AAH #747 - A Historical Perspective: How the Auto Industry is Changing

Speaker 1: That's we're live.

Speaker 2: So yeah, we start the show, then, yeah, you can go whatever.

Speaker 3: Start the show, John, Okay, everybody out there watching the show right now, we're having technical difficulties. The streaming service

that we usually use to do the show has gone down for reasons. We don't know what's going on here,

but we are able to come to you anyway. The

video's probably going to be okay. The audio maybe not

as good, but maybe good enough. So we're gonna go

ahead with the show anyway. And of course we've got

Gary Vassilash here, the famous Gary Vassilash. We've got Dave

Andrea from Plant Moran, the more famous, the more famous, soon to leave Plant Moran, but we'll get into that.

We got Lindsay Brooke are College, the infamous Lindsay Brooke.

But but we're gonna do online after hours anyway. And

I know, Gary, one of the things that you wanted to have us talk about is how much the four of us have seen the auto industry change over the course of our careers.

Speaker 2: And I think particularly since Dave will be retiring from Platin Moran at the end of the month, and he has probably had more perspectives on different things than the three of us, all.

Speaker 1: Working as journalists for our careers, have had. I think, Dave,

we need to start with you to give us just give us.

Speaker 2: A snapshot of where we are now and how we got there.

Speaker 1: Well, look over the forty years, I have had many different perspectives. They've always been from the outside looking in

to the industry here. But sometimes Gary, I think it's

the old The more things change, the more they stay the same going through Like on the Working Relations Index studies, I remember and.

Speaker 3: Let me interduct you with the Working Relation Index. This

is where suppliers evaluate how the different automakers treat them, I guess is the way to put it. But just

for those who may not know the WRI off the top.

Speaker 1: Of her perfect John, Yeah, I can go back truly to nineteen eighty three, nineteen eighty four when I was an intern at Ford Motor Company, and some of the stories, some of the comments that are in the WRI are things that I experienced forty years ago. So it hasn't

changed that much, without a doubt, though. What has changed

is the globalization of the industry in terms of the number of players and the culture of the players, and certainly Detroit has changed from when I started forty years ago.

Speaker 2: So you're basically always looking at it from the point of view of relationships between the two types of organizations, the OEMs as well as the mainly Cure one suppliers, and then also sort of from an economic perspective.

Speaker 1: Is that fair to say, Well, the economics come in terms of the macro environment, and we do see over the years how things change. If you go back, you know,

fifteen years or so, when the industry was all coming back, the production levels were all growing, profits were in the industry.

The numbers follow the profitability. A lot of times, when

things get difficult, that's when the relationships tighten up in terms of everybody's trying to get protect and get their own dollar, and that's where we see a lot of the tension and stress in the industry.

Speaker 3: You know, when I got into the industry, boy, it was a different worldly, different world. It was the World

War two generation was running the auto industry. And I

don't mean the World War two generation that ran World War Two. I'm talking about the grunts. So, like you know,

when I got onto Automotive Industries magazine, one of our guys that I worked with, had been at the D Day invasion, he was a captain in an LST. Had

another guy that worked on the magazine that had fought through North Africa and up through the Italian campaign. Had

another guy that was on a mind sweeper in the Pacific.

And so the whole attitude at that time was America was so great, Detroit was so important. And I remember

wanting to write about these companies called Toyota and Honda and Docson at the time and getting criticized, why are you writing about those companies. Those are the Japanese. We

beat them in the war. And you know, when I

think about back to the attitude then and the way that the industry was structured, it's completely different today. I mean,

back then, the Detroit Three, the Big three as they were known then. Right now they're the Big four, five,

and six. That's how much they've come down. Is they

built something like eighty percent of everything in the house.

And the supplier industry was this small little thing. They

were tires, and maybe they were some specialty transmissions and stuff like that. But the car companies did everything in

the house. They had not really there was not the

supplier industry that there is today. It's completely changed now.

You know, they buy seventy to eighty percent of what goes into.

Speaker 1: A car, and the engineering and design were flip flipped around as well. And that's part of that globalization. And

you probably get the same type of opinion right now about writing about BID and g Lee some of those other Chinese firms. But the thing with the half LIFs right,

because it took Volkswagen decades right to make their inroads.

Then it took when you look at at Kendai and Dawu and like, it just took decades for them to grow.

And so that the speed of how the industry has changed from a market share standpoint and then from a leverage standpoint, has without a doubt, has changed dramatically. And

that's where going back to the twenty five years ago with the WRI, the leverage was purely in the hands of the of the vehicle manufacturer.

Speaker 2: Some man the vehicle manufacturers could tell us players, we want this, this is what we wanted when we.

Speaker 1: Wanted well, right, and so when you said, well why do you put up when you ask the question, well why do you put up with that attitude? Well, it's

the volume, right, And that's the customer and will do anything for the customer. Where things have changed now because

you have to go down five, six, seven and eight right to get in terms of total production share. Now

that leverage has changed, and that's where we see that the vehicle manufacturers then respond to the survey because the suppliers have choices, and in fact, when we give them the comments, there's direct comments. You know, we're working away

from one one OEM or we want to grow with another OEM. And with the technology transformation is that it's

moving so fast, the vehicle manufacturers have to try at least to be a customer of choice that the suppliers want to work with them. So necessary.

Speaker 4: One second, Gary, we don't have many complaints or anything like that in the comments. We have about one hundred

people watching now on this one. Do you mind just

giving a quick little update on kind of what's going on.

Speaker 3: Yeah, yeah, yeah, Sean just asked me to talk to you guys who are watching right now. We're having technical difficulties.

The streaming service that we use normally to go live with the show, which we've been using now since two thousand and eight, never had a problem somehow or other.

Speaker 1: It went down.

Speaker 3: Today, we're still trying to figure out what's going on with that, so we've got sort of a backup mode.

The audio may not be as good. I think the

video is okay, but just so all of you watching understand right now why it's not to our regular production quality standards.

Speaker 1: You know what's going on. Thank you. I think that

should be good. The content is above for great. I

just want to make that clarity. So we didn't make it.

Speaker 2: So John was talking about how early on in our careers OEMs were vertically integrated.

Speaker 3: Why did they stop being vertically integrated.

Speaker 1: Well, there was always a perception that they were the high cost manufacturer. So I go back when I was say,

an analyst at Ronian Company, and that was at the time when GM was spinning off what became the Delphi assets.

Ford was spinning off the Vistian assets. I remember going

to these meetings where the vehicle manufacturer side would make this case that they had to spin off the parts side of their business because it was too capital intensive, it was too costly, and they were going to shed that and become more profitable. And then literally next you

would go next door to hear the Delphi or the Vistian or the the ACU Stars story. They never went

in public, but and it was completely the opposite. Well, wait,

because we're going to be focused, we're going to be capital efficient, we're going to be profitable, we're going to be able to sell a course more so to other OEMs, and we're going to diversify our customer base. And you know,

we'll wait a minute. Just five minutes ago you heard

that these were the worst assets, the most costly, and now it's the best story ever. So it didn't give.

It didn't.

Speaker 5: But during that period too, we had in this history the Japanese setting up manufacturing widespread in particularly.

Speaker 1: In the eastern part of the US, and.

Speaker 5: Toyota and Honda brought their corretzus with them, and for a long time you hear about, well, we can't compete because of the Corretz, we can't compete because of the relationship with Eijen and den Soil and et cetera, et cetera, And that was seen as a real asset that the new Japanese North American automakers had.

Speaker 1: Well there, lindsay. The thing I always found funny was

when I was at for it and we had the internal parts division side. We treated those guys as worse

or more worse than as an independent supplier. And and

you'd question that, why would you You know, it's the same, it's a Ford paycheck, right, And they did because it was the vehicle manufacturer versus the supplier in that standpoint, My point being, I think if they would have acted like a Japanese in the terms of the Japanese culture of respecting those the design, the engineering, the production capabilities of the suppliers, that would have been a different industry.

But they know they treated them just as bad as any other supplier, even though they were.

Speaker 2: But John, do you think that goes to the cultural thing of.

Speaker 1: The people who were running the car companies or in managerial positions, not just running, but.

Speaker 3: Who are in charge of those guys. I think you've

got to look at a big picture here. So number one,

when they were vertically integrated and they were oligopolies and they were GM Ford and Chrysler were oligopolies, they had collectively eaten nine plus of the market, So everybody had to do whatever they wanted them to do, whether it was the customer, the dealers, or the suppliers, and so when things started to change, when international competition, namely the Japanese started to come in and eat their market share,

they really got much more focused on cost because now they had to compete with the Japanese. They couldn't just

pass costs along, and so when they started looking at highly labor intensive operations like wiring highnesses and cutt and soap for making seat covers and seat assembly, it was like, holy crap, we can outsource this to suppliers who are paying fifty percent less on their labor costs. Also, both

suppliers they can shift to any automaker, they're not just an in house one. And that was part of the

culture thing. I think that you got to the supplier.

The in house supplier operations knew the company had to buy from them. There was no competition there. And when

you started to get into new technologies, then the automakers started to realize, Wow, now we got to spend a lot of capital on our in house operations. Why don't

we just start outsourcing this stuff? And so the outsourcing

craze started in the early eighties, and then they took it too far. They outsourced too much, and they realized

that they pulled some back and and there's still this ongoing debate today is it make or buy? Do we

do we make it ourselves or do we buy it from a supplier.

Speaker 2: So, Dave, you mentioned CHS, Dion and Delphi. That didn't

work out so well for either of those two companies going forward.

Speaker 1: No, it it didn't. And I was out of the

analyst role after they really were established through their I pos and we're standalone companies from that standpoint, And that was probably because they were staffed managerially with people who still had the mindset of their parents. Right, they weren't

they weren't the true competitor and for and also the piece of competition changed, I think from exterior design in a bit on interior design really heavy to technology. But look,

I think when when I went through the Vistai on R and D centers and all those things, and you look at some of the instrument cluster the instrument clusters, and a lot of that innovation started at Fistian or with FISTI on. So it wasn't like they didn't have

it or couldn't do it. But I just don't know

why they didn't get the establishedment and to go up against the other independent, always an independent.

Speaker 3: But remember Dave, they were unionized, and so you don't only have much higher labor rates. You've got union work rules,

lines of demarcation, threats of strikes. You have to create

a much bigger labor staff. And so I think that

played a key role in why they were not able to compete. Having said that, several of the spinoffs have

done fantastic. Detroit Diesel, which is now part of Dinler

Truck is healthy and going. American Axle has done relatively

well for itself. On Delco Remy, you know, is still

alive and kicking. So there were operations that were spun

off that you know figured out now. Having said that,

look who their leaders were. Roger Penske is ahead of

Detroit Diesel. Dick dalk is the head of American Axle.

Hal Spurlock former president of Chrysler running Delco Remy. They're

a dynamic personnelity, dynamic executive. So even though they may

have had that OEM mindset, they got it. They knew

exactly what they had to do. Roger didn't have that

OEM mindset. He's always been an entrepreneur, entrepreneur.

Speaker 1: And they had the operations standpoint, and more of an engineering bent I think for the cost piece of the puzzle. Yeah,

on the union side, I've always have felt that it was as much, if not more, of the work rules. Yes,

that stemied the flexibility that then you couldn't overcome the cost differential. It's not so much the wages and beneface.

Speaker 3: You can manage that if but having to manage a plant along with a union adds a huge layer of complexity.

Speaker 2: So, Dave, I want to I want to ask you about your findings for this twenty fifth Working Relations Index, because I think that there are some surprises.

Speaker 1: To me anyway in here.

Speaker 2: Now, what's not surprising is that Toyota leads the pack again, Okay, But what is surprising is the space between them and the one of the bottom Stilantis, so on a five hundred point scale, which I think is absurd because nobody's ever to get near five hundred, because the top has only been four fifteen by Toyota back in the day. Okay,

So Toya scores three eight six, Stillantis scores one for one?

How can how can Stillantis compete when its suppliers have such a low level of respect for the.

Speaker 1: Company out and and we've seen that you have to take it at least a three year window on that because if you go now here, this is where I'm going, Gary is if you go back and when Stillantis was riding high on well, don't look at don't look at the w r I number, No riding high on on the RAM pickup truck sales on the Cherokee, on the

Grand Cherokee. And they were making higher margins than the

other two Big three. Their profitability was and but there's

supplier numbers were down here. If you take that snapshot,

and maybe if your question going forward, how can they do it? They can't. They need their supply base to

be with them. Because John was pointing out sixty seventy

percent of the value of the vehicle is with those suppliers, and so Stillantis is providing the design and the integration and all those other elements. But they need their suppliers.

And that's one where the suppliers are starting to make choices of where they're lining up. They're constrained resources, both

human resources and financial resources. So is it a case that.

Speaker 2: A supplier is more likely to provide an OA that they have good relationships with the latest technology versus others that don't score quite so high in terms of the relationship index.

Speaker 1: Absolutely, and and that plays out in many different forms.

It does come back to the cost to serve, which has been a big theme for us this year and in the in the w r I roll out. So

think of it from this standpoint. You have a history

of getting paid for that innovation, uh, for the volumes on that intervation. You know, is it going to be

exclusive exclusivity or can you sell it to all of those other elements. So when the tech fares happen and

the other types of innovation fares happen, without a doubt, the innovation gets shown to your better customers. But more

equally important is every day to day operation. So there's

a problem in the assembly plant on a warrant, a potential warranty issue, and they call is the supplier, and particularly if they get two or three calls, is a supplier going to send out the team to the assembly plant of their best engineers, their best workaround experts to the customer they had the most difficult relationship with, or the one with the best And that may not be just the pure profitability piece. It's just all the friction

that goes into the relationship, and the suppliers will say that well, while contractually they have to provide production to all of their customers, it doesn't mean that you can't respond quicker or better to an issue with the people you have a better working relationship with. That's that's what

this shows. And I think back to your point about

how why the range is this year really points to how difficult it is to be a supplier today because typically the suppliers supply at least four, you know, or even sometimes five or six of those OEMs, So you have to have your own systems set up to fit what a Stilantis. You know how to work with a

Stilantis as well as how to work with the Toyota.

And that's a tremendous amount of complexity.

Speaker 5: Hey, what's your sense in looking at the supply base you interviewed, any differences of feeling to there's the OEM comparing say hard parts suppliers and soft software and electronics suppliers, which the ladder being a major major cause of customer dissatisfaction today.

Speaker 1: Yeah, so that's one area where as John mentioned, I'm going to be retiring at the end of this month, Angela Johnson will be taking over for me and we're we're working with a group of suppliers right now to change around the questionnaire because it was developed up for the hard parts, stamping, foraging, casting and volume. Yeah, you

know high production parts too. So we're going to integrate

more things like over the air updates. How does that happen?

Progress payments progress payments for tooling for hard tooling is completely different than progress payments for software.

Speaker 2: Sure, john from what he was saying about the situation.

Say with Stilantis and we were talking earlier before the show started about the RAM EV pickup truck, and you were suggesting that it may not come out. I wonder

how much of that might be predicated on technology issues with the supply base.

Speaker 3: Look, I'm speculating that ram will not and then Speculation will not come out with its BEV pickup. Why because

BEV pickups are not selling very well. I mean the

Ford Ranger or the Ford Lightning excuse me, is now outselling the cyber truck. The Silverado is less than that,

the Rivian's less than that, the GMC Sierra is less than that. None of them. If you look at their

sales through the first five months. None of them will

crack thirty thousand sales this year. You can't make mone

me at that. So why would you bring a new

truck to the market knowing it's dead on arrival. You're

just going to lose money on it. I think the

Stalantis has got a lot of issues to solve right now.

Why would you bring a product to market that you know you're going to lose money on it. I think

it's better bite the bullet right off. The investment in

that go to the e REV the extended Grange GV version of that truck, which I think happens to have a much better fighting chance than a pure BEF does because you can toe with it, you can haul heavy loads and the like. I don't think it's a technology issue,

except as technology is such with evs right now that they're really not conducive to towing or hauling heavy loads.

Speaker 1: The use cases aren't there. But flip around everything you

just said about Stilantis in terms of the volume, the profitability, all those things. It's the same for the suppliers, right right, Yeah,

So why would the supplier go and put in a lot of investment certainly in new innovation that's bespoke to one vehicle manufacturer, and certainly to one nameplate or one platform.

Let me go there. If they don't believe there's going

to be a return on that investment, So okay.

Speaker 2: But if I'm a supplier, I mean, my existence is predicated on my being able to.

Speaker 1: Sell stuff to someone else.

Speaker 2: Wouldn't I just be interested in trying to sell to whomever I possibly can to keep my business going.

Speaker 1: But as long as you know you can sell, whether it's fitment specifications, all of those other elements to those other customers, yeah, because if it's to a Stillontis design, then I locked in. And that's where it's interesting watching

or reading the analysts and everything now of you still have to keep it ev investment stream going because that's where the industry ultimately will be. We just don't know when.

Like the all the four billion dollars of GM investment that they just announced, some new, some old, but you know it four billion.

Speaker 3: Dollars, don't you think they they threw everything in the kitchen sink to make that number look as big as possible.

Speaker 1: Well, there's there's a bit of public relations there, sure, but what that's but that's you know, maybe going also back to how things have changed. It's, you know, back

thirty years ago, the industry government relationship was all about regulation or about regulation, and now it's about the business conditions.

It's about tear trade and tariffs, it's about all the elements of the business case, not necessarily about the product.

It's although you know, the terrorists are on the product, but it's about the business versus about hard regulations.

Speaker 5: What sense you did you get from the study on how suppliers feel about the newcomers TESLA, I mean you have data on that, and even the byds. I mean,

I've heard just a lot of guys saying we can't sell it to you know, the Detroit three we're going to We've got business growing in China, and are those companies they are they learning from all the data year to year from the study.

Speaker 3: You know what it takes.

Speaker 1: So the other the other vehicle manufacturers outside we continually talk with trying to get them into the study. My

step is even for the supply base, an intermediate step of saying, let's do a proprietary study. You don't have

to be in the public what first. So that's another

one that's queued up for after Dave. After Dave leaves. No,

from this standpoint, I we we've we've surveyed, we've gotten data.

But the thing is, I was never comfortable that we got a sizeable sample across all of the different systems to be able to say that this is representative, you know, without a doubt. I mean people have argued, you know,

if a number goes up or a number goes down, or maybe what the absolute number, But nobody's ever argued that our ranking is off the Toyota, Honda, General Motors on Forward and Stilantis. They don't argue the ranking. So

we just have to get the right sample to be able to do that.

Speaker 5: Do you think those companies will want to come into it?

What sense you have?

Speaker 1: No, not not yet because they the supplier. Well it's interesting,

I mean, John, going back to your portrayal of how some of the arrogance might be of those you know, like with Tesla. No, but for the you know, they

owned that market, yeah, right, and so they could put their specs out, they could change, they could go back and forth until you know, Job One all those others that you know the suppoint. But and they did that

because they were TENESLA. Now that their market share is

starting to go down, they have more competition across different segments all of those types of things with their product portfolio.

Time will come when they they will care, not necessarily right now.

Speaker 2: So you know, getting back to this ranking means it's been fairly consistent. But Ford has been taking a tumble

over the last few years. Why do you think that's

the case or why what did your data show you?

Speaker 1: Yeah, so I think it's a combination of a couple of things. One is well, actually they all point back

to one thing, organization and and I pointed back to organization to two ways though. First is when they split up.

I think for the Model Model E and the Ford Blue piece, that confused internally, you know, engineering, purchasing, all those types of things. It confused the external with the

suppliers to who was making decisions and things like that that we see with the Japanese companies about is it North America or Japan making decisions. We saw that just

within Dearborn. The other element that they structurally over the

last couple of years have done is to move a lot of purchasing activity both first to Mexico and then it was to India that they moved centers to. And

in a time when the industry has a lot of uncertainty, a lot of you know, just leave it at that.

The last thing you want to do is extend decision making authority, to extend the timeliness of decisions. And that's

what they've done. I mean even from like looking at tooling,

uh tooling payment disputes that a decision has to go over to the Indian group. Take a look, information may

or may not be there, to be missing, has to come back, has to go back over. And you're you're

looking at talking about terror just you know, uh, cost pressures and you're delaying the payment to a supplier. Well, yeah,

that's going to impact your numbers dramatically because your cost to serve is going up. It's a reverse relationship to

your wr I know.

Speaker 2: So, Okay, I'm a supplier and I'm based in Allen Park, which is right next door to Deerborn, right right across ninety four.

Speaker 1: I've got a problem.

Speaker 2: Yeah, I've got to deal with India rather than the guy who's like literally across the street.

Speaker 1: Depending upon what it what it is. Yeah, and and

let me just say this that it's also difficult when the Ford organization itself doesn't know the process. Two. So

if a supplier needs an answer and they can't get a quick answer, yeah, you know that's again it's an inverse relationship. So so that those would be the two things.

And so I pointed directly back to the organization.

Speaker 3: Yeah, we saw some news break in China this week where they're has been a move to essentially compel the automakers to pay their suppliers within sixty days. And you know,

this has been a complaint here in the US. I

know it's been in year Rope two that when times get bad, when money gets tight, automakers starts stretching out the time it takes to pay. You know, the horror

cases have been ninety days. Well in China it was

way worse than that. It was one hundred and forty days,

it was one hundred and sixty days, it was one hundred and eighty days. I think byd was over two

hundred days and paying and the government through different ministries now it's starting to crack, the government's starting to get worried about the Chinese autoway. The Chinese government is getting

worried about the Chinese auto industry, and you know, we're seeing none of them are making money. Maybe three automakers

are making money. There, dealers are going out of business

by the thousands, and so three different ministries sort of it looks like joled these automakers into saying you've got to pay within sixty days. And literally just yesterday, almost

every Chinese automaker came out and said, we've got a new policy.

Speaker 1: Now we're going to.

Speaker 3: Pay within sixty days. Where do we stand in this country? Now?

What do you think of the move in China?

Speaker 1: Well there, and before that, the Japanese government made the same request out of their top to their top two vehicle manufacturers as well, because they were worried about how fragile the supply base was. And some of those decisions

there ended up coming over here because that's the thing going back to you want to try to be one Toyota or one Ford, you know, back in the Malal days, and so that that transfers over here. Payments have pretty

well stayed the same over the last i want to say, three years, four years type of of peace there. It

was interesting with one of the vehicle manufacturers it was last year when I was reporting out to them, I made a statement saying, look, one way you could improve your numbers. I know it's costly, but it's to shorten

your payment terms. And that wasn't a popular thing to

say in the in the purchasing staff meeting because what they came back, well, who's saying, you know how big of an issue is that all those other kinds of things, And and my point was, wait a minute, we know you could you have all the financial numbers on your supply base. You know how fragile it is, so the

last thing you want to do is extend those payment terms.

That's the type of thing going back to what we see in the in the survey and things is where I guess this is going to sound like I'm picking on finance. But if finance says no way, in a minute,

we need a little more cash on our balance sheet and not on the supplier's balance sheet, so we're going to extend it, That's where I think the survey has served a good purpose over the years. Then purchasing can

go to finance and say, look, this is what you're causing us. And it goes back to innovation. Slowing down

and it goes back to and they know the stories about the customer support and things like that.

Speaker 5: Speaking of gripes, a neighbor who works at a Tier one said to me this morning, ask Dave Andrew about an ongoing He called it a generational issue and that's.

Speaker 1: Late engineering change.

Speaker 5: And I remember doing reporting on this years ago, you know, and talking to people and they're no longer we're freezing it, we're not budgeting.

Speaker 1: And we still hear this from the supply base.

Speaker 3: What's your data?

Speaker 1: Yes, so we do ask about actually, in three different ways, are late or excessive engineering changes impacting cost, timing and quality.

And if you look at Toyota's over the last couple of years, some of their numbers have worsened on that and you think, well, but then you look at the situation of like when they were putting out the new Toyota architecture, generation architecture, on the new camera and those types of things they're laid, engineering changes spike up because most of that, of not all that was being done

in Japan. So it's an issue. That's the one thing

I keep saying to the OEA, use this data to try to convince product development and marketing. Now I am

picking on those two functions to simplify your product mix.

We've heard over and over again from many of the OEMs the old eighty twenty rule. You know, eighty percent

of our sales comes from twenty percent of our part numbers are skews. You know, however you want to define it,

but we never We don't reduce that complexity. And by

not reducing that complexity, we still have all the engineering changes that go along with way that.

Speaker 3: But there's a new dynamic in the industry now too that Tesla started and the Chinese are copying, and that's engineering changes on the fly. And part of it is

to get to market faster, not wait until you have one hundred percent development, launch the product, and with over the year updates and other improvements along the line, catch up so to speak. Also getting to market faster. You know,

it's very obvious in the industry. First US with the

mostess is going to gain market share. And you know,

if it's the worst, no, that's absolutely true.

Speaker 1: It doesn't catch up with but in terms of warranty and others, right, keep going.

Speaker 3: No, you're right, So I mean, uh, the Silicon Valley model is essentially what Tesla adopted. And now that the

Chinese startups maybe not necessarily the stain enterprises in China, but it's you know, break things fast, iterate, iterate, iterate, you know, uh, don't wait until everything's perfect, get an eighty percent of the way there and go with a launch.

And you know, Alex Partners even came out with a study on this is you know, the the Western companies and I'll throw the Japanese and the Koreans into that want to have the absolute last piece of envh of write in handling, acceleration and breaking absolutely perfect before they launch a car. And so they hit the market at

a later date with higher cost and are losing market share.

So how do you reconcile with what you're saying, Yeah, with this new imperative to go fast and break things.

Speaker 1: So I'm going to reconcile it by saying, what's your what your go fast and break things that are absolutely rooted in safety validation, on engineering validation and all those things.

And then what is what are the excessive engineering changes based on we're trying to get that last feel for the vehicle dynamics or you know, types of things and and that was one where I go back to more things change, the more they sing. How Titang from Ford

was on that at least six years ago, seven years ago, and we haven't gotten there, you know, because because that the engineer wanted to get it perfect, which is an engineering mindset without a doubt, and what would the customer pay for? But so that that's where I would I

would separate out kind of the hardcore vehicle functionality versus coming up with the last five percent of to get it perfect in the vehicle dynamic. The other thing we're seeing.

Speaker 3: Chin doing is buying a lot of off the shelf parts.

They're there, they're engineered, they're validated, they're six sigma, they're ready to go.

Speaker 1: Why reinvent the wheel? Which is huge because the supply

base can provide that without a doubt. But this comes

back to some of the vehicle manufacturers having to have their own design, having to have their own engineering or it's not right.

Speaker 3: And how do you break that mindset? Yeah, well, I'll

give you a couple of examples. Well, higher pressure monitor systems.

It's a little thing that tells you what the pressure is.

Every car company's got a different one. Why you know,

a windshield wiper actuators. It's under the you know the call.

Nobody ever sees it as long as it works. But

they all have different ones. Why the fillernet where you

stick the nozzle in to fill your tank up, they're all different.

Speaker 1: Why? Well, going back to an old story, I was

at a dinner at the at the Henry Ford Museum and I was, you know, you start conversation with the guy next to you, and I said, you know, what do you do? And he said, oh, I design uh

ty rods And I said, oh really, and he gave me the there was for a hybrid vehicle that and I mean, I'm going back fifteen years so you kind of probably guess who the hybrid was.

Speaker 6: But and I said, oh, I'm not an engineer, but is that because different do you weight that you have to have a different tirod end than the base one, uh, the internal combustion.

Speaker 1: Engine and not the hybrid or And he said, no, it has nothing to do about functionality. We got the

budget to do it, so we're gonna do it. And

and that's a chief engineer. Yeah problem. So I didn't

solve that problem for you, but I explain maybe why it's there when your point about Okay, so when does it end good bankruptcy or two will do that, that will end it. Unfortunately, there's a lot of collateral damage

that comes along with that. But sometimes unfortunately you have

to hit that proverbial wall.

Speaker 3: What you're saying to wait is they have too many resources, you know, because when you have limited resources, you you think your way through the problems. You don't buy your

way out of the problem.

Speaker 2: Yeah.

Speaker 1: Well, and wasn't that kind of the American Motors Chrysler.

Speaker 3: Absolutely right, Absolutely, you know, American Motors had limited resources.

They did brilliantly with the resources they had. Chrysler coming

out of the first bang Rum see, based everything on the K car and it did actually rather well. They

really came out with some innovative product off a common platform.

Speaker 2: Yeah, but doesn't doesn't every company think they have limited resources?

Speaker 1: Uh h? Every person was I was going to try

to flip it around Gary something clever. Every individual, Yes,

within those organizations, and so then collectively there's never enough, right And and that's yeah, if that's an American thing, No, no.

Speaker 3: It's not, you know, because I don't mean to pick on Mercedes and BMW but they have you want to reduce complexity. Boy, they have a complexity issue to start.

They have way too many models, too many variants of those models, separate all those name plates exactly, and and and they recognize that they have too much, but they can't seem to stop themselves.

Speaker 2: Yeah, so they want to go back to as an example, we were talking earlier about the General Motors four billion dollars for the three factories Orion, Fairfax, and Spring Hills.

And and this is in the context of suppliers.

Speaker 1: So Orion was going to.

Speaker 2: Become a plant where they're going to be building full size evs, right, and now they're basically going, we should put ice products in there because people are buying ice products. Okay,

but you're a supplier and you've been talking to them, and you've been having your people work on projects that would serve this full size EV SUV, which is now not applicable at all to what they're gonna beople. So

over the last few years, haven't supplier has been faced with having to do this in this and.

Speaker 1: Still be able to make money money doing it. Yeah,

And that's where I've tried to convey that profitability is not the piece. You know that you look at each

individual program and say, yeah, they keep going with GM.

Is GM is it a profitable business for you? Because

it's not on each of those peace prices. It's about yeah,

I've invested tens of millions sometimes ofcity and capacity or in tooling that's sitting idle. And so if I look

at my GM business now, all of a sudden, my radar return goes down dramatically on my current business and I have to try to figure out how to get it back on my future business. And that's one where

I think, with the shifts in product plans and product cadence and all those types of things, purchase it's not a purchasing alone decision. It's got to be with your manufacturing.

It's got to be with your engineering and finance to say and maybe bye, you have to it's easy to meet for me to say, bite the bullet. And maybe

there's a special payment schedule that you do to help the supplier cover their empty capacity that they have. Maybe

there you and this is not the old we make it up on volume. Right, We're losing on this product,

but you know, we make it up on it and and it really gets down to realistic production volume estimates. John,

going back to what you were going through on the EV pickup trucks. You know, we've been through it so

many times before that I think any of the vehicle manufacturers can really take a step out and show they're different if they stabilize their well. And that's where Toyota

and Honda we're golden for all those years because you know they will proverbial piece where you designed it, the production for one less than you thought you were going to sell, and you might give up some volume, you might give up some sales. But I think you know

that's the mindset you have to get into to put your competition out of business. Because you get the right

supply base A and then B, you can you can price your product more competitively because you're not carrying that burden around even though you may be selling fewer vehicles.

And the industry has talked about that for all. You know,

we're going about margins, we're not going about volume. But

it's an easy trap to fall back in to try to get the volume.

Speaker 2: It goes back to the beginning of it's it's talked about then it's.

Speaker 7: Yeah, and and and so the industry I think without a doubt. I mean I got into it because I.

Speaker 1: Love the designs, I loved the engine, even if even for the business economists and corporate finance guy, I love the product. And there's still a love for that product.

So it's still there, It can still be there. It's

going to be a different cast of characters, both on the vehicle manufacturer side and I think on the supplier side.

And some of that also that Lindsy goes back to your question about the software providers and some of those and and that, yeah, the soft cy versus the hard part side is going to change dramatically.

Speaker 5: Well in that realm too. Recently we've seen two German

suppliers that were heading from the traditional industry transmissions with ZF and tires with Kanti, into tech tech companies.

Speaker 1: They were tech companies.

Speaker 5: Just exploding with self driving technology, interior technology, radars, et cetera.

Speaker 3: And now they're.

Speaker 5: Splitting off and kind of heading back into you know, it's like Johnson Controls makes thermostats now, you know, I mean, they're all kind of reverting to that. And then today

we saw or yesterday we saw Morelli, you know, following chapter eleven. So what happens in that scenario where we

had these giants that were really kind of scooping up smaller companies and really leading in technology.

Speaker 8: And now with this uncertainty over EVS and uncertainty over avs, know what happens to that to those who were wanted to play in that realm.

Speaker 9: It's no different than the vehicle manufacturers, right, who grew in what you described, rather than a lot more vertical integration, that.

Speaker 1: Was much more on the horizontal side that they wanted to be in all those mobility pieces. And that's one

where I've seen the industry go back and you know, these pendulum swings where we have to have massive change to have something to talk about. One but the Toyota

case of incremental improvement, right, you know, kind of the chaison.

It's boring, but boy do you make a lot more money over the course of the year rather than acquiring and then splitting up, and then acquiring and then splitting up again. So I think we'll end up with a

supply base that it's it. It requires greater ability to

partner and versus ownership, and I think that's that's the end.

Even with the vehicle manufacturers, I think that's where we go.

I mean there's these little rumblings out there about powertrain partnerships and things like that. Gary as you smile like

he's like, yeah, that'll be the day that I see that.

But it's my favorite subject. No, but we get to it. Yeah,

I mean eventually the economics will force it, because you just you can't. In going back twenty years the studies

on the industry, we've destroy more capital than we've created.

I mean, you know, if you do the pure math.

I'm not saying if you don't, if you look at you know, what we've built around and what the our communities are built on and all those things. I think

if you take that into account, we've created more capital.

But if you just take a pure basis, that's Sterns and Sterns and Stewart. If I remember, right from my

U of M days math, Yeah, we were, and Sergio Marchion right pointed that out and as capitalist confessions of a capital capitalist, right, capital junkie.

Speaker 3: Yeah right, No, I I completely agree with you. Finance

is going to force the industry to do things differently.

It's already started and you're you're seeing uh, suppliers merging, not of their own volution. It's usually venture capitalists buying

up distressed companies and forcing the merger. You're hearing more

and more car companies talking about the need to partner with another car company and buy and large. That hasn't worked,

and so that's why I think they're a little bit gun shy about it. But you know, the days of

easy capital are over. This fact thing ran its course,

interest rates are high. The investment community has seen that

all this autonomy and electric vehicle stuff is not going to happen in this decade, and they're taking their money elsewhere.

The industry is going to have to figure out how to get things done on a much more capital efficient basis.

Speaker 1: Yeah, it's interesting to watch what Toyota has been doing on the on the product side on their truck truck portfolio and then also bringing in from their curretsy right to vertically integrate to see. It's an interesting study to

see how do they manage those assets that way. I

guess if you'll allow me to put my sae ad on see, I think that's where standards come into play.

Back to your off the shelf, whether that's about off the shelf parts or if it's talking about partnerships and things like that that we can we can standardize. We

got the standards for the part and for the software and for the validation processes and all those things. We

have to get more standards about the business operations of how those partnerships work and then we can put the power training folks together.

Speaker 5: Is that difficult to do though?

Speaker 1: Yeah? Yeah, then that's why it hasn't been done. But yeah,

I guess John, as you're saying, you know that there's not the capital markets anymore to feed this beast. So

that's no different than what we're talking about over here with the suppliers. There's not enough of them to go

around to feed the beast. So they're going to be

selective too, and that forces you to to focus on maybe those top three in the in the in the in the survey, and maybe the other vehicle manufacturers start looking at what do they have that we need to put in place to be a customer choice to you guys have been.

Speaker 2: It's just like they don't know.

Speaker 1: And I did want, no, it just a little sarcastically.

I did want, you know, all those OEMs to be in that you know, at least in the average group right before I left, but didn't get there, did I.

Speaker 3: Well, look, we're gonna have to wrap this up. But Dave,

I think you hit the theme perfect for the discussion that we've had here today. The more things change, the

more they stay the same.

Speaker 1: Yeah, and and and that's the thing that always frustrates me is if you talk to individuals, they know they like even within the vehicle manufacturers, the executives, they know those issues. And here, look, I mean the one that

I think kind of shook Nissan up several years back was when they hit the bottom and we went in with the the comments and there was you know, three or four wasn't overwhelming. But that said, I know my

buyer knew what the right thing to do was, but wouldn't do it because the organization wouldn't support it. And

that's not an individual. It's not that they weren't competent

that they you know, it's because of leadership. It's because

the organization systems that there are probably good people in bad systems.

Speaker 2: To be fair to thee some before we go, though they weren't at the bottom. General Motors was the bottom.

Oh well yeah, and you go, yes, so they hit the all time low back in twenty ten. Yeah, and

now they have gone way, way way up.

Speaker 1: Yeah, because they it shook them up well. And then

plus Nissan with number three right, number four not going back all that many years, so it's possible. And then

gumb came in. The proverbial train went off of the tracks,

didn't it.

Speaker 2: So I found it funny that when Ford was doing its best within the last ten years, Heckett was in charge.

Speaker 3: Of course, those might have been a result of policies that Malali put in place, so who knows. But like

I said, we're gonna have to wrap it up. Dave Andrea,

thanks so much for coming on. You'll have to let

us know what the next chapter of your career might be.

Speaker 1: I'll still be around town, yeah, Muse Brooke, great having you here too, and Gary will keep on doing it.

Speaker 3: And thank you to all of you for having watched.

And please excuse the technical difficulties we had with today's show.

AAH #747 - A Historical Perspective: How the Auto Industry is Changing

Dodge Ram

Ford Ranger

Chevrolet Silverado

Ford F-150 Lightning

Gmc Sierra

Bristol Bullet

Ford Orion

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