How have lower development and tooling costs given Japanese auto manufacturers an advantage in the marketplace?

CASE: 2: IMPROVING PRODUCTIVITY IN THE AUTO INDUSTRY   IIBMS – IMPROVING PRODUCTIVITY IN THE AUTO INDUSTRY In 2004 Detroit’s big three care makers—GM, Ford, and Daimler Chrysler—accounted for only 58.6 percent of vehicles sold in the United States, the lowest level ever, down from 76.7 percent in 1984. For most of the last decade strong sales of sports utility vehicles, in which Detroit dominates, have held overall market share losses in check; but now foreign producers such as Toyota, Honda, and Kia are going after that segment too, creating huge potential problems for Detroit. The American automobile makers have responded by trying to reinvigorate their passenger car business, coming out with a host of new designs and cutting the costs of developing and producing those cars. The old rule of thumb in the industry was that it took four years and cost $1 billion to design a new car and tool a factory to produce it. To recoup these costs, Detroit would typically sell a car for seven years before developing a new design. Unfortunately for the American producers, the Japanese have shortened the life cycle of a typical vehicle to five years; and by lowering development and tooling costs, they have been able to make good money on their car models. Now the American producers are trying to strike back. Typical is Ford, which has reduced its product development time by a quarter since the late 1990s and continues to reduce development time by 10 percent per year. Ford now designs almost a third of its models in less than 30 months. One reason for this progress has been the increase in communication among designers at Ford. Ford designers used to work in different teams and did not share enough knowledge about parts and platform design. Now teams get together to see they can share the design work. Moreover, design teams are trying to use the same parts in a wider variety of car models, and where appropriate use parts from old models in new cars. Detroit auto designers used to boast that new models were completely redesigned from the floor up with all new parts. Now that is seen as costly and time-consuming. At General Motors, for example, the goal is now to reuse 40–60 percent of parts from one car generation to the next, thereby reducing design time and tooling costs. At Ford the number of parts has been slashed. For example, Ford engineers now choose from just 4 steering wheels instead of contemplating 14 different designs. Another important trend has been to reduce the number of platforms used for car models. This is something Japanese producers have long done.  Honda, for example, builds its Odyssey minivan and Pilot and Acura MDX SUVs on the same platform and has added a pickup truck to the mix. Currently Chrysler bases its vehicle fleet on 13 distinct platforms. The company is trying to bring this down to just four platforms, reducing the product development budget from $42 billion to $30 billion in the process Ford and General Motors have similar aims. The platform for GM’s new small car offering, the Pontiac Solstice, will also be used for its new Saturn coupe and perhaps one more GM car. As GM develops its next generation Chevy Silverado and GMC Sierra pickups, it plans to reuse much of the existing platform, cutting development costs in half to nearly $3 billion. Over the next eight years Ford plans to use its Mazda 6 sedan platform (Ford owns Mazda) as the basis for 10 new vehicles. The idea, according to Ford’s head of operations, is to engineer it once and use it often. Along with these changes in design philosophy, the Detroit companies are retooling their factories to reduce costs and make them capable of producing several car models from the same line. By doing so they hope to reduce the breakeven point for a new car model. GM’s Solstice, for example, is forecast to sell around 25,000 units a year—too few to recoup fixed costs under the old design and build philosophy. But GM has cut design costs (by using a common platform and parts) and tooling costs (by investing in flexible manufacturing technologies that can produce multiple designs based on the Solstice platform from the same basic line). GM has also worked hard to get unions to agree to changes in inflexible work rules. Assembly-line workers now perform several different jobs, which reduces waste and boosts productivity. Similarly, Ford hopes to have 75 percent of its production built on flexible assembly lines by 2010; if successful, its investments in flexible factories could reduce annual costs by some $2 billion a year. The big problem with the new vision coming out of Detroit, as critics see it, is that not much is new about it. The techniques being talked about will reduce development time and tooling costs; but Japanese automakers have been pursuing the same techniques for years. The critics fear that Detroit is chasing a moving target, and when they arrive in the promised land it will be too late because their global competitors will already have taken competition to the next level. Questions How have lower development and tooling costs given Japanese auto manufacturers an advantage in the marketplace? What steps are the Detroit automobile makers taking to reduce product development time and tooling costs? If they are successful, what are the implications of these initiatives for the number of car models they can sell and breakeven volumes for individual models? Will these initiatives benefit Detroit’s customers? How? The Japanese producers have for years used many of the methodologies now being introduced in Detroit. Why do you think it has taken the Detroit automakers so long to respond to their foreign competitors? IIBMS – IMPROVING PRODUCTIVITY IN THE AUTO INDUSTRY At Global Study Solutions, we take immense pride in our ability to offer specialized support to students pursuing various programs at IIBMS (Institute Indian Institute of Business Management & Studies).