U.S. Automotive Crisis: Lessons and prospects - preserving the old design concept backfired

Faculty Fellow, RIETI

While major automakers worldwide have reported weakening results in the face of the economic recession, U.S. automakers are facing a particularly serious structural crisis. This is because at the root of the crisis lies an enduring gap between organizational capabilities and the product designs sought by society.

As automobiles are heavy loads moving in public spaces at high speed, they can have serious repercussions for society, in the form of traffic accidents, air pollution, and global warming. The requirements and constraints imposed on automakers by the public are becoming increasingly strict with each year.

Generally speaking, when constraints become tighter, product designs become more complex. Design is a concept that connects the functions and structure of an artifact. When the demanded functions and constraints become tighter, it becomes increasingly difficult to deal with them with a modular-type design concept (architecture) that develops functionally complete components. Rather, a group of newly designed components fine tuned for total optimization becomes necessary. This style of design is called "integral architecture."

As such, automobile design has become complex in, at least, developed countries. With Japanese cars, for instance, the ratio of common parts has declined on average compared to ten years ago, while the ratio of electronic controls has risen and the workload of developing new products (i.e., engineers' work hours per project) has increased. Although design simplification advanced, the selection environment of the automobile markets and societies did not allow rapid penetration of products with modular (simpler) architecture. Thus, design style of small or luxury cars in advanced automobile markets continued to be integral. Therein lies the difference in the design evolution of cars and personal computers, which adopted a highly modular architecture in the past decades.

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Meanwhile, the basic design concept of U.S. automobiles, which was rather stable in the first half of the 20th century when constraints involving fuel, safety, and the environment were still loose, was basically a truck type (i.e., body-on-frame type), which tended toward module architecture that clearly divided the functions of the chassis and the body. For example, though the chassis of the 1908 Ford Model T featured an integral-type design, the overall vehicle structure was a truck-type. General Motors' well-known full-line and annual model change policies were also based on the truck architecture, in which chassis were shared and bodies were diversified to achieve a balance between product changes and high-volume production of parts.

In the postwar period, U.S. automobiles gradually became bigger, with greater horsepower, and a stronger focus on style. In the 1950s to 1970s, the truck type architecture was still adopted by American big cars like Chevrolet and Cadillac, which were revenue sources during GM's heyday and boasted extravagant body designs. Most cars that supported the revenue resurgence during the 1990s were also large truck-type vehicles such as the minivan, sport utility vehicle (SUV), and pickup. After all, profitable business models that appeared over the 100-year history of U.S. automakers were based on the truck-type (relatively modular) architecture.

In the meantime, organizational capability is also a product of history. In the United States, where immigrants flowing continuously across the borders have been used as a ready made labor force, there has long been a manufacturing concept that emphasizes the division of labor and minimizes the need for cumbersome coordination of workers and parts. The "American System of Manufacture" of the 19th century was based on interchangeable parts that increased the processing precision of components and reduced fitting work. It was Ford that perfected the interchangeable parts concept and achieved overwhelming cost reductions through assembly lines, special purpose machines, vertical integration, and mass production.

In the first half of the 20th century, the U.S. manufacturing industry helped create an economic powerhouse with standardization and mass production. Although the second half of the century saw the U.S. enter a position of competitive disadvantage in many small-sized, diversified and integral products (e.g., analog consumer electronics and compact vehicles), its economy benefited from digital technology, which neatly matched its favored approach of emphasizing the division of labor and saving on coordination of the workload. The U.S. then leveraged this technology at the end of the century to dominate in areas such as information services, package software, and novel financial products.

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However, the evolution of automobile design took a different route to these products. Due to the aforementioned constraints, mainstream passenger car design outside the U.S. shifted to compact vehicles. Japanese and European cars, for which compact and lightweight vehicles were unavoidable given the high fuel prices, anticipated the constraints, worked on the layout of components, and developed a complicated front-wheel driving system and a monocoque body (integrated chassis and body structure) that created body shell rigidity by integrating a number of thin steel panels. With progress also in control, combustion, and catalyst technologies for small engines, automobiles in general gradually moved in the direction of complex designs with integral architecture.

The organizational capability of Japanese manufacturing companies was suited to this design concept. In the postwar period, many design and manufacturing facilities had built up integration-oriented organizational capabilities based on multifunctional teamwork of multi-skilled employees and backed by long-term employment and long-term transactions, which was well suited to the manufacturing of compact and integral vehicles.

Meanwhile, in the U.S., the Big Three profited from large-sized vehicles and were rather indifferent to the development of compact car technologies until the end of the 1970s. Although the first oil shock descended on the automobile industry at that time, the U.S. automakers weathered this by downsizing profitable large-sized vehicles. However, it was not until large cars hit a dead end with the second oil shock that the Big Three for the first time seriously entered the market of integrated front-wheel-drive small cars. The result was a global battle in the compact vehicles market.

However, Detroit was hesitant when it came to developing compact vehicles, with which they were unfamiliar, and their competitive disadvantage compared with Japanese makers became clear in manufacturing capabilities, such as productivity, manufacturing quality, and development speed when they competed on an equal footing. In short, the gap between the division of labor-type organizational capability of U.S. automakers and the integrated design concepts of compact vehicles became apparent.

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The Big Three subsequently turned to politics. In 1981, voluntary export restraints were introduced for Japanese-made passenger cars coming to the U.S. (a de-facto import restriction). Detroit gained time to learn about the integrated organizational capabilities of Toyota and other Japanese automakers and tried to catch up in manufacturing competitiveness. This was the so-called Toyota Production System boom. At the same time, U.S. automakers strove to revive the profitable truck-based business. With their ability to derive strategies with strength in this aspect, as might have been expected, the market development strategy for truck products proved effective. Partly due to strategic mistakes by Japanese automakers, which were slow to enter the truck market in North America, the Big Three made even more profit than their Japanese counterparts in the 1990s. This could be seen as a successful example of American competitive strategy in avoiding competition and taking the smart and easy route toward making a profit.

In other words, U.S. automakers faced a disparity between their organizational capabilities and product architecture, and so adopted a two-edged strategy: on the one hand striving to improve integration-oriented organizational capabilities in accordance with the architecture of compact vehicles, and on the other hand preserving the truck-based businesses to go with their traditional division of labor-type organizational capabilities.

Ironically, too much success with the latter led the Big Three to an error in long-term judgment, and ultimately hindered the creation of integrated organizational capabilities. Though they did narrow the gap with Japanese automakers in productivity at plants and in manufacturing quality, their productivity in product development remained approximately half that of the Japanese, and development speed remained stuck at about two-thirds the Japanese level. Most managers were unaware that weakness in developing compact vehicles was the major problem. GM adopted a makeshift response of launching small cars from alliance partners and subsidiaries with development capabilities in Japan, South Korea, and Europe to fill the gap between the huge sales network in North America and their relatively insufficient development capabilities.

There was also an effort to prolong the lifetime of large-sized vehicles in North America. First, gasoline prices were suppressed for apparently political reasons. Second, the demand for large-sized minivans, SUVs, pickups was strong during the 1980s and 1990s, when many of the baby-boomer generation, the largest portion of American population, held standard families with children, and thus needed larger vehicles. Third, just as the effect of these market enhancing conditions began to slow, the financial bubble occurred, which increased the number of consumers purchasing high-end and large-sized vehicles through excessive borrowing. The response to this strong demand, simply speaking, was large, truck-type vehicles manufactured at plants in the United States and all-in-one luxury or integrative vehicles imported from Japan and Europe.

As such, U.S. automakers were so focused on prolonging the lifetime of truck-based vehicles that they failed to solve the fundamental issue of steadily building integration-oriented organizational capabilities. They were able to postpone dealing with problems temporarily through sophisticated strategies and international business alliances coupled with good fortune and competitors' mistakes, however, results gradually deteriorated.

Additionally, there were a number of management errors made one after the other including: the financial subsidiary involved in the financial bubble that resorted to coercive sales and dug a hole for itself; the automaker that invested a huge amount of its capital in the services business, based on management's architectural illusion that income resources had "shifted to downstream services" just like computer businesses, only to watch the investment vanish into thin air; and the case in which confusing policies of a merger partner led a U.S. automaker to lose its identity in the market place. Through these events, together with huge human resource expenses such as pensions and medical plans, the Big Three arrived at their present plight.

From their experiences we should learn the risk of neglecting to build long-term organizational capabilities in favor of seemingly clever competitive strategies. There is no magic bullet in this industry, nor is there a quick fix by relying entirely on the future of electric vehicles. There is also no basis for the illusion that an automaker cannot survive unless it manufactures 4-6 million cars and trucks per year. After all, the key is how to quickly and economically supply products a few steps ahead of the competition in terms of quality, cost, safety, the environment, and fuel consumption, through continuous capability-building and tenacious technology development. The next stage may be the resumption of intense capability-building competition and product evolution in the field of environmentally friendly and safe automobiles rather than large-sized, luxury vehicles. As long as strict constraints remain, Japanese automakers, as well as other capability-oriented manufacturers, will have the opportunity to succeed.

* Published in "Economics Class" in the Nihon Keizai Shimbun on May 22, 2009, with minor revisions.

>> Original text in Japanese

September 8, 2009

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