The automotive industry is usually admired as one of the world’s best-managed business sectors. But recently, competition and mismanagement have brought a decline in fortunes, accelerated by lost market share and skyrocketing petrol costs.
In many cases, manufacturers are going back to the drawing board to create new technologies and find new ways in which to grow their businesses. Undoubtedly, the industry is facing an overhaul.
In the US, the Big Three car makers –General Motors (GM), Ford Motor and DaimlerChrysler – are still feeling the pinch from Japanese rivals that continue to invest heavily in North America and chip away at their market share.
This July, Asian automotive companies, led by Toyota and Nissan, increased their US market share to 35.3%, prompting Ford and GM to give deep discounts on their vehicles in a bid to push up sales.
The Japanese continue to ratchet up pressure on Detroit’s renowned car makers. Toyota announced this summer that its seventh North American vehicle assembly plant in Woodstock, Ontario, will bring about 5600 new jobs to the province. The new plant will open in 2008 and will build 100,000 vehicles annually.
The Toyota juggernaut shows no signs of stopping. The company is expanding its wheel-making plant, Canadian Autoparts Toyota Inc, in Delta, British Columbia. It already has three US auto assembly plants, in Kentucky, Indiana and California, with another set to open in Texas in 2006, and a plant apiece in Mexico and Canada. Toyota factories are sprouting up around the world, including a recent new opening in the Czech Republic. Plants in Texas and China are set to start production in 2006, and new factories in Thailand and Russia are scheduled to open the following year.
Despite the overheated competition between global auto makers, today’s pressure is coming from the gas pump: drivers want stylish, roomy vehicles but dislike paying an extortionate amount to fill their tanks. Consequently, auto companies are focusing on strategies for hydrogen-powered engines, fuel cells and/or new hybrid models. This requires big investments in research and development (R&D).
Energy bill boost
A big boost to the effort in the US is president George W Bush’s signing of the 2005 Energy Bill, which gives buyers of hybrid cars credits of up to $3400. Competition to capture hybrid customers is heating up. Rex Parker, an analyst at AutoPacific, based in Tustin, California, reports that Detroit is already several generations behind the Japanese in rolling out models with better fuel efficiency.
But it is not only new engines that car makers are considering. Auto manufacturers also want to distinguish their models with high-tech gadgetry. The likes of Toyota, GM and BMW are already falling over each other to track down the latest in digital, imaging and even biological technologies.
“The field is so competitive that we’ll visit a university and find out that GM was there yesterday and Honda is coming tomorrow,” says Jeff Makarewicz, general manager of materials engineering at Toyota’s technical centre in Ann Arbor, Michigan.
Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff University, Wales, says that if British auto manufacturers want to keep ahead of competitors, they must lead in testing and technology. He urges major suppliers to spend more on R&D to give added value to products. And Jon King, director of UK-based Corus Automotive, emphasises that product innovation is key if the UK and European automotive industries want to keep ahead of developing countries such as China. The same holds true for those operating in the US and Canada.
“Firms need to double investment in R&D,” Professor King says. He estimates that by 2020, 180 more car plants will be needed worldwide to meet anticipated demand.
Investment in innovation is under way. Toyota, for one, is spending €75m over the next four years in its R&D centre in Zaventem, Belgium. Half of this sum will go into new testing and evaluation facilities.
“Toyota’s investment not only shows the importance we attach to R&D, it also shows the importance we place on Europe and our intention to continue to develop, design and build cars in Europe for Europeans,” says Akihiko Saito, executive vice-president at Toyota Motor Corp.
R&D in Russia
GM is opening a new R&D science office in Moscow to leverage Russian science institutes and universities on a broad array of technologies, including fuel cells, hybrid and electronic controls, and battery research. Initial work will focus on materials, emissions control, catalyst development, lightweight metal processing, hydrogen storage for fuel cell applications and engine control technology.
“GM sees the new R&D science office as a unique opportunity to expand its R&D global network in areas of critical importance to the company and give GM a greater mix of R&D knowledge. Since these programmes are collaborative, we believe there is significant potential for both sides to benefit,” says Gil Golan, director of GM’s R&D global strategy.
GM started working in Moscow in 2002 with Moscow State University and the St Petersburg State Institute of Information Technologies and Optics. Every year since then, the portfolio of projects has increased, and the work has expanded to scientific and technical institutes in both Russia and Ukraine.
The bulk of GM’s research is still undertaken at its R&D department in Warren, Michigan, although the company continues to expand into markets that offer promise. Today, GM R&D operations are found in 12 countries around the globe, including a science laboratory in Bangalore, India, where projects complement the ongoing research in Warren and introduce exploratory projects of high value to GM.
Operations in India
“The research lab in India provides an increased diversity of talent and resources to our global R&D network,” says Alan Taub, executive director of the science laboratories for GM R&D. “We are able to tap into these science-rich societies and involve the world's best technical talent.”
More than 30 research projects are being conducted at universities and the national laboratories, including the Collaborative Research Lab set up at the Indian Institute of Science in Bangalore. In addition, GM has relationships with several industry partners in India.
“India is an emerging market in Asia and it is essential for us to grow our global R&D capability as part of the overall expansion of our presence in the region,” says Aditya Vij, president and managing director of GM India.
Hyundai is the most recent international auto maker to announce a new R&D facility in Michigan, which is already home to more than 215 of the world’s vehicle-related R&D centres. More than 67% of all North American auto-related R&D activity is conducted there.
Hyundai already operates its Hyundai America Technical Center in Michigan, which was established in 1986 and is a wholly owned subsidiary of Hyundai Motor Company of Korea. From there, the company conducts emissions testing, engineering, research, development and design for Hyundai and Kia automobiles.
Announced in October, the 18,581-square-metre, $117m expandable Hyundai-Kia Tech Center is expected to generate a total of 751 new jobs for Michigan workers, including 400 created directly by the company.
“The opening of our new R&D centre represents another milestone in the history of Hyundai and Kia. It will allow us to expand our ability to support the improvement of current products and the development of new Hyundai and Kia vehicles for North America,” says Robert Babcock, manager of corporate affairs for Hyundai-Kia America Technical Center, Inc. “It’s vital that we identify the customers’ needs and desires for this market. This is one of our most important goals.”
To help seal the deal, the Michigan Economic Development Corporation granted a single business tax credit, valued at $22m over 12 years, to convince Hyundai (which was considering Alabama) to expand in Michigan. Local tax abatements totalled $6.4m.
DaimlerChrysler invests about €15m every day in turning ideas into projects and products. DaimlerChrysler Research and Technology North America (DC RTNA), conducts its R&D in Palo Alto, California, where the mission is to observe high-tech trends in Silicon Valley and assess their importance for the automotive industry.
Activities focus on vehicle IT, human-machine interaction, social and technological trends, and the study and testing of concept cars equipped with alternative drive systems. More than 50 researchers and engineers and numerous college and graduate students work at DC RTNA, which is a wholly owned indirect subsidiary of DaimlerChrysler AG.
DC RTNA also has a facility in West Sacramento, California, where DaimlerChrysler is a member of the California Fuel Cell Partnership and tests fuel cell-driven vehicles, such as the Mercedes-Benz A-Class F-Cell. Among other things, this location houses a testing lab for the further development of fuel cell technology.
“The mission of DC RTNA is to remain in tune with the changing times and conduct research into possible future DaimlerChrysler products in line with specific US requirements,” says Akhtar Jameel, president and CEO of DC RTNA. DC RTNA is one of nine DaimlerChrysler research centres worldwide. Others are found in Germany, India, China, Japan and Russia.
R&D is no doubt a critical element to this industry that must constantly reinvent itself. Yet auto makers must also continually expand their global manufacturing and product footprints to capture a bigger share of the world market and boost profits.
The battle for China
A battleground is forming in China, where millions of people are giving up their bicycles for automobiles. The opportunities there are staggering.
Today, GM is one of the largest foreign investors in China, where it employs nearly 9000 people. It has set up four vehicle manufacturing joint ventures there, along with one design joint venture and two solely funded enterprises. It plans to more than double its vehicle assembly capacity in China to 1.3 million units by 2007.
As part of the plan, GM is investing more than $3bn in China over the next three years with the introduction of new vehicles and power trains, the building of new facilities and expansion of manufacturing, and a new financing joint venture.
In addition, GM and its Chinese partners plan to introduce nearly 20 new and upgraded products, including luxury vehicles, most of them made in China. Among them will be several Cadillac models, which will be assembled at Shanghai GM with parts imported from North America. There are also plans to build an advanced prototype lab to test noise, vibration and harshness, as well as a kinetics and compliance lab.
Ford moves in
Ford is moving up on GM in China. In January, it received approval from the Chinese government for a $1bn state-of-the-art manufacturing facility near Nanjing in Jiangsu province, to be operated jointly by Ford, Mazda and Changan Automotive Group. The plant will be Ford’s first manufacturing presence in China and will be able to produce 160,000 units a year. The joint venture has also entered into a contract for a new engine plant one kilometre west of the vehicle assembly plant, which will be able to make 350,000 engines annually.
In an interesting twist, as US companies rush to build plants and research centres in China, Michigan is trying to persuade fast-growing Chinese companies to open offices there. Their pitch: Detroit is still the automotive capital of the world and Asian companies need R&D or sales offices there. The state has already had some success. Recently, Shanghai Automotive Industry Corp, which is the largest Chinese auto maker, set up a small operation in the city of Troy.
More business could be on the way. Six major Chinese auto makers and hundreds of smaller car companies and parts suppliers are fighting for a piece of China’s burgeoning auto industry and looking beyond their own shores for opportunities.