The US auto industry is really hurting right now…
General Motors, Ford, and Chrysler have all been seriously impacted by the combined credit crunch and economic slowdown we are going through right now.
Ford’s miserable performance last quarter – an operating loss of over $3 Billion – places it at the top of a sad lot. General Motors is running out of cash and teetering on the edge of bankruptcy, and Daimler AG has just declared its 19.9% share in Chrysler to be a deprecated asset and valued it at zero.
And everyone expects it to only get worse going forward…
The solution many seem to be clamoring for – some type of financial bailout from Washington – simply isn’t going to solve anything. The most pressing problems faced by the auto industry aren’t temporary – they are core structural problems:
- Current labor contracts prevent market forces from working.
- Fully loaded labor costs per automobile are too large.
- There are way too many dealerships.
Having access to fresh capital won’t help the industry address any of these issues. And any solution that keeps the status quo in place there will only end up delaying the inevitable. As draconian as it may seem, I believe that the only viable path forward for the auto industry today is to hit the RESET button.
They will need to file for Chapter 11 bankruptcy…
Why so drastic a step?
The automotive industry needs to reinvent itself from the ground up. It needs to be lean and agile. It needs to be optimized and efficient. It needs to begin thinking like a high technology industry that’s driven by innovation and change, not like a manufacturing industry that thrives on predictability and process stagnation.
Unfortunately, the contractual framework the auto industry is currently forced to operate under will not allow this to happen. It’s the product of a time that no longer exists, and it threatens the viability of the auto industry going forward. It cannot be simply renegotiated around the edges. The changes needed for survival are too sweeping to be shoehorned into the framework the existing contracts are built around.
Voiding them is probably the only way the industry can begin to rebuild itself.
But then what? What should a new 21st century auto industry should focus on if it whats to be successful? While there are probably tons of things that need to be addressed, I see them falling into three main categories:
- Intellectual Property Competitive advantage will depend in large part on the underlying assets that can be built into a car. These will cover a range of areas from intelligent/adaptive control systems to engine and power sources technologies. This will be as much about developing intelligent software as it is about advances in material sciences, chemistry, and physics. The challenges offered in this space could end up attracting some of the best and brightest to this industry. It should be one of the highest priorities for investment.
- Standards Development Not every component that goes into a car needs to be unique. There are certain commodity components that could be shared across manufactures without compromising the uniqueness of their particular car designs. From fasteners and seals, to embedded processors, to common structural sub components, there are savings to be had in this area. Reducing the number of unique components simplifies parts inventory and assembly line tooling requirements.
But this shouldn’t be just about physical components.
A transformed auto industry will be built as much on software as on hardware. Creating standards based interfaces that work across the numerous software components of a car’s design will also become important. With the level of processor performance available today, real time control systems can effectively be designed using a service oriented software architecture to abstract details of the physical devices being managed. This will allow for the development of reusable software components that can be leveraged across car lines – or even be open sourced in more commodity based component areas. Overall, this can reduce testing and production costs, simplify the assembly of new configurations, facilitate integration of new capabilities into existing product lines, and accelerate the introduction of new models and technologies.
- Assembly Optimization You would be hard pressed to find a prosperous technology company that completely assembles their own consumer products. It makes little sense for most of them to tie up the massive capital necessary to in-source this part of their business. To be successful, the auto industry needs the ability to scale production up or down rapidly in response to market demand (to better aligning their costs with their revenues), to rapidly shift production capacity to new areas when new market opportunities present themselves, and to leverage their capital in those parts of the business that will ultimately create the most value for them. While politically unpopular, this will most likely require a major change in the way the industry approaches product assembly, bringing it more in line with the way other technology industries operate.
At the end of the process, the auto industry will no doubt look substantially different. There may even be some totally new business models and ecosystems that spring up around it. For example:
- If cars are built more around standards and software, I could see more revenue coming to the industry through updates and subscriptions – some software only, and some software and hardware. People could even purchase new features long after they purchase a new car. (Think iPhone like interfaces driven by software applications.)
- I could even see some “manufacturers” getting out of the end production part of the business entirely to focus on the high value component end of the business. This could create an opportunity for new ‘down stream’ car companies to form that license and assemble these components under their own brands.
The industry simply needs to break with the past and be open to thinking differently about the opportunities and markets they can address in the future. Innovation on a business level is as important as innovation on a product level.
It’s what will distinguish the real leaders in this market from everyone else.
While the changes that need to happen in the auto industry are going to be painful in the near term, I see them as an unfortunate but necessary precursor to it becoming a growing, revenue and job producing industry once again. It clearly won’t be easy for the major auto makers to transform themselves, but nothing worth achieving ever is.
A government bailout of the status quo will only make things worse…