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OEMs are moving away from in-house R&D, a model they've held for decades, and are becoming more dependent on specialty suppliers to provide new vehicle technology. Booz & Company released its 2013 Automotive Industry Perspective and it shows some important shifts in the roles of OEMs and suppliers.

Clare Goldsberry

December 28, 2012

6 Min Read
Innovation and the changing role of suppliers

OEMs are moving away from in-house R&D, a model they've held for decades, and are becoming more dependent on specialty suppliers to provide new vehicle technology. Booz & Company released its 2013 Automotive Industry Perspective and it shows some important shifts in the roles of OEMs and suppliers.

"OEMs can no longer afford to operate with such a broad technological agenda," said the Booz report, "and they must focus on some R&D priorities while dropping others." Some of that shift is already happening in some areas of automotive technology like new powertrain technologies such as hybrid-electric, all-electric, or fuel-cell technology. futureexit.jpg

Future exit

However, with OEMs likely to control a narrower portion of R&D, Booz noted that the "dynamics and choices they make regarding which areas to specialize in are critical and will determine future success. These factors will inevitably lead to more technology partnerships with suppliers, such as Chrysler's purchase of diesel engines for pickups from Cummins."

The same holds true for suppliers, which Booz projects will "shoulder a larger share of rising innovation costs as OEMs cede innovation in strategic ways. This will force suppliers to decide where to make technology best - a process that requires real discipline in evaluating the likelihood of success for a new and innovative product and the probability that others are developing equivalent or superior technology." In some cases, Booz added, "outsiders to the automotive industry will emerge with very real competitive advantages."

What this means for molders and moldmakers:
For moldmakers that serve the automotive industry, this could mean some new opportunities to help Tier 1 molders and their OEM customers use cutting-edge mold technology to achieve benefits. Those might include but would not be limited to reducing cycle time, and reducing or eliminating secondary operations such as assembly that may involve welding of various metal components through design for manufacture and/or design for assembly using metal-to-plastic conversion.

Awarding specialty technology for various parts and/or systems to technology firms that are not specifically automotive also means that both molders and mold manufacturers will have additional competition beyond other molders and moldmakers. Because of their specific areas of technological expertise, these companies can offer real cost savings and time-to-market advantages.

More mold manufacturers, particularly those larger-sized enterprises that have the financial and human resources to invest in R&D for new mold technology, are collaborating with mold component suppliers and partner with molders and molding machinery manufacturers to push the envelope of productivity and cost efficiencies for OEMs looking to reduce costs.

However, these changes could also spell new business opportunities for suppliers, especially and Booz projects that "winners in the North American auto industry five years from now will be those that develop a process for capitalizing on innovation from a wide range of sources - some proprietary and some open," Booz reported. These supplier companies will also "need to manage the technology portfolio, evaluate scenarios (some of which may be highly uncertain), develop a better sense of market requirements, make selective best, and adjust accordingly."

All of those factors will be critical to the long-term success of these suppliers. And while Booz noted that managing these investments and partnerships will be critical to suppliers' long-term success" and ROI "may take years to materialize . . . companies that shortchange innovation today are ceding the future to rivals."

Implications of this new paradigm for OEMs:
Booz outlines four ways that automotive OEMs will need to adapt to changing conditions, strengthen their existing innovation capabilities and develop new ones:

Become experts at managing a broad, far-reaching, and active innovation network that requires technological capabilities that historically have not resided inside automotive OEMs. To survive in this environment of dispersed technology development OEMs much cultivate an active and creative extended network; strike a careful balance between reducing production costs through competitive sourcing incentives; and partnering with the most technologically advanced entities, with an expectation that more adept partners will improve vehicle innovation.

Focus internally on select technologies that are absolutely essential and must remain proprietary. OEMs will need to make sure they are focusing their limited R&D spend in the areas where it is most critical and will have the most impact (incorporating a make-versus-buy discipline to technological innovation). This will require intimate knowledge of the OEM's own capabilities as well as those of suppliers. For example, where does the OEM need to control the technology absolutely? Where does the supplier have the scale to advance technology much more effectively? Where could a partnership be most effective?

Plan for and manage the inherent uncertainty associated with this new operating paradigm. Given the large number of technologies under development and the complexity surrounding their eventual adoption, OEMs need to continue to strengthen their ability to manage uncertainty. This includes: placing well-considered bets on early technology winners on the basis of economic fundamentals and development trajectories; developing a strong market-sensing capability that can detect early clues regarding potential front-runners or shifts in the competition based on a range of impacts (from breakthrough scientific findings to new government regulations).

Strengthen system and vehicle interaction expertise. OEMs must retain and even strengthen their cross-system, vehicle integration expertise, and continuing to build this expertise that will be essential to maintaining control and achieving high-level quality and reliability targets in an increasingly dispersed innovation environment.

Implications for Suppliers:
As suppliers take on more responsibility for technology innovation, they need to rethink their approach to contracting with OEMs and become more discerning in their evaluation of programs. For example, Booz suggests they ask whether there is "a clear path to recover costs associated with serving OEMs in the long term? Is there a segmentation of sourcing relationships across vehicle OEMs that might warrant differential pricing and/or tiered service choices? Will some programs be more or less attractive in the presence of an updated technology road map, an increased ability to refine production techniques, or greater scale in fundamental operations?"

For mold manufacturers who supply automotive OEMs, either directly or through Tier 1 molders, that first question is a good one since it is often difficult to get the automotive OEMs to pay for innovation specific to their requirements. That means that many mold manufacturers and Tier 1 molders will have to invest their own money to develop new technology. The return on this investment might not come until - and unless - they can market their 'proprietary' technology to a number of OEMs and across vehicle models.

It also means not allowing one OEM to claim exclusivity of a mold/molding innovation for their vehicle(s) alone, but recognizing the innovation as that of the mold manufacturer's or the molder's. If the innovation is the proprietary development of the moldmaker, the best way for that company to recoup its investment is to use that technology for other customers as well. [See "The design is mine: Moldmakers speak out on who owns the IP".]

Suppliers that choose this new role of technology innovator for automotive OEMs will need to "become more agile and adroit in managing the technology project portfolio, including deciding where to specialize from an innovation standpoint," Booz said, analyzing the market opportunities, and "building a capability to identify changes in technical, market, and regulatory factors that may impact the technology success."

Finally, in order for suppliers to improve the chance that their innovations will improve competitive positioning, Booz said "They will need to continue to expand their knowledge of the vehicle systems in which they play," i.e. fuel systems, powertrain, instrument panel (IP), etc. "This could involve enhanced networking or partnerships with sub-tier suppliers (such as electronics providers), market peers, or adjacent technologies, in addition to traditional OEM relationships."

About the Author(s)

Clare Goldsberry

Until she retired in September 2021, Clare Goldsberry reported on the plastics industry for more than 30 years. In addition to the 10,000+ articles she has written, by her own estimation, she is the author of several books, including The Business of Injection Molding: How to succeed as a custom molder and Purchasing Injection Molds: A buyers guide. Goldsberry is a member of the Plastics Pioneers Association. She reflected on her long career in "Time to Say Good-Bye."

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