Automobile manufacturers face a difficult equation: in a globalised market where they can produce, buy and sell virtually anywhere, how can they make the right choice concerning localisation? In other words, how can they get closer to customers while remaining connected to resources, specifically to intellectual resources? The answer might well be found in a new industrial grammar that consists in globalised sourcing, disintegration of value chains and maximisation of comparative advantages. The rise of mega-platforms is at the heart of this redeployment and conveys a redefinition of the competitiveness equation.
At the global level, the manufacturing industry produces an annual added value of 10,000 billion dollars. To maximise their share of this huge cake, manufacturers must design and implement strategies that obey to the expected long-term market developments. The Korean group Hyundai is allegedly designing its strategy over the very long term: 2040 or even 2050. Toyota executives have adopted the same forward-looking orientation: what will energy prices, environmental laws and safety standards look like in thirty years?
Manufacturers must act quickly to respond to the external economic jolts provoked by new technologies, changes in availability of resources or in regulation. In 2012 alone, for example, car manufacturers have discovered a new recycling tax in Russia, new importation taxes in Brazil and new obligations in China concerning development centres, local brands and electric vehicles.
The automotive industry is an illustration of all of these issues. In 2013, in all countries where it is present, this sector continues to be a central pillar of industrial policy, for at least four reasons. It’s product with a high statutory value for the end consumer; competition is fierce; this sector is a vital market for a vast ecosystem of suppliers. Finally, it presents significant policy issues through the jobs it promises and the environmental performance required of it.
Let’s start with some figures from the International Organization of Motor Vehicle Manufacturers (OICA). In 2012, the world produced 63 million passenger cars, an increase of 5.3% compared to 2011. This positive trend masks contrasting situations: in the European region (including Turkey), 17,832,000 vehicles were manufactured, a decrease of 2.5%. In the Americas, 10,159,000 vehicles were produced (+15.9%); in the Asia Pacific region, 35,147,000 (8.2%), with China accounting for 44.2% of the regional total.
The top four ranking manufacturers in this segment are not surprising: Volkswagen Group (8,577,000 vehicles), Toyota Group (8,382,000), Hyundai Kia (6,761,000), General Motors (6,609,000 vehicles) and Renault Nissan (6,134,000). According to a KPMG report, among the top 10 automakers that will increase their market share between 2014 and 2020, only two – Volkswagen and BMW – are from Western countries.
Automobile manufacturers face a difficult equation: in a globalized market where they can produce, buy and sell virtually anywhere, how can they make the right choice of localization, in other words, get closer to customers while remaining connected to resources, specifically to intellectual resources? The answer is to found in a new industrial grammar that consists in globalised sourcing, disintegration of value chains and maximisation of comparative advantages.
Let’s take the example of Renault. The French firm is assembling kits (CKD) of thousands of Sandero models in the facilities of its Japanese partner Nissan, in Pretoria (South Africa). Some components come from Franche-Comté, over 8,000 kilometres away. The Renault-Nissan “Alliance” organises this sharing of tasks through its Industrial Logistics Network (ILN), which optimises its supply worldwide by determining at each moment which supplier is best in terms of prices, tariffs or logistics. The aim is to identify the specific dynamics of each class of providers. Electronic components suppliers have very different constraints compared with suppliers of mechanical parts. The success criteria are not all the same. Manufacturers that focus on technological advance and precision engineering have very different requirements from those that build low-cost models.
But too gain a truly global dimension, and that has nothing to do with a simple internationalisation, there are fundamental requirements. The manufacturer group must have an industrial base in Asia, principally in China, in the United States, in Central and Eastern Europe and in Latin America. Today, only the Volkswagen Group, which comprises twelve brands, can claim this truly global label. Renault, thanks to its 43.4% control over Nissan and the Alliance, has reached the third position of largest manufacturers in 2011 with 8 million vehicles. However, the industrial integration of the Alliance is not comparable to that of Volkswagen because the Alliance is not – and perhaps will never be – a group. At best, it is a capital reconciliation under joint chairmanship, with a limited number of shared organs and technical solutions.
One of the conditions of globalisation is standardisation, which will be at the heart of all strategies.
The development of outsourcing has contributed to standardisation because some parts manufacturers are industrial giants that serve several constructors: the same components can be found in vehicles of different brands. This phenomenon is all the more powerful that since the 1990s, the importance of electronics in vehicles has dramatically increased and electronic parts are very widely outsourced. In terms of purchase value, electronics represented already approximately 70% in 2004 (knowing that the purchase costs represent approximately 70% of the cost of a vehicle).
But standardisation is also specific to each manufacturer’s industrial strategy. It uses modularisation and mega-platforms, that is to say, largely automated assembly lines capable of producing up to ten families of vehicles – from SUVs to sports cars, from entry-level to luxury, from fuel to electric – while allowing significant geographic adaptations to meet local requirements and enable the integration of locally produced parts.
Platforms have a history, according to Rémi Maniak, researcher at the École Polytechnique. « They first appeared as policies of joint purchasing, with plans for cutting costs and streamlining purchases. The explosion of product diversity in the 1990s led to economic aberrations known as the “fat design” (each new product adds fat to the company, with new components). By the 2000s every manufacturer began pooling (in industrial jargon, it’s called commonalising) as many components as possible across different products. This was the case in automotive sector, but also in other sectors such as aircrafts and printers. What does commonalising mean exactly? It depends on the industry, which determines what can be modularised and what cannot. In the aircraft industry, it concerns chiefly sections (their numbers varies depending on the size of the aircraft. An A340-200 will have less than an A340-400). In the automotive sector, it’s rather the wheelbase.”
According to Rémi Maniak, the automotive industry has developed adjustable platforms that allow, from a common, extensible structure, to commonalise several product segments. In the early 2000s, automotive manufacturers started a race for commonality rates between models. VW, for instance, announced rates of 80% between different models of the same segment. And that’s not all, a given platform can assemble vehicles from different segments. “The last platform allows Volkswagen to manufacture different models from a small Polo to a Passat sedan with the same wheel base: just imagine the economies of scale!”
Automation is one of the elements of this new industrial grammar. But it isn’t easy to assess the productivity potential generated by the arrival of robots. As explained by Rémi Maniak, assessing the delta productivity of a given technology over the long term would require being able to focus on one aspect only, all other things being equal. However, in the automotive field, product complexity has increased dramatically over the last 10 or 20 years. “In contrast, no study has ever succeeded in demonstrating that computers increase productivity... partly because the content of the work has completely changed”. What we can say, however, is that automation is a key element of platform strategy. The latter has helped produce better equipped and more efficient vehicles at the lowest possible price.
According to advisory firm Alix Partners, the production of vehicles using these platforms is expected to double between 2014 and 2020 and will represent over 88% of the industry’s growth by this time. In 2017, 46% of the world production, i.e. 46 million units, will be produced on these mega-platforms, against 30% in 2012.
Along with the increased use of mega-platforms, their number reduces. In 2016, half of world production should be concentrated on 27 platforms, against 31 in 2012.
The most advanced variation of this approach is the “world car” strategy implemented by Volkswagen also known as MQB (Modulare Querbaukasten), a German acronym for Modular Transverse Matrix. On MQB, only the distance between the accelerator pedal and the centre of the front wheels is fixed. All the rest (length, width, height, wheel size etc.) can be modulated and the platform can accommodate conventional, hybrid and electric engines. This concept, studied since 2007 by Volkswagen, enables to design and produce most models of the group. The company intends to use it for most of its 12 brands (as different and varied as Skoda, Audi, Porsche or Lamborghini) and produce more than 40 different vehicles by 2018. According to Morgan Stanley, the platform will cost over 70 billion dollars and by 2019, gross annual savings generated by the MQB will reach between 7.9 and 10.5 billion dollars per year, from the moment that more than 4 million vehicles have been mounted on MQB – this should be reached by 2015 or 2016. The group’s gross margin almost reaches 10%.
Manufacturers already produce on the same line different vehicles that share the same chassis size, powertrain, transmission system and suspension, but differ in their silhouettes. The arrival of mega-platforms expands even further the possibilities of sharing elements – invisible to the client because hidden under the car’s body – for vehicles as different as a Polo and an Audi TT. MQB will not be the only platform developed by the Volkswagen Group, which also includes a so-called MLB configuration, already the basis of several of the larger Audi models, and a third, the MSB, for luxury vehicles such Porsche, Bentley or Lamborghini.
The MQB is presented by Volkswagen as the most important initiative in the automotive industry of the last 25 years and as a technological breakthrough as important as Ford’s standardisation of parts or Toyota’s streamlined production system. The flexibility of the MQB system will allow the German automaker to develop models to suit specific markets at lower costs, thereby reducing the financial break-even point. The single platform will also represent a turning point for the group’s suppliers. While currently working on order volumes of five or six million units at most, some of the group’s executives are seeing their orders increase up to 35 million pieces for models based on the MQB.
Economies of scale are real, but go along with increased complexity of the supply chain and of quality control. That’s evidently the inherent danger of the development of mega-platforms.
The standardisation of components implied by mega-platforms calls for absolute perfection in terms of quality standards. One faulty piece and Volkswagen will need to repair not thousands but millions of vehicles. In addition, other doubts arise among industry analysts about the reality of savings and therefore, about the expected competitiveness gains. According to the Bernstein Research firm, Volkswagen is already a world leader in cost-effectiveness and it seems impossible that MQB would allow to reduce these costs by 20% as advertised.
For Bernstein Research, the group can certainly realise some savings, but at a much more modest scale. For several reasons. First of all, the MQB mega-platform can do nothing against the high costs of raw materials, labour and hours of assembly. Let’s remember that economies of scale are the ability of a company to make savings by distributing fixed costs over a larger volume of production. By standardising all of its platforms, will Volkswagen be able to reduce costs throughout the supply chain by pushing its suppliers to achieve economies of scale? In reality, it appears that beyond a production level of one million units, returns diminish. Why? In this sector, according to Bernstein, economies of scale are usually performed at the factory level rather than at the company level. Most manufacturers are already at full capacity which means they need to optimize their supplying ecosystem. For these suppliers to achieve economies of scale, they would have to invest in new plants and these expenses would negate most of the desired savings.
Mega-platforms are fashionable but should not be viewed as a panacea. Less comprehensive and more targeted initiatives can bring significant improvements, provided they meet two major trends: the shift of demand towards developing economies and the transition to new technologies for powertrains. Following these tendencies, BMW took the challenge of launching an all-electric city car, the i3. This model responds to two strategic goals: equip people in rapidly expanding Asian megalopolises and allow BMW to improve its knowledge of electric trains, batteries and lightweight composite materials – knowledge that can later be transferred to other models.
In the automotive sector, new trends can quickly lead to systemic consequences. For example, the involvement of the industry in favour of lightweight materials, new powertrains and chassis technologies, has put significant pressure on the supply of aluminium, carbon and rare earth minerals. According to McKinsey, if manufacturers were to launch a massive shift towards electric propulsion systems, this might increase their demand for rare earths such as neodymium by 15% and increase the current world production by 550% by 2020. Carbon fibre demand could reach 600 kilotons – about 20 times the current demand – causing bottlenecks in the automotive supply chain and triggering a direct competition for resources with the aircraft industry.
Technological advance, requiring considerable human resources in large groups, is another prerequisite of future performance or, in some cases, of survival. Vehicles will feature more embedded intelligence, in form of sensors and on-board computers. McKinsey predicts that during years 2015-2020, electrical and electronic components may represent over 80% of all innovations in the automotive industry. Many vehicles will incorporate electronic stability control technology which improves the dynamic stability of a vehicle by detecting the loss of control and correcting it. Not to speak of parking assistance and chips monitoring tire pressure and activating wipers.
To illustrate the explosion of technological devices, the software of the all-electric Chevrolet Volt, with more than 100 electronic controllers, has ten million lines of code, about two million more than the Boeing 787 Dreamliner. New expertise will certainly be needed. To support the development of hybrid and all-electric powertrains, the automotive industry will need to massively recruit skilled workers specialised in “mec-chem-nic”, that is to say, systems involving simultaneously electronics, mechanics and chemistry.
The immense challenges facing the automotive industry are probably just beginning. Ultimately, the standard car changed very little during the twentieth century. Vehicles have four wheels, ride on roads and are powered by fuel engines. In factories, assembly lines are not fundamentally different from their glorious beginnings. Changes mainly come from electronics, robotics and new materials. That is to say, from other industries. Standardised vehicles offered by manufacturers look very much alike. True innovations, such as Google’s driverless car, or the ultra-low-cost car, are yet to come...