The Evolution of the Automotive Industry and its Impact on Management Practice

 

The Evolution of the Automobile

            The ancient dreams of building a horseless carriage lead to many inventions over time. By the late 1700s and early 1800s, experimenters built steam-powered vehicles and electric locomotives; however, these inventions never reached the general public. Around 1885, several inventors in the greater Stuttgart area of Germany independently worked on the first automobiles powered by internal combustion engines using gasoline. Karl Benz, Gottlieb Daimler, and Wilhelm Maybach also designed the frame of the car from scratch, unlike previous inventors who attempted to fit an engine to a horse carriage.

            In 1888, Bertha Benz, the wife of Karl Benz, was the first long-range car traveler recorded in history. Without her husband’s knowledge, she travelled 80 km from Pforzheim to Mannheim using his gasoline powered car fitted with an internal combustion engine (“History of the automobile”, 2009). Unexpectedly the new invention had received publicity and attracted many hobbyists and enthusiasts, who saw little use in these unreliable cars for transportation purposes but valued the prestige factor of owning one.

            Throughout next decades, car designs went though many technological stages of improvement. Early designs were based on carriages made out of wood. Later, in the brass era until World War I, cars were fitted with electric ignition and suspension systems but were generally open structured. The large number of small manufacturers created a very dynamic industry marked by rapid deterioration of market value for older cars because of the fast-paced innovation and ever-changing technology at that time. Between 1908 and 1927, Ford built its Model T, the best-selling car of that era, which used pedals for control and utilized planetary transmission systems.

            Gradually, cars became more functional and affordable for average income earners. Manufacturers changed the structure towards a functional design, offering trunk space for suitcases and windows to protect from the environment. The improvements of engine technologies also lead to more reliable vehicles that could travel farther than ever before. One of the biggest successes of the mid-1900 era was the Volkswagen Beetle, which was manufactured from 1938 (as a prototype) until 2003.

            During the last 30 years, however, the industry experienced an unforeseen level of differentiation and foreign competition. Vehicles have been designed for a wide range of consumers, targeting all the different budgets and tastes of various generations of buyers. Sport utility vehicles (SUV), sports cars, vans, minivans, trucks, sedans, and limousines are just part of a huge range of market offerings. Car manufacturers are increasingly trying to meet the demands of niches in a desperate attempt to expand the market.

In today’s fast-paced and globalized world, the time to develop and build cars became a major obstacle for car companies. Even though the product development times have been shortened over the past decades given the advances in computer engineering, the typical product life cycle still ranges from three to six years. Since car companies usually work on the development of tens of new models concurrently and given the fairly long time to develop new vehicles, automakers can only slowly respond to market fluctuations compared to other industries. Automakers therefore try to secure a first mover advantage based on a radically changed and attractive new design or redesign, as recently achieved by BMW’s Mini Cooper and Volkswagen’s redesigned Beetle.

Computer technology and an ongoing series of innovations have kept major car manufacturers alive; however, all players in this industry are now suffering from strong competition and a saturating market.  As a result, some of the benefits of higher competitive market forces are increasingly passed over to the consumer fairly quickly. For example, the S-class first built in 1973 by Mercedes Benz featured a range of new safety features, such as electronic anti-lock brakes, traction control, pretension seatbelts, and restraint air bags, which are now standard in most new vehicles. This occurred as a result of strong competition but also because of radical advances in governmental vehicle safety regulations.

            The automobile has hence transcended from being a rich man’s toy into a collector’s item, functional vehicle, status symbol, but also to a product of political power. The car industry is now said to be the most globalized in the world and car companies frequently rank as largest organizations in most countries (Buckley, Clegg, Zheng, Siler, Giorgioni, & 2007). Over the past century, the rapid expansion of the markets, globalization, technical advances, and the increased political power of the auto industry on the government have created a very complex organizational environment. Today’s management is confronted with far more issues and complexities than 50 years ago. The results of many decades of dynamic evolution in the auto industry are a wide-range of vehicles, short development times, increased productivity, increased outsourcing, and strong international competition.

The Evolution of the Automobile Industry

            As the first prototypes received wide public attention, the prototypes soon turned to products and an industry started to form in the U.S. as well as in Germany and other countries pioneering in the automobile business. In fact, there were more than 500 new entrants in the industry’s first 20 years (Klepper, 2002). The vast majority of newly formed companies were not new spinoffs but companies which diversified into the automobile business from related industries, such as the bicycle, wagon, engine, and carriage industry. Klepper (2002) found that for those diversified companies the risk of failure was limited and they were more successful than new entrants. What was the reason for this higher success rate?

Pre-entry experience especially in related businesses of that time constituted a long-lasting advantage for new entrants. Those that diversified into the automotive business from other related industries were among the most long-lived firms because they were able to apply knowledge gained from previous operations to manufacturing automobiles. For example, precision drilling and work arrangements that worked well in other factories were applied to new spinoffs to build cars. Furthermore, organizations started to integrate backwards which reduced transaction costs but this strategy also helped raising capital without bank loans. Just 30 years after the first working vehicles were invented, in 1930, the industry had consolidated considerably for 80% of the industry’s output came from General Motors, Ford, and Chrysler (Klepper, 2002).

            The change of corporate and legal landscape over the years, however, brought more change and complexities as the years went by. One important new challenge to management practice that emerged by the mid-1900s is the departure of the owner-manager setting that dominated previous centuries and which was advocated by Adam Smith. Publicly owned corporations instead of private partnerships became a new method of raising capital; however, the absence of an entrepreneur raised new questions on the efficiency of top management to whom shareholders delegate control over the company (Wren, 2005). The sourcing of capital from various independent sources has brought its own benefits, especially from an international perspective. It was found that foreign direct investment has a positive impact on the productivity on host economies and governments should actively promote foreign investments (Buckley, Clegg, Zheng, Siler, & Giorgioni, 2007). Foreign investments unfortunately also expose the organization and host economy to higher levels of risk because the interdependency to other countries and economies is strengthened by international investment.

            One major group of new entrants after WWII era was manufacturers from Japan. Today, Toyota surpasses all other car manufacturers in terms of revenue and customer satisfaction ratings. What gave the newcomer from overseas such advantage over U.S. producers? The rise of the Japanese car industry was mostly rooted in their higher quality products and leaner production methods. Unfortunately, American companies are still struggling to match Japanese quality management systems today; however, they recently responded with an attempt to combat low quality with Six Sigma.

            Managing for Six Sigma comes with its own challenges for today’s managers. The so-called Total Quality Management (TQM) system works best when top managers are committed to transforming the mindset of the whole organization (Bandyopadhyay & Sprague, 2003). Companies need to concentrate on the customer’s wants and needs as well as overall satisfaction levels. Products and services need to be designed a priori for quality and manufacturing processes are only part of the quality management cycle that needs attention. TQM further requires employees to be trained frequently and their involvement and empowerment is of paramount importance to ensure the quality measures pay off quickly. Given the hundreds and thousands of suppliers involved today in the design and manufacturing process of automobiles, the arm of quality management and assurance needs to extend outside the organization. Since the strict quality requirements need to be met by suppliers as well as in-house departments, today’s managers need to acquire new skills and set new standards for balancing the various and often conflicting interests.

TQM is implemented through various devices. First, the customer focus is implemented by the collection of customer satisfaction information as well as customer preferences and trends in tastes. Second, companies deploy a company-wide zero defects quality policy which is to bring the importance of prevention to every employee’s attention. Many work processes are therefore equipped with an ingoing and outgoing inspection at a rate of 100%, meaning that every part is checked before entry and departure. But even better than merely placing quality checkpoints between processes, however, is work in progress inspection.

Work in progress inspections require employees to set high standards and also take responsibility for their own work; ergo, they must be given some authority to correct their own mistakes. For that reason, quality standards now include a clause to require organizations to empower their employees and create an environment that promotes innovative activity (Reid, 2002).

Since many parts are preassembled and preprocessed by suppliers, TQM also necessitates the inspection of incoming raw materials. Furthermore, suppliers are to be quality audited on a random basis to ensure quality requirements are followed in the supplier’s design and manufacturing facilities.

The implementation of TQM, Six Sigma, and similar quality measures had a great impact on the management practice in U.S. and other countries. At Ford, the transition to quality principles was a drastic change and required the cooperation of all stakeholders. Ford quickly realized that achieving quality and reducing waste were not merely new processes to be added on to the organization—in order to turn the company around, there had to be a long-term cultural change within the organization (Holtz & Campbell, 2004). To clarify and establish quality principles throughout Ford, top management established the following quality cycle: define, measure, analyze, improve, control. Unlike previous top-down planning methods, these steps were recurring, signifying the importance of continuous improvement.

Another crucial change in auto factories that greatly impacted managerial practice and the general work climate for workers was the invention of the assembly line. Henry Ford is frequently credited for having set up the first large-scale assembly line; however, historians differ in their opinion and also credit several of Ford’s workers (“Henry Ford”, 2009; Wren, 2005). While Taylor’s scientific management ideology focused on fatigue reduction and productivity growth by analyzing and optimizing each worker’s production steps, Ford took another stance. Ford placed more emphasis on getting rid off manual production steps by using innovation (“Ford”, 2009). Ford created new tools and brought the vehicle and parts to the worker instead of the worker to the vehicle by using the assembly line. Moreover, Ford utilized division of labor; hence, workers focused on a single specific and related group of tasks such that they did not have to switch tools too often. While this constituted in part Taylor’s scientific management because it optimized the handling of tools by the worker, the assembly line was not moving at the optimal pace for the worker at each work step; rather, the pace was set with overall productivity goals in mind.

            The assembly line changed managerial thinking in two critical ways. First, precision equipment became necessary because creating scrap at the assembly level would have created extraordinary amounts of waste. Second, the practices in the shop have to be standardized to make laborers replaceable but also to ensure fluent production (Heizer, 1998). Moreover, since the assembly line opened the door to efficient mass production, several manufacturing steps were allocated to different assembly lines. By splitting work processes in that fashion, car makers broke down car design into standard components; however, standardized components required matching standardized processes in the factory (Wren, 2005). As soon as the work processes were homogenized at the Ford plant, the labor time was reduced from 20 to just five minutes of manpower requirements for each assembly.

            Managing productivity became a major area of focus during the second half of the 19^th century. Productivity increases after 1950s were achieved mainly through optimizing the use of labor. At the same time, the impact of capital productivity compared to labor productivity was insignificant (Lieberman, Lau, & Williams, 1990). Toyota and Nissan increased their rates of vehicles per worker for more than 20% per year during the 1950s. That rate of increase dropped to zero by the 1980s signifying that the impact of automation and economies of scale had been maximized by that time. All major Japanese firms had reached higher levels of labor productivity by the 1970s compared to their U.S. counterparts. These developments reflect the effort of automakers to optimize the efforts of the workforce using automation and other innovations in manufacturing. Eventually the number of work hours started to decline.

            Since assembly lines required that work progresses on a fixed schedule without interruption, companies traditionally had to add sufficient extra inventory stock and slack time to guarantee ongoing production (Blackhurst, Scheibe, & Johnson, 2008). This, however, turned out to be costly and inefficient. Toyota, with its waste reduction ideology, saw an opportunity to build competitive advantage by striving towards zero inventories. This process, called just-in-time production (JIT) was invented and practiced by Toyota in the 1950s and onwards (Lieberman, Lau, & Williams, 1990). The goal of JIT production is to continuously minimize inventory levels.

 

Table 1

Common just-in-time production problems (Matson, &Matson, 2007).

Problem
Lack of supplier support
Supplier inability to deliver materials on time
Substantial distance between suppliers and customers
Poor production quality
Poor quality of supplied parts
Difficulty establishing systems to support JIT
Poor and/or inaccurate data
Difficulty establishing accounting practices to support JIT
Training difficulties
Lack of JIT information
Lack of top management support
Lack of employee support
Union difficulties
Difficulty achieving set-up time reduction
Difficulty laying out the facility to support JIT
Difficulty implementing smaller lot sizes
Unstable customer schedules/scheduling
Difficulty with large number of items produced and/or amount of material handled.
Forecasting inaccuracies
Difficulty justifying JIT.

Table 2

The most frequent just-in-time production problems (Matson, &Matson, 2007).

Frequency	Problem
86%	Poor production quality
78%	Poor quality of supplied parts
76%	Supplier inability to deliver materials on time
74%	Unstable customer schedules/scheduling
66%	Poor and/or inaccurate data
64%	Lack of supplier support
50%	Forecasting inaccuracies

 

            Table 1 lists all common problems faced in JIT manufacturing facilities. Table 2 shows the top seven causes of JIT problems in the industry today. Even though JIT was a promising idea to automakers, the main problem remains quality related (Matson, & Matson, 2007). Just-in-time implementations usually put a heavy burden on the supplier because suppliers need to rearrange their schedules to match that of the automaker. Inaccurate specification documents and unpredictable traffic conditions make it difficult to deliver quality parts on time whenever needed. Managers therefore need to find ways to communicate with suppliers effectively and unambiguously but suppliers rarely prefer to support JIT facilities because they operate mainly to their detriment. Matson and Matson (2007) suggest that carmakers should instead opt for long-term contracts with suppliers because that would aid communication and optimize the cooperation between automaker and supplier. In the long-term the benefits from an intimate cooperation can lower prices and improve quality; however, the two reasons why JIT was set up in the first place were to push more burdens onto the suppliers and at the same time to increase the automaker’s bargaining power by lose-coupling suppliers. Since automakers want to lower the prices of parts by inducing brutal price wars between suppliers, automakers are not interested in long-term contracts. Long-term contracts, so the negative view of most carmakers, give suppliers too much bargain power. In essence, the matter seems far more political than mechanical. Obviously quality could be improved by giving the supplier more incentives to invest in better quality; conversely, there is no guarantee for the automaker that such improvements will actually follow from a long-term commitment to cooperate.

            Incentive practices have come a long way since Ford’s idea of raising his worker’s hourly rate to $5. Ford called this profit sharing; however, secured Ford’s position because well-qualified engineers stayed with the company and were also able to afford the cars they build (Wren, 2005). Joetan and Kleiner (2004) investigated modern incentive practices in the US automobile industry and recommended that to use a fixed salary in recession times and for people who are new on the job. A risk-based commission scheme, on the other hand, is more suitable during times of boom as an incentive to work harder. This model suits veterans on the job and newcomers equally if they are allowed to switch between the two methods whenever they wish. Incentive plans remain to be major motivators in many industries today. The challenge that many managers face is that incentive plans can backfire and actually deter newcomers and thereby endanger the future of an organization.

            The proliferation of the automotive industry has dramatically changed the corporate landscape in many countries and geographic areas. Manufacturing automobiles requires the cooperation of hundreds to thousands of companies and the coordination of such huge value chain constitutes another major challenge to today’s managers. Contemporary automobile industry is characterized by heavy outsourcing and structured in several tiers (PingQing, HuaJie, & Qiang, 2008). The global value chain consists of assemblers, global mega suppliers, first-tier suppliers, second-tier suppliers and third-tier suppliers. Global mega suppliers are so-called tier 0.5 suppliers, have global coverage, and are located close to assemblers. First-tier suppliers deliver directly to OEM and assemblers, while second tier suppliers provide their products and services to the higher tiers. Third tier suppliers generally supply only basic engineering services and materials.

            The complex landscape of suppliers requires its own discipline of management. Supplier management strategies generally focus on integrating multiple manufacturing initiatives and given today’s focus on waste elimination and lean manufacturing, the supplier’s cooperation with the automaker is very important (Johnson, Sun, & Johnson, 2007). While this integration process seems to be more efficient in Japan than in the U.S. and most efficient for Toyota in particular, lean manufacturing is generally not practiced as much by automotive suppliers, who focus more on quality management and environmental compliance. The supplier’s lack of lean manufacturing support, hence, creates unnecessary waste and inefficiencies. In addition, heavy reliance on external suppliers also increases overall risk for the automaker.

            Today’s managers need to be risk savvy and anticipate potential events that can negatively impact the workflow. Supply chain disruptions, especially in JIT manufacturing environments can be very costly for the automaker but also for the supplier, as suppliers often agree to pay compensatory damages to the automaker in case of delays (Blackhurst, Scheibe, & Johnson, 2008). Traditionally slack in both time and inventory has been used to minimize supply chain disruption risks, but because of inefficiency concerns such practices can no longer be supported. Other sources of supply chain risks include systems, forecasts, intellectual property, and procurement. Again, the use of several concurrent suppliers can reduce risks but increases management complexity and reduces overall quality due to the short duration of contracts.

            Ford employs today more than 245,000 people worldwide (“Ford Motor Company”, 2009), whereas Chrysler employs 58,000 (“Chrysler”, 2009) and General Motors provides work for 266,000 people (“General Motors”, 2009). Given their size, such titan organizations would have never survived without a loosening of their hierarchical management styles. By the 1980s, Ford was faced with a major crisis as it was not able to respond quickly to the Japanese quality challenge. While Ford ignored the progress of Japanese companies, it took Ford a big crisis to realize that Japanese made better cars. They then changed from thinking they are brilliant financial planners and marketers to a “back to the roots” mindset. Ford realized they had to improve their technical competence and retain key engineers by creating teams (Luke, 1992). By placing people in teams to do a job rather than pushing them into positions they do not fit, Ford was able to bring out the best in people by having them do what they like and having them cooperate and communicate with each other. The idea of teamwork was hence spread very quickly as a cure in order to save the company. Managing teamwork continues today to be a major challenge for managers; however, as illustrated by the case of Ford Motor Company, it has proven to be a valuable tool for responding quickly to volatile market conditions.

 References

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