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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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134 1.10 1.00 0.90 LL en OCR for page 133
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

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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-

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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

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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. .

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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.

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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

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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 ~. ._

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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.

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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."

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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~.