
The automotive industry’s value-destroying addiction to capital (2015) [pdf] - mxschumacher
https://www.autonews.com/assets/PDF/CA99316430.PDF
======
csours
Disclaimer up front: I work for GM. These are my opinions only and do not
reflect my employer etc.. I don't work in corporate planning, but I have some
familiarity with vehicle platforms and programs.

I see a lot of people commenting on specific OEMs and getting caught up on
details. That's not what this is about.

This is about the fact that GM has a ~1.5 liter turbo 4 cylinder and so does
Ford and so does FCA and so does Volkswagen and so does ... ... ...

The specific 4 banger in a vehicle will never be a differentiator for a
customer (except in VERY specific cases), so anything you spend on R+D for
that engine will not help you get ahead, only to keep up.

It's about the fact that developing a engine that no one will ever get excited
about still costs a great deal of money, and pretty much every OEM is spending
that money.

That cost is dragging the whole industry down, and that's why EBIT and Return
on Invested Capital is low across the industry (but it may be lower for some
OEMs).

It's about the fact that ~50% of components may be like that engine that the
customer will never get excited about.

\---

It also talks about how companies are trying to mitigate that by platform
sharing, with pictures of a couple from Volkswagen and Toyota. Shared
platforms are great for a lot of products, but they don't work so well for
specialized products like sports cars or luxury cars.

Here's a great video covering GM's plans for their electric car platform
(shameless plug):
[https://www.youtube.com/watch?v=-25fGfjHP5Y](https://www.youtube.com/watch?v=-25fGfjHP5Y)

\---

It also talks about how hard this is to do. I know of several instances where
this has been done or been tried and it's always been harder and lower payoff
than expected. For example, Ford and GM cooperated on the development of a 9
speed (Ford) and a 10 speed (GM). Each company developed their own
transmission and then at the end they shared them.

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throwaway8291
Spot on. As a consumer of a newer generation: I do not care about 90% of the
stuff that's in a modern car. I could not care less about the manufacturer. If
it drives and is relatively safe and clean, cool. Best case: I do not even
need to own a car.

The best counterexample for the R&D spree of western automotive can be found
in Russia. The Lada Niva is car that is extremely useful and mostly unchanged
in structure since inception. People can repair them with their own hands. I
wish we had robust clean cars like the Niva in the west as well.

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lowdose
The presentation is lacking the words electric and battery. Seems like Fiat
Chrysler Automobiles did not see Tesla as competition in 2015. Another
headline today report automotive industry is still in shock of Tesla's
success(2020).

The innovators dilemma is real and confirmed.

~~~
phkahler
>> Another headline today report automotive industry is still in shock of
Tesla's success

I'm still in shock at Tesla's success. Not that they managed to get where they
are, but that they didn't go under. I can't help thinking there are larger
forces at work behind the scenes.

The other car makers have refused to compete head-to-head with them. EVs seem
like something they want to have eventually, but they don't seem to have the
will to make it happen.

~~~
bsder
> The other car makers have refused to compete head-to-head with them.

Because all their profit comes from SUV's.

The big auto manufacturers would simply stop producing most of their low end
cars if they didn't have to meet fleet efficiency numbers.

~~~
7532yahoogmail
Agree. In the US it makes sense to eliminate cars; consumers have voted for
SUVs. I guess Detroit will need EV SUVs. I find pharma's roic and ebita
suspiciously high; pivot to healthcare cost inflation. And I am surprised by
retail numbers. Still the OP's point stands ... A damn interesting read btw.
There are other articles talking about what Tesla has done to Germany. Their
combustion based cars are falling in sales. The number 1 purchased EV is tesla
not German. Yikes!

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advisedwang
The detail and comparisons are incredible here.

However couldn't you basically apply this to any industry with substantial
fixed costs? In this situation you can always save by consolidating so that
fixed cost is amortized over more units.

What is the "right" level of R&D spend for auto-industry? This analysis
assumes it's unreasonably high, but the flip side of this is just that he's
pointing a path to higher profit.

Although this deck says it's not about "Putting FCA up for sale", this reads
to me like it's trying justify consolidation without just saying that it will
make more money, so that it can avoid competition-regulation scrutiny.

~~~
jgust
I compare this to two global software teams, 1 in country x the other in
country y, who both have the identical charter to massage bits and bytes into
a certain shape. Team 1 believes in "The Best Function" approach, and team 2
believes in "The Goodest Function Ever" approach. They've reached an impasse,
and the company ends up paying for both.

The paper reads as a recommendation that Team 1 and 2 "should just
compromise". Great idea, but difficult in practice.

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avalys
Yawn. The financier CEO of the automaker in one of the worst financial
positions, with the lowest R&D spending, oldest product line, and nonexistent
EV strategy complains that auto R&D is too expensive and argues the solution
is that someone should buy his company. Not impressed.

~~~
mxschumacher
have you studied the most recent balance sheet of FCA? [0]

How come you think the firm is in a bad financial position?

[0] [https://www.fcagroup.com/en-
US/investors/financial_regulator...](https://www.fcagroup.com/en-
US/investors/financial_regulatory/financial_reports/files/FCA_NV_2019_Annual_Report.pdf)

FCA will merge with PSA towards the end of this year!

------
karpodiem
Sergio was way ahead of his time, I miss him.

Huge FCA fan, really looking forward to all of their upcoming product.

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ChuckMcM
That is a really amazing look at a part of auto development I've never seen
before. I'm wondering if some private equity firm went with it and rolled up 3
or 4 OEMs into a single more cost productive OEM.

~~~
linksnapzz
This is classic Sergio, and it is written as he would see things, as a
financier working w/ first-tier automakers.

His observations are spot-on, and it's true that half of what you're paying
for in the development of a new car are things that are invisible to most
consumers. Quick, can you name the company that made the AC system for your
car?

Things that make carmaking expensive/difficult:

1.) Huge regulatory burden (safety & environmental) on R&D

2.) Low margins (for mainstream cars)

3.) Vast capital requirements

4.) Very vulnerable to consumer confidence

5.) Globally segregated market (much as we might wish it away...)

6.) Mature market

If I knew nothing else, this would make carmaker stock unappealing from a
growth perspective. If that's the only way you can get more capital, then
that's a problem. For a cost-productivity sake, you'd want one or two giant
companies that each make one car, but under multiple brands. Then you rely on
marketing to tell customers that there's a difference. This would drive down
the overhead involved in many manufacturers making different models, and push
the growth potential of automaker stock more towards consumer products in
general.

We sorta had this, in the US, with GM in the '60s and '70s. It was so big it
was almost a monopoly...and yet, in the long term, that didn't last. Mostly,
for reasons that escaped Fred Donner and Jim Roche back then, and that I don't
think Sergio ever grasped.

In the end, a global auto oligopoly that answers to Wall St. and to gov't
regulators, and to _only_ those two, is going to be bad for consumers in the
long term.

~~~
nordsieck
> For a cost-productivity sake, you'd want one or two giant companies that
> each make one car, but under multiple brands. Then you rely on marketing to
> tell customers that there's a difference. This would drive down the overhead
> involved in many manufacturers making different models, and push the growth
> potential of automaker stock more towards consumer products in general.

The common term for this is "badge engineering" and it doesn't really work
long term for the simple reason that there are just too many car enthusiasts
who figure out the truth pretty quickly. This problem is compounded by the
fact that there is a large overlap between enthusiasts and people who buy more
expensive cars.

~~~
linksnapzz
Exactly. If you were an economist or a banker, you might not get that until it
was too late.

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7532yahoogmail
One thing I question is the assessment that what's under the hood is
unimportant to the customer ... Now many guys and most wives surely don't care
unlike a mechanical engineer until it doesn't work. In the early 90s Japanese
cars cost more but consumers saw quality. JP took 30% of the US market as a
result. Wouldn't this be better examined in terms of how repair costs factor
into customer assessment of car desirability?

------
purplezooey
I don't get the complaint of "hey we have this overlap and it's killing us".
This isn't BART. This is an industry. Please do compete, even if it is
painful, and lower prices. This is why we have antitrust. You know the
industries that were allowed to overconsolidate... do they add joy to your
life?:)

------
nimbius
wow. Five years ago? the thunder on the horizon was all the way back in 2002
when Japanese automotive manufacturers began ripping apart the luxury market
with Lexus/etc...

Lee Iacocca tried to help and really did in a lot of ways, by consolidating
Chryslers various drivetrain and option specifications into tighter
platforms...i believe at the time his strategy was likened to Taco Bell's
toppings. Its exactly what Japanese automakers pioneered for their dive into
Luxury. Take an existing platform and powertrain, and "goose" it with a few
luxury features. Then, break the bank on marketing (which is all luxury brands
really are anyway these days.) switches and buttons for seat options came
prewired into the base models, but were built out in the luxury models, so
this saved a lot of time and money. regular shocks, coilovers, struts,
etc...were swapped for primo, and the seat design was slapped up with leather
instead of cloth. you _can_ do this and it _does_ work.

Fast forward to 2015 and the auto industry learned bupkis from their crow
dinner at congress begging for handouts in 2008. Chrysler basically blocked
the memory out entirely, dove hard off the deep end and came out with garbage
like the hellcat. Its not even in the top 20 fastest cars, and most
importantly its a loss leader with custom engine work, custom drivetrain,
custom paint, etc...that is shared by _no model._ people want reliable cars
with good gas mileage and good performance like the Ford Focus and its ST
counterpart which were well executed. Ford of course then immediately turned
around and wiped out their car divisions entirely under the assumption all
americans will drive SUV's and trucks forever. maybe so, but the electric
mustang crossover is dead on arrival at sixty grand if its still getting its
doors blown off by a used model S with a 'baby on board' sticker.

Bureaucrats didnt help this capital addiction either. You could argue this
'ignore the real problems' stuff started in 2008 when boomers in congress
shook their fists and demanded Pontiac die, and Buick get to live, when
Pontiac was clearly a stronger company with a better offering for customers
than Buick who at the time was living off fumes from the Lucerne and Lacross,
two virtually indistinguishable cars which were getting creamed by Cadillacs
CTS and V platforms that targeted a younger and hipper trend. Pontiac
basically prayed at the altar of Iacocca with the G6, the G8, and the
Solstice, and their willingness to damn the consequences and innovate was
already on display with the Aztek...whereas Buick was still hucking 80's
designs around their Lucerne. Look at a 2008 Honda dashboard, then look at a
2008 lucerne dashboard. Buick is alive solely thanks to geriatric politicians.

~~~
7532yahoogmail
Your rant + some good points to be sure reminds me of a long running argument
I had with an ex-detroit guy on who the mororns and/or cheaters were: Detroit
or Japan? -- this was mid 80s and early 90s. Hint: some American companies are
slow to learn. That was my argument then.

------
soniman
The problem is too many "national champions." Korea alone has two auto
companies (Hyundai and Kia). France (Peugeot, Citroeb, Renault) and Italy
(Fiat) have their own car companies, even though neither country is known as
manufacturing powerhouse. Until those national champions are shut down or
consolidated (politically difficult), there will continue to be overcapacity.

~~~
yardie
So that’s never going to happen. You may as well say why build highways when
rail is more efficient. Most developed countries will want to have some local
manufacturing for national defense reasons. A car plant can be retooled to
make tanks, planes, and guns. But if you don’t have one now you wont have it
when you need it.

Also, r&d consumes a lot of resources. Shared platforms are the way to go. VW
outsourced beetle production to Mexico where they continued to produce them
even after VW stopped selling them. They were good and cheap enough. Exactly
what a developing economy needed.

~~~
gcbpp
so very wrong. but unfortunately a common misconception in the colonial world
we live in.

older car models are not made in 3rd world because of some grandiose
benevolent plan to bring robustness and cheap cars to the poor pitiful people.

older models are usually more expensive to produce, less economical to run,
have less confort and everything, and the margins are lower. BUT, the tooling
and RD cost is already paid for. so with zero investment (simply shipping what
would be scrap metal otherwise) they can extract profits from markets starved
of any other offering. And let's not forget they negotiate tax breaks on top,
after all they bring jobs to the poor pitiful people.

