Automakers who have been adjusting their business models over the past few years are likely to increase their efforts during this period of dramatic change. As consumers clamor for connectivity, partnerships are needed, but new strategies must also address the heightened pressure for profits.
Techniques ranging from standardization to global design partnerships to outsourcing were discussed at the Convergence 2008 panel “The Changing Business Model.” One successful example is the Ford Sync system developed in conjunction with Microsoft.
The two teamed up because Ford needed to change its market perception, while Microsoft needed a high-profile win, according to Ray Gage, Business Development Manager at Microsoft Corp. But getting two giants in their respective fields to alter their business practices was no easy task.
“Ford was accustomed to using their standard terms and conditions, and Microsoft had its own terms and conditions,” Gage said. “We had to break of lot of rules to make the collaboration work.”
Many of the panelists’ ideas were borrowed from the electronics industry, where standardization and interchangeability are considered keys to market growth. These techniques should increase competition between suppliers.
“Automakers need to componentize their business, looking at the plug-and-play model. They’ve got to be able to switch partners,” said Saul J. Berman, Global and Americas Strategy Practice Leader for IBM Global Business Services.
That is starting to happen in the cabin, where automakers must adopt standards so consumers can bring a range of consumer products into the vehicle. This compatibility is also a mainstay of some telematics offerings now being examined by automakers.
“The architecture has to provide flexibility,” said Paul Kirsch, Vice President for Hughes Telematics. “Companies need to provide the right services at the right time. If they want to change partners, we make it easy by using standard interfaces.”
Partnerships will play a critical role in the future of most companies, panelists agreed. It is no longer possible for a single company to have the expertise and people power to finish complex designs in a short time. By teaming with specialists, automakers can bring designs to market in shorter time frames.
“We set up a joint venture with Chery and went from signing an agreement to finishing six new products in two years,” said Tom Watson, CTO at ArvinMeritor.
Emerging markets such as Chery’s home, China, are expected to dominate growth, so many designs should be done there. That is partly for convenience and partly because local designers are often more in tune with the tastes and interests of the area’s customers. “Design services need to be where the markets are. Nearly 30% of our workforce is in India and China,” Watson noted.
Partnering with electronics equipment suppliers can also help automakers cut costs. Contract manufacturers produce a high percentage of products in the electronics industry. Outsourcing to these specialists is still fairly rare in the auto industry.
“In my opinion, electronics manufacturing services are far too low in automotive,” said Donald L. Runkle, EaglePicher Corp.’s Chairman. “The numbers are all over the place, but they’re still only around 10%.”
Another way to cut costs is to avoid asking for components that can practically withstand unclear blasts. Many engineers over-specify requirements to make sure there won’t be failures. But that can drive costs up.
“We need to be smart about component specifications. If we can chop 5-10% off each end of some specifications, we can probably trim 40% in total cost,” said John Thomas, General Manager at Tesla Motors.
Making changes like these will not be easy. Though automakers are being hit hard in this downturn, many executives may be reticent to change business approaches that have worked well in the past. However, making changes helped IBM after the giant was slow to respond to changes in the electronics and computer industries.
“The more successful a company has been, the harder it is to change. IBM went through a near-death experience before it changed,” Berman said.