"Sell a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime"
This old saying reflects the 'global positioning' dilemma that presently faces the UK, Western Europe, the US, Japan and South Korea; all eager strengthen each's respective ties with China, SE Asia, India, the CIS and S.America.
Having been respective chronological leaders of the industrial revolution, mass manufacture, quality improvement and broad value-chain conglomerates, each of those 'advanced' countries individually sit on different 'co-ordinates' at the high-end of the value-chain. One where the provision of high-end technologies and the provision of services merge and are expected to deliver both national and international wealth generation via domestic (private, corporate, state) consumption and as export packages sold directly to other advanced and emerging countries in either B2B or B2C formats.
This then indicates that amongst the advanced countries each will look to specialise its offering, using the notion of competitive national advantage to do so, whilst the innate historical story relative to emerging countries is that they will try to broaden their own value-chain span relative to the size of its population – the bigger the greater the incentive to create economic foundations and cyclical stability. This evidently re-run time and again since, mid-nineteenth century USA and 21st century China the choice examples.
Yet within this globalisation model, there has always been a level of political and commercial friction between the 'developed' and 'emergent', the former keen to be the technological and economic broker, both plying its student with specific 'fish' whilst also 'teaching to fish', whilst the student has sought more directly given fish whilst also seeking to hasten the 'fishing lesson'. And of course as a defining influence in itself is the willingness of the student to absorb the intrinsic 'soft-power' cultural expectancies of the master.
This picture approximates the reality of commercial and industrial international relations, and so the development speed of EM nations. The cases of similarly sized Brazil versus Pakistan, or Mexico versus Philippines, or Taiwan versus Syria contrasting historical examples.
Thus not surprisingly the general spread of economic well-being has historically followed a cultural course of 'least resistance', commerce and industry naturally attracted to similar conditions. This altered over the latter half of the 20th century as many Middle-Eastern & Asian countries saw it in their interests to welcome elements of the Anglo-Globalisation model, whether by historical precedence of by self desire, but of course the split of the profitable proceeds between 'teacher' and 'student' was always a major bone of contention; a larger population giving proportionately greater negotiating leverage.
Like its European & American counter-parts, the UK has been a disseminator of automotive sector technologies and services, starting in the 1930s when Austin licensed the tooling and construction of its legendary Austin 7 small car model to both BMW and Nissan so that the UK may be an influential force as part of its industrial foreign policy. In the early1960s Austin offered its larger Oxford model to India's Hindustan Motors named the Ambassador, Reliant & the Rootes Group developed Turkey's (2nd) national car the Otosan Anadol, and Rootes licenced its Hillman Hunter to Iran as the Paykan (*see below).
[NB FIAT, Renault & PSA did likewise. FIAT in the 1960s to India's Premier Motor and USSR/CCCP countries AutoVAZ-Lada, Polski-FIAT & Zastava, Spain's SEAT, Turkey's Tofas, Pakistan's Raja Motors and North Korea's PMC. Renault has previously offered licenses to Iran's Samar, Turkey's Oyak-Renault. *PSA had newly acquired Rootes Group when it offered Iran the 'Paykan' technology licence, this displaced by successive PSA sedan and hatch models since)And of course Ford, GM and Chrysler's early international reach is self-evident].
Historically then it was well recognised by the leaderships of EM countries that the development of a national vehicle industry in truck, bus and car forms was a necessary critical step in achieving economic growth, satisfied populace and international standing.
Yet that development model has not been without frustrations, since dependence upon foreign technology, IPR and general knowledge was typically one step removed from the real advances being made and enjoyed by a foreign 'teachers' homeland. The understandable ploy from the West/TRIAD nations has been to provide EM government's with previous generation platform & technologies – partly since less sophisticated mechanics etc were better suited to rougher local conditions and partly to ensure a technology-gap between the 'teacher' and 'student' countries which would theoretically be maintained as newer generation vehicles were constantly evolved and then passed-on to EM countries.
For those EMs with fast-paced effectively 'clean-sheet' development ambitions such as Malaysia in the 1980s/1990s, this technical disadvantage was something it sought to overcome. Having licensed 'old' Mitsubushi technologies and platforms to supply the tooling for Proton – its national champion mass manufacturer – it then sought to bypass the technology disadvantage by purchasing a renowned western automotive engineering & sportscar firm, Group Lotus. The intent was to have UK engineers rapidly develop its own next generation models and export those to international markets as both entry level vehicles in mature western markets and gain market share in EM Islamic countries from the local western-backed companies given the more sophisticated 'new generation' product offering.
This important aspect of what was Malaysia's own economic grand-plan did not come to pass. This resulting from:
- the operational problems of having its cars developed 'remotely' even with some project engineers shipped to Malaysia.
- Malaysia's 2nd national champion Perodua (based on Daihatsu/Toyota tech) was successful.
- western entry-level car markets became so competitive (Hyundai, Dacia etc).
- Islamic countries' own badge-engineered marques were tightly linked to home economies (though Proton has gained licencing contracts in pro-Islamic Iran).
- Seemingly 'new generation' platforms introduced into EM regions by VW, Hyundai, Dacia.
In recent years Proton (read Malaysia) has been assessing strategic coupling with other foreign VMs.2006 talks with Germany's VW failed to secure agreement, 2009 saw a contract-manufacturing agreement for 15-30k units with China's Jianhua Youngmann for its Europestar brand, whilst recently in March 2011 a 'strategic partnership evaluation' MoU was signed for a n investigative project that ran 2 months, so far instigating replacement of the Proton Perdana with the Fuga.
This in effect puts Proton on the same technology-source track as its homeland competitor Perodua, which sources from Toyota/Daihatsu. It then also re-affirms the notion that Proton has been seeking to dispose of Lotus Group, given that it did not receive the technology and marketing boost initially expected from the original 1996 64% purchase, nor from its 100% takeover in 2003. The divergence of Proton and Lotus fortunes also appears evident in Lotus's highly ambitious strategic planning, trying to create a whole new future for itself given the apparent inability to rely on further Proton financing
For the UK's auto-engineering sector, the example of Malaysia's Proton and its inter-relationship with Lotus serves as a useful case-study, representing:
- domestic policy ambitions of EM countries keen to develop their own benchmark auto-sectors
- their initial reliance upon established VMs for technology platforms
- the desire to un-hook themselves from this dependent position as soon as practicable.
- reliance on European engineering consulting firms to do so (ie via core-competence acquisition)
- the frictions created as both 'parent & child' seek maximise their gain (knowledge vs finance)
- the possibility of strategic failure given separate 'parent & child' agendas.
- the need for EM countries to seek alternative outsourcing models with the western firms
- the need for western design and engineering companies to react with appropriate new models
Of course these conditions have not appeared 'over night' and this broad description of unfolding events and perceptions is very general; the boundaries and exactitude of any single business relationship between an EM country seeking UK engineering services dependent upon the specific details of those firms involved: eg state vs private ownership, funding position, executives' operational freedoms etc. But it nevertheless provides general template of understanding of the dynamic that has emerged between typically East and West.
This was crystallised when China's SAIC employed Ricardo Consulting as the prime intermediaries in developing its Roewe range of cars derived from Rover's 75, 45 and 25 after its own 'lift & shift' of tooling from Longbridge. SAIC demanded that a new seperate project-based company be created as a 'half-way house' to avoid/reduce the possibility and impact of operational problems. The created intermediary was titles Ricardo (2010) Consulting Ltd, which itself was fully acquired by SAIC in 2007 and renamed the SIAC UK Technical Centre. Whilst largely UK based. UK engineers were also posted to China to assist the project transfer locally and assist the initial stages of duplicating the UK technical centre with a mirror-image technical base.
The obvious strategic aim of SAIC - and many of China's new VMs - is to develop a domestic HR and capital goods (IT, test-beds, test-cells) engineering skill-set which in turn allows for the creation of world-class vehicles at a proportionately lower cost base than all other nations. This is no secret.
Russia likewise must update and develop its indigenous auto-sector.
Having witnessed cases such as Malaysia, Russia decided to have its 2 primary vehicle makers OAO Avtovaz and OAO GAZ use contrasting strategic paths. The scale of the challenge was arguably greater for car producer Avtovaz, so Moscow decided that the internal leverage from a strategic partnership with Renault-Nissan would provide the speediest route to develop the supplier-base, provide access to benchmark platforms to revitalise core models and thereby give access to leading technical developments. To do so it gave Renault an initial 25% stake, with Renault now seeking 50%. Alternatively GAZ sought the foreign-tech 'lift & shift' option, purchasing Chrysler's Sebring/Stratus line of large cars for its premium brand Volga, whilst acquiring the UK's LDV vans so as to immediately update its GAZelle commercial vehicle portfolio.
These then necessary actions if Russia wishes to not only satisfy national demand, but stave-off foreign brands in the home market and retain & create export markets throughout the CIS, China and worldwide EM nations.
[NB investment-auto-motives previously highlighted the ambitions of Russian supercar maker MARUSSIA in a previous essay / web-log; noting its purchase of two UK firms related to motorsport engineering and motorsports events management].
Thus the changing face of global auto production, much influenced by the strategic choices of large EM nations, sets a challenge to the UK's auto-engineering sector. A challenge which is becoming increasingly apparent and possibly concerning.
The automotive engineering realm spans a broad realm of activities, some 'high-value', some 'mid-value', some relatively 'low-value'. An engineering project, whether for whole new car or facelifted car will contain varying proportions of these value-levels, the 'all new' product arena containing a greater amount of 'high & mid' value work given the demand for wholly new approach. The same also the case for sub-systems or module work across body, power-train, chassis, electrical, and trim.
Possibly because of the absence of domestic VM car manufacturers, the UK engineering-sector (at a surface level) looks to become increasingly split between high-value work typically seen in the specialist realms of Formula One, general motor-sports & specialist machines (AGCON & marine) and the low-value work generated from 'packaged outsourcing' from other countries' vehicle manufacturers.
'Packaged Outsourcing' is colloqially known as 'bums on seats engineering', and has typically undertaken by large US multinationals such as MSX International that rely on both large scale efficiencies and internal flexibility to create service offerings to VMs, often using project-based staff previously from the homeland & international operations of GM, Ford and Chrysler. Its innate business model devised to offer lower rate 'bums on seats' engineering packages to VMs. (As a profit margin-builder, it also offers 'mid-value' engineering solutions to a VMs national sales company in any specific region, if it thinks bearing the cost of re-engineering an otherwise unavailable vehicle worthwhile for local market demand. Typically the cost would be split between VM and NSC as cost-diffused market-test exercise).
The UK auto-engineering sector typically contains SME sized companies with backgrounds in more specialised engineering spheres typically relating to powertrain, chassis and (niche vehicle) structures, an emergence of eco-engineering including LEVs and EVs over the last 20 years.
However, such specialised business have historically tended suffer from the peaks and troughs of broad economic cycles. In good times client budgets are deep, whether from a VM's R&D cost-centre seeking alternative solutions, from better sponsored motorsports (F1 to WRC to UK touringcar to entry-band single-seater development) to niche vehicle business start-ups to an increased demand for specialist off-road vehicles by government and privatised utility companies. But in poorer times of economic downturn or stagnancy, such specialist auto-engineering firms tend to have to broaden their net and seek-out new work. They obviously seeking to both cover base operating overhead costs and seek to create stronger long-term relationships with influential clients by undertaking less profitable work.
This has been the perennial dilemma for the UK's auto-engineering firms when trying to forecast future work-flow opportunities and possibilities. Thus the more enlightened firms, seeking to overcome the income distortions of the economic cycle, have sought to broaden their remit in as flexible manner as possible so as to access mid-value and low-value work as necessary. This a near necessity for those that are publicly listed, rely on investor capital and need to demonstrate operational stability to attract long-term investors and so their Market Capitalisation.
It is also a consequence of VMs increasing tendency to retain 'in-house' the high-value aspects of their R&D and new product programmes, this especially so the case of Germans and Japanese who's brand equity is closely correlated to technological prowess.
This appears the case with Ricardo Engineering, relative to its work on the BMW small-block straight six engine – mentioned in the previously posted essay / web-log.
[NB The following is by no means indicative of a full and proper company review, nor its operational strategy / efficiency nor comment on future profitability].
Though it now spans whole vehicle and multiple sub-systems engineering, Ricardo is renowned as a powertrain specialist, harking back founder Harry Ricardo's roots. Yet on a now completed BMW motorcycle engine/gearbox project the firm essentially served as a mid-low value service provider; nominally stepping on the toes of the likes of MSX and notionally operating beyond their specialism.
Very basically, the development process – in this case for a new engine – typically consists of the following individual project phases:
1. product investigation, broad conceptualisation & technical targets.
2. detailed concept packaging + mating of ancillary components.
3. on-screen (3D) model development.
4. prototype(s) build & test.
5. (supplier) production-engineering input.
6.early-phase 'pre-production' functionality testing.
7. sign-off and full production.
Of course given that it was very probably seen as a core BMW AG project it is not surprising that much of the work was undertaken in-house, the first and final blocks necessarily so. Ricardo took responsibility for phases 3, 4 and 6, which in reality represent a large bulk of the project's lower value work, consisting of a high number of 'screen-jockey' & 'test-cell technician' man-hours in what is a saturated supply market thus able to command generally low rates.
Ricardo will have no doubt been able to improve its sold-rates above the' global market bottom' given its broad portfolio of proprietry IT development software, specific software sold at different rates depending upon the perceived technical advantage offered. This opportunity to create 'corners of differentiation' seen in software, is not equally possible in the commodity-priced 'test-bed' arena
Thus much of the projects innate profitability will have been in convincing BMW of the need to use as many software applications as possible for as many man-hours as possible.
From an overtly simplistic short-term ROE, ROI perspective, this BMW project would have added little to Ricardo's profit margin measures. But if this project had been raised by 'sector informed' shareholders will have been argued as a necessary strategic step to highlight the 'development software capabilities' and so forge relationships and credibility with the German VMs, and demonstrates the 'to-hand' service provision of the company's German-located Schwabisch Gmund test-cells.
Ricardo Engineering then saw it as a strategic imperative then to 'follow the Germans' and act as a smaller, European bound, version of MSX; using the basic 'bums on seats' work – albeit in 'sliced and diced' software specific manner, as a foundation-stone to building what it hopes will be a long term lucrative deal with BMW, ideally able to recapture the work levels seen when Ricardo took on aspects of the 'whole vehicle' engineering task of the 2001 New MINI. As a UK produced BMW product the German's sought out capable UK engineering consultancies to deliver that car - as with Rolls-Royce – but today the 'homeland repatriation' of German VM's work means that those UK companies seeking close relationships must meet German technical expectations and benchmarks at below German industrial rates.
For a UK firm this then means preserving a more costly German office, the high standards of which are maintained by CapEx investment and high quality German management & staff, whilst to off-set this prospecting / retention cost, simultaneously seeking cost-base reductions across its activities in the UK and elsewhere.
Ricardo's belief appears to be that if a UK engineering firm with its own esteemed track record in specialist markets can continue to built good German relationships, it will be able to carve-out an ever broadening and well defended business proposition and investment model. Seemingly seeking to set world-class engineering sector standards, and extending its 'knowledge reach' from niche-volume to mass-volume arenas. Able then able to offer its top-tier capabilities to worldwide clients from Europe, America, Chinese, Indian, Russia and EM nations.
From the broad UK sector perspective, Ricardo's German learning (ideally from a combine of VW-BMW-Daimler) to provide the credibility and know-how as the necessary resource option for domestic clients such Jaguar, Land Rover (in turn parent TATA Motors strengthening the UK-India link). Furthermore, as a ripple-effect, Britain's numerous small scale vehicle producers - who themselves are often reliant upon outsourced engineering solutions to gain market differentiation – then have access to world-class engineering standards which on a 'whole vehicle' or 'sub-systems' basis can be selectively instilled into their products to match international quality standards.
The loss of the indigenous large-scale British car industry undoubtedly shook-up any innate complacency that existed within the auto-engineering consulting sphere, yet that loss was replaced by a high level of FDI coming in the form of 'replacement' trans-plant factories from Nissan, Honda, Toyota, and willing new 'parents' of BMW, VW & TATA. The Germans provided world-class technology platforms and modules which effectively revived MINI, Rolls-Royce and Bentley marques, whilst the Indians provided both a financing-platform and assisted-access to what will be a massive new market for JLR.
Through-out this long transition period of the 'big players' the other client-segment of UK motorsports has itself been through volatile times, what was a vibrant broad-scope field hit very hard by the fall-out of the 2008 financial crisis, its own financing base slashed and technology development programmes either cancelled or heavily modified. Yet FIA regulations and the like have sought to push technical boundaries of various motorsports – the 'eco' agenda obvious - so that learning can be trickled-down into road-cars.
Each of the UK's auto-engineering firms is typically idiosyncratic relative to people and cultures, but efforts to 'de-risk' their innate business models by broadening their service provision across multiple sectors and client-types has been typical when economic slow-downs occur – typically a case of 'rapidly off the motorsports gas peddle' and then 'heel and toe-ing' VM clients and alternative others.
The rise of the EV provided a for a while strong secondary fiddle for auto-engineering firms, able to access the income of both government scheme funding and VC funding, but much of the EV expectation has collapsed with the collapse of the credit boom, turning back to ICE based hybrids and LEV projects.
The greatest concern however has been the tendency for VMs to maintain and grow internal engineering competancies. The was typically the case with Germans and Japanese but even they appear to have renewed vigour to do so given a combine of both their ICE and Hybrid technical leadership and the re-emergence of a self-dependent attitude within nations that must look after their own national interests whilst also acting as prime economic agents for their respective geographic regions. S. Korea will probably also follow a similar route, wishing to protect any advances in their consumer electronics fields that can be integrated into their vehicles to provide a competitive edge, aswell as trying to add in-house powertrain and chassis competence.
This then makes for an evermore complex web of challenges and opportunities for UK auto-engineering firms.
The 1960s/70s yesteryear route to business growth and success was born from creating a cup winning race-team or assisting race-teams within a burgeoning motorsports arena. That has now become a centric business-world unto itself, although the lower ranks of the sport may still offering valuable design contracts when conditions suit. That old era garnered contracts from VMs to adapt mass-models into special sporting edition model-lines, sporty chassis dynamics & enhanced engine BHP, and with an extra fee obtained for co-branding. But much of the notionally high margin pricing failed to materialise on the VM's Cash Book and P&L account, so latterly similar projects were created in-house to bind engineering knowledge, marketing punch and defined profitability.
Engineering sector evolution saw the M&A of names and capabilities, companies tended to follow either a horizontal 'diversification' route combining once separate spheres (ie Auto, AGCON, Military, Marine, Rail etc) to gain varied markets access in the hope of a gaining a counter-cyclical activities, or tended to vertical 'integration' so as to extract greater efficiencies from the value-chain and demonstrate sector reach and expertise, with intention to preserve portions of the feasted profits in economic famine.
Today, the engineering sector remains broadly multi-faceted, yet given its commercial profile with VMs & SME producers aswell as a high public profile via motorsports it is automotive-engineering which understandably holds perhaps greatest investor attraction.
Of course different investor types, ranging from low-risk institutionals to technology-led VCs, will seek out (very) different types of engineering firm, slow and steady operators through to technology 'moon-shot' start-ups.
Yet, the age old investor promise of a company creating a technological leap that becomes integrated into millions of vehicles remains, a notion which certain sector players well recognise when defining and re-defining themselves. If founder-owned or PE-owned typically seeking to maximise that perception as part a semi or full exit strategy via either the secondary PE market, an IPO or trade-sale to another engineering firm, much depending upon the details of the firm's innate structure and proposition.
This then represents the dynamic at the more fluid end of the sector, typically closer to the type of conceptual engineering related to transformative eco-tech and its place with motorsports.
Conversely, at the opposite end of the spectrum amongst volume vehicle producers, because of VM self-interests it has become far less probable that 'moon-shot' ideas are adopted, the 'not invented here' syndrome becoming increasingly endemic. This is well known by the well established engineering firms and thus they have sought to create business models which provide low-cost 'commodity' engineering services, the 'bums on seats' work mentioned previously.
Each of Britain's auto-engineering firms of course sets its own strategy accordingly, yet as a whole Britain must recognise that the general 'shape' of its auto-engineering base has very probably already started to increasingly look like the silhouette of an hour-glass / sand-timer, a bulge of (F1-type) 'transformative eco-tech' at the top, a thin waist middle-ground (held by in-house VM) and a 'bums on seats' bulge at the base.
Maintaining it F1, high-end motorsport and 'transformative eco-tech' capabilities should be par for the course if a new generation of engineers can be suitably educated and trained by academia & firms; the establishment of an educational centre at Silverstone demonstrating the commitment to do so.
Operating in the realms of commodity engineering is untenable unless British firms – ideally dedicated outsourcing firms - can duplicate the MSX model across India, Russia and China, using their UK staff as lead engineers to educate local populations – thus effectively duplicating the Ricardo (2010) Consulting experience. To try and compete at home in such a competitive arena is obviously foolish given the cost-base, especially so given the ambitions of TATA Group and other similarly styled ASEAN conglomerates to do so.
Yet there is also the massive 'waist-land' of that hour-glass. Yes it is understandably occupied and highly protected by global VMs, but that does not theoretically prohibit the UK from 'designing a better mousetrap'. The evolutional design of powertrain systems, chassis systems, body-systems, electrical systems is the norm, and the UK has proven itself in the past with cases such as the Coventry Climax engine, the K-Series engine, 4WD All-Terrain Response Control, mixed-material structures and attack blast-defence materials. But its lack of a mass-manufacturing champion and directly R&D supporting supply-base meant that it fell behind too, in areas such as 'lean burn' VVT (although adopted), CANBUS electronics and 'bio-flex' body surfaces.
It also means adding greater onus to VM support services that span the design and development process. The obvious being new a new breakthrough generation of IT software either leased or sold, ideally compatible with, but reaching beyond, the likes of CATIA, NX etc. Beyond the ethereal world is that of the physical and disciplines such as 3-D modelling and prototyping, which although
gaining good press coverage has failed to yet become fully fledged industry tool, leaving VMs to set out scale models, exterior and interior bucks, working-mules and production prototypes. Progress in this area would assist the time and cost of physical development work. And beyond this is the very idea of 'creativity' itself, possibly overlapping the activities of education research and firms to assist EM nations especially to better create their own creative cultures.
Thus creating close 'confidant' relationships with the volume manufacturers and their Tier 1 suppliers in Germany, Japan, S. Korea, India, China, Brazil and the USA will continue to be critical, so as to create meaningful dialogues about the engineering challenges and aspirations sought by their mass manufacturers.
The UK must recapture its eminence as a respected engineering nation, and to do so means generating ideas and IPR that can directly assist clients given the constricted technical and production boundaries they themselves must work within.
"Sell a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime"
The next stage surely must be to “sell the man a better fishing rod, a better net, a boat....set the rod, mend the net and refurbish the boat, etcetera, etcetera, etcetera”.