Thursday, 25 June 2015

Industry Practice – Volume Manufacturing – Call for a Paradigm Shift...Usual Rhetoric or Prescient Timing? (Part 2)

Throughout much of the auto-industry's history there have been calls for rationalisation, obviously so, especially through periods of substantial economic contraction, awaiting the upturn: just a few examples given previously in the 'take-away' of Part 1.

Such rationalisation inevitably undertake via inter-firm consolidation.

However, there have been calls for yet greater re-modelling of the auto-industry, so although arguably somewhat (or very) remote from the ultra-competitive realities of a VM's operational demands, the intention of this portion of the weblog is to very basically highlight the broad 'paradigm shift' efforts within the sector – see accompanying graphic.

And to highlight how at a time when Marchionne's call for consolidation has been viewed by some as overtly idealistic, over the last two decades there have been other 'shadow debates' and efforts which have sought alternative technical solutions, along with part and wholesale re-creation of the sector's innate (historically embedded) operating structure.

The internet powered information-age has in turn promoted such perspectives, especially amongst those with vested interests in disrupting the norm. Cyber-space deployed along with the combined use of traditional academic 'heavyweight' publishing, the trade press and ever greater exposure to 'industry insider' issues within car consumer magazines.

The Traditional “Play Book” -

The ideological conflict between a global growth ambition, a desire to sweat its vertically integrated industrial assets and need for improved ROI, appears to have set FCA Group on a rational path toward further 'Eastern Consolidation'; even if subtly presented.

[NB although the words spoken and put-out in the press release highlighted the challenge of 'tomorrow's world' mobility and its enabling technology, little if any of this detail was actually apparent in the presentation].

The 'set play' by corporations and (very often) their capital markets backers the is merger and acquisition of 'synergistic' firms, so as to gain broader overall market footprint, greater penetration of its segments, operational economies of scale, improved margins and cash-flow and thereafter greater efforts and rewards from research and development. As seen then, merger and acquisition is “par for the course” and with the success of globalisation a repeatable formula ad infinitum.

Such calls then are expected and critiqued relative to the zeitgeist, and could be viewed as ostensibly evolutionary for the sector.

Versus “Alternative Revolutions” -

However, as will be seen, there are periodically other - far more revolutionary – calls made, along with rare efforts toward 'sector-disruption'. These (though previously failed, now gaining greater publicity) then are:

1. Sector Technological
2. Sector Structural

These may be viewed as the two primary avenues of change, and are inevitably entwined, any progress within one sphere opening up debate and opportunity in the other.

The spectrum itself ranges from the marginally evolutionary of either sphere (eg improvement of the internal combustion engine vs cross corporate consolidation) through to the radically revolutionary (ie broad adoption alternative propulsion units vs wholly new manufacturing or retailing methods). As such each may represented as opposing 'x' and ''y' axis on a basic Cartesian graph.

So it is seen that in both realms – Technological and Sector Structural – that a seeming plethora of alternative routes may be undertaken; by both sector incumbents (typically more modest and plausible) and sector disruptors (typically more ambitious and problematic).

Mainstream “Business as Usual” -

Firstly that which is viewed as the convention with low-risk/lower-reward “baby steps” by most VM firms, whether mainstream or premium. (seen in 1.)

Mainstream 'Eco-Mobility' -

Then onto what may be termed 'Semi-Intermediate' technical initiatives, which very rationally combines (or better described 'integrates') unfamiliar new technologies within the conventional. The best known and most successful example to date being Toyota's massive early investment into Hybrid powertrains, from Prius onward. These power-sets intentionally installed into otherwise conventionally manufactured and styled products for operational integration and increased market acceptance. Over time continued research in the 'miniturisation' - or at least scaling-down - and improvements upon the original Prius mk1 power-set has allowed for broad vehicle range applications. (seen in 2.)

Taken yet further, a similar balanced rationality, has lead to the diametrically opposed position taken-up by Tesla, whereby its market revolutionary EV system is now installed into a sporting sedan based upon advanced aluminium construction but produced via evolutionary pressed-metal stampings in Fremont, CA, USA in order to quickly scale-up volume of its EV products.

However, the greatest progress has been made by BMW, with its i3 model: in either full EV and (more practical) 'range-extended' variants. Unlike other major manufacturers, under the new 'i' sub-brand and its 'MCV' (MegaCity Vehicle) ideals, BMW undertook essentially a clean-sheet design to maximise the optimisation of the overall package; whilst ensuring it could be built in volume numbers via its conventional (pressed steel and aluminium) production system (thus far in Leipzig, Germany). Most impressive though is the company's investment in carbon-fibre composite processing to create the strong yet light structure. (Further future weight-saving likely to be achieved with poly-carbonate windows). Thus BMW's leap of faith with 'i3' demonstrates its commitment to 'visioneering'.  

Niche “Business as Usual” -

As is well understood, even by the early 1930s the trend toward mass demand of the motorcar witnessed an industry morphing from what had for decades been a crafted item, toward one effectively re-moulded by the volume and speed efficiencies of Fordism, and thereafter the Budd-based and semi-monocoque and full-monocoque.

However, whilst there was indeed consolidation amongst the old-style upmarket (chassis-on) coach-builder body-makers, with some names absorbed into conglomerate structures of major manufacturers, the basic skills deployed in crafted, low volume, bodies and whole vehicles were re-utilised after WW2; with now the added advantage of new materials and thinking prompted by WW2.

Together with the post-war economic boom, this provided fertile ground for development of the unadulterated sports-car to satiate the demands of aspirant and more adventurous members of western society.

However, unlike mainstream production's usually sustainable variability through the economic cycle, the very nature of sports-car and luxury-car niche is dependent upon prosperity. Hence the innate business model had to be 'back to basics': dependent upon low CapEx tooling and fabrication solutions, far greater use of a flexible labour force and as low as possible overhead. (see item 3 on the graphic).

Even so, this has not been a perfect formula for success, since so much depends upon the appeal of the product itself, and the very real difficulty and onerous cost of scaling up production beyond certain niche limits if ultimately very successful.

The boundaries of what was once possible however has been somewhat expanded by those major VMs who have acquired specialist marques, and with relatively large R-D budgets, have been able to undertake the learning curve to instigate the ever greater numbers of advanced 'trickle-down' materials and methods; specifically the application of aluminium, carbon fibre, other composite types, usually combined as a 'mixed matrix', depending on performance requirements. Those parent car-makers well recognised the need to improve production and quality levels to raise the prestige of specific marques, and have been very successful in doing so.

The only others, as plausible independents, seen to have invested in advanced engineering - using internal and external fund-raising - have been Pagani (Italy), Koenigsegg (Sweden) and McLaren (UK). These companies viewed as patriotic torch-bearers in their respective national ambitions toward advanced engineering, and the export earnings and technology transfer hopes.

However, very frankly and a world away from the cosseting of VM guardianship, and national interests, it must equally be recognised that this glamorous business arena has a darker side.

Historically used as the stalking ground for disingenuous entrepreneurial “Producers” who – who as with the namesake film – have sought to instead absorb and channel as much excitable investor cash as possible, before going (intentionally) “belly-up”.

Nevertheless, some companies have been long-lived - typically if managed well with avoidance of debt - as was the case for so long with family run Morgan Motors; cutting its operational cloth to suit good and bad times. Likewise (the defunct but seemingly returning) TVR when under Peter Wheeler ownership. And (from a distance) today the seeming example of Ginetta with Lawrence Tomlinson.

But it must be stated that as an ongoing long lived enterprise, Morgan is a rarity, the historical experience of premium orientated niche vehicle businesses run independently that of at best “feast and famine” and at worst substantial investor losses. Only few names such as Aston Martin are typically able to ride the such waves - taking shelter under VM influence as required, thanks to enormous cache.

This said, the following arena, based toward commodity-type, city-mobility should not automatically be viewed in the same manner, though investor caution should always apply.

Micro-Factory Retailing -

The centre ground of the chart may be loosely termed 'Definitively Intermediate', centred around what is essentially niche type (ie low volume) production methods which have been utilised since the 1930s in Grand Prix cars and the 1950s in sports cars: typically a structural skeleton supporting major systems, covered with composite, aluminium or mixed panels.

This was re-named Micro-Factory Retailing by academia in the mid 1990s to befit a far more localised approach to vehicle construction. It was initially imagined as the best way to create locally-fabricated vehicles for developing markets (ie 1980s Africar to 2010s Mobius). (see item 4 on the graphic)

A commercial model latterly seen as eventually applicable to advanced nations as well (as in relative terms the Triad sees an economic 'structural shift' with lower growth and increased eco-awareness). Hence the ability to offer new vehicle architectures and powertrains that are concisely designed around the ideal of much expanded eco-mobility; made operable at a local level to support sub-national regional economies. (seen in 3.)

With this 'eco-local' perspective in vogue amongst Triad regions governments at the height of mid 2000s consciousness and eco-budget spending, a number of previous conceptual and prototypical vehicles and business models were created to date befitting the LEV and NEV remit. Such eco-concepts as the continuance of THINK!, and new Mindset, Loremo, Bollere-Pininfarina, Tesla and GMD's T-series were generated during the period. The latter examples gained greater financial backing and so exposure. Most recent arrived in this conceptual space is 'Divergent Micro-Factories', showcasing its 'Nodal' construction arrangement as rolling chassis for its Blade concept'. The basic structure a partial materials update of the conventional niche production space-frame / bird-cage method (as applied to early aircraft, race cars and typically niche-car specialists).

[NB The massive funding difference between America's Tesla and France's Bollere vs Britain's GMD says much about the power and speed of wealthy entrepreneurs, versus the modern equivalent of the drip-fed funded 'garagista' awaiting roll-out through licensing].

One aspect of that automotive “eco rush” was the emergence of often overtly idealistic 'open-source' designed cars such as Oscar, Local Motors and OSvehicle; each progressing in stops and starts. These invariably appear to have insecure funding streams, possibly used by others to extract IPR ideas, and may have arising issues regards any eventually monetisation of the value provided by external contributors.

Sector “Unbundling” -

Perhaps most profoundly is the call for 'Sector Unbundling' by the likes of Maxton and Wormald. (see item 5. on the graphic)

[NB as can be imagined, it is the very opposite of the 'bundling' trend seen in developed market telecoms and info-tainment over the last decade].

The hypothesis (seen in 2004) is that the the Triad regions (USA, Europe and Japan) have matured to effectively stagnation point, and the true ultimate market opportunity for major triad car-makers in EM nations will not be as great nor as lengthy as appears the 'promised land' case. The expectation that BRIC and EM nations will likewise seek to follow China's own automotive manifesto; to conjoin with JV partners from the triad nations so as to capture modern technology assets and know-how, but to critically deploy that knowledge to serve its own economic growth, thus slowly squeezing-out today's major / global auto-industry players.

With such a bleak horizon, the only way to further extract investment reward from the largely triad-based auto-industry will be to undertake a wholesale restructuring to align to 'core competencies' and so 'key competitive advantages'. The outcome being any remaining vertical integration of the major players is divested and likely bought-over by Tier 1/2 suppliers; and likewise, 'core activities' remaining in-house to a VM, but peripheral activities given over to current or newly created corporate entities wholly focused upon a specific realm. This would eventually naturally lead to the creation of Tier 0.5 companies and 'Integrators' who effectively act as vehicle architects and suppliers to many of the brand names of today, and a new emergent set of newcomer brands from outside the industry.

[NB Very small scale, indeed thus far negligible, efforts by auto-sector outsiders to initiate such thinking has been seen by the 'open-source' (OS) vehicle design community, as shown in the accompanying graphic].

This then a major over-haul of what historically has been a very entrenched industry; one which when faced with forms of external disruption has sought to quell the threat.

[NB One example is the previous selected assets acquisition of some of Europe's various niche production design-contract houses (eg Karmann, Heuliez), before being possibly resuscitated as 'Integrators'.Another example is Daimler's stakeholding in Tesla Motors. As investment-auto-motives has mentioned time and again, that some 'entrepreneurial disruptors' may in reality simply be seeking to gain a very handsome reward by exiting their ventures with sales to the industry's incumbent major players. Thus, in some instances – autos most obviously – there may well be a commercial imperative, masked by apparent humanitarianism, behind such sector disruption].

Thus, 'Sector Unbundling' does indeed promote the scaling back of VM's (often dynastic) centralist power-base, seeking to create what is viewed as a far more rational (horizontally integrated) industry structure; one which now includes far greater provision of electronics and cyber-based 'info-tainment' hardware and software. Under the 'Unbundled' scenario, today's auto-companies would effectively shrink to become automotive 'brand houses', able to concentrate on their specific USP internally and procure what would be far more complete 'vehicle modules' and 'sub-systems' from external parties, with the 'ultimate ideal' of farming-out much of the whole vehicle manufacturing process to a new crop Tier 0.5 firms (the apparent ambition of Magna International).

The Take Away -

Quite obviously, such calls for change are presented by those who essentially convey themselves as deliberate antagonists so as to push the boundaries of two important arenas:

A. Eco-Consciousness and Revolutionary Eco-Mobility.
B. Potential for Improved Return on Investment via Sector Re-Alignment.

Both sets of sector activists seek to create a major shift in current, historically engrained, perceptions by consumers, industry insiders and investors. Variously, such voices come with and without auto-industry experience, each background with positive and negative attributes. Others have practical experience of different product and service fields. Others still with very little or no experience, with bravado and a PR driven publicity machine, simply seeking to re-deploy the basis of other sectors' commercial models into eco-mobility.

These pointers for change ostensibly arise from an overtly intellectual and philosophical standpoint, either in auto-associated management consulting or auto-orientated academia. And those actions for disruption made by a plethora of initiators, from over idealistic, commercially naïve eco-activists to those with seemingly high ideals, very deep pockets, political connections; and very possibly high-return exit strategies.

However, these 2 calls for change, from very different perspective and goals, should not be immediately viewed as inter-linked or inter-dependent; though of course the latter may ultimately assist the former.

With this understanding, given the level of great publicity generated by the Californian 'Mamas and Papas' of eco-mobility, little more need be added.

Instead, Part 3 of this weblog instead looks to the investor critical ROI hypothesis, as purported by Maxton-Wormald, and provides a summary of the recommendations made over a decade ago, back in 2004; with recognition of the fact that even Marchionne's calls for evolutionary consolidation fell to a large extent on the 'deaf ears' of necessarily cynical investment analysts.