Suppliers are integral to new technology in the auto industry to an extent not true since the early years of the 20th century, when ventures such as Ford began as mere assemblers, not manufacturers. That will be highlighted on Monday, at the 21st PACE "academy awards" for supplier innovation. (For those not in the know, Monday's the opening night of the SAE [Society of Automotive Engineers] in Detroit.)
General Motors began as a conglomeration of existing firms, both suppliers and assemblers. As it grew – and as Ford stumbled – it added more suppliers while dropping brands. By the 1960s it was highly integrated, with suppliers relegated to trying to make parts to GM's blueprints. Now that strategy had unintended consequences, as the route to the top became finance, with other functions such as making and selling cars treated as an afterthought. Be that as it may, come the 1970s, first emissions controls, then fuel efficiency mandates, and finally safety regulations forced car firms to engage with non-traditional, outside suppliers. Meanwhile, new entry meant that the comfortable Big Three oligopoly could no longer ignore the challenge of actually making and selling cars. One response was to spin off internal parts operations, and with it the ability to do the relevant component-specific R&D. Finally, alongside this demand-side story were two technology revolutions, those of materials science and of electronics and sensors that enabled these suppliers to turn to innovation as a way to build their businesses and preserve margins. The bottom line was that suppliers became central to automotive innovation.
This supplier-centric industry has lots of implications. For one, it may facilitate new entry; Aptera, Fisker, BYD, Chery, Geely, Great Wall, Tesla, Bright Automotive, Edison2 and others could buy drivetrains, transmissions, sensors and controls from existing, auto-tech-savvy suppliers. Not all have survived, due to a combination of undercapitalization, poor product strategy and bad luck. However none could have started had suppliers not controlled – and built their businesses around selling – core technologies. Exploring such implications, including for investors, is however a topic for subsequent posts.
Here let me briefly note the role of suppliers, using engines are an example. (My apologies to Europeans for focusing on gasoline rather than diesel engines.) Drawing from among PACE award winners, we see the following areas dominated by suppliers: fuel tanks, fuel pumps, fuel vapor recovery, injectors, injector electronics, spark plugs, valves, camshafts, pistons, piston rings, bearings, seals, sensors of many types, turbochargers and turbocharger escape valve technologies. There are other areas (engine block castings, machining) where car companies continue to dominate, but even there suppliers provide the machine tools that are critical to these operations. In short, while car companies may work on the configuration of the engine and the integration of these various components, the advances come from supplier technology.
It's not just engines. A wide array of vehicle systems are dominated entirely by suppliers, such as clutch components, transmissions, differentials and driveshafts, HVAC systems, lighting, ESC systems, tires, tire sensors, suspensions, ECUs and most other sensors and vehicle electronics, airbags, seatbelts, hot stamping, hydroforming, paints, structural adhesives, sound-proofing materials, water pumps, radiators, headliners, instrument panel surfaces and underfoams, starter/alternator systems, belt and pulley systems, timing chains, windshields and glass, wiper motors, wiper blades, radar, lidar and ultrasound sensors, cameras and image recognition systems, infotainments systems, and on and on. More important for Monday, you can find examples among the two decades of PACE finalists and award winners.
I've been privileged to judge this competition since its inception, thanks to the entre provided by my own research (my PhD dissertation was on automotive suppliers in Japan). As a result I've been able to visit 2-4 suppliers a year for in-depth presentations on technologies and their business case, and to sit with the judging panel to hear their summaries of similar visits. Along the way I've earned my PE degree as well. [P.E = pretend engineer] Now the entire process is under NDLs (non-disclosure agreements) so I have to be careful, but I have tried my hand (with co-author Peter Warrian) at analyzing the finalists using publicly available information for lessons on technology. You can find our initial paper here and a more recent analysis (incorporating 2015 finalists) here. photo: Federal Mogul's IROX engine bearing
Anyway, watch Monday night for the stream of press releases from the winners, and the Automotive News coverage of the entire award ceremony. I'll be there, in my tuxedo, enjoying the food and drink, and the celebration of innovation. It's a fun and thought-provoking event!