At the beginning of this year, Nikkei Business Publications tore down a Tesla Model 3. They showed the electronics from that car to some engineers from Japanese automakers. Their conclusion: Tesla’s electronics are six years ahead of the rest of the industry.
Six years is also how long it takes an automaker to develop a new model.
The Problems of Innovation in the Established Way
The established car manufacturers are very proud of their supply chain: they have contracts with thousands of suppliers, building all the subsystems which make up a car. What is the key goal of the carmakers in this supply chain management? Driving down costs.
As a car manufacturer, it is neither cost-effective nor feasible to do everything by yourself. Logically, you then outsource most of it. As a consequence, you have to assemble numerous different parts that you do not know very well — hardware as well as software.
While it makes total sense to not do everything yourself, there are also two very clear problems in this situation: Most of the profit is made by the car manufacturer and the companies that develop the different parts do not see the bigger picture.
What Happens When Margins Are Low
Many car manufacturers are known to squeeze their suppliers. What does that mean? Margins and profits for the suppliers are low. The typical supplier’s reaction to this is usually one of two things: making the product cheaper, or making your brand irreplaceable.
When your margins are low, there are two basic things that you can do: decrease costs or increase prices. Obviously, increasing prices does not work for suppliers — with endless car suppliers to choose from, car manufacturers are just too powerful.
So, suppliers will try to produce as cheaply as possible. The consequence? No money “wasted” on innovation efforts. They have to get a hold of the little money they make; they are not in the economical position to invest in R&D.
To get out of this spiral, suppliers can try to lock in car manufacturers. An effective lock-in makes the car manufacturer dependent on the supplier due to high switching costs. In effect, this means that suppliers build parts that no one else can maintain and that cannot be replaced. For software, this could mean to purposely write code in a way that makes it impossible for others to understand.
Again, this is the exact opposite of innovation. Instead of collaboratively working towards a better future, both car manufacturers and suppliers focus on making the supply chain as profitable as they can —which affects innovation.
Why the Carmaker Is Responsible for All Innovation
If you are a supplier that is dependent on a certain car manufacturer, do you make any efforts to do more than fulfill the requirements in your contracts? No, you probably do not. Instead, you will simply do your job, deliver on time and not think about the bigger picture.
If you are a car manufacturer that gets hundreds of parts from different suppliers, do you make any efforts to find potential for synergies or optimizations in the system design? Again, you do not. To you, all those parts are black-boxes that you do not really understand. And since your team might mainly consist of supply chain managers, you would not really know what to do anyway. Car makers especially have problems when it comes to electronics and software, since they tend to be dominated by mechanical engineers.
Since their suppliers are squeezed and cannot foot the bill for R&D, the car company is the one responsible for all innovation. Since they split up their systems in small blocks to source from different suppliers, they cannot innovate in certain areas.
Both sides are stuck between a rock and a hard place.
How Manufacturers React
Not surprisingly, car manufacturers have reacted to this situation in quite a simple way: they try to avoid lock-ins.
To do so, they have established standards like AUTOSAR. This is a standard designed to ensure that the electronic control units (ECUs) that they get from their suppliers stay interchangeable. The car manufacturers do this because some suppliers have gotten so good at the lock-in game, that they started to get a better position in negotiations.
However, as said, this approach does not spur innovation in any way. Innovation does not come in a standard format. Standards can also be barriers to entry for new suppliers with interesting new ideas. Instead, it is another strategic-economic-profit-cost game. So, what would be a better way to solve the problem?
Here Is a Better Way to Innovate
When you build a product, you should have two things in mind: the bigger picture and the user. The best way to do is, is to actually work together. Concurrent Engineering is one concept which can successfully “fix” the relationship between car manufacturer and supplier, at least at the technical level.
At the moment, the European Space Agency (ESA) provides a large-scale example for this: The Ariane 6, Europe’s next big rocket, is built by numerous subcontractors and companies from all over Europe — but they all sit in the same office building near Paris in an effort to avoid the problems that the auto industry is currently facing.
The point of this example is: as a car manufacturer, you need innovation partners. Small innovative speed boats which can lead your big corporate tanker into the right direction to the future; companies that have the expertise and the potential to truly innovate.
Why Tesla Is Ahead on This
All the problems described above are not due to the established car manufacturers being stupid, ignorant or unwilling to innovate. They are a result of history. Tesla started from scratch, with zero baggage and no fear of cannibalizing their own products.
The “old” companies however have a long heritage. These companies are well tuned machines that can produce new car designs, and new cars, in the millions, without water leaking in. But since they are so well-tuned, they are also locked into the ways of the machine: optimization is bad for flexibility.
Are You Ready to Innovate?
At Motius, we build on user-centric Design Thinking to create radical innovations. Paired with emerging technologies and the power of our partners, we build the products of the future.
For us, it does not matter if you only need an idea or if you need a ready-to-implement product — just get in touch, we’re happy to help.
