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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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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 auto- and tune vehicles in the preproduction phase (e.g., calibrating motive industry, which spends more on research and develop- the power train to meet the customer profile for a vehicle). ment (R&D) than any other industry except the pharmaceuti- Product engineers can also be test engineers responsible for cal industry (Figure 1).1 Ranked by R&D spending, four of performing durability, stress, thermal, or noise and vibration the top 10 global firms are automotive companies (Figure 2). testing. The vast majority of the $55 billion spent on R&D in the Although product engineers have traditionally been automotive industry is on development, rather than basic or grounded in mechanical and industrial engineering, as the applied research,2 and most steps in the vehicle-development software content of vehicles has increased, the industry process require engineers and technicians. A typical new- has increasingly hired electrical, electronics, and software vehicle development program costs between $500 million product engineers. Many vehicle manufacturers also operate and $1 billion and takes two to three years from concept to advanced engineering departments to search for new ideas customer. A new-engine development program costs roughly and develop new technologies for future vehicles. $100 million to $500 million, and a new-transmission devel- opment program costs roughly $50 million to $250 million. mAnUfACtUring engineers Thus corporate engineering capability is a key competitive differentiator for vehicle manufacturers. Manufacturing engineers, who tend to be trained as industrial and mechanical engineers, are responsible for de- termining the most efficient way to produce vehicles. Some ProDUCt engineers manufacturing engineers are part of a central engineering There are two basic types of automotive engineers—prod- staff dedicated to production. However, most are located uct engineers and manufacturing engineers. In general, prod- in offices at production facilities, such as vehicle-assembly uct engineers design cars and trucks and their components. plants and component-manufacturing plants. Individual product engineers focus on specific systems (e.g., Most firms encourage close coordination between product braking, steering, or interiors) or specific components within and manufacturing engineers. Design for assembly, design those systems (e.g., antilock braking controllers, steering for manufacturing, and value engineering require that prod- columns, or instrument clusters). Product engineers can also uct and manufacturing engineers work together to engineer be development engineers who evaluate prototype vehicles excess cost and waste out of a vehicle. 1 If information and telecommunications technology industries are sUPPLiers 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 The importance of the supply base cannot be overstated. that provided data spent less than 10 percent for research and more than A typical automobile is made of 20,000 to 30,000 indi- 90 percent for development. 69

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70 THE OFFSHORING OF ENGINEERING Software 23.0 Telecommunications equipment 26.9 Semiconductors 27.0 55.1 Motor vehicles and auto parts 76.9 Pharmaceuticals 0 10 20 30 40 50 60 70 80 $ Billions FIguRE 1 Estimated R&D spending for top industries, 2006. Source: Schonfeld & Associates, 2006. Reprinted with permission of Schon- feld & Associates. Note: Industry SIC Codes are: Software: 7372; Telecom Equipment: 3663 and 4812; Semiconductor: 3674; Automotive: 3711 and 3714; Pharmaceutical: 2834. Fig 1 Schonfeld Associates 8 forecasts Toyota to be Automotive the #2 R&D investor in 7 2007 at $9.8 billion Non-Automotive 6 $Billion 5 4 3 or r en or s er or ia e ft ny tis ck l M e n ng s Sm tric te le or en ch so in so ok IB ot ot ot iz ar er So In ys ag su Kl ot ec ro Ro Pf em hn M M M N ov M hr M m sw ith El ic Jo rd ta a N rC Sa Si M al nd lk it a yo Fo le & er Vo Ho sh To xo im en n so su la Da G G hn at M Jo 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. Fig 2 vidual parts engineered into hundreds of components and divided into tiers. A tier-one supplier sells directly to the subsystems. Vehicle manufacturers purchase one-half to vehicle manufacturer (e.g., BorgWarner may sell a trans- three-quarters of these parts from their suppliers. All of the mission to General Motors [GM]). Tier-two suppliers sell major vehicle manufacturers spend at least 50 percent of their to tier-one suppliers (e.g., Timken may sell roller bearings revenue on components from suppliers.3 Vehicle manufac- to BorgWarner). In practice, however, the distinctions are turers increasingly specify overall system requirements and often blurred, and some very small firms may sell directly give suppliers free rein to engineer and design a component to vehicle manufacturers (although these should not be con- or vehicle subsystem to meet those requirements. This con- sidered tier-one suppliers for the purposes of analysis). Some trasts with the traditional business model (which still exists firms, such as Freescale (formed when Motorola spun off its for some components),4 in which vehicle manufacturers give automotive semiconductor business), Siemens, Sumitomo suppliers detailed technical specifications for components. Electric, DuPont, and even Microsoft), are not thought of as Supplier engineers, who frequently work closely with en- automotive supply firms, although they have large automo- gineers at the vehicle manufacturers, play a critical role in tive businesses. In addition, many firms supply production introducing technology into vehicles. equipment to the automotive industry (e.g., stamping presses Many of the hundreds of firms that primarily supply the or robotics systems) or test equipment (e.g., dynamometers automotive industry have consolidated into global enter- and road simulators). All of these firms employ product and prises that employ thousands of people in facilities spread manufacturing engineers. across the planet. In theory, the industry supply base is ProDUCt ArChiteCtUre 3 Some vehicle manufacturers and suppliers have significant equity relationships. In the Japanese keiretsu system, for example, Denso and Product architecture, the relationship between the func- Aisin Seiki, two large Japanese suppliers, are partially owned by Toyota. In tions and structures of the vehicle, greatly influences how a France, PSA Peugeot Citroën and Faurecia have an equity relationship; and vehicle is engineered. The terminology developed by Clark Hyundai-Kia and Mobis in South Korea have a similar relationship. and Fujimoto (1991) provides helpful distinctions: 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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71 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY engineering effiCienCY As A DriVer of ChAnge • Modular architecture is based on a one-to-one cor- respondence between functional and structural From a financial perspective, most vehicle manufactur- elements. ers and many tier-one suppliers destroy value, meaning that • Integral architecture is based on a many-to-many their real market value is lower than the real value of capital correspondence between functional and structural put into the firm by investors. Most American and European elements. automotive firms have lost value in recent years, while most • Open architecture is based on a mix and match of Japanese automotive firms have returned value to their inves- component designs across firms. tors (Marcionne, 2006). • Closed architecture is based on a mix and match of Although some original equipment manufacturers component designs within one firm. (OEMs) (e.g., Toyota, Honda, Nissan, BMW, and more re- cently Hyundai) are profitable and create value, the rest have Figure 3 illustrates where some typical products fall not created value for several years. In addition, the fortunes in a product-architecture matrix based on this terminol- of the winning firms and losing firms are diverging. For ex- ogy. Lego, the children’s toy, is an example of a perfectly ample, in 2006 the value of Toyota, the most valuable auto- modular, closed architecture. The bicycle and PC system are motive firm in terms of market capitalization, was more than examples of products with modular, open architectures. PC 10 times that of GM. Almost every manager and executive in components, such as printers, displays, and other devices, the industry—even at profitable firms—reports tremendous are interchangeable among many manufacturers and are pressure to reduce costs and improve performance, reflect- mapped closely to specific features (e.g., printers are used ing the fiercely competitive nature of the current automotive for printing). market. Automobiles have traditionally had integral, closed archi- In light of the extraordinary R&D costs for a typical ve- tectures (although in the past few years, vehicle manufactur- hicle manufacturer (Figure 2), firms that can engineer a ve- ers have attempted to reduce costs through modularization). hicle at lower cost and bring the vehicle to market faster have The many internal parts of a vehicle are not interchangeable an extraordinary advantage over their competitors. Fujimoto among manufacturers, even though the same suppliers may and Nobeoka (2004), who have studied automotive product make very similar parts for different vehicle manufacturers. development for many years, found significant differences The integral architecture of the vehicle often forces close, in efficiency among vehicle manufacturers. Their data show coordinated interaction among teams of engineers from that differences in engineering efficiency—as measured vehicle manufacturers and suppliers. by engineering hours adjusted for comparison—are actu- The product architecture for heavy trucks is significantly ally increasing between American, European, and Japanese more modular and open than for cars (e.g., trucks can be automakers. Figure 4 shows the product-engineering hours ordered with engines from different engine manufacturers). Open Bicycle PC Modular Integral Heavy Trucks Trend Cars Cars (2006) (1990) Closed FIguRE 3 Product architecture matrix for cars, heavy trucks, and other products.

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7 THE OFFSHORING OF ENGINEERING 3,500,000 3,000,000 2,500,000 Europe 2,000,000 USA 1,500,000 Japan 100,000 50,000 0 Period 1 Period 2 Period 3 Period 4 1980-84 1985-89 1990-94 1995-99 FIguRE 4 Adjusted product engineering hours for vehicle manufacturers in three regions. Source: Fujimoto and Nobeoka, 2004. Reprinted with permission. fig 4 New type. Original type did not translate. required for a typical vehicle program averaged for vehicle • a shift toward a more open model to accelerate manufacturers from three regions and for four time periods. innovation (The data are presented as regional averages to mask the identity of individual firms; so, for example, an individual The first item, managing the global engineering footprint, is Japanese OEM may be less efficient than an individual the subject of this paper. Items two and three are discussed American OEM.). below. Note that product-engineering loads in the United States and Europe increased in the last five-year period (1995– relationship between Vehicle 1999) as a result of significantly more stringent regulatory manufacturers and suppliers requirements. Fujimoto and Nobeoka (2004) argue that in Japan, regulatory requirements cancelled out improvements One of the most significant trends in the automotive in engineering efficiency; as a result, the number of engi- industry in the past two decades has been the emergence of neering hours remained about the same. Indeed, returning to mega-suppliers capable of designing and developing large Figure 2, it is entirely unclear whether vehicle manufacturers portions of the vehicle and, in some cases, manufacturing that spend more on R&D than their competitors have an ad- entire vehicles. The focus of the largest tier-one suppliers has vantage or disadvantage. To evaluate R&D output, one must been shifting from components to full-vehicle systems, or also consider the efficiency of the engineering operation. “modules.” Their customers, the vehicle manufacturers, have One vice president of engineering reported that his single granted them greater engineering responsibility and have an- greatest challenge is the pressure “to do more with less.” nounced plans to work more closely with fewer suppliers. This manager had been asked to meet a corporate target of increasing engineering efficiency by 30 percent in three Contract Manufacturing years—a remarkably ambitious objective. This particular manufacturer measures engineering efficiency by dividing The increasing importance of suppliers in the global engineering output by total engineering costs; engineering automotive industry is reflected in the emergence of con- output is measured by a point system that assigns various tract manufacturers. For example, Magna Steyr, a wholly weightings to the company’s new vehicle programs, sig- owned subsidiary of Magna International, builds complete nificant vehicle redesigns (known in the industry as product vehicles for several OEMs. In 2005, Magna International freshenings), and new power trains. declared more than $20 billion in automotive sales, making it the third largest automotive supplier in the world.5 Magna The drive to improve efficiency (i.e., to increase engi- neering output while lowering engineering costs) has led to Steyr’s production volumes have increased steadily; in 2005, several interrelated developments: the company sold 230,505 units representing $4.1 billion in sales to OEMs. The company’s manufacturing complex in • pressure to manage a firm’s global footprint more ef- fectively across the enterprise 5 2005 revenue of the top three automotive suppliers: Robert Bosch • changes in the working relationship between vehicle GmbH, $28.4 billion; Denso Corporation, $22.9 billion; Magna Interna- manufacturers and their suppliers tional, $22.8 billion (Automotive News, 2005).

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73 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY Graz, Austria, includes two assembly plants that build about development of hydrogen refueling systems since May 2003, 1,000 vehicles a day, including the BMW X3, Mercedes and Ford and PSA Peugeot Citroën have been working on E-class and G-class cars, Saab 9-3 convertible, Jeep Grand small diesel engines since March 2000. Cherokee, Chrysler 300, and Chrysler Voyager. Vehicle manufacturers and suppliers have increasingly Magna has also moved into the upstream business of leveraged the Internet to solicit new ideas and technical contract engineering for automakers, and the company now solutions to specific problems. Online technology brokers, employs 2,300 engineers in 10 locations around the world. such as NINΣ, Yet2com, and InnoCentive, are like eBay for The largest engineering center, in the Graz complex, employs technology. Automakers and suppliers describe a problem 1,000 people. Magna Steyr says it not only completely engi- in detail and request proposals (sometimes anonymously). neered the 9-3 Cabriolet, G-class; BMW X3; and Audi TT Researchers from all over the world can offer solutions at coupe and roadster, but also performed engineering projects various stages of development, from vague ideas to well for Alfa Romeo, Audi, Iveco, Lancia, Lincoln, Pontiac, tested technology. BMW has taken the search for outside Smart, and VW. These projects range from adding a body solutions directly to its own website, where anyone can point derivative to creating a four-wheel-drive version. out a problem or need and offer a solution. The blurring of the lines between OEMs and suppliers Automakers have reached out to universities for decades, is reflected in DaimlerChrysler’s Toledo Supplier Park in but the volume of research funding and depth of collabora- Toledo, Ohio. The 2007 Jeep Wrangler is manufactured at tion seem to be increasing. GM’s collaborative research this facility with the significant involvement of a variety of laboratories (CRLs) program, which was established in suppliers. Kuka Flexible Systems, a German company, runs 2002, includes 10 long-term strategic relationships with the body shop; Magna-Steyr runs the paint shop; and Mobis, professors or teams of professors at specific universities to a Korean company, supplies chassis modules. This arrange- focus research on specific technical areas. An electronics and ment is in sharp contrast to traditional assembly plants, controls CRL, with Carnegie Mellon University, is one of where vehicle manufacturers are responsible for all of these the largest; others include an engine technology CRL at the functions. University of Aachen and a lightweight-materials CRL at the Indian Institute of Science. Ford and MIT have also estab- lished a multiyear, multimillion dollar research relationship. A more open innovation Process Toyota has pledged as much as $50 million to the Stanford Another result of the tremendous pressure to engineer University Global Climate and Energy Program. vehicles more efficiently is a migration toward openness in the innovation process. Vehicle manufacturers have histori- the engineer’s PersPeCtiVe cally looked inward for new ideas and better ways to engineer vehicles. In the previous section, we described how vehicle At the working level, most automotive engineers inter- manufacturers are working more closely with suppliers. They viewed reported that the single greatest change since 1990 are also turning to their competitors, universities, and even has been the introduction of remarkable new tools that have customers to improve their products through joint programs, changed their daily work routines. Most of these tools were technology alliances, online technology brokers, and univer- enabled by tremendous advances in information and com- sity research programs. munications technologies. At first, in 1990, computer-aided Vehicle manufacturers have always shared programs design (CAD), which enables engineers to fit components among their internal brands; for example, a Buick and together in a virtual three-dimensional space, and computer- Oldsmobile product from GM might have been given differ- aided engineering were specialty areas, and just a few en- ent names although they were nearly identical. In addition, gineers were taught to understand the software. Since then, manufacturers with an equity relationship, such as Ford and design engineers have had far more exposure to these power- Mazda, have shared vehicle platforms. However, in the past ful systems. Today, every Ford product engineer either has 10 years collaborations on vehicle programs have increased a dedicated UNIX workstation at his or her desk or shares a among manufacturers that do not have an equity relationship UNIX machine with a neighboring engineer. and that are otherwise fierce competitors in the marketplace; Access to information has also greatly improved. From examples include the Toyota Aygo and the Peugeot 107, or the company intranet, engineers can access assembly plant the Pontiac Vibe and the Toyota Matrix. quality data in real time and call up engineering prints, engi- Vehicle manufacturers that do not have equity relation- neering specifications, and engineering test procedures. They ships are also increasingly entering into technology alliances. can also assess critical data from suppliers. The alliance of most interest in the industry currently is The changing knowledge boundary between OEMs and an agreement announced in September 2005 among GM, suppliers has had a significant impact on both OEM engi- DaimlerChrysler, and BMW to develop a new hybrid electric neers and supplier engineers. The role of engineers at vehicle power train to surpass the one developed by Toyota for its manufacturers and suppliers has changed as the structure of Prius vehicle. GM and BMW have been collaborating on the the industry has changed. When Ford spun off many of its

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74 THE OFFSHORING OF ENGINEERING automotive-parts businesses to form Visteon, engineering 1910 was a key enabler of offshoring of vehicle-production work that had been done in house (e.g., axle engineering) facilities. Mass production, with its interchangeable parts, was moved to the new company. The same thing happened greatly reduced the amount of labor required to assemble a when GM spun off Delphi. Several OEM engineers de- motor vehicle (and reliance on craft assembly skills). This scribed the change as shifting from a designer of components led to a proliferation of automotive assembly plants around and subsystems to a systems integrator. Several supplier the world to gain access to new markets. engineers noted that their customers now grant them greater American automotive firms were pioneers in the early age autonomy to design components (or even full-vehicle sys- of globalization. Both Ford and GM established their first tems)—although the degree of autonomy varies by vehicle production facilities outside the United States only one year manufacturer. after each company was founded. The early development of Finally, some engineers stated that they are much more the “build where you sell” philosophy was driven by the high aware of potential legal liabilities related to their daily work costs of shipping finished vehicles and later by increases in than they were 10 years ago, which has changed the way they trade tariffs in the 1930s. To reduce transport costs, most document information. Many engineers also mentioned that early offshore assembly plants were based on the assembly of they feel pressured to work more efficiently today than they completely knocked down (CKD) kits. Ford could ship eight did 15 years ago, because fewer engineers seem to be doing unassembled Model T CKD kits in the same amount of space more of the work. 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. requirements for entry-Level engineers The appeal of CKD kits gained traction during the 1930s The general requirement for entry-level engineers in the when higher tariffs and other trade restrictions were imple- United States is a bachelor’s degree in engineering or phys- mented by governments around the world. CKD kits were ics. However, some interviewees noted that the number of assessed at a lower tariff rate in exchange for the investment entry-level hires with master’s degrees has increased. and employment provided by local CKD facilities. Eventu- ally, offshore CKD plants began to procure components locally, especially in Europe where tariffs were high and the supply of Qualified engineers markets were large. Several press reports have suggested that the United Ford and GM followed different paths in Europe. Ford States is losing its technological lead by graduating fewer established wholly owned subsidiaries that were initially engineers than India and China. Typical reports state that tightly controlled by Detroit. GM increased its European op- the United States graduated roughly 70,000 undergraduate erations through acquisitions. In 1926, GM bought Vauxhall engineers in 2004, while China graduated 600,000 and India in England, and in 1929 the company bought Adam Opel AG graduated 350,000 (Figure 5). However, these numbers may in Germany; Opel was seized by the German government in be misleading. Duke University researchers determined that 1940 and reclaimed by GM in 1948. the data were not comparable. The numbers for China and By the 1950s, both Ford and GM’s European operations India include graduates of three-year training programs and were largely autonomous; each had its own engineers who diploma holders, whereas the numbers for the United States designed vehicles specifically for the European markets include only graduates from four-year accredited engineer- (and, in the case of GM, its own European brands). Each ing programs. 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 gLoBALiZAtion were largely autonomous and organizationally distinct. The creation of Ford of Europe in 1967 by Henry Ford II, which historical Context forced the integration of Ford’s German and British units, is The automotive industry has been international since its considered one of the most significant reorganizations in the earliest days. Daimler vehicles were produced under license company’s history. in France in 1891, England in 1896, and America (New York The automotive industry in the mid-1960s was domi- City) in 1907.6 Proximity to customers—wealthy individuals nated by two large markets—America and Europe—and one in the early days of craft production and mass markets in the emerging market—Japan. At the time, interregional trade days of mass production—has always been a key determinant in vehicles was insignificant. For the most part, Americans for the location of vehicle-production facilities. The devel- purchased vehicles manufactured by GM, Ford, Chrysler, opment of Henry Ford’s system of mass production around 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 6 For an excellent historical account of globalization in the automotive on. A firm like Adam Opel, although it was owned by GM, industry, see Sturgeon and Florida, 2000.

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75 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 700,000 Number of Subbaccalaureate Degrees ** 600,000 Number of Bachelors Degrees 500,000 292,569 Degrees Awarded 400,000 300,000 200,000 84,898 351,537 103,000 100,000 137,437 112,000 0 United States India China 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 today. Japanese manufacturers followed a similar pattern Assembly Plants as of 1928 of investment in transplant production facilities in Europe fig few years later. Beginning in the late 1980s, but greatly 5 a Number accelerating throughout the 1990s and the first few years of Company of Plants Location of Plants (Year Opened) the 2000s, the world’s automotive firms—both OEMs and Ford 24 Canada (1904); England (1911); France (1913); suppliers—underwent a wave of mergers, acquisitions, and Motor Argentina (1915); Argentina (1919); Spain various kinds of strategic alliances. Company (1919); Denmark (1919); Brazil (1919); Belgium Today, the level of business integration among vehicle (1919); Sweden (1922); Italy (1922); South Africa (1923); Chile (1924); Japan (1924); Spain (1925); manufacturers varies greatly. The list below is organized Germany (1925); France (1925); Australia (1925); from the most integrated to the least integrated: Brazil (3 locations, 1926): Mexico (1926); India (1926); Malaysia (1926) General 19 Canada (1907); England (1908; not a CKD plant); • Merger/Acquisition: Daimler Benz and Chrysler Motors Australia (1923); Denmark (1923); Belgium Corp. (until August 2007); Ford and Jaguar; Ford and (1924); England (1924); Argentina (1925); Volvo; Volkswagen and Seat; Volkswagen and Skoda England (1925); Spain (1925); Brazil (1925); Germany (1926); New Zealand (1926); South • Controlling Equity Stake: Ford and Mazda; Africa (1926); Uruguay (1926); Indonesia (1926); DaimlerChrysler and Mitsubishi Motors (until Japan (1927); India (1928); Poland (1928); July 2005) Sweden (1928) • Non-controlling Equity Stake: GM and Fiat Auto Chrysler 3 Germany (1927); Belgium (1928); England (1928) (until February 2005); GM and Fuji Heavy (until Sources: Rhys, 1972; Maxcy, 1981. October 2005); DaimlerChrysler and Hyundai (until July 2005) • Product-Development Agreements/Shared Plat- forms: GM Pontiac Vibe and Toyota Corolla (shared was largely managed and operated like a German company. platform); Peugeot 107 and Toyota Aygo (small-car The next big automotive production powerhouse—South program) Korea—had not yet appeared on the scene; Hyundai Motor • Technology Alliances: Ford and PSA on diesel Corporation was founded in 1967. engines; GM, BMW, and DaimlerChrysler on dual- The automotive industry underwent a second wave of stage hybrid vehicles; PSA and BMW on small globalization starting around 1970, when international trade gasoline engines in motor vehicles—especially fuel-efficient Japanese ve- hicles—increased in response to the oil shocks of the 1970s. This evolution has blurred the distinction between do- In the 1980s, foreign direct investment in manufacturing mestic and foreign automakers in all countries, including the facilities increased. Honda opened the first transplant7 in United States. Ford owns Jaguar, Volvo, and Land Rover and Ohio in 1982, beginning a wave of investment that continues a controlling stake in Mazda. GM owns Saab and Daewoo and has only recently divested itself of equity stakes in sev- 7A transplant is a foreign-owned manufacturing facility, such as a Toyota eral Japanese manufacturers. At the time this was written in or BMW assembly plant, located in the United States.

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76 THE OFFSHORING OF ENGINEERING 2006, Chrysler was owned by DaimlerChrysler AG, a com- penetration of foreign brands in Western Europe includes pany based in Germany; 74 percent of DaimlerChrlysler’s Chrysler vehicles, but not Opel vehicles (owned by GM). The capital stock was owned by European investors, and the 38.2 percent penetration of foreign-owned vehicles includes single largest shareholder was the Kuwait Investment Au- Opel vehicles, but not Chrysler vehicles. The 9.0 percent thority (DaimlerChrysler, 2005). Some of these international figure for Japan includes Mazda vehicles (controlled by relationships are considered great successes (e.g., Renault- Ford), and the 26.2 percent for South Korea includes Daewoo Nissan), but many are considered failures that have destroyed vehicles (controlled by GM). shareholder value (e.g., GM-Fiat, Ford-Jaguar). the U.s. market Current Level Competition from foreign automakers in the United States Although traditional global business relationships in the has steadily increased providing more choices for U.S. industry are breaking down (e.g., the GM-Fiat relationship consumers: has been terminated), the automotive industry today is more globally integrated than ever. Figure 6 shows the percent- • Since 1980, several foreign brands have entered the ages of employment, sales, and production outside the home U.S. market or dramatically increased their share. For- country for the top 10 vehicle manufacturers (in terms of eign automakers have attacked their U.S. competitors 2005 global sales). Because these 10 vehicle manufacturers on all fronts. In 1986, Honda made a strong move to account for about 83 percent of global sales, we can draw attract upscale consumers when it introduced the Acura some conclusions from these data: brand in the United States. Toyota followed suit with the introduction of the Lexus brand in 1989, the same • All 10 automakers sold more vehicles outside their year Nissan launched the Infiniti brand. home markets than in their home markets. In 2005, for • New market segments are being created. Toyota moved the first time, GM sold more than half of its vehicles toward the downscale/hip-youth segment with the in- outside the United States; the average for both U.S.- troduction of the Scion brand in 2004. DaimlerChrys- based automakers, Ford and GM, is slightly more than ler introduced the Maybach, a new super luxury car half. For the other eight manufacturers, the percentages that costs more than $300,000. range from about 70 to 80 percent. • Manufacturers are offering more models to cover all • Among these 10, the lowest percentage of sales, pro- market segments. Low-end producer VW tested the duction, or employment outside the home country was U.S. market with the high-end Phaeton, while high-end about 38 percent, but the percentages for all of them producers Audi and BMW have introduced lower cost are increasing. While GM and Ford sales are declining models, such as the Audi A3 and the BMW 1-series. in their home market (USA), their competitors’ share • The threat of reentries also looms large. Speculation in the U.S. market is growing. is rampant that both French automakers—Renault and PSA Peugeot Citroën—will soon reenter the U.S. We can also look at globalization from the market per- market. spective—how open major national and regional automo- • The Koreans have also entered the fray. In 1986, tive markets are to foreign-brand or foreign-made products. Hyundai entered the U.S. market but retreated in the Figure 7 shows 2005 sales in the U.S. market divided into early 1990s because of problems with quality. Over four-categories: foreign-owned foreign-brands (e.g., Honda); the past five years, however, U.S. sales of Hyundai foreign-owned domestic brands (e.g., Chrysler); domestic- vehicles have come roaring back as quality has greatly owned foreign brands (e.g., Volvo); and domestic-owned improved. Hyundai also acquired majority ownership domestic brands (e.g., Chevrolet). In 2005, 54 percent of in Kia Motors in 1998, and by 2005, Hyundai/Kia U.S. the vehicles sold in the United States were sold by foreign- market share had increased to 4.3 percent. owned firms. Table 2, which compares U.S. data with data from West- Figure 8 shows the increases in sales of foreign-brand ve- ern Europe, Japan, and Korea, shows that the U.S. market hicles, at the expense of domestic brands, in the United States is the most open, but penetration of foreign brands and in the past 25 years. The combined U.S. market share of the foreign-owned domestic brands in other developed markets traditional Big 3 automakers since the mid-1980s steadily is increasing. Japanese automakers are following a similar declined to 58.5 percent in 2005. In 1985, GM’s market share pattern of building transplants in Europe.8 The 26.6 percent 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 8 Japanese automakers operated 16 transplants (assembly plants) in European Union member countries in 2006, producing over 1.5 million 26 percent in the mid-1990s but had dropped back to 18.2 vehicles (more than double the production for 1995). Japanese automakers percent by 2005. DaimlerChrysler’s 2005 U.S. market share operated 13 R&D centers in European Union member countries in 2006 of 14.5 percent is nearly identical to the 1985 market share (JAMA, 2007).

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77 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 90 % Employees outside home 80.4 79.5 % Sales outside home 77.7 77.1 80 75.0 % Production outside home 71.0 70.7 70.3 70 63.3 63.0 Percentage 60.3 57.9 60 56.1 53.7 53.3 53.0 52.8 52.5 50.9 50.7 48.1 47.5 46.7 50 39.7 39.3 37.8 40 N/A N/A N/A N/A 30 GM Toyota Ford VW Daimler- Hyundai- Nissan PSA Honda Renault Chrysler Kia Home Country of Vehicle Manufacturer 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. fig 6 Domestic-Owned, Foreign-Owned, 2005 Total Sales = 16,997,192 units Domestic-Brands: Foreign-Brands: Ford, Lincoln, Mercury, Buick, BMW, Mini, Rolls Royce, Mercedes Cadillac, Chevrolet, GMC, Hummer, Benz, Maybach, Ferrari, Acura, Oldsmobile, Pontiac, Saturn Honda, Hyundai, Kia, Isuzu, Lamborghini, Lotus, Maserati, Mitsubishi, Infinity, Nissan, Porsche, Subaru, Suzuki, Lexus, Scion, Toyota, Audi, Bentley, Volkswagen 40.4% 43.3% 13.6% Domestic-Owned, Foreign-Owned, Foreign-Brands: Domestic-Brands: 2.7% Aston Martin, Jaguar, Land Rover, Chrysler, Dodge, Jeep Volvo, Saab, Mazda Data Source: Automotive News FIguRE 7 U.S. vehicle sales by category, 2005. Source: Automotive News, 2005. 45 fig 7 42.6 40.8 41.4 40 37.3 37.8 35.2 35 (%) 31.7 29.5 30.2 30 29.0 28.7 27.0 26.9 28.4 27.8 27.6 27.3 26.5 25 26.3 25.7 20 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 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. fig 8

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78 THE OFFSHORING OF ENGINEERING TABLE 2 Foreign Penetration in Four Developed for Chrysler Corporation. The combined share for Japanese Markets, 2004 brands steadily increased from about 20 percent in 1985 to almost 34 percent in 2005. Penetration by Penetration by As shown in Figure 9, U.S. sales of foreign-brand ve- Foreign Brand Foreign Ownership hicles were driven by imports through the mid-1980s, when Country or Region (%) (%) they were supplemented by transplant-produced vehicles. United States 41.3 51.2 Figure 10 shows the 17 transplants now sold in the United Western Europe 26.6 38.2 States—14 from Japanese OEMs, one Korean OEM (Hyun- Japan 4.2 9.0 South Korea 2.3 26.2 dai), and two German OEMs (Mercedes Benz and BMW). As of early 2005, transplants employed about 65,000 Data sources: ACEA, 2004; JAMA, 2004; KAMA, 2004. 8 7 Imports Transplant 6 3.38 5 3.37 Sales (millions) 3.31 3.29 2.87 3.08 4 2.49 2.04 1.93 2.16 1.92 1.72 3 3.03 2.17 3.24 2.36 2.59 4.19 4.05 3.64 3.62 2 3.06 3.67 3.31 2.86 3.11 2.64 2.81 2.73 2.64 2.56 2.54 2.39 2.37 2.31 2.16 1 1.83 1.69 1.55 1.49 1.25 0.9 0.8 0.7 0.31 0.46 0.18 0 0.09 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 FIguRE 9 U.S. sales of foreign-brand vehicles transplant-produced and imports, 1982–2005. Source: Adapted from Center for Automo- tive Research study prepared for Association of International Automobile Manufacturers Inc.; Automotive News data; U.S. Department of Portrait view Commerce; IMVP. fig 9 FIguRE 10 Transplants in the United States. Source: IMVP, 2004; JAMA, 2004.

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79 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY TABLE 3 North American Assembly Plant Footprint as Toyota plant in San Antonio had ramped up production, the of October 2006 figure had risen to almost 4 million units. Thus roughly one of every three vehicles built in the United States is from a North America foreign company. Manufacturer United States Canada Mexico Total Following the “power train is core business” mantra, all GM 17 1 3 21 major vehicle manufacturers engineer and manufacture en- Ford 10 2 2 14 gines and transmissions. However, OEMs are increasingly DaimlerChrysler 8 2 2 12 sharing engine and transmission programs or obtaining them Other OEMs 14 3 7 24 Totals 49 8 14 71 from other manufacturers. A report by the Center for Auto- motive Research estimated that the engine-production ca- Notes: Locations that include two assembly plants, such as Honda in Lincoln, Alabama, and Toyota in Princeton, Indiana, counted only once pacity of foreign-brand automakers in 2003 was 3.5 million above. Mercedes plant in Alabama included with DCX USA. This accounts units, 30.5 percent of the overall capacity in the United States for the difference between 14 U.S. transplants shown above and 17 cited (Center for Automotive Research, 2005). Honda has major previously. Other OEMs USA includes NUMMI Toyota-GM facility and engine-manufacturing facilities in Anna, Ohio, and Lincoln, AutoAlliance Ford-Mazda facility. Other OEMs Canada includes CAMI Alabama; Nissan has an engine plant in Decherd, Tennes- GM-Suzuki facility. Sources: Automotive News, 2005, and company reports. see; 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 people and accounted for a cumulative investment of more capacity of foreign-brand automakers at 1.5 million units. than $27 billion, and these figures have rapidly increased Hence, over an eight-year period, foreign engine-production since then. In April 2006, Toyota announced a major expan- capacity increased by 133 percent. sion of its Indiana plant. In June 2006, Honda announced Although globalization in the United States has been dis- it would build a new assembly plant in Indiana to begin ruptive for automakers and parts suppliers, it has generated production in 2008. Kia (a brand of Hyundai) broke ground tremendous benefits for U.S. consumers: (1) Americans have for a second assembly plant in Georgia in October 2006. more vehicle-model choices than ever before; (2) manufac- During that same period, Ford closed its St. Louis and turing productivity and quality levels have improved and Atlanta assembly plants, and GM closed its Oklahoma City converged among all automakers; (3) vehicle prices have plant. The assembly plant footprint in North America as of fallen in real terms; and (4) significant product enhance- October 2006 is shown in Table 3. ments in safety, environmental impact, and performance have Figure 11 shows light-vehicle production for domestic been made. plants and transplants in the United States since 1982. Over- all U.S. production has hovered around 12 million vehicles the Automotive-supplier industry since 1994, so in a sense, the industry remains relatively healthy. However, Figure 11 shows a gradual, but relentless Since the 1990s, suppliers of components—a critical shift from domestic plants to transplants, which produced a link in the automotive value chain—have also undergone record 3.58 million vehicles in the United States in 2005. By relentless globalization. Nowadays, vehicle manufacturers 2006, when the new Hyundai plant in Alabama and the new “shop at the global mall”—that is, they purchase components 14 Foreign Brands Big 3 12 0.5 2.6 2.7 2.2 0.7 0.3 2.3 0.8 0.9 1.3 2.4 2.4 2.5 2.8 3.0 3.3 3.6 10 1.8 2.6 0.2 Production (millions) 1.5 1.7 1.5 8 0.1 6 11.2 10.6 10.6 10.1 10.3 10.1 9.7 10.1 9.8 9.6 9.3 9.5 9.2 9.3 8.9 9.1 9.0 8.6 8.4 8.0 8.3 4 8.0 7.3 6.9 2 0 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 FIguRE 11 U.S. light-vehicle production (domestic and transplant), 1982–2005. Source: Automotive News data. Portrait view

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9 THE OFFSHORING OF ENGINEERING Just as manufacturing labor costs are not the primary offshore, there must be, at a minimum, qualified engineers determinant for locating production facilities, engineering available to perform the required tasks. This implies an labor costs are not the primary determinant for locating the engineering-education infrastructure that produces an ad- product-design function. The following factors must also be equate supply of qualified engineers. considered: Vehicle manufacturers can offshore product engineer- ing in two ways: (1) offshore the full vehicle-engineering • Low labor rates may not provide a sustainable ad- program for a specific vehicle or a family of related vehicles vantage, because engineering labor rates can increase (e.g., large, rear-wheel-drive cars); or (2) offshore part of over time. the vehicle-engineering process, such as a particular task • Engineering labor accounts for roughly one-third to or area of expertise. (Offshoring of full-vehicle programs is one-half of the engineering cost of vehicle develop- discussed in the next section.) ment.10 Other major costs are for vehicle prototypes, With respect to offshoring certain engineering functions, testing equipment and laboratories, buildings/office several interviewees noted that low-cost countries are best space, software licenses, and so on. Engineering suited for certain types of engineering work: software licenses for products like CATIA are very expensive regardless of where they are used. As of June • repetitive or routine tasks that require technical skills 2005, a CATIA license cost roughly $5,000 per user, but not innovation or creativity, such as documenting regardless of the location of the user. an engineering bill of materials, performing a failure • Low productivity can effectively increase the cost of modes effects analysis (FMEA), certain types of rou- engineers in “low-cost countries.” The same executive tine stress analyses or heat-transfer calculations, and who estimated the annual loaded cost of an engineer in generation of a tool design from a part specification Shanghai at $10,000 per year noted that, after training • specialized functions that leverage local expertise or and adjusting for output, the cost was easily $20,000 capabilities, in effect creating an offshore R&D center per year. Many interviewees cited the lack of domain of excellence in a particular technology or capability, knowledge as the key reason for lower productivity of such as computational fluid dynamics engineers in countries like India and China. • localization tasks, that is, taking a vehicle (or compo- nent) designed in one part of the world and modifying In conclusion, cost is a critical factor in location decisions, it to comply with local regulations or customer prefer- and labor costs (both manufacturing labor and engineering ences in a different part of the world labor) are important components of overall costs. It makes sense to manufacture certain vehicles or certain vehicle com- A study by Booz Allen Hamilton also concluded that ponents in a low-cost country—but not all of them. It makes higher value-added engineering tasks are more difficult to sense to engineer certain vehicles and vehicle components in offshore. More demanding tasks, such as the full engineer- a low-cost country—but not all of them. The dilemma facing ing responsibility for a vehicle program, are more difficult manufacturers was summed up by one CEO of a European to outsource or offshore. Almost all interviewees for this re- manufacturer, “No one has the solution to this problem. If port agreed that more complex engineering tasks were more you don’t move some jobs away from your home base, you difficult to offshore, although there was some disagreement could be overwhelmed by competitors who are willing to do about the level of complexity for some tasks. Routine tasks this. On the one hand, your family loses jobs. On the other that require relatively low skills, such as creating a mesh for a hand, if you don’t shift jobs to places like India and China, finite-element model, are the easiest to outsource or offshore we’re all dead.” (Figure 24). Two overarching messages emerged from interviews of automotive executives in the United States. First, many the Capability factor managers expressed concerns about the lack of automotive Capability has little impact on the production footprint domain knowledge among engineers in low-cost countries. strategy for vehicles or components because, for production, As the Asia-Pacific managing director of a North American the capability of the local manufacturing workforce and lo- tier-one supplier said, “I don’t use my engineers in China cal manufacturing engineers is less important than customer for innovation. The culture is imitative, not innovative. They location, government policy, and cost. However, capability are great for reverse engineering, and so we use Chinese has a high impact on the footprint strategy for product en- engineers for many of our aftermarket applications.” Others gineering. For a firm to shift a product engineering function 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. 10 To determine engineering labor costs, the overall engineering head A second concern expressed by some automotive man- count is multiplied by $100,000 per engineer and divided by overall R&D agers was the shortage of engineers in the United States, budget.

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93 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY Increasing Task Complexity Type 1 Tasks: Type 2 Tasks: Type 3 Tasks: Type 4 Tasks: • New product programs • Paper drawing to CAD • Detail original drawings • Colocation with dev. team • Wireframe to solid model • Resolve quality issues • System-level FMEA System- eve • Full CAE analysis • Scan data to CAD files • VA/VE • Dimensional mgmt. • Tooling design (concept • FEA meshing • Teardown analysis • Self-directed design & to production) • PDM/BOM management • Component level FMEA engineering work Increasing Difficulty of Outsourcing / Offshor Outsourc Offshoring 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. fig 24 particularly of engineers with certain skills. A CEO of a U.S. cal engineers can discuss the modification of the design of tier-one supplier cited this problem, “In Mexico, an engineer a component. Software and electronic systems also tend to costs 10 times a manufacturing employee. In the United have a more modular product architecture than mechanical States, an engineer costs about the same as a manufacturing systems, making it easier to offshore both low- and high- employee. Think about that. The issue is not cost; the issue value added functions. Figure 25 shows a conceptual model is supply [of capable engineers]. We have a big problem of transportability (i.e., ability to offshore) for the capability with engineering in this country: it’s called ‘where’s the tal- of performing mechanical engineering tasks compared to ent?’ My view [for my firm’s engineering footprint] is that electrical and software engineering tasks. growth will occur overseas, and engineering in the U.S. will remain flat.” gLoBALiZAtion of reseArCh AnD DeVeLoPment The value of electronics content in automobiles has increased steadily for the last two decades. Thus electri- Coordinating global r&D cal and software engineers have become as important as the traditional mechanical engineers who have historically Engineering managers at Ford, GM, and DaimlerChrysler been associated with the automotive industry. Several inter- report that their top priority is improving coordination among viewees indicated that electronics and software engineering their engineering functions around the world, rather than functions are easier to outsource or offshore than mechanical further offshoring of engineering. Despite many attempts engineering functions. Software engineers across an ocean to improve coordination, at the beginning of this decade can more easily discuss a few lines of code than mechani- Ford, GM, and DaimlerChrysler each had several regional Software Eng ineering High FE Meshing Elect rical Engin Transportability eerin g Drawing Layout Mechanical Engineering CONCEPTUAL Powertrain Low Innovation Low Capability High FIguRE 25 Conceptual model of trade-offs between capability and transportability versus engineering disciplines.

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94 THE OFFSHORING OF ENGINEERING 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 trans- missions) 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 Ford and GM are now trying to integrate their regional regional markets and did not work together. Product plan- engineering centers so that engineers across the globe can ning—making critical decisions about which vehicles are coordinate on global programs. The objective is not to engi- brought to market and at what level of funding—was also neer the same vehicle for different markets (the “world car” relatively decentralized, with regional executives exercis- vision) but to engineer a family of vehicles with the same ing relative autonomy. As GM Vice Chairman Robert Lutz underlying structure that can be very easily modified to meet joked in 2004, “up until a few months ago, GM’s global local customer and (environmental and safety) regulatory product plan used to be four regional plans stapled together” requirements. Achieving this objective will require more (Hawkins, 2004). centralized product planning and more coordination among Ford and GM (and Volkswagen) had adopted a multinational global product development centers. Thus both GM and Ford business model with distributed, and (mostly) independent, re- are changing from their multinational business model to a gional R&D centers supporting mostly autonomous regional transnational business model. operations.11 GM and Ford’s highly decentralized global GM has transitioned from brand-specific engineering to network of R&D centers reflected the history of their develop- regional engineering and is now transitioning from regional ment. Both companies had developed significant European op- engineering to global engineering. For example, GM head- erations during the twentieth century selling distinct European quarters declined requests from its Daewoo subsidiary to vehicles engineered by European engineers built in Europe by build an SUV for the Korean market rather than leverage an European workers with parts supplied by European suppliers. existing GM vehicle program already under development. Ford’s engineering centers near Cologne, Germany, and in GM uses the term architecture to describe a family of ve- England supported Ford of Europe. GM’s European engineer- hicles that may appear very different to customers but have ing centers were aligned by brand; for example, Rüsselsheim, basic engineering commonality. Germany, supported Opel, and Millbrook, UK, supported For example, the Chevrolet Malibu, the Saab 9-3, and Vauxhall. the Opel Vectra are all products of GM’s midsize-vehicle Ford and GM’s acquisition of European brands during the architecture, developed at the Rüsselsheim engineering cen- 1980s and 1990s further complicated the picture. For exam- ter, although these vehicles appear very different outwardly. ple, Ford acquired Volvo’s engineering center in Gothenberg, GM is trying to reduce the number of vehicle architectures Sweden, when the company purchased Volvo in 1999, and while making sure that the right engineers among GM’s 13 GM acquired the engineering center in Trollhättan, Sweden, global engineering centers are working to support the appro- when it purchased Saab. priate vehicle architecture. Table 14 shows which engineer- ing centers have the lead responsibility for current vehicle architectures. 11Although Ford and GM conducted vehicle development in Europe for Toyota and Honda are also adopting a transnational busi- their European vehicle lines, both firms conducted the majority of their basic ness model, but from a much different starting point than and applied research in the United States through the 1990s.

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95 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 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 ing R&D centers outside Japan. Second, it must ensure that of its vehicles in the Japanese home market for the first two R&D is coordinated throughout its international network. decades. Toyota Motor Sales USA was established in 1957, Figure 26 illustrates how two groups of companies (Ford the Toyota Technical Center in Ann Arbor was opened in and GM; and Toyota and Honda) are migrating toward the 1977, production in the United States (at the NUMMI joint same model. venture with GM) began in 1984, and production in Europe The automotive industry was globalized first by brand (in the UK) began in 1987. Although Toyota has operated the (through imports and exports), then by production (through Ann Arbor Technical Center for nearly 30 years, engineers foreign direct investment in assembly and manufacturing in that facility have only recently been given program-level plants), and now by changes in management of R&D opera- responsibilities. tions. U.S. companies have expanded their R&D footprint Toyota has about 20,000 engineers in Japan; however, outside the United States and decreased their R&D footprint nearly 40 percent are contract employees or “guest engi- in the United States. At the same time, foreign companies neers” from suppliers. Like many Japanese firms, Toyota have increased their R&D footprint in the United States. is about to face a shortage of engineers in Japan as the first baby-boom generation there reaches the mandatory offshoring of r&D by U.s. Companies retirement age of 60. The Japanese call this the year 2007 problem.12 Thus Toyota is being forced to look beyond its GM operates 13 engineering and design (styling) centers borders for engineering talent, one reason the company plans in 13 countries (Figure 27). While GM has maintained a to dramatically expand employment at the Ann Arbor center strong market, production, and R&D presence in Europe in the next few years. and Latin America for decades, it has only recently entered Honda’s evolution has been similar to Toyota’s, although into China (1997), South Korea (2002), and India (2003). Honda shifted more engineering responsibility to America Ford reports that it spent $8 billion on engineering R&D in earlier than Toyota did. Honda, founded in 1948, opened 2005, distributed among seven engineering, research, and American Honda Motor as a sales operation in 1959. The design centers located in Dearborn, Michigan; Dunton, U.K.; company began producing the Honda Accord in Ohio in Gaydon, U.K.; Whitley, U.K.; Gothenburg, Sweden; Aachen, 1982, and Honda R&D Americas center in Ohio was estab- Germany; and Merkenich, Germany (Ford Motor Company, lished in 1984. The Ohio facility concentrates on product 2005b). engineering, development, and testing. A newer facility GM considers its technical center in Bangalore, India, a in California concentrates on market research and vehicle center of excellence for the development of math-based tools styling. Honda R&D Americas has full-vehicle engineering and electronic-control systems. Work in Banaglore includes responsibility for the Acura TL and MDX and the Honda the development of modules and systems; human model- Element, Pilot, and Civic Coupe. ing for predicting crashworthiness; development of vehicle Both Toyota and Honda started out by following an inter- structures; and development of control software, embedded national business model with strongly centralized R&D (very systems, software validation and calibration tools, voice little of it outside the home country) and regional operations recognition and communications systems, electrical-system with strong reporting lines to the home-country headquarters. simulation, and electromechanical simulation. In short, the As Honda migrates toward a transnational business model, rationale for opening the Bangalore center was to develop the company must first shift more of its R&D to new or exist- a specialized engineering capability that might be in short supply in the United States. According to a top GM execu- tive, “Electronics and software content will account for 40 12Toyota recently changed its re-employment system so its retirees can percent of the value added in the vehicle over the next 10 work up to the age of 65. The limit had been 63.

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96 THE OFFSHORING OF ENGINEERING International Firm: Centralized R&D 2006 Target Regional operations report to h eadquarters Transnational Firm: Ex: Toyota, Honda Distributed but coordinated 1990 regional R&D centers Distributed but coordinated Multinational Firm: regional operations Distributed and independent regional R&D centers Regional operations mostly autonomous from HQ Ex: GM, Ford, Volkswagen FIguRE 26 Evolution from the international and multinational models to the transnational model. years. There’s a shortage of software, electronics, and control The number of engineers and designers employed by engineers in the U.S.—that’s part of why I opened our [over- foreign-brand vehicle manufacturers in the United States seas] R&D center. I think we will see a shortage of engineers has increased rapidly. In 1987, the Japan Automobile fig 26 in the United States.” Manufacturers Association (JAMA) estimated that Japanese automakers employed about 200 engineers, scientists, tech- nicians, and designers in the United States. By 2004, JAMA onshoring of r&D by foreign Companies reported that 3,065 engineers and designers were employed Foreign-brand automakers have built product- at a growing number of technical R&D and design facilities. development and design facilities in the United States, in In the latest report, issued in September 2006, the number addition to manufacturing plants. Total employment for had risen to 3,593 (Figure 28). technical and design functions by foreign-brand automakers The number of U.S. engineers employed by foreign auto- in the United States is currently estimated at approximately makers is expected to increase substantially in the next few 4,000 people (Table 15). This figure does not include sales years. Toyota plans to invest $150 million to expand its Ann and marketing staff located in the United States, which Arbor, Michigan, facility and add at least 400 engineers to accounts for thousands more employees. Table 15 shows the current staff of roughly 950. One Toyota executive stated that foreign R&D facilities are spread across the United that Toyota plans to expand the Ann Arbor facility to 2,000 States; however, the majority of engineers are in Michigan engineers in the next five years. Also in Ann Arbor, Hyundai and Ohio. is investing $117 million to expand its technical center from Source: GM Europe FIguRE 27 Locations of General Motors global engineering and design facilities. Source: GM Europe, 2006. fig 27

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97 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 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.; 1977 1,000 Wittmann, Ariz. 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 processes, the main driver for increasing the engineering abundance of automotive engineering talent, and in the past head count overseas is to support the growth in overseas few years, scores of engineers have left domestic OEMs markets in China, India, Korea, and other countries. He says to take jobs with foreign OEMs. This trend is expected to the main reason for the decrease in engineering employment continue (Shirouzu, 2005; Vlasic, 2004). 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 Discussion components among vehicles, and better coordination of Many industry executives say that asking if offshoring is R&D (Cohoon, 2006). occurring is framing the issue the wrong way. They are quick Many interviewees also felt that there was a great deal of to point out that the automotive industry has been a global hype and misunderstanding about offshoring. As one senior industry since its inception and that the real question is how vice president of a North American tier-one supplier said, to optimize and reallocate existing resources, that is, how to “I laugh about the notion of a 24/7 product-development develop an effective footprint strategy. process—the idea that engineers in Europe will hand off GM acknowledges that it has increased its engineering a project to engineers in North America, who, in turn, will head count overseas and reduced its engineering head count pass it on to engineers in Asia. That’s a myth. Handoffs don’t in the United States. However, the company contends that happen for sophisticated [development] programs.” offshoring, defined as the replacement of U.S. engineering Nevertheless, some data indicate that some U.S. engi- jobs with equivalent jobs overseas, has not occurred. Ac- neering jobs are being replaced with engineering jobs over- cording to GM’s executive director of global engineering seas. In 2003, Helper and Stanley surveyed 615 small and 4,000 3593 Number of Engineers, Designers, R&D Staff 3,500 3101 3065 2946 3,000 2630 2589 2586 2528 2,500 2271 2238 1952 2,000 1784 1,500 1,000 500 200 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Japan Automobile Manufacturers Association FIguRE 28 U.S. technical employment by Japanese automakers, 1982–2005. Source: JAMA, 2006. fig 28

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98 THE OFFSHORING OF ENGINEERING medium-sized enterprises that produce components in the that the sales rate in all three mature automotive markets—the U.S. Midwest. The sample firms were second-tier suppliers United States, Western Europe, and Japan—has been essen- that sell largely, though not exclusively, to the automotive tially flat for the past five years.) After a slight slowdown in industry. Eighty-seven percent of respondents answered 2004, the growth rate in the Chinese market resumed. Sales “yes” to the question: “In the past three years, have any of of passenger cars for the first half of 2006 were 47 percent your significant customers awarded your traditional jobs to higher than in the first half of 2005. competing suppliers in Mexico, Central or South America, The Chinese automotive industry is uniquely fragmented Eastern Europe, or Asia?” 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 AUtomotiVe engineering in ChinA 2004, only 12 Chinese automakers had a production capacity Automotive engineering activity is clearly increasing in of more than 100,000 units. India, China, and Eastern Europe for different reasons. India Leading Chinese automakers, such as Shanghai Automo- is seen as an emerging knowledge hub in automotive elec- tive Industry Corporation (SAIC), First Automotive Works tronics, and Eastern Europe as having a low-cost, technically (FAW), Dongfeng, and Beijing Automobile Industrial Cor- advanced workforce. In October 2006, Renault announced poration (BAIC) have entered into a complex web of part- that it would invest €500 million to build a new engineering nership arrangements with foreign manufacturers. SAIC, for center in southern Romania. The company plans to hire 1,600 example, has a joint venture with both Volkswagen and GM. engineers and technicians by 2009. In addition, a few Chinese companies, so-called indepen- dents such as Chery, Geely, and Great Wall, are developing cars without the help of joint venture partners. the rise of the Automotive industry Vehicles sold by joint-venture partnerships, which ac- As recently as 1985, the automotive industry in China count for about 80 percent of the Chinese market, are sold was insignificant from a global perspective (total produc- mostly as foreign brands, such as Ford and Buick. Joint- tion of passenger cars was 5,200). In the early 1980s, three venture facilities are clustered in six regions, Shanghai, foreign automakers were allowed to enter the Chinese market Beijing, Changchun, Chongqing, Wuhan, and Guangzhou. through joint-venture agreements with Chinese partners: There is no Chinese “Detroit,” although Shanghai is the larg- American Motors Corporation (subsequently bought by est and fastest growing automotive center in the country. Chrysler), Volkswagen, and Peugeot. While Volkswagen’s China partnership, based in Shanghai, proved to be very impact on U.s. manufacturers and suppliers successful, the French and American partnerships were less successful. In these early joint ventures, the Chinese govern- U.S. vehicle manufacturers have benefited from the ment limited foreign automakers to a maximum of 50 percent exploding Chinese market. In 1983, Chrysler, through ownership in the joint ventures, and Chinese import duties its acquisition of American Motors, was the first foreign on passenger cars in 1985 were 260 percent. player in China. Although Beijing Jeep was not a success, Since China’s accession to the World Trade Organization DaimlerChrysler has been developing an aggressive China (WTO) in December 2001, the industry and market have strategy over the past few years through its joint venture with underdone a radical transformation. The WTO agreement, BAIC. Ford was a late entrant to the Chinese market, partner- combined with the lure of China’s huge potential market, has ing with ChangAn, a former supplier of military equipment spurred automakers to flood China with investment. Every based in Chongqing. At the Ford-ChangAn assembly plant vehicle manufacturer has tried to find a Chinese partner to in Chongqing, an impressive mix of vehicles rolls down the form an international joint venture. Chinese import duties on line: Ford Focus, Ford Mondeo, Volvo S40, and Mazda 3. passenger cars fell from about 90 percent in 1996 to about Ford’s sales in China for the first half of 2006 were up 102 75 percent in 2001, and as of July 1, 2006, they had fallen percent (U.S. sales for the same six months were down 4 to 25 percent. percent). GM has emerged as the sales leader in China. GM Today China has a huge and growing automotive market. sales for the first half of 2006 were up 47 percent (compared Last year, almost 6 million vehicles were sold in China, to a 12 percent decline in U.S. sales). GM made $327 million second in the world to the United States (about 17 million in profits from its operations in China in 2005 (Automotive units).13 The Chinese market exploded in 2002 and 2003 with News, 2006). growth rates surpassing 60 percent both years. (Remember 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. 13 The 2005 data were subsequently recalculated by the Chinese As- auto suppliers have lost business to Chinese competitors. sociation of Automotive Manufacturers (CAAM) to reveal that China had Several executives told IMVP researchers that they felt in- not surpassed Japan; however, China will surpass Japan in 2006 sales (Lee, ternal pressure from senior management to view investment 2006).

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99 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY in China favorably, in order to achieve the benchmark of a Congqing Lifan, China’s top producer of motorcycles, “China price.” This refers to the big differences in direct recently launched its first passenger car, the Lifan 520. labor costs between the United States and China, but does The vehicle was entirely engineered at Chinese university not account for system-wide costs. research labs using domestic R&D resources. In general, Chinese domestic suppliers are better posi- Until 2004, only one R&D center in China, the Pan Asia tioned to supply low-end parts, and foreign suppliers are Technical Automotive Center (PATAC), was related to a for- better positioned to supply complex modules and sophis- eign vehicle manufacturer. PATAC was established in 1997 ticated components, to Chinese joint-venture partners and as a 50-50 joint venture between GM and SAIC. PATAC vehicle manufacturers. Fourin, a Japanese-based research currently employs more than 1,100 people, about 35 percent of whom have master’s or doctorate degrees.14 Employment firm measured the percentage of foreign (i.e., non-Chinese) penetration into the production of automotive parts in China is expected to increase to 1,400 in the next year to support and found revealing data for chassis-related parts (Fourin the launch of many new products from Shanghai GM, which China Auto Weekly, 2005). In 2003, several low-end me- is now approaching a production volume of one million ve- hicles per year.15 Engineers at PATAC earn approximately chanical components (e.g., wheel bolts, wheel rims, steel wheels, rear-axle housings, axle shafts) were manufactured $12,000 per year. entirely by Chinese firms. More sophisticated components PATAC is managed by an executive committee, two (e.g., suspension systems, brake calipers, and ABS systems) managers from GM and two from SAIC, but is fully in- had the highest degree of non-Chinese production. The tegrated into GM’s global engineering network. Work at data for engine-related components reveal the same trend. PATAC includes product development, vehicle engineering, In 2003, 100 percent of the engine-management systems styling, and service engineering to support GM, SAIC, and manufactured in China were produced by non-Chinese firms. Shanghai GM. PATAC also houses a GM design studio with These data are for components produced in China and do not 80 designers (out of GM’s total global force of 1,200). The include imported components. PATAC design studio designed all new sheet metal for the The U.S.-China trade deficit in auto parts increased to Chinese edition of the Buick Lacrosse. $4.8 billion in 2005. U.S. exports of auto parts to China in- Jane Zhao, an IMVP researcher at the University of Kan- creased from $225 million in 2000 to $623 million in 2005. sas, conducted extensive interviews with Chinese automak- The top categories of parts flowing from the United States to ers and suppliers and complied survey data focused on R&D China include seats, air bags, and gearboxes, which are all capability. Her studies revealed three key findings. First, sophisticated components. However, U.S. exports to China domestic Chinese R&D capability is far behind the capability are dwarfed by imports from China, which increased from of non-Chinese competitors. Chinese vehicle manufacturers $1.6 billion in 2000 to $5.4 billion in 2005. The top catego- generally have a strong development capability for mechani- ries of auto parts flowing from China to the United States cal products, but have little capability for high-end electron- include radios, brake components, and aluminum wheels, ics and software. This is consistent with the data on foreign which are less sophisticated or more modular components. trade cited above. A closer look at the data reveals that a large proportion of Second, R&D management is less advanced in China than auto parts exported by China are produced by the Chinese in other automotive producing countries. This is consistent operations of joint ventures with U.S. suppliers. Shanghai with media reports of shortages of management talent in cer- Delphi, for example, exports automatic door systems. tain 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 r&D Capability budget.” Universities in China play a unique role in the automo- Recently, some Chinese companies have hired high-profile tive R&D process. Three government-funded university labs executives as R&D managers. The most notable of these was conduct applied automotive research—essentially product Phil Murtaugh, a talented, well respected manager who used engineering—for Chinese vehicle manufacturers. The cen- to run GM China, who was hired by SAIC on June 18, 2006. ters are based at Tsinghua University in Beijing (State Key Chery hired executives from Ford and DaimlerChrysler. Bril- Laboratory for Automotive Safety and Energy); Tianjin liance hired a former DaimlerChrysler executive to manage University in Tianjin (State Key Laboratory for Internal its R&D center, and Geely hired a former Hyundai executive Combustion Engines); and Jilin University in Changchun to run its R&D operations. Given the remote locations of (State Key Laboratory for Automotive Dynamic Modeling some Chinese automakers and, more importantly, the unique and Simulation). cultural requirements for success in China, it remains to be At Tongji University in Shanghai, which established the nation’s first College of Automotive Engineering in 2002, 14 Seehttp://www.gmchina.com/english/operations/patac.htm. nearly 50 faculty members teach 730 full-time undergradu- 15 Interview with Raymond Bierzynski, PATAC executive director, ate students, 124 master’s students, and 27 Ph.D. students. May 9, 2006.

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100 THE OFFSHORING OF ENGINEERING seen whether Chinese companies will be able to attract and In addition, PATAC now also has significant design ca- retain talented, world-class R&D managers. pability, such as clay modelers and CAD modelers who can Third, a great deal of R&D by international joint ventures design the aesthetics of a vehicle (e.g., exterior surfaces, is localization engineering, which is not nearly as sophisti- interior materials and design, etc.). Engineering design re- cated as designing a full vehicle from concept to customer. quires not only creativity, but also highly specialized skills. Some engineers have claimed that they had to “dumb down” Of the 1,200 people working at GM design centers around to work with joint ventures where the focus was on localiza- the world, 80 are in Shanghai. These are the people who tion rather than up-front design. designed the Buick Lacrosse sold in China by Shanghai GM, Despite the best efforts of the Chinese government to de- which looks significantly different from the same vehicle velop indigenous R&D capability, China is still heavily de- sold in America. As Figure 29 shows, automotive-related pendent on foreign design and technological know-how. The patent applications are on the rise in China. Chinese government’s rationale for promoting international Although the joint-venture model for technology transfer joint ventures was to develop R&D capability based on the to Chinese engineers has largely failed, other ways of de- premise that engineers from the Chinese domestic company veloping China’s automotive R&D capability are emerging, would spend a few years working in the joint venture R&D such as strategic outsourcing to foreign knowledge centers. center where they would acquire knowledge. Eventually, the Chery has outsourced engineering to AVL (an Austrian firm domestic company would hire back the engineer and his or that engineers high-tech power trains), Mira (a British firm her acquired knowledge. that does special noise and vibration testing), and Pinanfarina This has not happened, however. The backflow from the (an Italian design, engineering, and manufacturing house). joint venture to the home company is much smaller than Chery and AVL successfully collaborated on a line of new expected because of the large salary differentials, sometimes advanced engines, and Chery engineers gained engine a factor of 10, between domestic companies and their joint- technological know-how in the process. Thus learning from venture associates. In addition, the engineering infrastructure collaborative outsourcing seems to be working. in China is very poorly developed. Take for example the lack China is also simply buying technology from foreigners of sophisticated test equipment—the country does not have to improve its R&D capability. The best example is SAIC a single automotive wind tunnel, although one is currently buying stakes in Korean automaker SangYong and the failed under construction at Tongji University. British automaker MG Rover. Nevertheless, Chinese engineers working in the Chinese- Recently, a debate has arisen about the possibility of foreign joint venture framework have learned a great deal China exporting vehicles to the U.S. market. Success in about advanced automotive engineering. The Shanghai America and other key export markets is the ultimate test of municipal government has mandated that 60,000 hybrid an automaker’s capabilities and would be a huge symbolic vehicles be sold by 2010, and Chinese engineers at PATAC achievement, and this is a high-priority, medium-term goal are working to meet that challenge. Even though they are not for Chinese OEMs. Just as imports, followed by increased leveraging the extensive research program on a dual-stage production capacity (the rise of the transplants) by Japanese, hybrid being developed by a GM-DaimlerChrysler-BMW German, and Korean manufacturers, have increased in the partnership, engineers at PATAC are engaged in advanced American market, in the long term, China can be expected engineering. to develop automotive R&D capability and export significant Number of Patent Applications 4,500 4,000 All 3,500 Invention Patent 3,000 Utility Patent 2,500 Design Patent 2,000 1,500 1,000 500 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Year Source: State Intellectual Property Office, Peopleís Republic of China Note: Analysis by Jianxi Luo, PhD Candidate, MIT. Search performed for ìautomotiveî in the title of the patent FIguRE 29 Automotive-related patent applications in China, 1985–2005. Note: Analysis by Jianxi Luo, Ph.D. Candidate, MIT. Search application. performed for “automotive” in the title of the patent application. Source: State Intellectual Property Office, People’s Republic of China.

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101 THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY numbers of vehicles to the United States. However, China The global automotive industry has undergone radical will first have to develop R&D capability on a par with changes in the past 10 years, and indications are that change America, Germany, Japan, and Korea. 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. trenDs AnD ProJeCtions As vehicle manufacturers learn to engineer more with less, Offshoring of automotive engineering—defined as the a company’s footprint strategy will become increasingly replacement of engineers in a high-cost country by those in a important. low-cost country—is just one aspect of the complex dynam- ics of the global automotive industry. Focusing only on the referenCes offshoring phenomenon without considering, for example, ACEA (European Automobile Manufacturers Association). 2004. Data the onshoring phenomenon clearly misses the big picture. on foreign vehicle penetration of the European market provided to the While Ford and GM are closing assembly plants in North author for Table 1. America, Toyota, Honda, and Hyundai are building new Automotive News. 2005. Global 100 Supplier List. plants in North America. While Ford and GM are reducing Automotive News. 2006. 2006 Guide to China’s Auto Market. their engineering head counts in the Detroit area, Toyota, May 1, 2006. BLS (Bureau of Labor Statistics). 2005. May 2005 Occupational Employ- Honda, and Hyundai are increasing theirs in Ann Arbor, ment and Wages Estimates. Available online at http://www.bls.gov/oes/ Michigan, Raymond, Ohio, and elsewhere. oes_005_m.htm. Automotive engineers in the United States are legiti- BLS. 2006. Career Guide to Industries: Motor Vehicle and Parts Manufactur- mately concerned about offshoring, but many other issues ing. Available online at http://www.bls.gov/oco/cg/cgs01.htm#emply. should concern them more. Automotive engineers employed Casesa, J., et al. 2005. The Recapitalization of Detroit. Merrill Lynch. October 18, 2005. by domestic vehicle manufacturers should be more con- Center for Automotive Research. 2005. The Contribution of the International cerned that their companies are losing billions of dollars Automotive Sector to the US Economy: An Update. Study prepared and not earning adequate returns on invested capital. They for the Association of International Automobile Manufacturers, Inc. should be concerned that many of their competitors have March. “leaner” product-development processes, which means they Clark, K., and T. Fujimoto. 1991. Product Development Performance: Strat- egy, Organization and Management in the World Automotive Industry. can bring vehicles to market faster. They should be concerned Cambridge, Mass.: Harvard Business School Press. about legacy costs, such as pension and retiree health ben- Cohoon, J. 2006. Presentation at the National Academy of Engineering efit liabilities, agreements by previous managers that are no Workshop on the Offshoring of Engineering, October 24, 2006, Wash- longer tenable. They should be concerned that their brands ington, D.C. are cheapened when sales incentives campaigns essentially DaimlerChrysler. 2005. Driven by Values: 2005 Annual Report. Avail- able online at http://www.daimlerchrysler.com/Projects/cc/channel/ pay customers to buy their vehicles. documents/89811_DC_GB05_E_gesamt_comp.pdf. U.S. automotive engineers should keep one important DOC (U.S. Department of Commerce). Accessed 2006. TradeStats fact in mind. Toyota, the benchmark of the industry and Express™ Home. Available online at http://tse.export.gov/. the most valuable automotive company in the world, has Ford Motor Company. 2005a. Ford Motor Company 2005 Annual Report: done the least offshoring of any large automotive company. Driving Innovation. Available online at http://www.ford.com/NR/ rdonlyres/emwjt4turmgvsborq7bqproy43vwvnf4cztbl56l4oos4sf545 Toyota has become the automotive MVP by focusing on rswt6jdh3gap4juvgevydld4g43xxky6y5znoote/005_AR_full.pdf. value, rather than on cost. If a firm uses offshoring purely Ford Motor Company. 2005b. Form 10-K filed 3/1/2006 for period to cut costs, offshoring is unlikely to provide a sustainable ending 12/31/2005. Available online at http://www.fordcredit.com/ competitive advantage. If a firm uses offshoring (along with investorcenter/reports.jhtml. onshoring) as part of an integrated footprint strategy, the firm Fourin China Auto Weekly. 2005. An Analysis of China’s Autopart Pro- duction: Top Manufacturers and Foreign Efforts Expand. February 7, is more likely to achieve an advantage. 2005. Asia will continue to drive growth in the global automo- Fujimoto, T., and K. Nobeoka. 2004. Organizational Capabilities of Product tive market, and the automotive production and engineering Development: International Competitiveness of Japanese Automakers footprint in Asia will continue to expand. In the meantime, (Seishin Kaihatsu no Soshiki Noryoku: Nihon Jidosha Kigyo no Kokusai Toyota is attempting to upgrade its engineers to focus on Kyosoryoku). Discussion Paper 04-J-039. Research Institute of Econ- omy, Trade, and Industry. Available online (in Japanese) at http://www. technical areas that will be competitive differentiators in the rieti.go.jp/en/publications/summary/0408000.html. future. For example, Toyota has invested significantly in the Gereffi, G., and V. Wadhwa. 2005. Framing the Engineering Outsourcing past few years to increase its internal capability in software Debate: Placing the United States on a Level Playing Field with China development. This may indicate that Toyota believes that and India. December 2005. Master of Engineering Management Pro- understanding the code that controls complex vehicle-control gram, Pratt School of Engineering, Duke University, Durham, N.C. GM (General Motors Corporation). 2005. General Motors Corporation systems, such as the power controllers for hybrid power 2005 Annual Report. Available online at http://www.gm.com/company/ trains, will be one of those differentiators. Thus the most investor_information/docs/fin_data/gm05ar/download/gm05ar.pdf. advantageous thing for U.S. engineers to do is to focus on GM Europe. 2006. Information provided to the author. creativity and developing cutting-edge technologies.

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10 THE OFFSHORING OF ENGINEERING Hawkins, L. Jr. 2004. Reversing 80 Years of History, GM Is Reining in Sturgeon, T., and R. Florida. 2000. Globalization and Jobs in the Automo- Global Feifs. Wall Street Journal, October 6, 2004. tive Industry. Carnegie Mellon University and Massachusetts Institute ILO (International Labour Organization). 2005. Key Indicators of the Labor of Technology. Market (KILM). 4th edition. Independence, Ky.: Routledge. Technology Review. 2005. Corporate R&D Scorecard. Technology Review. IMVP (International Motor Vehicle Program). 2004. Data provided to author September. for Figure 10 and Table 10. United Nations. 2000. United Nations Statistical Yearbook. New York: IRI (Industrial Research Institute). 2005. Data provided to the author for United Nations. Figure 2. Vlasic, B. 2004. As Best Auto Jobs Fade: Big 3 White Collar Workers Turn Jackson, B., V. Sehgal, K. Dehoff, and V. Couto. 2005. Engineering Offshor- to Transplants and Suppliers. The Detroit News, June 20, 2004. ing for the Automotive Industry. McLean, Va.: Booz Allen Hamilton. Wards Autoworld. 2005. Data for Figure 19 from various issues. JAMA (Japan Automobile Manufacturers Association). 2004. Data provided Womack, J., and D. Jones. 2003. Lean Thinking. New York: Free Press. to the author for Tables 1, 8, and 13, and Figure 10. World Bank. 2005. World Development Indicators, 2005. Washington, JAMA. 2006. The Motor Industry of Japan 2006. Figures 16 and 32. D.C.: World Bank. JAMA. 2007. Common Challenges, Common Future: Japanese Auto Manufacturers Contribute to the Competitiveness of Europe’s Motor BiBLiogrAPhY Industry (Brochure). JD Power & Associates. 2006. Data provided to author for Figure 22. Boghani, A., and A. Brown. 2000. Meeting the Technology Management KAMA (Korean Automobile Manufacturers Association). 2004. Data on Challenges in the Automotive Industry. Warrendale, Pa.: Society of foreign vehicle penetration of the Korean market provided to the author Automotive Engineers. for Table 1. Helper, S. 2006. Testimony before the U.S.-China Economic and Security Klier, T.H. 1999. Agglomeration in the U.S. Auto Supplier Industry. Eco- Review Commission. Hearing on China’s Impact on the U.S. Auto and nomic Perspectives 23(Third Quarter): 1834. Auto Parts Industry, July 17, 2006. Available online at http://www.uscc. KPMG. 2006. Competitive Alternatives: KPMG’s Guide to International gov/hearings/006hearings/hr06_07_17.php. Business Costs. Helper, S., and S. Khambete. 2006. Offshoring and Value-Chain Archi- Lee, C. 2006. In China, It’s the Year of the Car. World Business, March tecture: The Case of Automotive Product Development. (Preliminary 28, 2006. Draft) June 2006. Marcionne, S. 2006. The Re-Making of Fiat: Remodelling the Last Chance JAMA. 2007. Common Challenges, Common Future. Available online at Saloon. Speech at the Automotive News Europe Congress, June http://www.jama-english.jp/europe/auto/007/jauto-mkrs_in_europe_ 20–22. 007.pdf. Maxcy, G. 1981. The Multinational Automotive Industry. New York: St. Maxton, G.P., and J. Wormald. 2004. Time for a Model Change: Re- Martin’s Press. engineering the Global Automotive Industry. New York: Cambridge McKinsey & Co. and OESA (Original Equipment Suppliers Association). University Press. 2004. Customer-Supplier Interface Study. Moavenzadeh, J. 2006. Testimony before the U.S.-China Economic and Se- Rhys, D.G. 1972. The Motor Industry: An Economic Survey. London, U.K.: curity Review Commission. Hearing on China’s Impact on the U.S. Auto Butterworth. and Auto Parts Industry, July 17, 2006. Available online at http://www. Ries, J.C. 1993. Windfall profits and vertical relationships: who gained in uscc.gov/hearings/006hearings/hr06_07_17.php. the Japanese auto industry from VERs? Journal of Industrial Economics NSF (National Science Foundation). 2001. Scientists, Engineers and Techni- 61(3): 259–276. cians in the United States: 2005. NSF 05-313. Arlington, Va.: NSF. Schonfeld & Associates. 2006. R&D Ratios & Budgets. Libertyville, Ill.: Smith, G. 2005. Mexico’s Carmakers in a Ditch. Business Week, p. 58, Schonfeld & Associates Inc. June 13, 2005. Shirouzu, N. 2005. Foreign Car Makers Grab U.S. Resource: Automotive Womack, J., D. Jones, and D. Roos. 1990. The Machine That Changed the Engineers. Wall Street Journal, Dec. 6, 2005. World: The Story of Lean Production. New York: Simon and Schuster. Smitka, M. 1999. Foreign policy and the US automotive industry: by virtue of necessity? Business and Economic History 28(2): 277–285.