Michael Smitka
Prof Emeritus, Washington and Lee Univ
Judge, Automotive News PACE supplier innovation awards
This is an edited version of a post to the NBR email discussion forum, NBR posts are archived here.
Mochizuki-san raises an interesting question.
I append the Mr. Mochizuki's original post in this thread at the end.
The modern auto industry in the US began as pure assembly, initially Ford made no parts itself (zero!), but as it increased standardization it pulled more parts making in-house ca. 1910-1912. GM was built through M&A but was initially just a holding company, the parts makers didn’t necessarily supply any of its car assemblers. That changed in the 1920s, but GM spun off its parts making in the late 1990s / early 2000s, as did Ford. European car companies were never as integrated, we even have Magna Steyr assembling vehicles under contract.
In Japan in the 1950s, car companies didn’t have the financial resources to vertically integrate, indeed Toyota spun off internal operations such as electrical components into what is now Denso, which then could raise funds on it own balance sheet. Toyota and Nissan also acquired some of the floundering independent car companies (there were 30 or so in the 1950s), turning them into branch assembly plants. But again, their focus was assembly, though they had shareholding interests in suppliers.
So the major car companies around the world have long been focused on assembling components purchased from the outside (or into the 1990s in the US, from highly autonomous internal divisions), with drivetrains a partial exception (motors were generally “made,” except for diesels, but transmissions were sometimes outsourced - patterns in Europe were a bit different, transmissions were primarily outsourced).
So what do car companies do? Final assembly, and design/development, and marketing and the coordinating of distribution. Since the 1990s they developed a “platform” (chassis plus suspension plus steering/braking), stuck different “top hats” on them, and filled them with purchased components. That was done in line with a product portfolio, to try to serve a broad array of the market (from the same platform) while providing protection against swings in taste. That vehicles today might be based on batteries and electric drive motors doesn’t challenge the industry's core business model.
...no disruption here: batteries and electric drive motors don’t challenge the industry's core business model...
Have electric vehicle startups managed to successfully enter? My judgement is “no.” There are a host of EV companies in China, but that’s a result of massive subsidies. Despite subsidies, all startups in the US and Europe have flopped other than Tesla, and Tesla has survived only due to the Silicon Valley stock market bubble, they’re a quintessential “story stock” as they’ve burned through roughly $23 billion in capital. While they declared a very small profit for 2019Q3, it appears to be a result of one-off changes, as total revenue declined. Tesla is no longer a growth company, yet needs to raise more capital to stay in business. I didn’t think it would last through CY2019, but investors keep showering the firm with cash, and who is Elon Musk to say “no” to that?
I think the evidence is pretty clear: car companies are indifferent to what’s under the hood, and the same is true of most consumers. If it’s cheaper to make battery electric vehicles, then that’s what they’ll do. If government fuel efficiency regulations force them to do so, as is happening in Europe, then that’s what they’ll do. [Until Dieselgate the EU had effectively mandated them for small cars – diesels were 70+% of the market in France – but they are intrinsically more expensive to make, and so you find few diesels in Japan, or in the US outside of work trucks.]
Unfortunately battery prices have not yet fallen, and while there are almost daily announcements of “breakthroughs” none have made it into volume production – any new battery technology will show up first in cell phones and the like, and only (years) later in electric cars. The lead time to drive down production costs and build capacity makes it very unlikely that we’ll see high volumes until 2025, and unless chemistry cooperates, not even then. (There’s also the challenge of cobalt and lithium supplies, lots of exploration, not much investment in mines, even less in refining brine and ores, but all have multiyear lead times.) So car companies are looking at financial disaster, particularly in Europe, as regulations are pushing them to make cars that are too expensive for all except well-heeled consumers to purchase, but failing to sell EVs will result in fines in the euro billions per company per year, enough to bankrupt them. I expect to see a walk-back of such regulation.
But to reiterate, Mochizuki-san’s question is interesting, and one that researchers focused on the industry (as well as consulting companies and car company executives) have debated and continue to debate.
To return more narrowly to his query, the major electrical/electronics component suppliers have developed their own electric motors and specialized tooling (eg, for winding flat wires). It’s not clear though that they will dominate motors. There remain fundamentally different architectures, such as inductance versus permanent magnet motors, no standardization yet at even the level of the core technology, while packaging differs enough from vehicle to vehicle that there’s no standardization there, either. Will the car companies continue to make their own motors, using of course many purchased components, or turn to outside suppliers? I don’t think that will be apparent until 2030, after all sourcing component systems for EVs that will launch in 2023 has already been completed. It will take a couple model cycles – 8 years – for the dust to settle.
In contrast, drive electronics are outsourced, and I don’t believe that will change. The original EV1 team at GM stayed together in what is now Delphi and Aptiv. The other big players are also in the game, Bosch and Denso and Continental and Valeo. A lot of the value added will be in the IGBTs and other specialized chips. Since the start of the 1980s the auto industry has been a huge consumer of semiconductors, at one time Delphi was the 4th largest chip company globally. But to my knowledge they and other suppliers (eg, Denso) no longer run fabs (or only do so as they’re fully amortized legacy plants).
Battery cells are outsourced, except by the Chinese firm BYD, which began as a battery company, not a car company. In contrast, battery pack assembly is done in-house, again the packaging varies from car to car, and car companies know how to do assembly. That might change a bit, with outside firms supplying modules of cells that can then be assembled into packs. My hunch though is that in 2030 car companies will be making their own electric drive motors and assembling their own battery packs.
So … we won’t see a repeat of the FANUC case, no "disruption" here. And if I’m wrong, it’s likely to be a Chinese firm that will be the global gorilla, given the sheer number of players there trying out different approaches. If success is 99% perspiration, well, they’re more likely than anyone else to come up with the bits and pieces that produce a winner.
Mochizuki-san might be able to speak to that, the case of Kuka in industrial robots, which from touring factories is the big rival of FANUC. Why did they do so well, and not just FANUC. [Aside: Kuka is now Chinese-owned.]
mike smitka
now prof emeritus of economics
judge, automotive news PACE supplier innovation award
(with visits to suppliers in Japan and Korea in Nov 2019)
organizing team, June GERPISA 2020 auto industry research conference in Detroit
On Oct 27, 2019, at 9:42 PM, Minoru Mochizuki
There was a major metamorphosis occurred starting in 1960s in the worldwide machine tool industry. Up until 1950s, the world leaders by countries were US and Germany, providing all kinds of metal-cutting machines, large ones weighing hundreds of tons in weights for machining large components for electric generators and steam turbines, steel mills, ships and aircrafts, to small ones weighing less than a ton for machining small components such as precision shafts and screws. Those machine tools were controlled by skills of human operators.
With the introduction of computers into the machine tool industry, those metal cutting machines (lathe, milling machine, drilling machine, etc., generally called “machine tools”) came to be controlled by computers. They were thus came to be called numerically controlled (“NC”) machines, and further renamed as computer-numerically controlled (“CNC”) machines.
In the early days, the US machine tool industry led the way by inventing NC and CNC machine tools of all kinds. The computerization of machine tools, i.e., driving various types of cutting tools and grinding stones on and off, guiding the tools along the calculated loci three-dimensionally to form three dimensional shapes of the workpieces, were helped by electronic and computer engineers from the electronic and computer industry easily, thanks to the fluid employment practice in the U.S. Example of those US suppliers of NC systems were Bendix, Bunker Ramo, GE, etc. In contrast, those engineers existed only in the telephone and general electrical companies, so the Japanese machine tool companies were generally unable to develop the machines with the new kind of controls in-house. The machine tool manufacturers could not find electronic and computer engineers because of the lifetime employment system prevailing in those days. Thus, except a few cases of machine tool manufacturers, such as Okuma, the majority of Japanese machine tool manufacturers relied on the package consisting of central computer, sensor, and servo drive units, which can be easily connected to the machine drive axes, supplied by Fanuc, an offshoot of Fujitsu, a major Japanese telephone/computer manufacturer. Fanuc quickly became a major supplier of the backbone system of NC/CNC machine tools in Japan, This was essentially a standardization of the machine tool industry from the control and computerization side, making the Japanese NC/CNC machine tools more competitive in cost and performance. The predictable result was the conquest of the U.S. machine tool industry by the Japanese companies. Even in Europe, the world-wide home of the machine tool industry, although there were a few tries to compete against Fanuc, the competition ended when Siemens decided to cooperate with Fanuc.
The success by Fanuc and the Japanese machine tool industries continued in Europe and in Asia. The farming out of manufacturing of US products in China, for example, iPhones or automobile components, all relied on Fanuc and Japanese NC/CNC machine tools unanimously using Fanuc controls and drives.
The automotive industry seems to me facing now the same kind of fundamental change as the machine tool industry experienced about a half a century ago, with the advent of electric drive system in various formats, electric motors replacing internal combustion engines, and maneuvering to be controlled by big-data-based road information, sensors and computers. Will the history repeat the same course, where automobile manufacturing companies reducing their development efforts to the packaging of the chassis, compartments, mechanisms of steering, wheels and brakes, adopting the control system to be supplied by the outside source? Who will succeed to be the major supplier of the control system?
Minoru Mochizuki
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