It's no secret that the automotive industry taps its supplier base for the latest and greatest technologies. Yet, many of those suppliers don't have anywhere near the R&D dollars of automotive OEMs, and, as I've asked before, even if the suppliers come up with cutting-edge technology, will the OEMs pay for it?
Automotive OEMs have some pretty big R&D budgets, so one would think they could out-R&D almost anyone, but that's not the case. In a PwC survey of the 20 most innovative companies in 2014, Apple was #1 with an R&D spend of $4.5 billion. That won't surprise anyone. The #2 spot went to Google, with a whopping $8 billion spent on R&D. Only one automotive company landed in the top 10: Tesla Motors garnered the #5 spot, with an R&D spend in 2014 of $0.2 billion.
The PwC survey of the 2014 top 20 R&D spenders saw Volkswagen in the #1 spot, with an R&D spend of $13.5 billion. Toyota captured the #7 spot ($9.1 billion), GM came in at #11 ($7.2 billion), Diamler was right behind at #12 ($7.0 billion), Ford made the list for the first time in 2014 at #15 ($6.4 billion) and Honda brought up the rear at #17 ($6.3 billion).
In a similar survey from Boston Consulting Group, only four automakers—Tesla Motors (#7), Toyota (#8), BMW (#18) and Ford (#19)—landed in the top 10 of its 50 most innovative companies in 2014.
In a two-part blog post, Evangelos Simoudis, Senior Managing Director at Trident Capital, took a hard look at the innovation (or lack thereof) of the automotive industry. "The results of the PwC and BCG surveys lead us to conclude that other industries do not view automotive OEMs as top innovators, despite their high R&D investments," wrote Simoudis (the italics are his). "So, at the very least, automotive OEMs have a market perception problem. But I think that the problem runs deeper. While investing heavily in R&D, automotive OEMs have not been investing in technologies and business models that are now used by newcomers to disrupt them (software, big data, user experience, additive manufacturing/materials, energy storage, sharing economy, direct to consumer). . . These technologies and business models are not in the automotive industry's DNA."
That could be the primary reason why automotive OEMs are encouraging greater partnerships with their first-tier supply base to tap into technology that the OEMs typically cannot see from behind the walls of their giant plants. Simoudis wrote that "culturally, automotive companies prefer, at best, to be fast followers, rather than first movers." They prefer this position, noted Simoudis, "because they perceive that in this way they are reducing the risk associated with early technology adoption."
Any supplier to the automotive industry can tell you that OEMs and even Tier 1 suppliers are risk averse to the point of paranoia. So, is it any wonder that they are encouraging their suppliers to be technology developers, to take the risk and share these innovations with the OEMs? I've known some really smart moldmakers and specialty processors who have developed fantastic innovations and tried to get OEMs to look at them, to no avail. That was back in the days of the not-invented-here syndrome.
Now, things have changed. When Volkswagen invited its key global suppliers to Wolfsburg, Germany, on February 26 , 2015, to kick-off its new Future Automotive Supply Tracks (FAST) program, the company's Procurement Board Member Garcia Sanz acknowledged in a press release that "the automotive industry is changing fundamentally. New technologies and short product cycles pose challenges for our industry. In the future, a key success factor will be a highly efficient global supplier network." The group-wide program targets the best partners in Volkswagen's international supplier network. "Together with our partners, we intend to forge ahead with the globalization and innovations of our brand and the entire automotive industry and to actively shape the future of the industry," Sanz emphasized.
The objective of the FAST program, said Volkswagen, is to prioritize investments and make efficient use of resources in closer cooperation with suppliers. An IHS SupplierBusiness editorial last week noted that "Volkswagen has nominated the first 44 suppliers who will be collaborating with the group on a new common strategic level" under the company's FAST initiative. Volkswagen is quoted in the SupplierBusiness editorial as saying that "the aim of the initiative is to successfully implement joint technological innovations ever faster than in the past and to realize vehicle projects worldwide even more efficiently and effectively." The suppliers listed are a who's who of Tier 1s and include Delphi, Mahle, Brose, Valeo, Honeywell, Magna and Continental AG, among 37 others.
IHS SupplierBusiness also noted that an early example of this is Ford, with its "aligned business framework, providing [suppliers] with access to long-term forecasts and long-term technology roadmaps, while at the same time saying that they have preferential access to Ford's business. Suppliers that match an OEM's investments in a certain region by following with a plant of their own have a stronger chance of getting business from that OEM in that region. Around two-thirds of Ford's purchasing is made through the 110 suppliers in the aligned business framework."
The carrot for Tier 1s and subsequently the Tier 2 suppliers (such as molders and moldmakers) is a promise of long-term contracts. But the stick of cost reductions, I'm certain, still will be in effect. While these programs help the OEMs mitigate risk by sharing it with their suppliers, the supply base isn't exactly home free. Past experience with the automotive industry has left many suppliers with a bad taste in their mouths when it comes to dealing with these companies. As SupplierBusiness notes in its editorial: "By bringing [preferred suppliers] on board, [the OEMs] can cherry-pick the best new technology and retain a degree of exclusivity on some projects. Because of this, suppliers will have to choose their projects carefully."
That's a caveat to which suppliers, especially the smaller Tier 2 companies, had better pay close attention.