“I can’t predict which auto producers will be around in 10 years time on the basis of current trends,” said Professor David Bailey of Coventry University Business School and renowned Birmingham Post blogger, speaking to a packed audience of students and business people as part of the ‘Design Built-In’ lecture series, held jointly by Birmingham City University and Aston University at the Birmingham Institute of Art & Design last week.
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| Professor David Bailey Coventry Business School |
“Patterns of production are shifting to lower labour cost areas, but still remaining within trade blocks relevant to end customers. Geographical proximity remains critical given the importance of exchange rate movements and the transportation costs associated with shifting cars around the globe. In the context of the West Midlands whilst JLR has promised an additional £5bn investment into the region over the next 10 years and guaranteed the viability of its three production plants here it is also looking to move production to India and China shortly to cater to the needs of these markets.”
With the growing importance of developing design finishes appropriate to local markets Renault set up a design centre in Mumbai and Citroen had done the same in China. “The new Chinese owners of Rover have a team of 300 based in Longbridge. China has become the biggest auto producer and end market for cars, overtaking the USA last year. India has been strong in the small car market with Nissan and Micra shifting production there.
“A key challenge for the auto industry is the ‘cost of recovery’ for each design. It is becoming more and more expensive to design a new car - anything from $400m-$1bn – partly because of the innovations in electronics, safety regulations, and in environmental performance requirements. From the 1960’s onwards new innovations have been changing the industry. This has led to increased collaborations between competitors – such as Peugeot and BMW’s collaboration over green engine production.”
High platform costs were resulting in consolidation amongst traditional producers. In 2007 the top 5 platforms had 9.5m units produced off them globally, and firms are looking to increase the number of units produced from each platform.
And in 2007 just 10 OEMs were responsible for 75% of the world output with further consolidation expected, combined with new entrants from China and India. “Unless auto producers are able to produce large numbers of vehicles a year, or fit into the niche categories emerging as alternative models, they could become squeezed struggling for survival, as happened in the case of MG Rover and – perhaps - Saab.
“Whereas in the 1960’s the USA had a 60% market share, in 2009 US market share declined to 10% of global production - even though US volumes have remained relatively stable over this period.
Tier 1 producers were seeing more and more responsibility passed down for them to absorb in their production and stock holding costs. Branded assemblers were increasingly ‘slotting together’ parts on their assembly lines with some forecasting they might ultimately become brand owners, rather like DELL, whilst others, in contrast, were focussing on over-riding quality concerns resulting in the majority of manufacturers retaining in-house production capabilities.
“In terms of technologies one of the biggest changes we’ll see is the shift to Electric Vehicle powertrains. Electric vehicles are being trialled at present in Birmingham and Coventry as part of a project known as ‘Cabled’, providing feedback on barriers to take-up of ultra low carbon vehicles by consumers. Alongside these developments auto producers are making many improvements in the traditional combustion engine and hybrid transition technologies are also improving the fuel efficiency of alternative fuels.
“Electronics now account for up to 50% of the value of a car. Unlike the pharmaceuticals industry where open innovation is the preferred new product development methodology, in automotive both R&D and innovation processes remain highly internalised.
“New entrants and niche vehicle producers by contrast are forming new networks to share technologies. Daimler is working with local firms like Zytec in developing smart technologies and Professor Bailey predicts that the automotive industry will need to become more ‘open’ in its quest to further develop new customer facing technologies.
“In the face of tough new emissions targets coming out of Europe government will have a central role to play in helping to provide the framework to support industry growth (for example in installing electric recharging points) and incentives for investment during this period of technological transition. Without government support many businesses could wither away. Key supply side issues to be tackled include skills shortages such as in R&D.”
Auto producers judge Britain as a suitable location for ‘swing plant investment’ where labour could be more easily hired and fired - depending on global demand conditions. Another feature of the UK was market specialisation in the luxury end of the market where there has traditionally been more volatility.
“Demand globally has been scarred by the economic crisis and some people are shying away from ‘conspicuous consumption’. In spite of this the luxury end of the market remains robust. The demand for green cars is evident, but consumers remain cost conscious. Health and safety is a key concern for customers who are also looking for more mobile networked computing options within their cars.”
Given the challenges facing the traditional auto producers new entrants had emerged including companies like Tesla and Riversimple – the latter based on ‘open source technologies’. As many manufacturers lose money in car manufacture and make money on parts and servicing the traditional producers are locked into existing technologies, such as ‘body and white steel’. In the longer run getting body weight down is going to require new technologies.
“How disruptive are these technological changes going to be?” asked Professor Bailey concluding his lecture. “By 2020 it is likely the electric vehicle market will still be small, but an increasing proportion of cars will be hybrids with further improvements in traditional combustion engines – Mazda is getting 70 miles plus fuel efficiency from its new internal combustion engines. Renault and Nissan are making huge investments in developing electric vehicles. With all this technological volatility, with the pressures on the volume producers business models and the need for a strategic framework from government to support investment and development it is hard to make predictions about the long-term viability of current producers.”
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