Automotive Futures: High Tech or High Dreams?

In the online NBR Japan Forum (and in a chat with a retired vice miniser of METI – the Japanese Ministry of Economy, Trade and Industry [経済産業省]) – I hear about how electronics, hybrids, and yes, fuel cell vehicles will turn around the [domestic] Japanese auto industry. (The US, too, has its advocates of industrial policy.) After all, the Prius has been a huge success.

This is wrong on three counts.

First, it relies upon a mistaken definition of the industry. As Klier and Rubenstein show in their 2008 book, Who Really Made Your Car?, the vast majority of employment – 3 jobs to 1 – is in parts manufacturers, not the car companies. Twenty-five years ago the Detroit Three sharply reversed their vertical integration, with GM and Ford spinning off Delphi and Visteon. In Japan, though, that process of dis-integration began circa 1950, when Toyota as part of its de facto bankruptcy spun off Denso. According to its Census of Manufactures [工業統計表] in Japan the employment ratio is on the order of 4:1.

Furthermore, while high-tech is sexy, it is not the name of the employment game. Mundane-seeming items such as wire harnesses and seats are the most expensive individual items purchased, and while I've sat through engineering presentations on new technologies they incorporate, they remain comparatively labor intensive in their manufacture. As bulky items seats are almost universally made within a short truck drive of an assembly plant, but harnesses come from the Philippines (where they are the biggest single source of manufacturing jobs), China and Mexico. In addition, even if Japanese parts firms were to dominate the high-tech end of the industry (they don't at present), it wouldn't halt the shrinkage of the domestic car market, thanks to demographics, as outlined in my August post, The Decline of the Japanese Auto Industry. Success in high-tech parts won't stem the erosion of domestic jobs.

...high tech won't stem the erosion of domestic [Japanese] automotive employment

Second, to me it is not clear that Japanese suppliers are ahead of the game. There are certainly individual suppliers (and particularly specialized sub-suppliers) that dominate their particular niche. When it comes to transmissions, or headlights, or turbos, or many other items, Japanese firms may be major players, but in the [confidential] "benchmarking" competitive analyses that I see as a PACE judge, they seldom appear on the leading edge. One reason may be that, despite 30 years of Japanese assembly operations in the US, suppliers remain parochial: when I visit firms I am the only non-Japanese in the room, unlike in the US or Europe. Yes, the better firms have R&D outposts around the globe, but careers are made or broken at headquarters, recruitment from the outside is highly unusual, and a "not invented here" attitude is all too common. Let me caution that this is based on a small set of personal observations. I hope I'm wrong: there are many talented people in Japan, but their value is best realized when they're embedded in the global network of automotive engineers.

Third, while eventually electric cars or fuel cell vehicles may be a big share of the market, it's unclear that they warrant effort today. That's not the perspective of Toyota Chairman Uchiyamada, as conveyed for example in Bloomberg. Yes, Toyota has sold 3 million Prius (is the plural Prii??) over 15 years. But with 75 million vehicles on the road in Japan and 250 million in the US, strict hybrids are a scant 1% of the fleet. The share is growing, and if we include vehicles that aren't marketed as hybrids (such as those with start/stop alternators robust enough to boost acceleration and recapture braking energy), the share is larger. Nevertheless, the reality remains that hybrids have not been a market success.

Quite simply, putting two complete, interconnected drivetrains in one vehicle drives up cost and weight. They must be sold at a premium to make a profit, while offering only a modest performance improvement. They also face a moving target, as "standard" gasoline and diesel engines continue to get better – thanks for example to turbos that permit downsizing. Hybrids don't offer sufficient benefits to be a strong value proposition. In some markets, such as Europe, almost none are sold; efficient, tried-and-true diesels dominate. In Brazil, with the wide availability of ethanol and CNG, new cars are designed and assembled to use any mixture of gasohol at minimal incremental cost, and to switch seamlessly to/from CNG and gasohol. Who needs a hybrid to save money? Hybrids likewise fare poorly in China. So far, however, global markets are diverging, not converging, undermining the business case for hybrids, battery electrics and fuel cells.

markets are diverging, not converging

I'm left with a feeling of deja vu from encounters with the "magic bullet" mindset that prevailed at GM 25 years ago. At that time executives, including the visionary Roger Smith who brought us $19 billion in robot-ridden factories that promptly closed, and the Saturn venture that neither made money nor drove the Japanese from our shores, were searching for the "secret" of Japanese management. Once they had that miracle cure in hand, GM with its high-powered MBAs and PhD engineers would in short order leapfrog the competition.

Japan has lots of great engineers and competent managers. I hope they aren't forced to devote themselves to the Sisyphian task of making money from fuel cells.

mike smitka

Japan has a monthly survey of manufacturing [生産動態統計] that provides output data on 42 separate components. As is inevitable, definitions are about what was made, not what will be made, and so do not highlight "high tech" from commoditized parts. The only new items included are airbag modules and electronic braking systems, but plain vanilla frong airbags and antiskid braking systems are now comparatively mature technologies. No electronics per se are listed, and while car audio, car navigation systems, and automotive lighting appear under electrical equipment, semiconductors and sensors are broken down by type and not end use, so there are no data specific to (for example) engine and stability system electronics.

Who Would BUY a Chevy Volt?

Who In Their Right Mind Would BUY a Chevy VOLT?

After all, it’s $40K – think about what else one can buy for $40K! There are very nice Lexus, Benz, Infiniti, BMW, and Cadillac models in that price range. AND even with a government subsidy it doesn't stand on its own at $40K. Even if gas hits $5, it doesn't work. Plus who knows what it will be worth in 39 months, or 36 or 48 for that matter. If new technology trumps it, it could be next to worthless. Why take the risk just to be known as an "early adopter?" That's why Bob Lutz, the Father of the VOLT, told us at a fleet conference a while back, "It won't SELL. That's why we're leasing them for $350/month for 39 months."

Lutz says, "We gotta start somewhere if we EVER plan on achieving economies of scale." In true Lutz fashion he compared the VOLT to hunting ducks. "If you shoot at the duck, you will miss it every time. One has to "lead" the duck to hit it. We need to lead the market to have a chance to hit it. If we wait too long, the train has left the station and we are standing on the platform saying, "What happened?"

"Lead, follow, or get out of the way, said Lee Iaccoca. Lutz concurs.

Toyota lost money on every PRIUS beginning in 1996, and did for quite a while. That vehicle is thought to be profitable these days, although they are typically "tight lipped "on such matters. Toyota is now bringing a plug in hybrid to market. (The VOLT was the world’s first plug in hybrid.) Toyota has lots of experience and satisfied hybrid customers now, along with economies of scale.

In the meantime, the VOLT has attracted detractors. The Right Wing in the person of Rush Limbaugh has embraced the VOLT as a car they can hang around the President's neck, despite the fact it had been in development long before he was elected. Actually, Lutz IS the actual "Father of the VOLT." For Lutz to get after the Right Wing takes some doing -- see his Forbe article.

The barrage of untruths continue. A friend from told me that it would take 3 weeks to drive across the country in a VOLT with all the stops to recharge. He said heard it on Right Wing talk radio. In fact, the electric range on VOLT is about 45 miles before the internal combustion engine takes over to propel one across the country as with a normal car. It IS true that the internal combustion engine recharges the batteries which drives the electric motors rather than being actually connected to the drive train in a conventional manner. But to the driver, the difference is not noticeable except the engine doesn’t change RPM based on throttle position.

Others claim they catch fire in a collision. The VOLTs that caught fire had been crash tested and stored improperly for weeks before they caught fire. A vehicle with a regular lead acid battery stands the same risk if stored improperly. As with normal vehicles, the battery should have been removed.

A driver with a less than 30 minute commute to work, and a place to plug in while there, could drive all month without the internal combustion engine using any fuel at all. Figuring 50 miles per day plus other driving, one saves two tanks of fuel per month or about $120. Subtract that from the $350 lease payment and the VOLT can be easily justified. BUT GM has NOT made that case. Worse yet, sales people in Chevy dealerships haven't either. And coupled with the Right Wing misinformation blitz, GM has shut down production for 5 weeks to balance inventories. In my mind, the story has been that GM has not done the math for consumers in their marketing efforts. The marketing story is "$350 minus $120 equals $230./month. That WORKS!!!!!

[Smitka: But obviously consumers don't do the math -- ditto with the Prius, as there's no strong case for buying it on the basis of fuel savings, which is why no other hybrid, including those made by Toyota, sell well. In other words, people buy a Prius to make a statement – hence you don't find "base" models on the lot, the main reason Toyota may make money on the vehicle, despite the cost of installing two powertrains plus a battery pack. GM needs to borrow a bit of that marketing. At the moment, of course, so does Toyota....]

David Ruggles, April 17, 2012