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I M V P
Globalization of Innovationin the Automotive Industry
John MoavenzadehExecutive DirectorMIT International Motor Vehicle Program
MPI Spring SymposiumWorcester Polytechnic InstituteWorcester, MAMay 25, 2006
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
What is the International Motor Vehicle Program?
IMVP is an international network of professorsand researchers engaging with managers andexecutives in the global automotive industry.
The interaction between researchers andexecutives generates knowledge and insight ofvalue for the automotive industry.
I M V P
IMVP Researchers Span the Globe
Seoul NationalUniversity
Wharton School,Univ. of
Pennsylvania
Univ. ofPittsburgh
CarnegieMellon
Case-WesternReserve
MassachusettsInstitute ofTechnology
University ofMichigan
RochesterInstitute ofTechnology
Hosei University
OxfordUniversity
CambridgeUniversity
INSEAD
SocialScience
ResearchCenterBerlin
Indian Instituteof Management
CatholicUniversity of
Korea
Tokyo University
HitotsubashiUniversity
Kobe University
ÉcolePolytechnique
TsinghuaUniversity
I M V P
Takahiro Fujimoto
University of TokyoEducation: PhD HarvardExpertise: Production management;product development; suppliermanagement
Christophe Midler
École PolytechniqueEducation: École Polytechnique,PhD Université Paris SorbonneExpertise: Competition and innovation,project management, innovation mgmt.
Michael Cusumano
Massachusetts Inst. of TechnologyEducation: BA Princeton, PhD HarvardExpertise: Strategy and technologymanagement
IMVP is a knowledge network … a community ofscholars examining critical industry issues
John Paul MacDuffie
Wharton School, Univ. of PennsylvaniaEducation: BA Harvard, PhD MITExpertise: Lean production systems;organizational change; automotiveindustry employee relations
Ki-Chan Kim
Catholic University of KoreaEducation: PhD Seoul National UniversityExpertise: Role of IT in supply anddistribution chains
Dipl.-Wirtsch.-Ing., Univ. of AppliedSciences, Wedel, Germany, MScUniv. of Buckingham, PhD CardiffUniv.
Ulrich Jürgens
Berlin Social Science Research CenterEducation: PhD Free University of BerlinExpertise: Labor relations, productionsystems, corporate governance
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
Globalization: The US Automotive Market HasBecome Increasingly Globally Integrated inThree Phases …
… and other regional markets have followed this pattern(with notable exceptions)
1965Isolated Regional Markets
Isolated Regional Markets
1965
Business IntegrationBusiness
Integration
1990’sTrade Flows:
Imports & Exports
Trade Flows: Imports & Exports
Increased Global Integration
1970’s
FDI Flows: TransplantsFDI Flows:
Transplants
1980’s
I M V P
Merger/ Acquisition: Daimler Benz & Chrysler Corp.; Ford & Jaguar;Ford & Volvo; Volkswagen & Seat; Volkswagen & Skoda
Controlling Equity Stake: Ford & Mazda; DaimlerChrysler & MitsubishiMotors (until July 2005); Renault & Nissan
Non-controlling Equity Stake: GM & Fiat Auto (until February 2005);GM and Fuji Heavy (until October 2005); DaimlerChrysler and Hyundai(until July 2005)
Product Development Agreements / Shared Platforms: GM PontiacVibe and Toyota Corolla shared platform; PSA & Toyota small carsprogram
Technology Alliances: Ford & PSA on diesel engines; GM and Isuzuon diesel engines; PSA and BMW on small gasoline engines
More Integrated
Various Degrees of Business Integration in theGlobal Automotive Industry …
I M V P
Foreign-Brand Market Share in the US Light Vehicle Market
27.8
31.7
35.2
37.8
27.6
29.5
26.5
28.429.0
25.726.3
27.0 26.927.3
28.730.2
37.3
42.6
40.841.4
20
25
30
35
40
45
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005E
(%)
Foreign-Brand Market Share Has SteadilyIncreased in the United States to nearly 43% in 2005
Source: Automotive News, Univ. of Michigan
42.6%
I M V P
Source: IMVP, Automotive News 2004 data
But Foreign-Owned Firms Now Account for MoreThan Half of the US Market
2004 Total Sales = 16,912,613 units
3.1%
13.0%
45.6%38.2%
Foreign-Owned, Foreign-Brands:BMW, Mini, Rolls Royce, Mercedes Benz, Maybach, Ferrari, Acura, Honda, Hyundai, Kia, Isuzu, Lamborghini, Lotus, Maserati, Mitsubishi, Infinity, Nissan, Porsche, Subaru, Suzuki, Lexus, Scion, Toyota, Audi, Bentley, Volkswagen
Foreign-Owned, Domestic-Brands:Chrysler, Dodge, Jeep
Domestic-Owned, Domestic-Brands:Ford, Lincoln, Mercury, Buick, Cadillac, Chevrolet, GMC, Hummer, Oldsmobile, Pontiac, Saturn
Domestic-Owned, Foreign-Brands:Aston Martin, Jaguar, Land Rover, Volvo, Saab, Mazda
I M V P
US Light Vehicle Production: 1982-2005
6.9
9.0
10.611.2
10.610.1 10.3
9.6
8.3
7.38.0
9.1
10.19.7 9.3 9.5 9.2
10.1 9.8
8.69.3 8.9
8.4 8.0
0.80.9
1.3
1.5
1.5
1.7
1.8
2.22.3
2.42.4
2.5
2.62.7
2.6
2.83.0
3.33.6
0.70.5
0.3
0.2
0.1
0
2
4
6
8
10
12
14
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Pro
ductio
n (
mill
ions)
Foreign-Brands
Big 3
Source: IMVP, Automotive News
Transplant Production Accounted for 30.9%of US Production in 2005
I M V P
The Transplants Have a Different (and Expanding)Geographic Footprint from Domestic US Production
March 2006 News:Kia Will Build
$1 Billion AssemblyPlant in GeorgiaEmploying 2,500
March 2006 News:Toyota Will Build
100,000 AdditionalCars at the
Fuji/Subaru Plant inIndiana Employing an
Additional 2,000Workers
Source: JAMA, IMVP
I M V P
26.2%2.3%South Korea9.0%4.2%Japan38.2%26.6%Western Europe51.2%41.3%United States
Foreign-OwnershipPenetration
(2004)
Foreign-Brand
Penetration(2004)
Country or Region
US Vehicle Market is the Most “Open” to ForeignBrands …
Note: All Data for 2004Source: IMVP, ACEA, JAMA, KAMA
… But Foreign Penetration Continues to Increase in AllMarkets and Foreign-Ownership Penetration ExceedsForeign-Brand Penetration in All Markets
I M V P
1.65Russia
1.30India
5.23China
5.85Japan
16.86Western Europe
6.8750.1
5.7451.5
8.52185.5
1.66-0.1
1.97-2.4
2.78-0.316.91United States
AverageGDP Growth(%)1999-2004
VehicleSalesGrowth (%)1999-2004
2004VehiclesSales(Millions)
Country / Region
Growth Opportunities Are in the Developing World
Source: IMVP, Automotive News Data, World Bank Development Indicators
I M V P
Automotive Sales in China
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2000 2001 2002 2003 2004 2005
Commercial Vehicles
Passenger Cars
In 2005, China Became the Second LargestAutomotive Market in the World
Source: Automotive Resources Asia, China Automotive Technology & Research Center (CATARC)
Annual GrowthRate for Cars
16.8%
62.5%
60.7%
64.2%
7.4%
21.4%
3.97M
5.76M
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
Changes in the Automotive Innovation ProcessSince 19901) The innovation process has become more open(i.e., more innovation occurs outside the vehiclemanufacturer)
2) Innovation footprint has globalized (along withthe rest of the value chain)
3) Shift from mechanical to electronic product focus
4) Digitization of product development (new tools)
I M V P
Better Leverage of the Supply Base
The Innovation Process Has Become MoreOpen
More Strategic Alliances with Competitors
Emergence of Research Consortia
I M V P
Traditional Pattern of Ineffective R&D
ResearchResearch Results Technologies Components Vehicle Customer
Expectations
Advanced Eng. Vehicle Eng. Assembly
Not Invented Here New but disoriented
Fast but disoriented
Customer-Confusing
Scientific NetworkExcluded
Suppliers’TechnologiesExcluded
Source: Takahiro Fujimoto, University of Tokyo, IMVP
From a closed model of innovation …
I M V P
ResearchBy Open Network
Research Results Technologies Components Vehicle CustomerExpectations
AdvancedEng.
Vehicle Eng. Assembly
Select andRe-orient
Early, FastandIntegratedProblemSolving
LeanProduction
BTO
Scientific NetworkInvolved
Suppliers’TechnologiesAbsorbed
pullpush
Source: Takahiro Fujimoto, University of Tokyo, IMVP
… toward an open model of innovation
I M V P
Suppliers Play a Critical Role in the GlobalAutomotive Industry
Purchasing, $55.0
Labor, $12.6
Other Overhead, $6.8
Depreciation, $5.3
OPEB (Retiree
Healthcare), $4.6
R&D, $4.5
Advertising, $3.6
Pension, $1.8
Warranty, $3.4
Transport, $2.7
Active Healthcare, $1.6
Variable
Costs
Fixed
Costs
GM North America Estimated Cost Structure for 2004 (Total $101.9 billion)
Source: GM Annual Reports, Deutsche Bank, IMVP
I M V P
Many industry executives – from both OEMs andsuppliers – agree that more technological innovationoriginates within the supply base than within thevehicle manufacturers
Source: World Economic Forum, IMVP
2005 World Economic Forum Survey of Automotive CEOs:
In general, more technological innovation originates within the supplybase than within the vehicle manufacturers:
Strongly Agree: 33%Agree: 33%Neutral: 22%Disagree: 6%Strongly Disagree: 6%
I M V P
But the US Model for Supplier Relations ImpedesInnovation
-29.2%-20.8%114144156161GM-6.0%-1.9%157160161167Ford
12.0%7.1%196
183177175Chrysler
16.05%-0.6%259261234224IndustryMean
31.3%1.4%298294259227Nissan26.3%-2.3%375384316297Honda32.2%4.0%415399334314Toyota
2005200420032002
2002 -2005
%Change
2004-2005
%Change
YEAR
OEM
Supplier Working Relationship Index for OEMs in the United States
Source: John Henke, Planning Perspectives Report
I M V P
More Strategic Alliances with Competitors Since1990
GM & BMW:Hydrogen Refueling Systems (May 2003)
GM & Toyota:Fuel Cell (April 1999 - Feb 2006, continuesin advanced safety technology)
Ford & PSA Peugeot Citroën:Diesel Engines (March 2000)
Some Technology Alliances for Independent (non-equity) Firms
DaimlerChrysler, GM & BMW:Hybrid technology (Sept. 2005)
I M V P
More Shared Vehicle Platforms Since 1990
Toyota Aygo and Peugeot 107
GM Pontiac Vibe and Toyota Matrix
Some Shared Vehicle Programs for Independent (non-equity)Firms
Volkswagen and DaimlerChrysler Minivan (Jan 2006)
I M V P
Emergence of Research Consortia
US Council for Automotive Research
FreedomCAR & predecessor Partnership for NewGeneration Vehicle (PNGV)
AUTOSAR
Industry-Driven
Government-Driven
I M V P
The Innovation Footprint Has Globalized
R&D / Technical Centers Outside National Borders
Emergence of Global Product Teams
GM Locates Small Car Product DevelopmentCenter to Incheon, Korea
Vehicle Engineering teams go global: Ford-Mazda, Ford-Volvo
I M V P
GM Technical CenterBangalore, IndiaOpened Nov. 2003Employment: 240professionals in 2005increasing to 400 in 2006Vehicle design tools, virtualmanufacturing, controlsystems, materials
GM-SAIC Pan Asia Technical AutomotiveCenter (PATAC)Shanghai, ChinaOpened June 1997Employment: 660 Designers, Technicians,Engineers50-50 joint venture between GM and SAICprovides automotive engineering servicesincluding design, development, testing andvalidation of components and vehicles.
US Firms Offshoring R&D Tech Centers
I M V P
Nissan Technical CenterFarmington Hills, MichiganFirst Established 19892005 Employment:1056 (540engineers)In March 2005, Nissan added a$14M design studio to this site,following a $38M expansion in 2002..Total vehicle development for USmarket.
Toyota Technical CenterAnn Arbor, MichiganFirst established 1977 (multiple expansions)2005 Employment: 750Toyota’s New $150 Million R&D Facility willjoin this facility in Ann Arbor, Michigan and add400 technical jobs.TTC is engaged in engineering design, engineunit design, prototype development, vehicleevaluation, evaluation and design of parts andmaterials, regulatory affairs, emissioncertification, and technical research.
Foreign Firms Onshoring R&D Tech Centers
I M V P
7831977
Gardena, CA; Berkeley, CA; Ann Arbor, MI;Plymouth, MI; Lexington, KY; Cambridge, MA;Wittmann, AZ;Toyota
321986Ann Arbor, MI; Lafayette, IN; Cypress, CASubaru
10561983Farmington Hills, MINissan
1401983Ann Arbor, MIMitsubishi
501995Palo Alto, CA; Sacramento, CA; Portland, ORMercedes-Benz
1001972Irvine, CA; Ann Arbor, MI; Flat Rock, MIMazda
1001985Cerritos, CA; Plymouth, MIIsuzu
1501986Ann Arbor, MIHyundai
13001975Torrance, CA; Marysville, OHHonda
701982Spartanburg, NC; Woodcliff Lake, NJ; Oxnard,CA; Palo Alto, CABMW
EmployeesEstablishedLocation(s)Company
Foreign-Brand R&D and Design Facilities in theUnited States employed nearly 4,000 people in2005 – and this has been growing rapidly
Source: Japan Automobile Manufacturers Association (JAMA), Automotive News, IMVP
I M V P
Shift from Mechanical to Electronic ProductFocus
Declining cost of memory and exponential rise incomputing power enable an array of advancedautomotive technologies:
Examples of recent, current and upcoming electronics-based safetyinnovation: anti-lock brakes, traction control, active suspension, adaptiveeffort steering, electronic stability control, near obstacle protection, visionenhancement, adaptive cruise control, forward collision warning, adaptivecruise control, etc.
Q: So What?A: This TrendAcceleratesOpenness andConvergence
I M V P
Source: CATIA, Dassault Systems
Digitization of Product Development andIncreased Information Visibility
Access toInformationand Data HasAlso ImprovedSignificantly
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
Types of Innovation in the Auto Industry
Product Innovation: Clean Diesel, Hybrids, On-Board Navigation, Active Suspension, etc.
Process Innovation: Hydroforming,Stereolithography / Rapid Prototyping, etc.
Architectural Innovation: Modularity, Closedversus Open (Standards), Platform strategy, etc.
Organizational Innovation: Offshoring, Outsourcing,Collaboration, Alliances, Firm Boundaries, etc.
Business Model Innovation: mobility services,insurance, finance, etc.
I M V P
Drivers of Innovation in the Auto Industry
Relentless Competition: Downward Price Pressureand Upward Cost Pressure (both OEMs andsuppliers), Risk Management
Consumer Differentiation (Regional Differencesare Important. Tech Push versus Demand Pull)
Regulation and other Environmental, Safety, SocialDrivers
I M V P
Regional Consumer Differences Affect Innovation
The average German consumer spends 37 hours toresearch the automotive purchase decision …
… which is more than double the time spent toresearch their pension plan
Source: Alexander Gerybadze, IMVP-WZB Automotive Forum, Berlin, March 28, 2006
Fleet management (high percentage of companycars) and tax incentives in favor of productinnovation also drive automotive innovation inGermany
I M V P
Globalization of Innovation in theAutomotive Industry
Background of IMVP
Globalization of the US Automotive Market
Changes in the Automotive Innovation Process
Drivers of Innovation Changes
Case Study of US Emissions Technology
I M V P
0
1
2
3
4
5
6
1968
1969
1970
1971
1972
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1979
1980
1981
1982
1983
1984
1985
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1987
1988
1989
1990
1991
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1993
1994
1995
1996
1997
1998
Year
HC
CO
Nox
1970 CAA
1977 CAAA
1990 CAAA
NLEV
HC
CO
NOx
OxidationOxidation
CatalystsCatalysts
ThreeThree --WayWay
CatalystsCatalysts
Thermal Management SystemThermal Management System
Onboard Diagnostic SystemOnboard Diagnostic System
Str
ing
en
cy
(g
/mi
HC
, C
O/1
0,
NO
x)
CAA
CLEANAIR ACT
0
1
2
3
4
5
6
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
HC
CO
Nox
1970 CAA
1977 CAAA
1990 CAAA
NLEV
HC
CO
NOx
OxidationOxidation
CatalystsCatalysts
ThreeThree --WayWay
CatalystsCatalysts
Thermal Management SystemThermal Management System
Onboard Diagnostic SystemOnboard Diagnostic System
OxidationOxidation
CatalystsCatalysts
ThreeThree --WayWay
CatalystsCatalysts
Thermal Management SystemThermal Management System
Onboard Diagnostic SystemOnboard Diagnostic System
Str
ing
en
cy
(g
/mi
HC
, C
O/1
0,
NO
x)
CAA
CLEANAIR ACT
Vehicle Emissions Regulation Has BecomeIncreasingly More Stringent
Source: Francisco Veloso, Carnegie Mellon, IMVP
I M V P
0
1
2
3
4
5
6
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
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1987
1988
1989
1990
1991
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1993
1994
1995
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1997
1998
Year
Str
ing
en
cy
(g
/mi
HC
, C
O/1
0,
NO
x)
0
50
100
150
200
250
Nu
mb
er
of
Pate
nts
Issu
ed
HC
CO
NOx
Patent
1970 CAA 1977 CAAA 1990 CAAA NLEV
Patent activity increased with upcomingregulation
Conclusion: Increasing stringency associated to greater invention
Source: Francisco Veloso, Carnegie Mellon, IMVP
I M V P
OEMs and suppliers roughly split the patents
Suppliers,
1162
Universities,
11
Government,
16
Institutes, 26
Assemblers,
955
Other, 104
Universities and Government appear not to have significant contribution to technology
Source: Francisco Veloso, Carnegie Mellon, IMVP
I M V P
ASSEMBLER(Architecture)
SUPPLIER(Component)
Task Boundary
Assembler’s Knowledge Boundary
Suppliers’ Knowledge Boundary
Regulation, Uncertainty & Knowledge Partitioning
Question: Do firms move into each other’s knowledge space to help them jointly solve complex problems?
Source: Francisco Veloso, Carnegie Mellon, IMVP
I M V P
Conclusions from Carnegie Mellon Study
• “Technology-Forcing” regulations on automotive industry has had animportant effect on innovation– Patenting activities correlate with onset of regulations– New technologies developed as a result of regulations
• Technology dominated by Assemblers and Suppliers– Limited role for University and Government
• Firms need to adjust knowledge boundary to face uncertainty– Suppliers expand their in-house R&D capabilities beyond
component knowledge and into architectural invention– Overall assemblers’ in-house component invention is dominated
by evolution of technology – establishment of a dominant designand subsequent optimization. Small uncertainty effect
Source: Francisco Veloso, Carnegie Mellon, IMVP