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9
The Character of Automotive
innovation in the ~ 970s and Beyond
The rising cost of oil is the driving force behind the current fer-
ment in technology in the auto industry. From 1973 to 1980 the
real price of gasoline rose over 80 percent. In 1979 alone, the
nominal price more than doubled. The market is now demanding
levels of fuel economy significantly in excess of the mandated
corporate average fuel economy (CAFE) standards. The clear
competitive advantage accruing to products with advanced
efficiency performance has created an incentive for the develop-
ment of improved hardware. If the real price of oil continues to
rise and we experience significant supply interruptions, the future
course of product innovation may become more radical.
Questions about the character of innovation and technology are
thus closely linked to questions about the future of oil prices.
Given a national commitment to reduce reliance for oil on the
l~liddle East, it is of course possible that regulation could force
innovation even without any change in oil prices. But market
forces are likely to be far more conducive to radical innovation
than regulation. It is thus essential to examine the likelihood of
continuing increases in the real price of oil and gasoline.
Experience in the last two years reveals the large degree of
uncertainty surrounding movements in the price of oil. Not only is
the world price set through a complex political and economic
process--a process subject to swift and radical developments--but
we have had little experience on which to base judgements and
estimates." Though organized in 1960, OPEC did not exercise
significant control over the price of oil until the embargo of 1973.
The shift in power in 1973 following the war in the Middle East
was sudden and pervasive; the oil companies, long used to a nego-
tiated price, were faced with ultimatums and drastically higher
prices. The sudden jump in world oil prices and the price of gaso-
line marked the end of a long period of stability. Moreover, the
impact of the events of 1973-1974 was partially cushioned by
133
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Representative terms from entire chapter:
oil prices
134
1.10
1.00
0.90
LL
en
135
1 .300— West Germany
if_
0.800 H
Japan ~
1965 1967 1969 1971
YEAR
1973 1975 1977
FIGURE 9.2 Real price of gasoline in selected countries,
1965-1978 (1967 = 1.000~. (Data for 1965-1975 from Inter-
national Road Federation; for 1975-1978 from U.S. Department of
Energy, National Petroleum News Factbook, 1979.)
As the figures show, developments in 1975 and 1976 seem to
reinforce this view, as the real price of gasoline fell in most of the
major auto-producing countries. Price controls in the United
States helped to extend the period of slowly falling real prices into
1978. Predictions of steady real prices of gasoline were common.
Thus, it is no surprise that the congressional Office of Technology
Assessment in its projections of auto technology published in 1978
chose to use $1.20 per gallon as the price for gasoline for the year
2000. Although some observers, notably the Central Intelligence
Agency, took a far more pessimistic posture, these were dismissed
by persuasive arguments. Writing in the fall of 1978, Congressman
David Stockman argued against a national energy policy, declaring
that "the global economic conditions necessary for another major
unilateral price action by OPEC are not likely to re-emerge for
more than a decade--if ever."3
136
. .. . . . .
Subsequent developments in 1979 laid to rest such notions and
revealed the fragility of the world oil market. Political forces,
both In broad international terms and in terms of Middle East
politics, have assumed a major role in the long-term development
of the supply and price of oil. The revolution in Iran and the Iran-
Iraq war have underscored two critical aspects of the integration
of politics and economics in oil. The first aspect is the sensitivity
of the market to relatively modest shifts in supply. The shutdown
in Iran in 1979 removed about 10 percent of world supply, yet this
shortfall precipitated a scramble that drove spot market prices to
$40 per barrel. Secondly, the Iranian revolution demonstrated the
tension between tradition and modernization inherent in oil-
dominated Middle East development strategies. Second thoughts
about the wisdom of high production rates appear to be wide-
spread; the argument is that oil in the ground may be a better
long-term social and economic investment than western red I
estate or massive building programs.
~ ~ Hi,
~ —— O ~ ~
On top of the obvious political instability in the Middle East,
these considerations suggest that the real price of gasoline will
continue to increase over the long term and that periodic explo-
sions in prices and disruptions in supply are to be expected. It is
also true that this long-term scenario is likely to be accompanied
by periods of stable or declining real gasoline prices. OPEC
pricing seems to involve a ratchet effect, in which a given burst in
the nominal price is followed by a period of relative stability until
the next major increase. Unless more of the world's oil comes to
be traded on the spot market, this pattern is likely to continue.4
The prospect of a series of price bursts followed by periods of
stability may create problems for the U.S. auto industry. On the
one hand, they must plan and develop technology consistent with
long-term demands, but they may face periods in which fuel
efficiency becomes relatively less important and other factors
(recreation, comfort) dominate sales. If, however, the events of
1979 have altered perceptions of the long-term situation, long- and
short-term demands may become consistent. At least for now
there appears to be ample evidence that the old days of relatively
cheap gas are gone forever and that market pressures for fuel-
efficient vehicles will persist.
DIVERSITY AND RADICAL CHANGE IN TECHNOLOGY
From the introduction of the Model T in 1908 to the oil embargo
of 1974, innovation in the auto industry was conditioned by and
reinforced a convergence in products and processes. Earlier we
documented the increasingly incremental character of techno-
137
logical advances and the implications of such innovations for
strategy and competition. Spurred by the transformation of the
oil market and shifts in demand, the pattern seems to be changing.
Our analysis of the market's evaluation of technology and innova-
tion in the late 1970s suggests an increased role for technology in
competition. Casual impressions suggest an increasingly diverse
array of automotive hardware in engines, drive trains, and other
systems. There are indications that innovation is less oriented
toward refinements of existing design concepts and focused on the
development of new approaches. Yet the picture is not clearly
defined.
Considerable resources are being and have been allocated to
the development of a technology that can only be described as
incremental. While this state of affairs is to be expected if the
industry is in a period of transition, better evidence than casual
impressions is required to establish the character of technological
changes and to provide a basis for judging future developments.
Evidence must be developed through an examination and inter-
pretation of specific innovations; our approach is to compare
recent developments with the historical pattern and with innova-
tions known to be "in the wings" but not yet introduced. We are
concerned with the general pace of innovation as well as its
general character. Two aspects are especially critical. The first
is the diversity of technology growing out of the innovative
process; the issue is essentially whether, for any given system, a
new dominant design is apparent. The second aspect is the extent
to which innovation departs from design concepts currently in use,
whether innovation is epochal or incremental.5
The issues of diversity and dominance in design require a rela-
tively straightforward analysis of technology features embodied in
current production and identification of apparent trends. Classify-
ing a particular development as incremental or epochal (or some-
thing in between), however, is a more ambiguous problem. To
sharpen the distinction and to establish criteria for classification,
it may be useful to sketch out the framework of analysis more
fully than we have done.
Whether an innovation is radical or incremental is essentially a
question of perspective. What is radical from one standpoint may
be only incremental from another. A change in engine technology,
for example, may be greeted as a great step forward by the driver
of the car but might have only minor effects on the equipment and
people in the production process. In the current analysis we have
chosen to adopt the perspective of the production processes. Thus,
the key issue is how a given change in product technology affects
existing capital equipment, labor skills, materials and compo-
nents, management expertise, and organizational capabilities
within the production unit. Note that these categories encompass
138
the full range of activities involved in the development, produc-
tion, and marketing of the product.
From the perspective of the production unit, a truly epochal
innovation is one that destroys the usefulness of existing compe-
tence in several of the factors of production (capital, labor com-
ponents, management, organization). Such an innovation sweeps
through the production process, leaving obsolescence in its wake.6
Perhaps the most striking example of an epochal innovation was
the introduction of closed steel bodies in the 1920s and its impact
on Ford and its Model T. Confronted with a shift in market
preferences and competition from firms producing closed bodies in
great variety, Ford was forced to totally revamp the production
process, replace 15,000 machine tools, introduce new processes,
and lay off and hire thousands of workers. Moreover, management
skills and organization appropriate to the production and
marketing of a low-price standardized, mass-produced automobile
were not viable in the era of the annual model change and
increasing variety.
Contrast Ford and the closed steel bodies of the 1920s with the
introduction of the thin-wall, gray cast-iron engine in 1959?
Improvements in metallurgical consistency of gray cast iron and
the development of more accurate mold fabrication allowed Ford
to reduce the engine wall thickness from 0.20 inches to 0.15
inches, which increased thermal efficiency in addition to reducing
weight. This was an important development for Ford because it
allowed the company to compete with the new compact cars
equipped with aluminum engines using a familiar technology.
Thus, far from making existing capabilities obsolete, the thin-wall
engine preserved Ford's investment in cast-iron technology and
associated labor, managerial, and organizational skills. The new
technology extended and refined an existing concept, and in-
novation was incremental.
Between the extremes of such epochal developments as closed
steel bodies and the truly incremental changes such as the thin-
wall engine, there is a wide range. Our analysis will attempt to
place specific innovations on the spectrum, but we shall not make
f ine distinctions; definitive categorization would require fairly
detailed information beyond the scope of this study. In addition to
assessing particular innovations, we shall attem pt to gauge
possible interdependencies between innovations. Such interaction
has been of significance in the past, as a cluster of innovations
emerges that reinforce one another to produce major changes,
even though any particular innovation may, in isolation, have been
only marginally important. In the case of interdependence, as
with an innovation considered singly, the critical issue is the
number of factors of production that must be transformed if the
innovation is to be actually used.
.
139
Diversity and Dominance in Design
The historical course of innovation in engines and bodies has been
marked by a succession of what we have called "dominant designs,"
i.e., particular design approaches that evoke noticeable competi-
tive reaction and that result in significant market penetration.
George White has argued that dominant designs can be recognized
early in their development.8 One or more of the following
attributes appear to characterize designs that will achieve
dominance:
-
· Technologies that lift fundamental technical constraints
limiting prior art while not imposing stringent new constraints.
· Designs that enhance the value of potential innovations in
other elements of a product or process.
· Products that assure expansion into new markets.
It should be noted that a dominant design is not typically the
product of radical innovation.9 To the contrary, a design approach
becomes dominant, as did the integration of engine plants with
transfer lines and the closed steel body, when the weight of many
innovations tilts the economic balance in favor of one design
approach. Typically, the relevant design approach has already
been in existence. It may appear radical in a particular
application, because the newly favored concept replaces a much
different alternative, but the competing approaches were probably
the product of evolutionary improvement.
The importance of evolutionary change is evident in the cars
introduced just after World War II. In almost every major system
(engine, transmission, body, etc.) the designs could be traced to a
series of developments dating back some 15-20 years. ° The
concepts embodied in the large road cruisers of the late 1940s and
early 1950s proved to be dominant one in the U.S. market for over
2 0 years. It is true that some movement away from the basic
configuration took place as early as 1958, but the orientation of
the market toward ample power and a smooth, luxurious, boule-
vard ride did not change markedly until the late 1960s and early
1 970s.
The first movement away from the all-purpose road cruiser
was signalled by penetration of the market by imports in the late
1 950s. At that time the Corvair's systems and features were
already a significant departure from the industry norm, and
additional changes (aluminum engines, unit body construction)
were broadly introduced at various points until 1969. None of
these developments (except perhaps for unit construction)
displaced the dominant postwar designs, but they indicated the
beginning of divergence in market-tested configurations.
140
Throughout the 1950-1969 period there appears to have been a
logical, evolutionary shift in the locus of innovation. Technical
change was oriented toward meeting new competitive objectives
while preserving existing capabilities. The response to the initial
import surge of the late 1950s was generally to scale down exist-
ing designs. Pollution regulations were first met with add-on
components and modifications of existing systems. Similarly,
initial gains in fuel economy were realized by changes in com-
ponents and not in basic design!)
As problems with imports and environmental regulations have
persisted and have been compounded by higher fuel prices, how-
ever, the chain of ramifications has extended further up the design
hierarchy to affect the basic configuration of the car. Separate
f rames and bodies in smaller cars have been replaced with a
rationalized design combining the two in unitized construction.
Body designs have been changed to reduce the number of parts.
The recent developments of transverse-mounted engines and
front-wheel drive strike at more basic relationships among
components.
A similar pattern is apparent in engine design. The search for
greater efficiency has been met with refinements of the basic
technology, such as that of Nissan's NAP-Z engine--a move to
fewer cylinders, redesign of the combustion chamber, use of
exhaust gas recirculation, and so forth. In addition, the turbo-
charger (an add-on device) has been used by Saab and Buick as a
way to maintain performance while reducing engine size. Its most
promising operation, however, may be with diesels. The diesel
engine offers an alternative concept of increasing popularity; a
shift to diesel technology in passenger cars constitutes a refine-
ment of an existing technology. More fundamental changes in
propulsion systems are under development.
The thrust for improved efficiency reflects a series of trade-
offs among fuel economy, emissions, and safety. An example
illustrates the incentives and the constraints facing producers.
The easiest and cheapest way to improve fuel economy is to make
the car smaller, thereby decreasing weight without adding innova-
tive technology. There are limits to this approach, some imposed
by marketing considerations but more important ones by safety
concerns. As cars become smaller, the point is reached where
there is not enough "crush distance" to limit the g-forces on a
car's occupants if there is a crash. So one turns to innovative
technology: new structural materials to make the car lighter
without making it smaller and new engine and drive-train systems
to improve efficiency at a given weight. In a sense, these tech-
nologies have a safety objective and may require a premium price.
The development of product technology in the 1970s consti-
tutes a sharp reversal of the pattern of technical change that
141
dominated from 1900 to 1950.~2 In that period, innovation moved
toward a standardized design. The process of standardization
followed a hierarchy: first came the propulsion choice, then the
overall chassis configuration, and then major components were
advanced. Finally, once technological change in the components
subsided, the overall design of the automobile was optimized. In
the aftermath of energy shock and shifts in market preferences,
the hierarchy has been reversed. Change came first to
components, then to the overall body, and now changes are
appearing in the drive trains and engines.
A comparison of the technology currently on the market with
that available in 1973 reveals the diversity that recent innovation
has spawned. The market now offers both gas and diesel engines;
engines with four, five, six, and eight cylinders; engines with
computer-optimized control; and engines with turbochargers. One
can buy front- or rear-wheel drive; downsized and/or redesigned
bodies with new lightweight, high-strength materials; and new
kinds of automatic transmissions. Yet in the midst of this diver-
sity there appears to be at least some focus on ongoing develop-
ments, and some technologies appear to be achieving significant
market acceptance. To illustrate this point, it is useful to con-
sider the technology embodied in the new Ford Escort and the
Chrysler K car. Both were designed in the last few years, and
both are using their technologies as key selling points; it seems
reasonable to expect that they would be representative of the
most recent trends in technology.
Although these cars are aimed at different segments of the
market, their technological features are similar. Both offer a
transverse-mounted, four-cylinder engine with overhead camshaft
and aluminum head. The K car's engine design is (in the words of
Car and Driver) a "bit archaic" in its cylinder head, stroke length,
and combustion chamber; the Escort has a compound valve semi-
head configuration and specially designed pistons to improve com-
bustion. The drive trains of both cars are packed into the front of
the vehicle (both have front-wheel drive) and both have a four-
speed manual transmission as standard equipment, although the
Escort has overdrive in fourth gear. Rack and Dinion steering and
front disc brakes are standard on both.
When these cars are compared with the market leaders of
1979-1980, two conclusions are clear. First, front-wheel drive
with a transverse-mounted engine seems to be on its way to
achieving market dominance in the small, economy-car segment.
The popularity of the transverse-mounted/front-wheel-drive con-
figuration seems to come from its interaction with downsizing and
vehicle redesign. While front-wheel drive may offer superior
handling characteristics, it also seems to provide greater package
efficiency than the rear-wheel-drive format. The second point is
-
,__. ^. .O ~. ._
142
that a car with four cylinders seems to be the configuration of
choice. Such a car seems to provide the right mix of weight
r eduction and preservation of performance.
It is important to note in this context, however, that a good
deal of the current R&D effort seems to be focused on developing
alternative power plants." 3 The existence and likely future
availability of a small diesel option with turbocharging is further
evidence of the lack of an overall dominant design in the engine.
Thus, while four cylinders seem to be a focal point, additional (and
more critical) engine characteristics are in flux.
Incremental versus Epochal Innovation
The changing locus of technological development (components,
chassis, propulsion system) in the 1970s suggests that innovation is
becoming less incremental in its impact on the production unit.
Although thoroughly sweeping changes have yet to be introduced,
there is ample evidence that the industry is in the midst of a tech-
nological transformation that may have profound implications for
the basic factors of production. Tables 9.1 and 9.2 illustrate the
kinds of innovation experienced in the postwar era as well as
future developments that appear to be under active investigation.
Looking first at the evidence in Table 9.1, the preferences of
the market are clear in the growing shift from performance to
efficiency as a basic objective of innovation. Most of the major
product developments from 1945 to 1974 were designed to improve
handling, increase power, and generally improve the recreational
value of the product. Safety regulations and greater demand for a
more efficient vehicle have become increasingly important since
the mid- 1 960s; performance-oriented changes have almost dis-
appeared. The shift in objectives underscores the fact that
innovation has been significantly affected by market demand. And
if the future developments given in Table 9.2 are at all indicative
of the actual course of technology in the next several years, the
efficiency-oriented pull of the market will be strongly felt for
some time to come.
Whether the objective is performance or efficiency, the impact
of any one particular development may be magnified if it influ-
ences developments in other areas. Historically, individual
innovations have solved specific problems or added new features,
but they have seldom been independently decisive in causing one
approach to dominate its competitors. Often a shift in market
performance coupled with an innovation causes one approach to
gain in preference over another, as with the shift toward small
cars and bodies of unit construction. Because improvements are
cumulative, the chance decreases with time that a single
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147
innovation will change a favored approach.
_ _ ~ ~ . ~ ~ . . ~ · . .
Significant change
as fine result of a cluster of Interacting innovations.
Recent innovations in materials and electronics appear to offer
significant potential for interaction. In addition to being an
important development in its own right, electronic sensing and
processing of information is an "enabling" technology; without it a
variety of developments in engine design (e.g., advanced diesels)
would either never have advanced or would have advanced slowly.
With it, however, not only might individual technologies advance
more rapidly, but innovations in separate systems can be linked. A
potentially important example is the linking of a continuously
variable transmission with an advanced engine concept (e.g.,
adiabatic engine) to achieve significant increases in efficiency.
Thus, while electronics may not directly affect the production unit
in a radical way, its indirect impact may be extensive.
In general, it is clear from Tables 9.1 and 9.2 that radical
change is a likely consequence of technology currently "in the
wings." Note that this conclusion applies only to the impact of
innovation on the production process. It does not refer to the
scientific or technical novelty of the innovation. Indeed, the
discussion in Chapter 2 showed that a relatively minor technical
change, such as downsizing, can have a significant effect on the
production unit. In this sense, it appears that innovation in the
auto industry has become increasingly less incremental. Down-
sizing, for example, does not make existing stamping and assembly
plants obsolete, but it is a process different from the annual model
change. Indeed, in some parts of the production unit (product
design, materials), downsizing has not simply extended existing
technology; rather, it has required new concepts. Similarly, the
trans-axle requires extensive changes in axle and transmission
plants and. from that perspective, constitutes a more radical
change than would refinement or extension of rear-wheel drive
and conventional transmissions.
The evidence suggests that innovation in the 1970s generally
has proceeded first where the cost of change (in terms of its
impact on the existing process) has been least. This serves to
underscore the potential for change in future years. The tech-
nologies in Table 9.2 involve not only new design concepts but also
in many cases totally new physical or mechanical and chemical
principles. And indications are that such developments are not the
flight of some engineer's fancy; extensive development work is
under way in all areas and is some cases has been speeded up
remarkably in the last two years. During 1982, for example,
reports of important developments in battery technology have
opened up the possibility of electric vehicle commercialization
within the next five years.
148
There are two points to note about such future developments.
The first is the obvious point that most of these innovations have
the potential for transforming important segments of the produc-
tion unit. Were the electric car to dominate vehicle production,
f or example, a large part of the existing engine manufacturing
process, including labor skills and management expertise, would be
obsolete. Furthermore, the propulsion technology may interact
with other systems (transmission, chassis) to produce further
changes. Other innovations listed in Tables 9.1 and 9.2 might have
equally profound effects.
The second point is that, at least for engine technology, many
of the designs are competitive; obviously, it is as yet unclear
which will dominate. Moreover, it is not clear that even proto-
type development will serve to indicate the extent of market
acceptance. Since the innovations tend to be destructive of
existing capital, and since they themselves require large amounts
of capital for development and production, there appears to be
significant risk associated with these developments. Indeed, the
range of uncertainty about future technology appears to be
growing. Dealing with that uncertainty, positioning the organiza-
tion for adaptation and management of change will be critical to
survival if technology-based competition becomes a reality.
Yet the potential payoffs are significant. The implication is
that incentives for innovations in engines, materials, and other
technologies are strong: that it is unlikely that all Droducers will
choose the same line of development; and that it is equally
unlikely that any given producer will pursue development in all
areas. Depending on the nature of technical breakthroughs, it is
entirely possible that the market will see a diversity of advanced-
design power plants and other systems and components as the
available options compete for market acceptance; in terms of
product technology, a period of intense technological competition
may be just ahead.
_ _ 1 ~ _ _ ~ . . ~ . · . —
~ , ~
NOTES
1. This section draws on the work of the Energy Project at
the Harvard Business School. See Stobaugh and Yergin (1979a,b).
2. "OPEC: The Economics of the Oil Cartel," Business Week,
January 1975, pp. 80-81.
months.
3. Stockman ( 1978~.
4. As of early 1982 real oil prices had fallen for several
5. See footnotes 1-4 in Chapter 3 for sources of innovation.
6. This is the kind of innovation to which Shumpeter referred
when he coined the phrase "winds of creative destruction."
149
7. See Abernathy (1978), pp. 211-212.
8. White, G. (1978).
9. The application of this concept to the auto industry and to
conceptual development can be found in Abernathy (1978, see
Chapters 2-4~. This section draws extensively on his analysis.
10. Abernathy (1978) documents this position for both engines
and bodies.
11. Basic design in this context refers to such design concepts
as front-wheel drive, the principal of energy transformation (gas,
electric), and so forth.
12. Abernathy ~ 1 978; see Chapter 3, which documents the
pattern of change up to 1970~.
13. See Heywood and Wilkes (1980~.
