and Peugeot. While Volkswagen’s China partnership, based in Shanghai, proved to be very successful, the French and American partnerships were less successful. In these early joint ventures, the Chinese government limited foreign automakers to a maximum of 50 percent ownership in the joint ventures, and Chinese import duties on passenger cars in 1985 were 260 percent.
Since China’s accession to the World Trade Organization (WTO) in December 2001, the industry and market have underdone a radical transformation. The WTO agreement, combined with the lure of China’s huge potential market, has spurred automakers to flood China with investment. Every vehicle manufacturer has tried to find a Chinese partner to form an international joint venture. Chinese import duties on passenger cars fell from about 90 percent in 1996 to about 75 percent in 2001, and as of July 1, 2006, they had fallen to 25 percent.
Today China has a huge and growing automotive market. Last year, almost 6 million vehicles were sold in China, second in the world to the United States (about 17 million units).13 The Chinese market exploded in 2002 and 2003 with growth rates surpassing 60 percent both years. (Remember that the sales rate in all three mature automotive markets—the United States, Western Europe, and Japan—has been essentially flat for the past five years.) After a slight slowdown in 2004, the growth rate in the Chinese market resumed. Sales of passenger cars for the first half of 2006 were 47 percent higher than in the first half of 2005.
The Chinese automotive industry is uniquely fragmented and complex. The number of vehicle manufacturers in China has remained steady—about 120—for the past 15 years, and many of these firms have insignificant sales volumes. In 2004, only 12 Chinese automakers had a production capacity of more than 100,000 units.
Leading Chinese automakers, such as Shanghai Automotive Industry Corporation (SAIC), First Automotive Works (FAW), Dongfeng, and Beijing Automobile Industrial Corporation (BAIC) have entered into a complex web of partnership arrangements with foreign manufacturers. SAIC, for example, has a joint venture with both Volkswagen and GM. In addition, a few Chinese companies, so-called independents such as Chery, Geely, and Great Wall, are developing cars without the help of joint venture partners.
Vehicles sold by joint-venture partnerships, which account for about 80 percent of the Chinese market, are sold mostly as foreign brands, such as Ford and Buick. Joint-venture facilities are clustered in six regions, Shanghai, Beijing, Changchun, Chongqing, Wuhan, and Guangzhou. There is no Chinese “Detroit,” although Shanghai is the largest and fastest growing automotive center in the country.
Impact on U.S. Manufacturers and Suppliers
U.S. vehicle manufacturers have benefited from the exploding Chinese market. In 1983, Chrysler, through its acquisition of American Motors, was the first foreign player in China. Although Beijing Jeep was not a success, DaimlerChrysler has been developing an aggressive China strategy over the past few years through its joint venture with BAIC. Ford was a late entrant to the Chinese market, partnering with ChangAn, a former supplier of military equipment based in Chongqing. At the Ford-ChangAn assembly plant in Chongqing, an impressive mix of vehicles rolls down the line: Ford Focus, Ford Mondeo, Volvo S40, and Mazda 3. Ford’s sales in China for the first half of 2006 were up 102 percent (U.S. sales for the same six months were down 4 percent). GM has emerged as the sales leader in China. GM sales for the first half of 2006 were up 47 percent (compared to a 12 percent decline in U.S. sales). GM made $327 million in profits from its operations in China in 2005 (Automotive News, 2006).
All of the global tier-one suppliers who followed their customers into China have also profited from the explosive growth. However, many smaller tier-two and tier-three U.S. auto suppliers have lost business to Chinese competitors. Several executives told IMVP researchers that they felt internal pressure from senior management to view investment
13
The 2005 data were subsequently recalculated by the Chinese Association of Automotive Manufacturers (CAAM) to reveal that China had not surpassed Japan; however, China will surpass Japan in 2006 sales (Lee, 2006).
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in China favorably, in order to achieve the benchmark of a “China price.” This refers to the big differences in direct labor costs between the United States and China, but does not account for system-wide costs.
In general, Chinese domestic suppliers are better positioned to supply low-end parts, and foreign suppliers are better positioned to supply complex modules and sophisticated components, to Chinese joint-venture partners and vehicle manufacturers. Fourin, a Japanese-based research firm measured the percentage of foreign (i.e., non-Chinese) penetration into the production of automotive parts in China and found revealing data for chassis-related parts (Fourin China Auto Weekly, 2005). In 2003, several low-end mechanical components (e.g., wheel bolts, wheel rims, steel wheels, rear-axle housings, axle shafts) were manufactured entirely by Chinese firms. More sophisticated components (e.g., suspension systems, brake calipers, and ABS systems) had the highest degree of non-Chinese production. The data for engine-related components reveal the same trend. In 2003, 100 percent of the engine-management systems manufactured in China were produced by non-Chinese firms. These data are for components produced in China and do not include imported components.
The U.S.-China trade deficit in auto parts increased to $4.8 billion in 2005. U.S. exports of auto parts to China increased from $225 million in 2000 to $623 million in 2005. The top categories of parts flowing from the United States to China include seats, air bags, and gearboxes, which are all sophisticated components. However, U.S. exports to China are dwarfed by imports from China, which increased from $1.6 billion in 2000 to $5.4 billion in 2005. The top categories of auto parts flowing from China to the United States include radios, brake components, and aluminum wheels, which are less sophisticated or more modular components. A closer look at the data reveals that a large proportion of auto parts exported by China are produced by the Chinese operations of joint ventures with U.S. suppliers. Shanghai Delphi, for example, exports automatic door systems.
R&D Capability
Universities in China play a unique role in the automotive R&D process. Three government-funded university labs conduct applied automotive research—essentially product engineering—for Chinese vehicle manufacturers. The centers are based at Tsinghua University in Beijing (State Key Laboratory for Automotive Safety and Energy); Tianjin University in Tianjin (State Key Laboratory for Internal Combustion Engines); and Jilin University in Changchun (State Key Laboratory for Automotive Dynamic Modeling and Simulation).
At Tongji University in Shanghai, which established the nation’s first College of Automotive Engineering in 2002, nearly 50 faculty members teach 730 full-time undergraduate students, 124 master’s students, and 27 Ph.D. students. Congqing Lifan, China’s top producer of motorcycles, recently launched its first passenger car, the Lifan 520. The vehicle was entirely engineered at Chinese university research labs using domestic R&D resources.
Until 2004, only one R&D center in China, the Pan Asia Technical Automotive Center (PATAC), was related to a foreign vehicle manufacturer. PATAC was established in 1997 as a 50-50 joint venture between GM and SAIC. PATAC currently employs more than 1,100 people, about 35 percent of whom have master’s or doctorate degrees.14 Employment is expected to increase to 1,400 in the next year to support the launch of many new products from Shanghai GM, which is now approaching a production volume of one million vehicles per year.15 Engineers at PATAC earn approximately $12,000 per year.
PATAC is managed by an executive committee, two managers from GM and two from SAIC, but is fully integrated into GM’s global engineering network. Work at PATAC includes product development, vehicle engineering, styling, and service engineering to support GM, SAIC, and Shanghai GM. PATAC also houses a GM design studio with 80 designers (out of GM’s total global force of 1,200). The PATAC design studio designed all new sheet metal for the Chinese edition of the Buick Lacrosse.
Jane Zhao, an IMVP researcher at the University of Kansas, conducted extensive interviews with Chinese automakers and suppliers and complied survey data focused on R&D capability. Her studies revealed three key findings. First, domestic Chinese R&D capability is far behind the capability of non-Chinese competitors. Chinese vehicle manufacturers generally have a strong development capability for mechanical products, but have little capability for high-end electronics and software. This is consistent with the data on foreign trade cited above.
Second, R&D management is less advanced in China than in other automotive producing countries. This is consistent with media reports of shortages of management talent in certain regions and industries in China. During her interviews, the R&D manager of a well known Chinese automotive company confessed, “we don’t know how to spend our R&D budget.”
Recently, some Chinese companies have hired high-profile executives as R&D managers. The most notable of these was Phil Murtaugh, a talented, well respected manager who used to run GM China, who was hired by SAIC on June 18, 2006. Chery hired executives from Ford and DaimlerChrysler. Brilliance hired a former DaimlerChrysler executive to manage its R&D center, and Geely hired a former Hyundai executive to run its R&D operations. Given the remote locations of some Chinese automakers and, more importantly, the unique cultural requirements for success in China, it remains to be
14
See http://www.gmchina.com/english/operations/patac.htm.
15
Interview with Raymond Bierzynski, PATAC executive director, May 9, 2006.
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seen whether Chinese companies will be able to attract and retain talented, world-class R&D managers.
Third, a great deal of R&D by international joint ventures is localization engineering, which is not nearly as sophisticated as designing a full vehicle from concept to customer. Some engineers have claimed that they had to “dumb down” to work with joint ventures where the focus was on localization rather than up-front design.
Despite the best efforts of the Chinese government to develop indigenous R&D capability, China is still heavily dependent on foreign design and technological know-how. The Chinese government’s rationale for promoting international joint ventures was to develop R&D capability based on the premise that engineers from the Chinese domestic company would spend a few years working in the joint venture R&D center where they would acquire knowledge. Eventually, the domestic company would hire back the engineer and his or her acquired knowledge.
This has not happened, however. The backflow from the joint venture to the home company is much smaller than expected because of the large salary differentials, sometimes a factor of 10, between domestic companies and their joint-venture associates. In addition, the engineering infrastructure in China is very poorly developed. Take for example the lack of sophisticated test equipment—the country does not have a single automotive wind tunnel, although one is currently under construction at Tongji University.
Nevertheless, Chinese engineers working in the Chinese-foreign joint venture framework have learned a great deal about advanced automotive engineering. The Shanghai municipal government has mandated that 60,000 hybrid vehicles be sold by 2010, and Chinese engineers at PATAC are working to meet that challenge. Even though they are not leveraging the extensive research program on a dual-stage hybrid being developed by a GM-DaimlerChrysler-BMW partnership, engineers at PATAC are engaged in advanced engineering.
In addition, PATAC now also has significant design capability, such as clay modelers and CAD modelers who can design the aesthetics of a vehicle (e.g., exterior surfaces, interior materials and design, etc.). Engineering design requires not only creativity, but also highly specialized skills. Of the 1,200 people working at GM design centers around the world, 80 are in Shanghai. These are the people who designed the Buick Lacrosse sold in China by Shanghai GM, which looks significantly different from the same vehicle sold in America. As Figure 29 shows, automotive-related patent applications are on the rise in China.
Although the joint-venture model for technology transfer to Chinese engineers has largely failed, other ways of developing China’s automotive R&D capability are emerging, such as strategic outsourcing to foreign knowledge centers. Chery has outsourced engineering to AVL (an Austrian firm that engineers high-tech power trains), Mira (a British firm that does special noise and vibration testing), and Pinanfarina (an Italian design, engineering, and manufacturing house). Chery and AVL successfully collaborated on a line of new advanced engines, and Chery engineers gained engine technological know-how in the process. Thus learning from collaborative outsourcing seems to be working.
China is also simply buying technology from foreigners to improve its R&D capability. The best example is SAIC buying stakes in Korean automaker SangYong and the failed British automaker MG Rover.
Recently, a debate has arisen about the possibility of China exporting vehicles to the U.S. market. Success in America and other key export markets is the ultimate test of an automaker’s capabilities and would be a huge symbolic achievement, and this is a high-priority, medium-term goal for Chinese OEMs. Just as imports, followed by increased production capacity (the rise of the transplants) by Japanese, German, and Korean manufacturers, have increased in the American market, in the long term, China can be expected to develop automotive R&D capability and export significant
FIGURE 29 Automotive-related patent applications in China, 1985–2005. Note: Analysis by Jianxi Luo, Ph.D. Candidate, MIT. Search performed for “automotive” in the title of the patent application. Source: State Intellectual Property Office, People’s Republic of China.
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numbers of vehicles to the United States. However, China will first have to develop R&D capability on a par with America, Germany, Japan, and Korea.
TRENDS AND PROJECTIONS
Offshoring of automotive engineering—defined as the replacement of engineers in a high-cost country by those in a low-cost country—is just one aspect of the complex dynamics of the global automotive industry. Focusing only on the offshoring phenomenon without considering, for example, the onshoring phenomenon clearly misses the big picture. While Ford and GM are closing assembly plants in North America, Toyota, Honda, and Hyundai are building new plants in North America. While Ford and GM are reducing their engineering head counts in the Detroit area, Toyota, Honda, and Hyundai are increasing theirs in Ann Arbor, Michigan, Raymond, Ohio, and elsewhere.
Automotive engineers in the United States are legitimately concerned about offshoring, but many other issues should concern them more. Automotive engineers employed by domestic vehicle manufacturers should be more concerned that their companies are losing billions of dollars and not earning adequate returns on invested capital. They should be concerned that many of their competitors have “leaner” product-development processes, which means they can bring vehicles to market faster. They should be concerned about legacy costs, such as pension and retiree health benefit liabilities, agreements by previous managers that are no longer tenable. They should be concerned that their brands are cheapened when sales incentives campaigns essentially pay customers to buy their vehicles.
U.S. automotive engineers should keep one important fact in mind. Toyota, the benchmark of the industry and the most valuable automotive company in the world, has done the least offshoring of any large automotive company. Toyota has become the automotive MVP by focusing on value, rather than on cost. If a firm uses offshoring purely to cut costs, offshoring is unlikely to provide a sustainable competitive advantage. If a firm uses offshoring (along with onshoring) as part of an integrated footprint strategy, the firm is more likely to achieve an advantage.
Asia will continue to drive growth in the global automotive market, and the automotive production and engineering footprint in Asia will continue to expand. In the meantime, Toyota is attempting to upgrade its engineers to focus on technical areas that will be competitive differentiators in the future. For example, Toyota has invested significantly in the past few years to increase its internal capability in software development. This may indicate that Toyota believes that understanding the code that controls complex vehicle-control systems, such as the power controllers for hybrid power trains, will be one of those differentiators. Thus the most advantageous thing for U.S. engineers to do is to focus on creativity and developing cutting-edge technologies.
The global automotive industry has undergone radical changes in the past 10 years, and indications are that change will continue. Rather than stabilizing, the industry appears to be on the cusp of a significant restructuring because current business models are no longer sustainable for many firms. As vehicle manufacturers learn to engineer more with less, a company’s footprint strategy will become increasingly important.
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