Globalization of Innovation in the Automotive Industry · PDF fileGlobalization of Innovation...

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Globalization of Innovationin the Automotive Industry

John MoavenzadehExecutive DirectorMIT International Motor Vehicle Program

MPI Spring SymposiumWorcester Polytechnic InstituteWorcester, MAMay 25, 2006

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Globalization of Innovation in theAutomotive Industry

Background of IMVP

Globalization of the US Automotive Market

Changes in the Automotive Innovation Process

Drivers of Innovation Changes

Case Study of US Emissions Technology

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What is the International Motor Vehicle Program?

IMVP is an international network of professorsand researchers engaging with managers andexecutives in the global automotive industry.

The interaction between researchers andexecutives generates knowledge and insight ofvalue for the automotive industry.

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IMVP Researchers Span the Globe

Seoul NationalUniversity

Wharton School,Univ. of

Pennsylvania

Univ. ofPittsburgh

CarnegieMellon

Case-WesternReserve

MassachusettsInstitute ofTechnology

University ofMichigan

RochesterInstitute ofTechnology

Hosei University

OxfordUniversity

CambridgeUniversity

INSEAD

SocialScience

ResearchCenterBerlin

Indian Instituteof Management

CatholicUniversity of

Korea

Tokyo University

HitotsubashiUniversity

Kobe University

ÉcolePolytechnique

TsinghuaUniversity

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Takahiro Fujimoto

University of TokyoEducation: PhD HarvardExpertise: Production management;product development; suppliermanagement

Christophe Midler

École PolytechniqueEducation: École Polytechnique,PhD Université Paris SorbonneExpertise: Competition and innovation,project management, innovation mgmt.

Michael Cusumano

Massachusetts Inst. of TechnologyEducation: BA Princeton, PhD HarvardExpertise: Strategy and technologymanagement

IMVP is a knowledge network … a community ofscholars examining critical industry issues

John Paul MacDuffie

Wharton School, Univ. of PennsylvaniaEducation: BA Harvard, PhD MITExpertise: Lean production systems;organizational change; automotiveindustry employee relations

Ki-Chan Kim

Catholic University of KoreaEducation: PhD Seoul National UniversityExpertise: Role of IT in supply anddistribution chains

Dipl.-Wirtsch.-Ing., Univ. of AppliedSciences, Wedel, Germany, MScUniv. of Buckingham, PhD CardiffUniv.

Ulrich Jürgens

Berlin Social Science Research CenterEducation: PhD Free University of BerlinExpertise: Labor relations, productionsystems, corporate governance

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Background of IMVP





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Globalization: The US Automotive Market HasBecome Increasingly Globally Integrated inThree Phases …

… and other regional markets have followed this pattern(with notable exceptions)

1965Isolated Regional Markets

Isolated Regional Markets

1965

Business IntegrationBusiness

Integration

1990’sTrade Flows:

Imports & Exports

Trade Flows: Imports & Exports

Increased Global Integration

1970’s

FDI Flows: TransplantsFDI Flows:

Transplants

1980’s

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Merger/ Acquisition: Daimler Benz & Chrysler Corp.; Ford & Jaguar;Ford & Volvo; Volkswagen & Seat; Volkswagen & Skoda

Controlling Equity Stake: Ford & Mazda; DaimlerChrysler & MitsubishiMotors (until July 2005); Renault & Nissan

Non-controlling Equity Stake: GM & Fiat Auto (until February 2005);GM and Fuji Heavy (until October 2005); DaimlerChrysler and Hyundai(until July 2005)

Product Development Agreements / Shared Platforms: GM PontiacVibe and Toyota Corolla shared platform; PSA & Toyota small carsprogram

Technology Alliances: Ford & PSA on diesel engines; GM and Isuzuon diesel engines; PSA and BMW on small gasoline engines

More Integrated

Various Degrees of Business Integration in theGlobal Automotive Industry …

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Foreign-Brand Market Share in the US Light Vehicle Market

27.8

31.7

35.2

37.8

27.6

29.5

26.5

28.429.0

25.726.3

27.0 26.927.3

28.730.2

37.3

42.6

40.841.4

20

25

30

35

40

45

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005E

(%)

Foreign-Brand Market Share Has SteadilyIncreased in the United States to nearly 43% in 2005

Source: Automotive News, Univ. of Michigan

42.6%

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Source: IMVP, Automotive News 2004 data

But Foreign-Owned Firms Now Account for MoreThan Half of the US Market

2004 Total Sales = 16,912,613 units

3.1%

13.0%

45.6%38.2%

Foreign-Owned, Foreign-Brands:BMW, Mini, Rolls Royce, Mercedes Benz, Maybach, Ferrari, Acura, Honda, Hyundai, Kia, Isuzu, Lamborghini, Lotus, Maserati, Mitsubishi, Infinity, Nissan, Porsche, Subaru, Suzuki, Lexus, Scion, Toyota, Audi, Bentley, Volkswagen

Foreign-Owned, Domestic-Brands:Chrysler, Dodge, Jeep

Domestic-Owned, Domestic-Brands:Ford, Lincoln, Mercury, Buick, Cadillac, Chevrolet, GMC, Hummer, Oldsmobile, Pontiac, Saturn

Domestic-Owned, Foreign-Brands:Aston Martin, Jaguar, Land Rover, Volvo, Saab, Mazda

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US Light Vehicle Production: 1982-2005

6.9

9.0

10.611.2

10.610.1 10.3

9.6

8.3

7.38.0

9.1

10.19.7 9.3 9.5 9.2

10.1 9.8

8.69.3 8.9

8.4 8.0

0.80.9

1.3

1.5

1.5

1.7

1.8

2.22.3

2.42.4

2.5

2.62.7

2.6

2.83.0

3.33.6

0.70.5

0.3

0.2

0.1

0

2

4

6

8

10

12

14

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Pro

ductio

n (

mill

ions)

Foreign-Brands

Big 3

Source: IMVP, Automotive News

Transplant Production Accounted for 30.9%of US Production in 2005

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The Transplants Have a Different (and Expanding)Geographic Footprint from Domestic US Production

March 2006 News:Kia Will Build

$1 Billion AssemblyPlant in GeorgiaEmploying 2,500

March 2006 News:Toyota Will Build

100,000 AdditionalCars at the

Fuji/Subaru Plant inIndiana Employing an

Additional 2,000Workers

Source: JAMA, IMVP

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26.2%2.3%South Korea9.0%4.2%Japan38.2%26.6%Western Europe51.2%41.3%United States

Foreign-OwnershipPenetration

(2004)

Foreign-Brand

Penetration(2004)

Country or Region

US Vehicle Market is the Most “Open” to ForeignBrands …

Note: All Data for 2004Source: IMVP, ACEA, JAMA, KAMA

… But Foreign Penetration Continues to Increase in AllMarkets and Foreign-Ownership Penetration ExceedsForeign-Brand Penetration in All Markets

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1.65Russia

1.30India

5.23China

5.85Japan

16.86Western Europe

6.8750.1

5.7451.5

8.52185.5

1.66-0.1

1.97-2.4

2.78-0.316.91United States

AverageGDP Growth(%)1999-2004

VehicleSalesGrowth (%)1999-2004

2004VehiclesSales(Millions)

Country / Region

Growth Opportunities Are in the Developing World

Source: IMVP, Automotive News Data, World Bank Development Indicators

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Automotive Sales in China

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2000 2001 2002 2003 2004 2005

Commercial Vehicles

Passenger Cars

In 2005, China Became the Second LargestAutomotive Market in the World

Source: Automotive Resources Asia, China Automotive Technology & Research Center (CATARC)

Annual GrowthRate for Cars

16.8%

62.5%

60.7%

64.2%

7.4%

21.4%

3.97M

5.76M

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Background of IMVP





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Changes in the Automotive Innovation ProcessSince 19901) The innovation process has become more open(i.e., more innovation occurs outside the vehiclemanufacturer)

2) Innovation footprint has globalized (along withthe rest of the value chain)

3) Shift from mechanical to electronic product focus

4) Digitization of product development (new tools)

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Better Leverage of the Supply Base

The Innovation Process Has Become MoreOpen

More Strategic Alliances with Competitors

Emergence of Research Consortia

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Traditional Pattern of Ineffective R&D

ResearchResearch Results Technologies Components Vehicle Customer

Expectations

Advanced Eng. Vehicle Eng. Assembly

Not Invented Here New but disoriented

Fast but disoriented

Customer-Confusing

Scientific NetworkExcluded

Suppliers’TechnologiesExcluded

Source: Takahiro Fujimoto, University of Tokyo, IMVP

From a closed model of innovation …

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ResearchBy Open Network

Research Results Technologies Components Vehicle CustomerExpectations

AdvancedEng.

Vehicle Eng. Assembly

Select andRe-orient

Early, FastandIntegratedProblemSolving

LeanProduction

BTO

Scientific NetworkInvolved

Suppliers’TechnologiesAbsorbed

pullpush

Source: Takahiro Fujimoto, University of Tokyo, IMVP

… toward an open model of innovation

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Suppliers Play a Critical Role in the GlobalAutomotive Industry

Purchasing, $55.0

Labor, $12.6

Other Overhead, $6.8

Depreciation, $5.3

OPEB (Retiree

Healthcare), $4.6

R&D, $4.5

Advertising, $3.6

Pension, $1.8

Warranty, $3.4

Transport, $2.7

Active Healthcare, $1.6

Variable

Costs

Fixed

Costs

GM North America Estimated Cost Structure for 2004 (Total $101.9 billion)

Source: GM Annual Reports, Deutsche Bank, IMVP

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Many industry executives – from both OEMs andsuppliers – agree that more technological innovationoriginates within the supply base than within thevehicle manufacturers

Source: World Economic Forum, IMVP

2005 World Economic Forum Survey of Automotive CEOs:

In general, more technological innovation originates within the supplybase than within the vehicle manufacturers:

Strongly Agree: 33%Agree: 33%Neutral: 22%Disagree: 6%Strongly Disagree: 6%

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But the US Model for Supplier Relations ImpedesInnovation

-29.2%-20.8%114144156161GM-6.0%-1.9%157160161167Ford

12.0%7.1%196

183177175Chrysler

16.05%-0.6%259261234224IndustryMean

31.3%1.4%298294259227Nissan26.3%-2.3%375384316297Honda32.2%4.0%415399334314Toyota

2005200420032002

2002 -2005

%Change

2004-2005

%Change

YEAR

OEM

Supplier Working Relationship Index for OEMs in the United States

Source: John Henke, Planning Perspectives Report

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More Strategic Alliances with Competitors Since1990

GM & BMW:Hydrogen Refueling Systems (May 2003)

GM & Toyota:Fuel Cell (April 1999 - Feb 2006, continuesin advanced safety technology)

Ford & PSA Peugeot Citroën:Diesel Engines (March 2000)

Some Technology Alliances for Independent (non-equity) Firms

DaimlerChrysler, GM & BMW:Hybrid technology (Sept. 2005)

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More Shared Vehicle Platforms Since 1990

Toyota Aygo and Peugeot 107

GM Pontiac Vibe and Toyota Matrix

Some Shared Vehicle Programs for Independent (non-equity)Firms

Volkswagen and DaimlerChrysler Minivan (Jan 2006)

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Emergence of Research Consortia

US Council for Automotive Research

FreedomCAR & predecessor Partnership for NewGeneration Vehicle (PNGV)

AUTOSAR

Industry-Driven

Government-Driven

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The Innovation Footprint Has Globalized

R&D / Technical Centers Outside National Borders

Emergence of Global Product Teams

GM Locates Small Car Product DevelopmentCenter to Incheon, Korea

Vehicle Engineering teams go global: Ford-Mazda, Ford-Volvo

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GM Technical CenterBangalore, IndiaOpened Nov. 2003Employment: 240professionals in 2005increasing to 400 in 2006Vehicle design tools, virtualmanufacturing, controlsystems, materials

GM-SAIC Pan Asia Technical AutomotiveCenter (PATAC)Shanghai, ChinaOpened June 1997Employment: 660 Designers, Technicians,Engineers50-50 joint venture between GM and SAICprovides automotive engineering servicesincluding design, development, testing andvalidation of components and vehicles.

US Firms Offshoring R&D Tech Centers

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Nissan Technical CenterFarmington Hills, MichiganFirst Established 19892005 Employment:1056 (540engineers)In March 2005, Nissan added a$14M design studio to this site,following a $38M expansion in 2002..Total vehicle development for USmarket.

Toyota Technical CenterAnn Arbor, MichiganFirst established 1977 (multiple expansions)2005 Employment: 750Toyota’s New $150 Million R&D Facility willjoin this facility in Ann Arbor, Michigan and add400 technical jobs.TTC is engaged in engineering design, engineunit design, prototype development, vehicleevaluation, evaluation and design of parts andmaterials, regulatory affairs, emissioncertification, and technical research.

Foreign Firms Onshoring R&D Tech Centers

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7831977

Gardena, CA; Berkeley, CA; Ann Arbor, MI;Plymouth, MI; Lexington, KY; Cambridge, MA;Wittmann, AZ;Toyota

321986Ann Arbor, MI; Lafayette, IN; Cypress, CASubaru

10561983Farmington Hills, MINissan

1401983Ann Arbor, MIMitsubishi

501995Palo Alto, CA; Sacramento, CA; Portland, ORMercedes-Benz

1001972Irvine, CA; Ann Arbor, MI; Flat Rock, MIMazda

1001985Cerritos, CA; Plymouth, MIIsuzu

1501986Ann Arbor, MIHyundai

13001975Torrance, CA; Marysville, OHHonda

701982Spartanburg, NC; Woodcliff Lake, NJ; Oxnard,CA; Palo Alto, CABMW

EmployeesEstablishedLocation(s)Company

Foreign-Brand R&D and Design Facilities in theUnited States employed nearly 4,000 people in2005 – and this has been growing rapidly

Source: Japan Automobile Manufacturers Association (JAMA), Automotive News, IMVP

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Shift from Mechanical to Electronic ProductFocus

Declining cost of memory and exponential rise incomputing power enable an array of advancedautomotive technologies:

Examples of recent, current and upcoming electronics-based safetyinnovation: anti-lock brakes, traction control, active suspension, adaptiveeffort steering, electronic stability control, near obstacle protection, visionenhancement, adaptive cruise control, forward collision warning, adaptivecruise control, etc.

Q: So What?A: This TrendAcceleratesOpenness andConvergence

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Source: CATIA, Dassault Systems

Digitization of Product Development andIncreased Information Visibility

Access toInformationand Data HasAlso ImprovedSignificantly

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Background of IMVP





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Types of Innovation in the Auto Industry

Product Innovation: Clean Diesel, Hybrids, On-Board Navigation, Active Suspension, etc.

Process Innovation: Hydroforming,Stereolithography / Rapid Prototyping, etc.

Architectural Innovation: Modularity, Closedversus Open (Standards), Platform strategy, etc.

Organizational Innovation: Offshoring, Outsourcing,Collaboration, Alliances, Firm Boundaries, etc.

Business Model Innovation: mobility services,insurance, finance, etc.

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Drivers of Innovation in the Auto Industry

Relentless Competition: Downward Price Pressureand Upward Cost Pressure (both OEMs andsuppliers), Risk Management

Consumer Differentiation (Regional Differencesare Important. Tech Push versus Demand Pull)

Regulation and other Environmental, Safety, SocialDrivers

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Regional Consumer Differences Affect Innovation

The average German consumer spends 37 hours toresearch the automotive purchase decision …

… which is more than double the time spent toresearch their pension plan

Source: Alexander Gerybadze, IMVP-WZB Automotive Forum, Berlin, March 28, 2006

Fleet management (high percentage of companycars) and tax incentives in favor of productinnovation also drive automotive innovation inGermany

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Background of IMVP





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0

1

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1968

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Year

HC

CO

Nox

1970 CAA

1977 CAAA

1990 CAAA

NLEV

HC

CO

NOx

OxidationOxidation

CatalystsCatalysts

ThreeThree --WayWay

CatalystsCatalysts

Thermal Management SystemThermal Management System

Onboard Diagnostic SystemOnboard Diagnostic System

Str

ing

en

cy

(g

/mi

HC

, C

O/1

0,

NO

x)

CAA

CLEANAIR ACT

0

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Year

HC

CO

Nox

1970 CAA

1977 CAAA

1990 CAAA

NLEV

HC

CO

NOx

OxidationOxidation

CatalystsCatalysts

ThreeThree --WayWay

CatalystsCatalysts



OxidationOxidation

CatalystsCatalysts

ThreeThree --WayWay

CatalystsCatalysts



Str

ing

en

cy

(g

/mi

HC

, C

O/1

0,

NO

x)

CAA

CLEANAIR ACT

Vehicle Emissions Regulation Has BecomeIncreasingly More Stringent

Source: Francisco Veloso, Carnegie Mellon, IMVP

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0

1

2

3

4

5

6

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1969

1970

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Str

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cy

(g

/mi

HC

, C

O/1

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NO

x)

0

50

100

150

200

250

Nu

mb

er

of

Pate

nts

Issu

ed

HC

CO

NOx

Patent

1970 CAA 1977 CAAA 1990 CAAA NLEV

Patent activity increased with upcomingregulation

Conclusion: Increasing stringency associated to greater invention


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OEMs and suppliers roughly split the patents

Suppliers,

1162

Universities,

11

Government,

16

Institutes, 26

Assemblers,

955

Other, 104

Universities and Government appear not to have significant contribution to technology


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ASSEMBLER(Architecture)

SUPPLIER(Component)

Task Boundary

Assembler’s Knowledge Boundary

Suppliers’ Knowledge Boundary

Regulation, Uncertainty & Knowledge Partitioning

Question: Do firms move into each other’s knowledge space to help them jointly solve complex problems?


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Conclusions from Carnegie Mellon Study

• “Technology-Forcing” regulations on automotive industry has had animportant effect on innovation– Patenting activities correlate with onset of regulations– New technologies developed as a result of regulations

• Technology dominated by Assemblers and Suppliers– Limited role for University and Government

• Firms need to adjust knowledge boundary to face uncertainty– Suppliers expand their in-house R&D capabilities beyond

component knowledge and into architectural invention– Overall assemblers’ in-house component invention is dominated

by evolution of technology – establishment of a dominant designand subsequent optimization. Small uncertainty effect


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