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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 preÂproduction 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). 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, 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 engineersâprod- 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. â information and telecommunications technology industries are If lumped together, the automotive industry ranks third in R&D spending. SUPPLIERS â 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 90 percent for development. A typical automobile is made of 20,000 to 30,000 indi- 69
70 THE OFFSHORING OF ENGINEERING Software 23.0 Telecommunications equipment 26.9 Semiconductors 27.0 Motor vehicles and auto parts 55.1 76.9 Pharmaceuticals 0 10 20 30 40 50 60 70 80 $ Billions FIGURE 1â 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. 8 Fig 1 Schonfeld Associates forecasts Toyota to be Automotive 7 the #2 R&D investor in 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 2â 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. 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), 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 â PRODUCT ARCHITECTURE 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 CitroÃ«n and Faurecia have an equity relationship; and Hyundai-Kia and Mobis in South Korea have a similar relationship. vehicle is engineered. The terminology developed by Clark â For more on the rise of the âblack-box parts ratioâ in automotive product and Fujimoto (1991) provides helpful distinctions: development, see Clark and Fujimoto, 1991.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 71 â¢ Modular architecture is based on a one-to-one cor- ENGINEERING EFFICIENCY AS A DRIVER OF CHANGE respondence between functional and structural From a financial perspective, most vehicle manufactur- elements. ers and many tier-one suppliers destroy value, meaning that â¢ 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 â¢ 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). â¢ 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 childrenâs 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 industryâeven at profitable firmsâreports 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 efficiencyâas measured vehicle manufacturers and suppliers. by engineering hours adjusted for comparisonâare 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 3â Product architecture matrix for cars, heavy trucks, and other products.
72 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 4â 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 â¢ 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 (1995â 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. âmodules.â 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 âto do more with less.â 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 yearsâa 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 companyâs 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 The drive to improve efficiency (i.e., to increase engi- it the third largest automotive supplier in the world. Magna neering output while lowering engineering costs) has led to Steyrâs 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 companyâs manufacturing complex in â¢ pressure to manage a firmâs global footprint more ef- fectively across the enterprise â 2005 revenue of the top three automotive suppliers: Robert Bosch â¢ 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).
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 73 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 CitroÃ«n 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 NINÎ£, 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 DaimlerChryslerâs 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. GMâs 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 ENGINEERâS 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
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)âalthough 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 âbuild where you sellâ 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 bachelorâs 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 masterâs 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 GMâs 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 GMâs 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 Fordâs 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 companyâs history. in France in 1891, England in 1896, and America (New York The automotive industry in the mid-1960s was domi- City) in 1907. Proximity to customersâwealthy individuals nated by two large marketsâAmerica and Europeâand one in the early days of craft production and mass markets in the emerging marketâJapan. At the time, interregional trade days of mass productionâhas 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 Fordâs system of mass production around and American Motors. In Europe, where national markets were far more distinct than they are today, the French bought â For an excellent historical account of globalization in the automotive French vehicles, the British bought British vehicles, and so industry, see Sturgeon and Florida, 2000. on. A firm like Adam Opel, although it was owned by GM,
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 75 700,000 600,000 Number of Subbaccalaureate Degrees ** 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 5â 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 1â 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 a 5 Number Company of Plants Location of Plants (Year Opened) accelerating throughout the 1990s and the first few years of Ford 24 Canada (1904); England (1911); France (1913); the 2000s, the worldâs automotive firmsâboth OEMs and Motor Argentina (1915); Argentina (1919); Spain suppliersâunderwent a wave of mergers, acquisitions, and Company (1919); Denmark (1919); Brazil (1919); Belgium various kinds of strategic alliances. (1919); Sweden (1922); Italy (1922); South Africa Today, the level of business integration among vehicle (1923); Chile (1924); Japan (1924); Spain (1925); manufacturers varies greatly. The list below is organized Germany (1925); France (1925); Australia (1925); Brazil (3 locations, 1926): Mexico (1926); India from the most integrated to the least integrated: (1926); Malaysia (1926) General 19 Canada (1907); England (1908; not a CKD plant); Motors Australia (1923); Denmark (1923); Belgium â¢ Merger/Acquisition:â Daimler Benz and Chrysler (1924); England (1924); Argentina (1925); Corp. (until August 2007); Ford and Jaguar; Ford and England (1925); Spain (1925); Brazil (1925); Volvo; Volkswagen and Seat; Volkswagen and Skoda Germany (1926); New Zealand (1926); South â¢ Controlling Equity Stake:â Ford and Mazda; Africa (1926); Uruguay (1926); Indonesia (1926); DaimlerChrysler and Mitsubishi Motors (until Japan (1927); India (1928); Poland (1928); Sweden (1928) July 2005) â¢ Non-controlling Equity Stake:â 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) â¢ Product-Development Agreements/Shared PlatÂ was largely managed and operated like a German company. forms:â GM Pontiac Vibe and Toyota Corolla (shared The next big automotive production powerhouseâSouth platform); Peugeot 107 and Toyota Aygo (small-car Koreaâhad not yet appeared on the scene; Hyundai Motor program) Corporation was founded in 1967. â¢ Technology Alliances:â Ford and PSA on diesel The automotive industry underwent a second wave of engines; GM, BMW, and DaimlerChrysler on dual- globalization starting around 1970, when international trade stage hybrid vehicles; PSA and BMW on small in motor vehiclesâespecially fuel-efficient Japanese ve- gasolineÂ engines hiclesâincreased in response to the oil shocks of the 1970s. In the 1980s, foreign direct investment in manufacturing This evolution has blurred the distinction between do- facilities increased. Honda opened the first transplant in mestic and foreign automakers in all countries, including the Ohio in 1982, beginning a wave of investment that continues United States. Ford owns Jaguar, Volvo, and Land Rover and a controlling stake in Mazda. GM owns Saab and Daewoo â transplant is a foreign-owned manufacturing facility, such as a Toyota and has only recently divested itself of equity stakes in sev- A or BMW assembly plant, located in the United States. eral Japanese manufacturers. At the time this was written in
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 DaimlerChrlyslerâs 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- â¢ 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 â¢ All 10 automakers sold more vehicles outside their year Nissan launched the Infiniti brand. home markets than in their home markets. In 2005, for â¢ 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. â¢ Manufacturers are offering more models to cover all â¢ 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 competitorsâ share â¢ The threat of reentries also looms large. Speculation in the U.S. market is growing. is rampant that both French automakersâRenault and PSA Peugeot CitroÃ«nâwill soon reenter the U.S. We can also look at globalization from the market per- market. spectiveâhow open major national and regional automo- â¢ 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, GMâs market share pattern of building transplants in Europe. 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 â Japanese automakers operated 16 transplants (assembly plants) in about 22 percent of the market. Fordâs share crept up to about 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. DaimlerChryslerâs 2005 U.S. market share operated 13 R&D centers in European Union member countries in 2006 (JAMA, 2007). of 14.5 percent is nearly identical to the 1985 market share
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 77 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 6â 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 Foreign-Owned, 2005 Total Sales = 16,997,192 units Domestic-Owned, Foreign-Brands: Domestic-Brands: BMW, Mini, Rolls Royce, Mercedes Ford, Lincoln, Mercury, Buick, Benz, Maybach, Ferrari, Acura, Cadillac, Chevrolet, GMC, Hummer, Honda, Hyundai, Kia, Isuzu, Oldsmobile, Pontiac, Saturn 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 7â U.S. vehicle sales by category, 2005. Source: Automotive News, 2005. 45 fig 7 40.8 42.6 41.4 40 37.3 37.8 35 35.2 (%) 29.5 31.7 30 30.2 29.0 28.7 28.4 27.8 27.0 26.9 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 8â Foreign-brand market share in the United States, 1986â2005. Note: Includes domestic-owned foreign-brands, such as Volvo (Ford) and Saab (GM). Source: Automotive News data, 2005. fig 8
78 THE OFFSHORING OF ENGINEERING TABLE 2â 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 Penetration by Penetration by almost 34 percent in 2005. Foreign Brand Foreign Ownership As shown in Figure 9, U.S. sales of foreign-brand ve- Country or Region (%) (%) hicles were driven by imports through the mid-1980s, when United States 41.3 51.2 they were supplemented by transplant-produced vehicles. Western Europe 26.6 38.2 Figure 10 shows the 17 transplants now sold in the United Japan 4.2 9.0 Statesâ14 from Japanese OEMs, one Korean OEM (Hyun- South Korea 2.3 26.2 dai), and two German OEMs (Mercedes Benz and BMW). Data sources: ACEA, 2004; JAMA, 2004; KAMA, 2004. As of early 2005, transplants employed about 65,000 8 7 Imports 6 Transplant 3.38 5 3.37 Sales (millions) 3.31 3.29 2.87 3.08 4 2.49 2.04 2.16 1.92 1.72 1.93 3 4.19 4.05 3.24 3.03 2.59 2.36 2.17 3.64 3.62 2 3.06 3.67 2.86 3.11 3.31 2.64 2.73 2.64 2.81 2.37 2.39 2.54 2.56 2.16 2.31 1 1.69 1.83 1.49 1.55 1.25 0.7 0.8 0.9 0.18 0.31 0.46 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 9â U.S. sales of foreign-brand vehicles transplant-produced and imports, 1982â2005. Source: Adapted from Center for Automo- tive Research study prepared for Association of International Automobile Manufacturers Inc.; Automotive News data; U.S. Department of Commerce; IMVP. Portrait view fig 9 FIGURE 10â Transplants in the United States. Source: IMVP, 2004; JAMA, 2004.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 79 TABLE 3â 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 North America of every three vehicles built in the United States is from a Manufacturer United States Canada Mexico Total foreign company. GM 17 1 3 21 Following the âpower train is core businessâ mantra, all Ford 10 2 2 14 major vehicle manufacturers engineer and manufacture en- DaimlerChrysler 8 2 2 12 gines and transmissions. However, OEMs are increasingly Other OEMs 14 3 7 24 sharing engine and transmission programs or obtaining them Totals 49 8 14 71 from other manufacturers. A report by the Center for Auto- Notes: Locations that include two assembly plants, such as Honda in motive Research estimated that the engine-production ca- 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 previously. Other OEMs USA includes NUMMI Toyota-GM facility and (Center for Automotive Research, 2005). Honda has major AutoAlliance Ford-Mazda facility. Other OEMs Canada includes CAMI engine-manufacturing facilities in Anna, Ohio, and Lincoln, GM-Suzuki facility. Alabama; Nissan has an engine plant in Decherd, Tennes- 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 componentsâa critical shift from domestic plants to transplants, which produced a link in the automotive value chainâhave 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 âshop at the global mallââthat is, they purchase components 14 Foreign Brands 12 Big 3 0.5 2.2 2.6 2.7 0.7 0.3 2.3 0.8 0.9 1.3 2.4 2.4 2.5 2.8 3.0 10 1.8 2.6 3.3 3.6 0.2 Production (millions) 1.5 1.7 8 1.5 0.1 6 11.2 10.6 10.6 10.1 10.3 10.1 9.7 10.1 9.8 9.6 9.1 9.3 9.5 9.2 9.3 8.9 9.0 8.6 4 8.3 8.0 8.4 8.0 6.9 7.3 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 11â U.S. light-vehicle production (domestic and transplant), 1982â2005. Source: Automotive News data. Portrait view
80 THE OFFSHORING OF ENGINEERING TABLE 4â Top 20 Global Automotive Suppliers by Sales to Automotive OEMs, 2005 Company Home Region 2005 Sales to Auto OEMs (US$ billion) North America (%) Europe (%) Asia (%) Totals (%) Robert Bosch GmBH EU 28.4 17 69 14 Denso Corp. JP 22.9 21 14 64 1 Magna International Inc. NA 22.8 56 43 1 Delphi Corp. NA 22.6 71 21 7 1 Johnson Controls Inc. NA 19.4 46 47 7 Aisin Seiki Co. Ltd. JP 17.9 18 8 73 1 Lear Corp. NA 17.1 54 38 8 Visteon Corp. NA 15.9 61 24 12 3 Faurecia EU 14.0 11 81 4 4 TRW Automotive Inc. NA 11.7 38 54 8 Source: Automotive News, 2005. from locations around the globe, regardless of where sup- A study by the Federal Reserve Bank of Chicago analyzed pliersâ headquarters are located. Globalization has advanced the ELM Guide database, which tracks suppliers to the U.S. on two levels: (1) suppliers have followed their traditional auto industry (Klier, 1999). As shown in Table 5, in 1997, at home-market customers to other parts of the world (e.g., least 60 percent of suppliers to transplants were domestic. Denso, a large Japanese supplier, followed Toyota to the The study also sheds light on the importance of geographic United States); and (2) suppliers have focused on winning proximity to customers. business from OEMs based in other parts of the world. Merg- Table 6 is based on a study in 2004 by McKinsey and ers, acquisitions, and spin-offs have led to the creation of the Original Equipment Suppliers Association of 57 large âmega-suppliers.â suppliers operating in North America. The study showed Table 4 shows that the top 10 suppliers have significant that both European and North American suppliers wanted sales volumes outside their home regions. An analysis of to reduce their reliance on North American OEMs, from a the top 100 global suppliers (based on 2004 data) reveals high of about 80 percent in 2003 to about 60 percent in 2008. that 38.3 percent of total sales were to customers outside Japanese suppliers indicated that they were content with their home markets, with North American suppliers topping their customer mix, which includes about 40 percent North theÂ list: American OEMs. In general, diversification of a supplierâs customer base away from its traditional home region seems â¢ 41.2 percent of sales by North American suppliers in to make good financial sense. Some reports indicate that the top 100 were to customers outside North America OEM financial performance improves as reliance on business â¢ 38.2 percent of sales by Japanese suppliers in the top with the Detroit 3 decreases (e.g., Casesa et al., 2005). 100 were to customers outside Japan The complexity of the global supply base makes measur- â¢ 35.2 percent of sales by European suppliers in the top ing the local content of most modern automobiles nearly 100 were to customers outside Europe impossible. U.S. vehicles contain thousands of components from European and Japanese suppliers, each of which is TABLE 5â 1997 Proximity of Suppliers to Transplants: Number of Suppliers, Median Distance to Assembly Plant, and Percentage Domestic Company Location Start-Up Year Number of Suppliers Median Distance (miles) Domestic (%) Honda Marysville and 1982 507 251 65 East Liberty, OH Toyota Georgetown, KY 1988 452 285 69 Subaru-Isuzu Lafayette, IN 1987 292 245 60 Diamond-Star (Mitsubishi-Chrysler JV) Normal, IL 1988 286 309 63 AutoAlliance (Ford-Mazda JV) Flat Rock, MI 1987 360 242 71 Nissan Smyrna, TN 1983 460 423 70 BMW Spartanburg, SC 1994 119 477 75 Mercedes Benz Vance, AL 1997 77 610 68 NUMMI (Toyota-GM Joint Venture) Freemont, CA 1984 178 1,966 60 Saturn (GM) Spring Hill, TN 1990 300 462 81 Ford (1970â1980) Dearborn, MI n/a 222 405 89 Ford (1983â1993) Dearborn, MI n/a 301 200 77 Source: Klier, 1999.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 81 TABLE 6â Customer Mix for 2003 and 2008 (projected) European Suppliers Japanese Suppliers North American Suppliers 2008 2008 2008 Customers 2003 (Projection) 2003 (Projection) 2003 (Projection) Korean OEMs 0 4 0 2 1 5 Japanese OEMs 6 17 60 55 8 14 European OEMs 14 18 2 5 11 24 North American OEMs 79 61 38 38 80 57 Source: McKinsey and OESA, 2004. built from smaller components and materials from around U.S. ENGINEERING WORKFORCE the world. Consider, for example, the 2005 Dodge Dakota shown in Figure 12. Overall Employment in the U.S. Auto Industry Foreign-brand automakers are major customers of U.S. The automotive industry is one of the biggest employers suppliers. The report by the Center for Automotive Research in the United States. According to data from the Bureau of estimated that, in 2003, foreign-brand automakers purchased Labor Statistics (BLS), the automotive manufacturers and $66.7 billion worth of goods and services from suppliers suppliers directly employ roughly 1.1 million people (not in the United States. Of this total, $49.1 billion was for including sales, service, etc.). Figure 14 shows total em- manufacturing/production purposes, and $17.6 billion was ployment for vehicle manufacturers and vehicle and parts for non-production purposes (e.g., engineering and design, manufacturers. Overall employment in the parts sector has sales, distribution, finance, and port services). As Figure 13 declined slightly more (17.4 percent) than in the vehicle shows, purchases by foreign automakers from U.S. suppliers manufacturing sector (15.5 percent). increased rapidly from 1986 to 2005. Door Sealing System Master Cylinder Hutchison, France Mando, South Korea Front Wiper System Fuel Injectors Valeo, France Robert Bosch, Germany Passenger Airbag Module Valve Stem Seals Takata, Japan Freudenberg NOK, Germany CD Changer Mechanism Water Pump Bearing Mitsubishi Electric, Japan FAG, Germany Engine Cooling Module Door Beams Denso, Japan Benteller, Germany FIGURE 12â Some non-U.S. suppliers to the 2005 Dodge Dakota. Source: Automotive News, 2005. 50 fig 12 48.4 40 35.8 $ b illions 30 19.9 20 10 2.5 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 FIGURE 13â Purchases of U.S. parts by Japanese automakers, 1986â2005. Source: JAMA, 2006. fig 13
82 THE OFFSHORING OF ENGINEERING 1,400 1312 1313 1254 1272 1242 1240 1213 1169 1151 1,200 1125 Total Direct Employment (thousands) 1113 1098 1078 1084 1054 1048 1018 1,000 800 Motor Vehicles Only 600 Motor Vehicles and Parts 400 282 295 285 287 284 291 291 279 271 258 260 264 265 265 256 250 246 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FIGURE 14â Employment in the U.S. automotive industry, 1990â2006. Note: 2006 data are for first half 2006 for NAICS code 3361 for motor vehicles and 3361, 3362, and 3363 for motor vehicles and parts. Source: BLS, 2006. However, according to GM and Ford annual reports (GM, ity by about one million units between 2002 and 2005. 2005; Ford Motor Company, 2005a), the U.S. automotive GMâs U.S. salaried workforce (including contract workforce has undergone dramatic changes: staff) had been reduced by 33 percent since 2000. â¢ At the same time, Hyundai, Toyota, and Honda were fig 14 â¢ In January 2006, Ford announced its Way Forward building new plants and increasing their total employ- plan, which included idling 14 manufacturing facilities ment and R&D workforce in the United States. and reducing employment by 25,000 to 30,000. The plan calls for reducing North American production U.S. automotive suppliers are under tremendous financial capacity by 1.2 million units, or 26 percent, by 2008. pressure as a result of these production cuts by domestic The company also announced a 10 percent reduction manufacturers and downward price pressure by their OEM in salaried costs in North America and a related reduc- customers coupled with rising costs for steel, aluminum, tion in head count of 4,000. Ford recently announced resins, and other materials used to make automotive compo- plans to accelerate the Way Forward restructuring plan nents. Several U.S. automotive suppliers have filed for bank- by slashing its North American workforce by 44,000 ruptcy in the past few years (Table 7), many accompanied by and reducing fourth-quarter 2006 production by 21 substantial reductions in employment. percent. â¢ In 2005, GM announced plans to close 12 U.S. as- Engineering Employment sembly plants by 2008 and reduce its manufacturing workforce by 30,000. This will reduce GMâs U.S. It is extremely difficult to estimate the number of automo- manufacturing capacity by about one million units. tive engineers in the United States using BLS data. There GM had already reduced its U.S. manufacturing capac- are three NAICS codes for the automotive industry: 3361 TABLE 7â Recent Bankruptcies of U.S. Automotive Suppliers Company Date of Filing Total Assets Number of Employees Delphi Corporation, Troy, Michigan October 8, 2005 $17.1 billion 185,000 Federal-Mogul, Southfield, Michigan October 1, 2001 $10.1 billion 50,000 Dana Corporation, Toledo, Ohio March 3, 2006 $7.9 billion 46,000 Collins & Aikman Corporation, Troy, Michigan May 17, 2005 $3.2 billion 23,900 Hayes Lemmerz, Northville, Michigan December 5, 2001 $2.8 billion 15,000 Tower Automotive, Novi, Michigan February 2, 2005 $2.6 billion 12,891 Dura Automotive Systems, Rochester Hills, Michigan October 30, 2006 $2.0 billion 15,200 Venture Holdings, Fraser, Michigan March 28, 2003 $1.4 billion 12,980 Oxford Automotive,a Troy, Michigan December 7, 2004 $1.0 billion 3,800 aOxford Automotive also filed for bankruptcy on January 18, 2002. Sources: Automotive News, 2005; BankruptcyData.com; company reports.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 83 TABLE 8â U.S. Employment of Automotive Engineers (excluding R&D engineers) NAICS 3361: Motor NAICS: Motor Vehicle Body NAICS 3363: Motor Total of All Three Occupational Code Vehicle Manufacturing and Trailer Manufacturing Vehicle Parts Manufacturing NAICS Codes Engineering Managers 610 570 3,960 5,140 Industrial Engineers 3,390 1,240 14,460 19,090 Mechanical Engineers 1,920 1,360 9,300 12,580 Electrical Engineers 150 110 910 1,170 All Other Engineers n/a 180 7,200 7,380 Total 6,070 3,460 35,830 45,360 All Occupations 256,700 168,840 693,120 1,118,600 Source: BLS, 2005. (motor-vehicle manufacturing), 3362 (motor-vehicle body (e.g., Motorola, Siemens, IBM, et al.) that supply the auto and trailer manufacturing), and 3363 (motor-vehicle parts industry do not fall under an auto industry SIC or NAICS manufacturing). Table 8 shows the U.S. employment levels code. Therefore, the estimate of 100,000 is likely to the lower for various types of engineers for all three codes. However, boundary. engineers whose primary function is R&D (i.e., all product If we combine the figures in Tables 7 and 8, we can esti- engineers) are not included. R&D engineers in the automo- mate that 189,000 product and manufacturing engineers are tive industry fall under NAICS 5417 (scientific research and employed by the automotive industry in the United States development services). Therefore, numbers in Table 8 are (Table 10). This estimate is also probably on the low side mostly for manufacturing engineers. because many engineers work for the automotive businesses A BLS career brief, Motor Vehicle and Parts Manu- of large firms that also serve other industries (e.g., DuPont facturing, compiled using May 2004 data, estimates other and Siemens). engineering employment in the same three NAICS codes at 18,000, which is significantly higher than the roughly 8,600 shown in Table 8. Using this figure, we can estimate the Engineering Wages total number of manufacturing engineers in the automotive Based on the BLS database, the annual mean salaries industry in 2005 at 55,000. for the weighted average of NAICS codes 3361, 3362, and To estimate the number of product engineers, we can use a 3363 for May 2005 are $95,872 for engineering managers; bottom-up approach. Table 9 shows that an estimated 34,000 $66,284 for industrial engineers, and $65,861 for mechanical engineers and technicians work for vehicle manufacturers engineers. In a National Science Foundation report, Scien- (not parts makers) in the United States. Assuming the same tists, Engineers and Technicians in the United States: 2001, ratio of supplier engineers to vehicle manufacturer engineers estimates of mean annual wages were $90,086 for manag- as the ratio of supplier employees to vehicle manufacturer ers of science, engineering, and technical (SET) personnel, employees (roughly three to one), we can estimate that at $61,637 for scientists, $63,107 for engineers, and $46,947 least 100,000 engineers and technicians support the automo- for technicians. tive supply base in the United States. In addition, many firms Mean annual wages for engineering managers, industrial engineers, and mechanical engineers based on BLS occu- pational wage and employment estimates for the past eight years (Figure 15), shows that wages for U.S. engineers have been gradually increasing. However, this figure should be TABLE 9â U.S. Engineering/Technical Employment for viewed with some caution because the survey was designed Major Vehicle Manufacturers, 2006 for cross-sectional analysis rather than time-series analysis. Current Number of Engineers and Company Technicians Projection General Motors 11,500 Decreasing Ford Motor Company 12,000 Decreasing to 10,000 TABLE 10â Estimate of Overall U.S. Engineering DaimlerChrysler 6,500 Steady Employment Japanese companies 3,593 Increasing rapidly Industry Product Manufacturing Korean (Hyundai-Kia) 200 Increasing rapidly Sector Engineers Engineers Total German (BMW) 150 Increasing Total About 34,000 OEMs â 34,000 10,000 â 44,000 Suppliers 100,000 45,000 145,000 Notes: Technicians may be included. Japanese data includes designers. Total 134,000 55,000 189,000 Sources: Company reports and interviews; JAMA, 2004.
84 THE OFFSHORING OF ENGINEERING 100,000 90,000 Mean Annual Wage ($) 80,000 70,000 60,000 Engineering Managers 50,000 Industrial Engineers Mechanical Engineers 40,000 1998 1999 2000 2001 2002 2003 2004 2005 FIGURE 15â Annual mean wages for engineering occupations in the U.S. automotive industry. Note: 1998â2001 data are for SIC 3710, Motor Vehicles and Equipment. 2002â2005 data are a weighted average of NAICS 3361, Motor Vehicle Manufacturing; NAICS 3362, Motor Vehicle Body and Trailer Manufacturing; and NAICS 3363, Motor Vehicle Parts Manufacturing. Source: BLS, 2005. THE GLOBAL FOOTPRINT OF fig 15 and can move work among those centers as it wishes. States AUTOMOTIVE ENGINEERING GM can also âsourceâ engineering work to an overseas outside firm, such as Wipro Technologies in India. Finally, Definition of Offshoring GM can share engineering functions with a joint-venture partner, such as the Pan-Asian Technical Automotive Cen- The word offshoring is ambiguous and is frequently used ter (PATAC) in Shanghai, a joint venture between GM and interchangeably with outsourcing. Figure 16 is a matrix that Shanghai Automotive Industry Corporation (SAIC). can help distinguish between offshoring and outsourcing. For The point is that all vehicle manufacturers employ engi- this example, we can adopt the perspective of GM. GMâs neers in all four quadrants of the matrix. To optimize overall Technical Center in Warren, Michigan, can outsource certain engineering efficiency (i.e., to make the most efficient and ef- technical functions to one of many Detroit-area contract- fective use of engineering resources, both inside and outside engineering firms, such as MSX International or Kelly Ser- the firm, local and distant), management shifts functions to vices. These contract engineers frequently work side by side any of the four quadrants in the matrix. Thus the arrows point with GM engineers in the Warren tech center; this is called in both directions. GM can choose to bring an engineering local outsourcing. GM can also share engineering functions function back to Warren just as easily as it can send it out with one of the 12 GM engineering centers outside the United of Warren. The term offshoring is frequently used to imply the re- placement of U.S. workers with foreign workers. As Figure 16 shows, replacement is possible, but it is only one part of a much bigger story. Contract Engineering Outsource Offshore to Outside Firm (Contract Management of the Footprint Outsource Engineering) Many factors are involved in deciding where to locate Jointly Engineer Joint Venture product engineers and manufacturing engineers for a given with Partner firm. Industry managers identified four critical factors con- Engineer within Engineer in Offshore in sidered by both vehicle manufacturers and suppliers in deter- the Firm House House mining their footprint strategies: customer, cost, capability, and government policy. This is called the 3C+G Footprint Model (Figure 17). Local / Distant / Because manufacturing engineers are typically located domestic foreign near the production site, the production footprint can be used as a proxy for the manufacturing-engineering foot- FIGURE 16â Matrix for defining offshoring and outsourcing. print. In other words, the factors that determine the location fig 16
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 85 Customer Where is the vehicle market growing? In which segments? 3C+G Cost Footprint Capability What are local engineering Where can we leverage Model labor rates? What are the specific talent advantages? transaction costs to interface Where is the leading know- within the enterprise? how in technology? Government What is the influence of government trade and investment policies? FIGURE 17â 3C+G global footprint model for the automotive industry. of production facilities will also determine the location of 17 facturers to âbuild where they sellâ? Is it also valuable to fig manufacturing engineers. âengineer where they sellâ? For determining the location of product engineers, the same factors are involved, but they are weighted differently Vehicle Manufacturing (Figure 18). For example, government policy has a stronger influence on an automotive firmâs production footprint than Transport Costs on its R&D footprint. Trade policy in particular is a major factor in the âbuild where you sellâ strategy described in the As described in the section on globalization, minimizing section on globalization. transport costs is a key motivator for localizing vehicle- production facilities. Although transport costs have declined relative to the average cost of vehicles, transporting automo- THE VALUE OF PROXIMITY biles is still expensive. Before assessing each of the 3C+G factors, it is important to understand the value of proximity in the automotive- Trade Policy engineering world. Why is it valuable for vehicle manu- Trade policy is always a key factor in the localization of production. U.S. trade policy has contributed to the rise of transplants in the United States. In the early 1980s, the Big 3 automakers and the United Auto Workers (UAW) Influence on Influence on Manufacturing Product Union pressured the U.S. government to limit the import of Factor Engineering Engineering Japanese vehicles. In response to this pressure, the Japanese Footprint Footprint Ministry of International Trade and Industry announced a Voluntary Restraint Agreement (VRA) that limited Japanese Customer High Medium exports of vehicles to the United States. VRA backfired, however, for several reasons. First, the Cost Medium Medium U.S. limits applied only to imported vehicles and not to ve- hicles built in the United States. Thus they provided strong Capability Low High incentives for the development of transplants. Second, VRA Government High Low was based on the volume of vehicles rather their value, thus providing an incentive for Japanese manufacturers to de- velop upscale and luxury vehicles for export to the United FIGURE 18â Impact of 3C+G factors. States (e.g., Acura, Lexus, and Infiniti). Third, Japanese fig 18
86 THE OFFSHORING OF ENGINEERING manufacturers realized enormous profits (estimated from $4 TABLE 11â Value of Proximity billion to $7 billion per year for 1981 to 1985) on their high- Production (Manufacturing R&D (Product demand, VRA-limited vehicles (Ries, 1993; Smitka, 1999). Engineering) Engineering) Thus the net effect of VRA was completely contrary to the OEMs close Lower transport costs Localization protections sought by domestic manufacturers. to customer/ Lower trade barriers (trade policy) Engineering of market (value Improved political position/reputation regional-specific of proximity) Lower currency risk vehicles Currency Risk Suppliers Components that are bulky and Components Localizing production is a hedge against currency risk. close to relatively expensive to ship that are highly Recent declines in the U.S. dollar versus the Euro have OEMs (e.g., fuel tanks) integral to (components Components that require sequenced the vehicle hurt European manufacturers that export large numbers of with high just-in-time delivery to assembly architecture vehicles to the United States, such as BMW and Mercedes. proximity plant (e.g., seat sets) Currency risk was a factor in the decisions of both BMW value) Components that require careful and Mercedes to build U.S. transplants in the mid-1990s. production coordination with Foreign-exchange rates were also a major factor in the assembly plant (e.g., bumpers require careful color matching with increase in production by Japanese transplants in the United assembly plant paint shop) States in the late 1980s. In February 1985, the yen traded at an average daily rate of 260.5 to the dollar. By May 1987, the yen was trading at an average daily rate of 140.5 to the dollar, which greatly reduced the purchasing power of American of the study was on production-location decisions, but the consumers for imported Japanese products. This dramatic interviews also revealed a good deal about location decisions shift in the exchange rate provided an additional incentive for engineering and design processes. During the interviews, for Japanese companies to invest in U.S. transplants. it became clear that suppliers tend to follow their OEM customers to achieve âlean flow,â an underlying principle of lean production. Proximity of suppliers to vehicle manu- Company Reputation and Political Influence facturers may also support an OEMâs decision to build lower Localized production also improves a companyâs reputa- volume, more flexible assembly plants (e.g., Womack and tion in the local community and increases its local political Jones, 2003). influence. Honda has been manufacturing cars in Ohio for Proximity to a vehicle-assembly plant is especially impor- more than two decades, and many locals say that it now âfeels tant for certain types of components, such as bulky items that likeâ an American company. Some buyers are more likely to are expensive to transport, fuel tanks, and built-up exhaust buy a foreign-brand vehicle if it is built in America. systems. In addition, components that must be delivered to Bringing an automotive assembly plant to a community the assembly plant in a precise sequence, such as seat sets is a politicianâs dream. Many automotive assembly plants, (i.e., the combination of driver, passenger, and rear seats for even modern ones, employ an average of 3,800 people a particular vehicle), are almost always produced close to directly, and even more indirectly. In addition, assembly the final assembly plant. Seat suppliers are given the build plants tend to be located at the confluence of major highways sequenceâthe particular vehicles that will be built in a given where they are visible to voters in the local community. time periodâusually with only a few hours notice. The seat Most recent transplants in the United States have also been sets are loaded into trucks and delivered to the assembly offered tax breaks or other fiscal incentives to attract invest- plant just-in-time for installation in the vehicle. Production ment from state and local governments. In some cases, local facilities for bumpers, side mirrors, door cladding, and other governments compete against each other, offering increas- components that require precise color matching are also ingly lucrative fiscal incentives to bring a plant to their located close to assembly plants (Table 11). community. These factors combined heighten the impact of With the insourcing of foreign manufacturers to the customer location on production locationâand, therefore, United States, foreign OEMs have âpulledâ their suppli- on manufacturing-engineering location (Table 11). ers to the locations of new assembly plants. In 2005, when Hyundai invested more than $1 billion to build a new plant in Montgomery, Alabama, the company brought along sev- Supplier Location eral of its suppliers. Some, such as the large Mobis plant Suppliers have many incentives to locate their production just down the road from the Hyundai assembly plant, had facilities close to their OEM customers. The Lean Location been part of Hyundaiâs traditional supply base. The Mobis Logic Project (of the International Motor Vehicle Program plant produces front-end modules, chassis modules, cockpit [IMVP]) was developed to interview managers to assess modules, and so onâlarge, built-up chunks of vehicles. how suppliers make location decisions. The primary focus Hyundai also attracted U.S. suppliers to its new assembly
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 87 plant in Alabama. For example, Lear, a tier-one American The Engineering of Components supplier, built a âstate-of-the-artâ seating factory to supply It makes sense to engineer some components, especially seat sets exclusively for the Hyundai assembly plant located if they are highly integral to the vehicle architecture, close just minutes away by truck. to the vehicle engineering center, where supplier engineers can benefit from being close to their OEM engineer coun- Engineering and Proximity terparts, especially the OEM vehicle engineering team for a vehicle under development. When key supplier engineers are Market Factors co-located at the vehicle manufacturer, as part of a vehicle- development program, proximity facilitates interaction, Although proximity to customers is significantly less iteration, and, therefore, faster resolution of problems and important for product engineering than for manufacturing concerns as they arise. engineering, customer proximity can be important under cer- tain circumstances. First, âengineer where you buildâ makes sense if the engineered product is primarily consumed in the Conclusion local market. âLocalization engineering,â for example, is the Proximity does have value in the automotive industry. In adaptation of a vehicle engineered in country A to meet the other words, the automotive world is not entirely flat. Cus- unique regulatory and customer requirements of country B. tomers pull vehicle production, and to a lesser degree vehicle For example, a Buick engineered predominantly at GMâs engineering, closer to the end market, and suppliers follow Warren, Michigan, engineering center but manufactured their OEM customers for the production and engineering of and sold by Shanghai GM (GMâs joint-venture operation in certain components. Finally, the global footprint of custom- China), may undergo local engineering changes that require ers is changing, as described in the next section. different components (e.g., Chinese customers may prefer more chrome in the vehicle interior). These changes can most efficiently be made by GMâs Chinese engineers in China. THE 3C+G MODEL Second, it makes sense to âengineer where you sellâ if a vehicle will be sold predominantly in the local market. For The Customer Factor example, the United States is the largest market for pickup The first and perhaps most important factor that influences trucks in the world, so it is very unlikely that GM or Ford the location of product and manufacturing automotive engi- will ever shift their engineering centers for pickup trucks neers is the location of the customer. The U.S. automotive outside the United States (Table 11). market, like the Western European and Japanese markets, is Honda, however, whose sales of pickup trucks (e.g., the a mature, replacement marketâvehicle sales have been flat Ridgeline vehicle) and other light trucks (e.g., Acura MDX for nearly seven years and are projected to remain relatively sport utility vehicle) for the U.S. market are increasing, is flat. Figure 19 shows that U.S. sales of light vehicles (pas- shifting the engineering for those vehicles to the United senger cars and light trucks) have been high (about 17 million States. Honda now has 10,000 engineers in Japan and about units), but roughly steady since 1999. Although historically 1,300 engineers in Ohio. The engineers in Japan work on the industry has demonstrated cyclical behavior, most ana- most Honda vehicle programs, almost all power-train pro- lysts expect the U.S. market to remain relatively flat for the grams, and almost all of Hondaâs advanced R&D, such as next five years, hovering between 16.5 and 17.5 million units hybrid power-train systems and fuel-cell vehicles. However, through 2010. the 1,300 engineers in Ohio have been taking on responsibil- Despite stagnant sales in the developed markets, global ity for entire vehicle programs, especially for vehicles sold sales have consistently risen, increasing approximately 13 predominantly in the U.S. market. 18 16.8 17.0 16.9 16.9 17.0 17 17.2 16 16.1 16.7 Millions of Vehicles 15.5 15.4 15.0 15.1 15.1 15.4 15 14.9 14.5 14.3 14.7 14 13.9 13.9 13 12.8 12.2 12 12.3 11 10.5 10 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 FIGURE 19â Sales of U.S. light vehicles, 1982â2005. Source: Automotive News, 2005; Wards Autoworld, 2005. fig 19
88 THE OFFSHORING OF ENGINEERING percent from 2001 to 2005. Industry sales totaled 64.7 mil- the United States and Japan). The promise of continued lion vehicles in 2005, representing a 3.7 percent increase growth in China has attracted the attention of automakers over sales in 2004. Almost all of the growth was attributable around the world. According to Automotive News, roughly to emerging markets, particularly China, India, Brazil, and $6 billion in automotive foreign direct investment flowed Russia. Figure 20 shows vehicle sales normalized to 1999 into China between 1994 and December 2002. The same volumes in the three developed markets, the United States, amount, $6 billion, was invested in the following 18 months. Western Europe, and Japan, and three developing markets, Since the mid-1990s, GM has invested heavily in China. China, India, and Russia. In 2005, GM surpassed Volkswagen as the Chinese market Increases in vehicle sales are primarily driven by two fac- leader with sales of 665,000 vehicles (a 35 percent increase tors: vehicle saturation rates and income growth. Increases overÂ 2004). in vehicle sales shown in Table 12 are expected to continue In general, production increases follow market growth. in developing countries, particularly China and India. Fig- Figure 22 shows actual vehicle production data for the ure 21 shows that developed markets are saturated in terms same regions shown in Figure 20. The number of vehicles of vehicle ownership, but there is ample opportunity for produced in China and India has increased as the number motorization in the developing world. of vehicles sold in those markets increased. At a time when Market growth has attracted investments in new produc- Ford and GM are making significant reductions in produc- tion facilities (and the manufacturing engineers that go tion capacity in their home market, both companiesâlike with them). Chinese vehicle sales exploded in 2002 and automakers everywhereâare vigorously pursuing growth 2003, making China the third largest vehicle market (behind opportunities in the developing world. Besides their pro- 3 Chin a United States 2.5 Western Europe Japan China India 2 Russia Indi a 1.5 Russi a Japan, USA 1 West ern Europe 0.5 1999 2000 2001 2002 2003 2004 2005 FIGURE 20â Sales rates in key markets, 1999â2005. Source: Automotive News, 2005. TABLE 12â Vehicle Sales in Developed and Developing Markets and Growth Rates, 1999â2004 Country or Region 1999 2000 2001 2002 2003 2004 20 Growth in Vehicle Sales (%) fig Growth in Average GDP (%) United States 16,959 17,402 17,178 16,848 16,676 16,913 â0.3 2.78 Western Europe 17,296 17,053 16,944 16,608 16,352 16,856 â2.4 1.97 Japan 5,861 5,964 5,907 5,813 5,849 5,853 â0.1 1.66 China 1,832 2,089 This a figure has4,461 translated from the PDF in a different way 2,353 2,917 been 5,230 185.5 8.52 India 857 859 and 818 now retained the original line weights, except for Japan has 867 1,098 1,298 51.5 5.74 Russia 1,102 1,154 1,256 1,295 1,334 1,654 50.1 6.87 which now has a black dashed line (the original yellow does not Sources: Automotive News data; IMVP, 2004; World up in grayscale). show Bank Development Indicators, 2005.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 89 900 800 765 Developed World Developing World 700 600 557 543 500 400 300 200 124 100 12 10 0 United States Western Europe Japan Russia India China FIGURE 21â Vehicles per 1,000 people for selected countries and regions. Source: United Nations Statistical Yearbook, 2000. 1.5 1.4 1.3 1.2 1.1 North fig 21 America 1 Japan Europe 0.9 Brazil Production 0.8 Europe Production Brazil China Production 0.7 India Production China 0.6 India Japan Production NA Production 0.5 2002 2003 2004 2005 2006 2007 2008 Actual Data Forecast Data FIGURE 22â Vehicle production by country/region, normalized to 2005. Source: Automotive News, 2005; forecast data from JD Power, 2006. fig 22 duction facilities in Western Europe, Ford and GM actively strategy, although there are some important caveats. One invested in Latin America and Mexico during the 1980s and of the key findings in the interviews for the IMVP Lean 1990s and in Eastern Europe and Asia since then. In the Asia- Location Logic Project was that suppliers frequently un- Pacific region, GM now employs more than 20,000 people derestimate the cost of ramping up production in low-cost at assembly and manufacturing facilities in China, India, countries. Indonesia, South Korea, Thailand, and Australia. Ford has One such cost is training workers (i.e., developing key opened plants in the last 10 years in St. Petersburg, Russia; capabilities) so they can match the quality and productivity Chennai, India; and Chongqing, China. levels of their sister plants in developed markets. In practice, this often requires that teams of production engineers and equipment technicians make extended trips to the new plant The Cost Factor to train workers. Several managers noted that production Reducing costs is a critical factor in location decisions for ramp ups took longer than expected, resulting in delayed both manufacturing engineers (production-facility locations) orders for customers (at the supplierâs cost), and required and product engineers (R&D locations). All automotive more resources to train the new workforce than expected. companies, both OEMs and suppliers, whether profitable or For most components, the automotive supply chain is a unprofitable, are under tremendous pressure to reduce costs. highly integrated system in which each component is part of Shifting production to low-cost countries is an acceptable an elaborate, coordinated process. Production does not take
90 THE OFFSHORING OF ENGINEERING place in a vacuum. To supply something as simple as a hy- the United States, Canada, and Mexico, went into effect in draulic pump, tier-two suppliers must supply raw materials, January 1994, Mexico emerged as a low-cost country for fasteners, cast or forged components (such as pump vanes), automotive production in the backyard of the U.S. market. roller bearings, and so on. The quality of the pump depends Canada and the United States already had a strong trade in on the quality and responsiveness of the local supply base vehicles and vehicle components, and Canada had tradition- for all of those subcomponents. Even the best plant in the ally been a lower cost base for manufacturing. Both Canada world will produce inadequate products if it does not have and Mexico currently export more than half their vehicle an adequate supply base. production volumes to the United States, which imports more Until very recently, China was not a low-cost producer passenger vehicles from Canada than from Japan. Each of of automobiles because of its highly inefficient and costly the Detroit 3 manufacturers has four production facilities in tier-two and tier-three supplier base. Local suppliers must Canada and Mexico combined. not only produce components of requisite quality, they must Of the $124.1 billion in imported passenger vehicles to the also deliver those components on timeâusually to meet just- United States in 2005, the countries of origin were: Canada in-time requirements. Therefore, the capability of the local ($36.6 billion), Japan ($35.2 billion), Germany ($20.4 bil- supply base is also a function of the local transportation in- lion), Mexico ($10.8 billion), and South Korea ($8.8 billion) frastructure and the capability of local logistics providers. (DOC, 2006). The volume of U.S.-imported vehicles from The integration of the automotive supply chain is im- Mexico, which provides the clearest cost advantage, declined portant, but managers often analyze costs based on easily steadily, from $15.8 billion in 2000 to $10.8 billion in 2005. quantifiable metrics, such as wage rates, and fail to take into This is partly because the plants in Mexico produce more account broader system-level costs. The differences in manu- trucks than cars, and truck sales have suffered in the past few facturing wages in different countries are striking and well years because of rising gasoline prices. Production losses in documented (ILO, 2005). Automotive manufacturing wages Mexico have been offset by production gains in Canada. in Germany are about $26 per hour (unloaded), compared to The production footprint of U.S. companies expanded about $2 per hour in China. in Central and Eastern Europe, where production volumes Thus managers are strongly tempted to shift manufac- increased 31.4 percent from 2001 to 2005. Since May 2004, turing of simple components, like the hydraulic pump, to when Poland, Hungary, Slovenia, Slovakia, and the Czech a low-cost country where the local manufacturing wage is Republic joined the European Union (EU), trade barriers one-tenth the wage in the home country. However, experi- among the EU-15 and the new entrants have been reduced ence has shown that the significant reduction in wages can or eliminated, and Poland, Hungary, Slovakia, and the Czech be outweighed by lower productivity rates, higher than an- Republic have all offered substantial fiscal incentives to at- ticipated production training and ramp-up costs, and higher tract automotive investment. In addition to the much lower costs for quality materials and parts to build the hydraulic labor costs, these countries are accessible to the automotive pump. As the CEO of a North American tier-one supplier supply chains of Germany and Austria and can provide a said, âWeâve learned that chasing [ever lower] labor rates local low-cost production center for Western Europe. The is not a sustainable business strategy. We invested heavily increases in automotive production and exports to Western to build up production volumes in Mexico, only to discover Europe from these countries are shown in Table 13. As the that it was difficult to retain workers after investing in their CEO of a European manufacturer noted, âWithin the radius training. We also discovered unanticipated costs much of a one hour flight in Europe, manufacturing wages range higher than we expectedâsuch as the cost of customs and from â¬5 to â¬50. We [car companies] cannot ignore that; we border-clearance processes for our supply flows along the are not in a position to negotiate with our customers.â U.S.-Mexico border.â Japanese manufacturers have increased production in For reasons described above, the general mantra in the Asian low-cost countries, such as Thailand, Indonesia, automotive industry is âbuild where you sell.â The three Malaysia, and Viet Nam. Nevertheless, Japanese OEMs traditional automotive-production regions (i.e., the United have not exported vehicles produced in these countries to States, Western Europe, and Japan), have invested in low- the Japanese market. Imports to Japan of Japanese-brand cost countries in the backyards of their production centers, vehicles actually declined, from 90,682 in 1995 to 19,119 as shown in Table 13. For Western Europe and the United in 2005 (both numbers represent a negligible portion of the States, production has increased in these low-cost countries, overall Japanese market of roughly 5.9 million units in 2005) and a significant share of that production has been exported (JAMA, 2006). Instead, the Japanese have used Thailand back to the traditional high-cost country, except in Japan, where increased production in regional low-cost countries â The Canadian cost advantage has declined, but automotive production in has not led to increased exports back to Japan. Even today, Canada is still estimated at a 5.1 percent cost advantage for the production of almost all vehicles sold in Japan are produced in Japan. auto parts compared to the United States (KPMG, 2006). The U.S. corporate When the North American Free Trade Agreement average fuel economy (CAFE) requirements also provided incentives for (NAFTA), which lowered or eliminated trade barriers among U.S. automakers to locate certain vehicle production in Canada.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 91 TABLE 13â Production in Local Low-Cost Countries for Key Automotive Regions Region Low-Cost Countries Units Produced in 2001 Units Produced in 2005 Percentage Change United States Canada, Mexico 4,396.5 4,390.3 â0.1 Western Europe (Germany, Czech Republic, Poland, Slovakia, 1,341.1 1,762.6 +31.4 France, United Kingdom, Slovenia, Hungary, Romania Italy, Belgium, Spain) Japan Thailand, Malaysia, Indonesia, Philippines 1,248.9 2,270.2 +81.8 Note: Production declined 9.1 percent in Mexico and increased 6.4 percent in Canada. Source: Automotive News, 2005. and other Asian low-cost countries to increase their vehicle hicle. Wire harnesses are built up from thousands of strands production to the home markets in those countries and the of individual wire braided into a complex product with many Asia-Pacific region in general. branches and end connectors. The work is highly labor inten- Other start-up costs for an offshore plant are associated sive and cannot be easily automated. Wire harnesses are an with teaching local manufacturing engineers the companyâs early candidate for a component to be shifted to a low-cost basic production principles and procedures. Toyotaâs well country. known Toyota Production System involves creating value By contrast, highly capital-intensive products, such as a and eliminating waste from production processes through nozzle for a diesel fuel injector, may not be suitable for pro- just-in-time production (smooth flow, minimal inventory), duction in a low-cost country. Diesel fuel injectors are highly jidoka (building in quality, error-proof processes), heijunka sophisticated products that require a clean-room production (stabilizing variability in production schedules), and kaizen environment and sophisticated production equipment. Lower (continuous improvement). When Toyota opens a new as- labor cost is not much of an advantage because the product is sembly plant, be it in Kentucky, Thailand, Turkey, or France, not labor intensive. In addition, some sophisticated compo- a key challenge is ensuring that the Toyota Production Sys- nents require manufacturing knowledge that cannot be easily tem is understood and embraced at the new facility. How- transferred to a new production location. ever, Toyota has kept production of its high-end vehicles All of the cost factors discussed above are pertinent to (e.g., Lexus) in Japan. Many other OEMs follow a similar offshoring of the production of full vehicles and vehicle strategy. components, which can be used as a long-term proxy for The âbuild where you sellâ mantra, or âbuild close to the manufacturing-engineering footprint. The offshoring where you sellâ mantra, applies to fully assembled auto- of product design is also driven in part by cost consid- mobiles. For automotive components, the situation is more erations. All of the industry managers interviewed were complex. It makes sense for suppliers of certain components, asked to estimate the cost to the company of employing such as bulky or sequenced components, to be close to OEM a product engineer with 5 to 10 years of experience in six assembly plants. Other components can more easily be sup- different countries/regions. The answers varied widely, plied from a low-cost country. For example, components that both within and among regions, as shown in Figure 23. A are highly labor intensive but easily transportable might be âfully loadedâ experienced engineer in the United States shifted to a low-cost country. Wire harnesses, for example, may cost $100,000, while an equivalent engineer in China are essential for connecting all electrical functions of a ve- may cost $15,000. China India Eastern Europe Mexico Western Europe United States 0 20 40 60 80 100 120 $ thousands FIGURE 23â Approximate labor rates for fully loaded vehicles by country/region for an automotive engineer with 5 to 10 years experi- ence. Note: Fully loaded was defined as total cost to the firm of employment of one full-time equivalent. Source: Interviews with industry managers. fig 23
92 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 â¢ 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 â¢ 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 â¢ 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 â¢ Low productivity can effectively increase the cost of modes effects analysis (FMEA), certain types of rou- engineers in âlow-cost countries.â 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 â¢ 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. â¢ 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 countryâbut 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 countryâbut 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, âNo one has the solution to this problem. If port agreed that more complex engineering tasks were more you donât 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 donât shift jobs to places like India and China, finite-element model, are the easiest to outsource or offshore weâre all dead.â (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, âI donât 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.â 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 10â To determine engineering labor costs, the overall engineering head have a basic familiarity with the product. count is multiplied by $100,000 per engineer and divided by overall R&D A second concern expressed by some automotive man- budget. agers was the shortage of engineers in the United States,
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 93 Increasing Task Complexity Type 1 Tasks: Type 2 Tasks: Type 3 Tasks: Type 4 Tasks: â¢ Paper drawing to CAD â¢ Detail original drawings â¢ Colocation with dev. team â¢ New product programs â¢ Wireframe to solid model â¢ Resolve quality issues â¢ System-level FMEA System- eve â¢ Full CAE analysis â¢ Scan data to CAD files â¢ VA/VE â¢ Dimensional mgmt. â¢ Tooling design (concept â¢ FEA meshing â¢ Teardown analysis â¢ Self-directed design & to production) â¢ PDM/BOM management â¢ Component level FMEA engineering work Increasing Difficulty of Outsourcing / Offshor Outsourc Offshoring FIGURE 24â Complexity and difficulty of engineering tasks suitable for outsourcing/offshoring. Notes: CAD = computer-aided design; FEA = finite element analysis; FMEA = failure mode effects analysis; VA/VE = value analysis/value engineering; CAE = computer aided engineering. Source: Jackson et al., 2005. particularly of engineers with certain skills. A CEO of a U.S. fig 24 cal engineers can discuss the modification of the design of tier-one supplier cited this problem, âIn 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: itâs called âwhereâs the tal- of performing mechanical engineering tasks compared to ent?â My view [for my firmâs engineering footprint] is that electrical and software engineering tasks. growth will occur overseas, and engineering in the U.S. will remain flat.â 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 25â Conceptual model of trade-offs between capability and transportability versus engineering disciplines.
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 (âWâ indicated a âworldâ program) was a driving force behind the creation of a highly ambitious reorganization, the Ford 2000 program, announced in 1994, to merge Fordâs 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 minicarsâa 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 ningâmaking critical decisions about which vehicles are coordinate on global programs. The objective is not to engi- brought to market and at what level of fundingâwas also neer the same vehicle for different markets (the âworld carâ 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, âup until a few months ago, GMâs global local customer and (environmental and safety) regulatory product plan used to be four regional plans stapled togetherâ 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 Fordâs 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. Fordâs engineering centers near Cologne, Germany, and in GM uses the term architecture to describe a family of ve- England supported Ford of Europe. GMâs European engineer- hicles that may appear very different to customers but have ing centers were aligned by brand; for example, RÃ¼sselsheim, 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 GMâs midsize-vehicle Ford and GMâs acquisition of European brands during the architecture, developed at the RÃ¼sselsheim engineering cen- 1980s and 1990s further complicated the picture. For exam- ter, although these vehicles appear very different outwardly. ple, Ford acquired Volvoâs 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 GMâs 13 GM acquired the engineering center in TrollhÃ¤ttan, 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 11â Although Ford and GM conducted vehicle development in Europe for architectures. their European vehicle lines, both firms conducted the majority of their basic Toyota and Honda are also adopting a transnational busi- and applied research in the United States through the 1990s. ness model, but from a much different starting point than
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 95 TABLE 14â 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 SÃ£o Paolo, Brazil Compact Crossover Warren, Michigan Compact Car RÃ¼sselsheim, Germany Performance Car Warren, Michigan Mid-size Car RÃ¼sselsheim, 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 âguest engi- in the United States. At the same time, foreign companies neersâ 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 Hondaâs evolution has been similar to Toyotaâs, 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- 12â Toyota recently changed its re-employment system so its retirees can tive, âElectronics and software content will account for 40 work up to the age of 65. The limit had been 63. percent of the value added in the vehicle over the next 10
96 THE OFFSHORING OF ENGINEERING International Firm: Centralized R&D Regional operations report to 2006 Target h eadquarters Ex: Toyota, Honda Transnational Firm: 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 26â Evolution from the international and multinational models to the transnational model. years. Thereâs a shortage of software, electronics, and control The number of engineers and designers employed by engineers in the U.S.âthatâs 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 in the United States.â fig 26 Manufacturers Association (JAMA) estimated that Japanese automakers employed about 200 engineers, scientists, tech- Onshoring of R&D by Foreign Companies nicians, and designers in the United States. By 2004, JAMA 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 27â Locations of General Motors global engineering and design facilities. Source: GM Europe, 2006. fig 27
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 97 TABLE 15â 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 âI laugh about the notion of a 24/7 product-development develop an effective footprint strategy. processâthe 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. Thatâs a myth. Handoffs donât in the United States. However, the company contends that happen for sophisticated [development] programs.â 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 GMâs 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 2589 2630 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 28â U.S. technical employment by Japanese automakers, 1982â2005. Source: JAMA, 2006. fig 28
98 THE OFFSHORING OF ENGINEERING medium-sized enterprises that produce components in the that the sales rate in all three mature automotive marketsâthe U.S. Midwest. The sample firms were second-tier suppliers United States, Western Europe, and Japanâhas 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 âyesâ to the question: âIn 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?â and complex. The number of vehicle manufacturers in China has remained steadyâabout 120âfor 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 â¬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 âDetroit,â 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 Volkswagenâs 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 Chinaâs 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 Chinaâs 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 Fordâs 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 13â growth. However, many smaller tier-two and tier-three U.S. The 2005 data were subsequently recalculated by the Chinese As- sociation of Automotive Manufacturers (CAAM) to reveal that China had auto suppliers have lost business to Chinese competitors. not surpassed Japan; however, China will surpass Japan in 2006 sales (Lee, Several executives told IMVP researchers that they felt in- 2006). ternal pressure from senior management to view investment
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 99 in China favorably, in order to achieve the benchmark of a Congqing Lifan, Chinaâs top producer of motorcycles, âChina price.â 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 firm measured the percentage of foreign (i.e., non-Chinese) of whom have masterâs or doctorate degrees.14 Employment 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- chanical components (e.g., wheel bolts, wheel rims, steel hicles per year.15 Engineers at PATAC earn approximately 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 GMâs 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 GMâs 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, âwe donât know how to spend our R&D R&D Capability budget.â 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 researchâessentially product Phil Murtaugh, a talented, well respected manager who used engineeringâfor 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 nationâs first College of Automotive Engineering in 2002, 14â See http://www.gmchina.com/english/operations/patac.htm. nearly 50 faculty members teach 730 full-time undergradu- 15â Interview with Raymond Bierzynski, PATAC executive director, ate students, 124 masterâs students, and 27 Ph.D. students. May 9, 2006.
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 âdumb downâ 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 governmentâs 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 Chinaâs 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 equipmentâthe 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 automakerâs 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, PeopleÃs Republic of China Note: Analysis by Jianxi Luo, PhD Candidate, MIT. Search performed for Ã¬automotiveÃ® in the title of the patent FIGURE 29â Automotive-related patent applications in China, 1985â2005. Note: Analysis by Jianxi Luo, Ph.D. application. Candidate, MIT. Search performed for âautomotiveâ in the title of the patent application. Source: State Intellectual Property Office, Peopleâs Republic of China.
THE CHANGING NATURE OF ENGINEERING IN THE AUTOMOTIVE INDUSTRY 101 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 engineeringâdefined as the a companyâs footprint strategy will become increasingly replacement of engineers in a high-cost country by those in a important. low-cost countryâis just one aspect of the complex dynam- ics of the global automotive industry. 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