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AAH #748 – How To Catch Up With The Chinese
AAH #748 – How To Catch Up With The Chinese
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About this episode
A deep dive into the automotive industry's disruption, focusing on insights from the latest Alex Partners Automotive Outlook study. Mark Wakefield discusses how the auto sector is the most disrupted industry, emphasizing the need for agility and rapid decision-making. The conversation highlights the differences between Western and Chinese automakers, particularly in product development timelines and risk tolerance. Key themes include the importance of timing in launches, the role of AI in streamlining processes, and the impact of tariffs on vehicle pricing and market dynamics.
Topics:
industry disruption
agility in automotive
chinese vs western automakers
product development timelines
risk tolerance
use of ai
tariffs impact
supplier relationships
modular design
competitive landscape
TOPIC: Industry Outlook PANEL: Mark Wakefield, AlixPartners; Gary Vasilash, shinymetalboxes.net; John McElroy, Autoline.tv
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Speaker 1: This is Auto Line after Ours, unscripted, uncensored, unapproved. Everybody,
thanks for joining us on the show today. Today we're
going to get into a study that Alex Partners just came out with.
Speaker 2: In fact, here's kind of a copy of it.
Speaker 3: They do this every year.
Speaker 2: They call it their Automotive Outlook.
Speaker 1: It's chock full of all kinds of interesting information, and we're going to get into some of it.
Speaker 2: There's no way that we can get into all of it.
Speaker 4: Gary is here, Hello, Gary, John, how are you.
Speaker 2: I'm doing well.
Speaker 4: Until we learn all about disruption?
Speaker 3: Yeah, guys.
Speaker 4: Right, we have our old friend Mark Wakefield here who claims that the auto industry is the most disrupted industry of any industry.
Speaker 5: Yeah, that's true.
Speaker 1: That's what we h So, you guys, you look at more than just the automotive industry.
Speaker 5: Yeah. So Alex Partners does work in ball industries, and
so we do these annual Disruption Index survey where we go and survey people US, Europe, Asia, everything, And there was one other year where auto was the most disrupted.
The interesting thing is that the survey was completed before April, before libration, So I think we can before I think we can safely, say safely.
Speaker 4: So you look at financial services, healthcare, retail technology, aerospace, energy, consumer products, telecommunications, media and entertainment.
Speaker 5: There's a few other smaller ones that didn't make it.
Speaker 4: Automotive is the one, so.
Speaker 5: It's number one. It's number one in that. It's also
number one in our survey of restructuring and distress as well, which so it's it's those are. One is the opportunity
one and one is the danger one. Either way, things
are changing fast in auto and that's one of the reasons we talk about this disruption cycle driving the business more so than the economic cycle you used to have. Okay,
I got the seven year thing and it's going to go like this and now it's just hit hit, and you've got to be agile and ready for it.
Speaker 1: And by and large the industry is not agile and ready for it.
Speaker 5: I would say not. Yes, let's say that's true.
Speaker 4: So before John wants to get into what one needs to do, define for us what you mean by agility.
Speaker 5: Ah, So agility in the auto context, it's taking something beyond the hierarchical and siloed based deterministic strategies of the past, where you'd say I have a five year plan and then the three year plan, the one year planning. Here's
all the budgets, here's we're going to go achieve, and all this stuff and getting into more. What's our competitive stance?
How are we going to compete? What are consumers or
our customers if you're to year one needing from us and going to choose us for over the other guy.
And it doesn't have to be the same thing, right, We're not all faster, better, cheaper. Some of its relationship
and orientation. Some of it is standardization, some of it's
quite fast and innovative. It can be different stances, but
that the company understands what it's good at and what it's just okay at and has objectives and goals in mind, but not a deterministic path to get there. That allows
people to play the field as it lays, rather than focus while something changes dramatically like tariffs or something. You
then allow yourself to be agile because you can move to where you want to go with your stance that you were going to do and what you're going to be good at, rather than no, I'm going to spend this much. We have this initiative that was birthed under
a non tariff regime and no longer makes as much sense. Well,
rather than taking a year going through the next strategic planning cycle to change that, the captains on the field need to be able to call audibles to change without it being you know, chaos and paralysis, because paralysis doesn't win either of course.
Speaker 4: So this is deeper than I've I've talked to some OEMs in executives at these companies and.
Speaker 3: They were agile.
Speaker 4: If you know we need to make this kind of vehicle, we can make this kind of vehicle.
Speaker 5: If we need to change the part round, we.
Speaker 4: Can make that because we have agility. But you guys
are taking it much further than just that.
Speaker 5: I'm taking much further than that, though you know that's one element. You know, you're manufacturing flexibility, I would say,
rather than agility, how many mixed model lines you can We're seeing more and more mixed model lines going down with the tariffs, You're going to see much more of that because now you've got you know, maybe it used to make one make sense to have, you know, a German OEM with a big plant here and a big plant in Germany, and they both make different cars and send them across the ocean. Well, now it makes sense
to make the big plant making both cars here, both cars in Europe and not sending them across the ocean, So you have to be more flexible. You're seeing more
of those mixed models, for sure, but you already saw the Japanese been doing that for twenty years. So there's
a catch up there that's going on at the industry.
That's not what I mean by what I mean is there's a much broader sense of it.
Speaker 4: Okay, John, yea.
Speaker 1: So one of the things I'd like to get into is, uh, You've got three slides, one of them looking at the new operating model in China. And the reason I wanted
to get into this so many people watch this show work in the auto industry, and we talk often, you know, about these these big trends and things that are moving the industry. But what I liked about these specific things
is that they are specific. They tend to be more actionable.
But talk about the new model that you see in China and how it differs from the legacy auto makers.
Speaker 5: Yeah, well, it's it's more lessons from China that are applicable anywhere because we tried to not be China specific.
You know, one of the pillars is not you know, cozy up to your provincial government for support. So you know,
it's it's around six elements that we've we had four in the past. And we started sort of ringing this
alarm bell about two years ago and saying, hey, there's some lessons that could be learned and those that don't learn them are at risk of someone else learning them, even within a walled garden and out competing them. But now,
over the last two years, working with both sort of new startup automakers as well as traditional automakers in Europe and North America predominantly, we've sort of refined our view of what it takes to move it and as well, we've got some things that are unique to Non China that allow us to compete. But one of the primary
was when we go through them, one of the primary things is timing and that time is not the variable.
So launching on time, it's not a launching on time or else, it's just a launch on time period.
Speaker 2: And when I say, what you're saying is programs do not get delayed.
Speaker 5: They do not get delayed for and if they do get delayed, that company usually sees a massive volume problem from that. So if you took a forty month program
versus a twenty month program, that means that your your tech on that car is two years older. The cost
forty months is typical for for Western audible.
Speaker 1: Western auto makers, twenty months typical for Chinese typical.
Speaker 5: I mean it goes as low as seventeen but yes, typical, and as high as twenty four. But time not being
the variable means you don't have these attributes and requirements that must be hit. You have a timing that must
be hit, and you do your best up until that point.
Speaker 3: So even if the car is not perfect, we're pressing print.
Speaker 1: It's got to be good enough. But you're going to
go ahead no matter what to hit that launch date.
Speaker 5: Yeah, and if you've got one hundred competitors, you have to do that right. If you've got twenty competitors, not
as important, and it's then you get into the oh, I know, I can't afford to be just good enough on this, this and this. I need to hit the
original requirement some engineer made up four years ago, Come hell or high water, and it's an exaggeration, you know, there's there'd be a handful of things that obviously would be compromised. But it's that again stance of a Chinese automaker.
It's that timing that is not variable.
Speaker 1: You know, I'd make an analogy to motor racing. The
car better be on the grid by Sunday or you're not in the rate.
Speaker 5: Okay.
Speaker 4: But but the thing is is that if the lug nuts aren't going to fit, you're not going to launch that vehicle.
Speaker 5: Yes, that's right, Well that's not right. You would still
do it, and you would find a way. You would
you'd be a working hard you'd be b architecting up front to be a reuse. Some of these vehicles are
a reuse of almost eighty percent of the purchase bond.
Speaker 3: Reuse you mean off the shelf parts.
Speaker 5: Yes, off the shelf parts, not necessarily from the prior model, but from from some somewhat standard catalog. So you see
them packed like if you look open the hood of a b id, you see a ton of space in there.
Why because they're basically architecting for space boxes and then saying okay, then I'm going to go put something in here, and there's room to go versus this sort of immaculately use every cubic inch of the space under there. And
it's not just for pedestrian protection, it's it's really for the use of standardized and the and the ability to change six months a year to a different component that might be a different size, and so that respect upfront for the idea and the stance that we're going to do those things allows one to do those things, which allows you to then use the validation that that supplier may have done, or your own internal might have done in a different area, and do far far less validation production validation, particularly when you're going through it. So you know,
it's it's not one thing, right, It's not like, you know, like Dell's instant computer when you order one, wasn't we're just going to do that, you know. They change the
entire supply chain of how you make a computer. And similarly,
the Chinese have changed the whole product development process from what traditionally the big V cycle that we do in automotive.
Speaker 2: And explain that V cycle, what does that mean.
Speaker 5: That's just a traditional way of doing a development where you go down the design and up the validation. The
way of breaking software and hardware isn't just to say I'm going to have these two separate. It's to architects
really well the hardware up front, Like if you think of a fab a chip, Intel design to very high degree, what that chip looks like before they get anywhere near prototyping anything, right, And we don't do that in the auto industry for the electronics as much as we should, because there's still this creeping I'm going to change, change, change, change up until you know you press print, whereas the electronics can't really do that. And if you do that
with the hardware and you don't put headroom into it, then you're locking the software into being coupled directly with the hardware, and directly in the hardware is v cycle and you go as slow as the slowest component, and you have to continually do the marriages versus having headroom in your hardware an abstraction layer to be able to have software run at its agile cycles agile software sense, not in my sense, and in the sprint sense, and able to then develop without everything having to come together all the time, which allows you to go faster, allows
you to even continue that software in production. But the
timing piece is a big deal because you know, a Western automaker, it's it's requirements, it's program profitability, and then it's timing. Notionally in China it's timing and then wailor
down sticks cost and then into okay, requirements and attributes and what's the vehicle. So that's a very big difference.
And it starts also with empowered chief engineers. Much more
systems engineering, much less component teams where you, okay, go make your thing and you know, talk to us in a year once you've got your thing developed. Much more
systems integration.
Speaker 1: And you just said something important there. Empowered chief engineers
or empowered program managers. You're saying they can make a
whole lot more decisions on their own.
Speaker 5: Oh yeah, a whole lot more about content, about the cost of the vehicle, and about the trade offs and the forcing of a system's approach to trade offs, and also about delaying when they do something. So, oh, we
can't get there on L two plus plus, Well, we're launching with L two and we'll hit L two plus plus later. Even if that was the original plan was
we're launched with L two plus plus. It's not working.
Speaker 4: We got to hit it okay, But chief engineers at Toyota have that kind of authority. Chief engineers are very empowered,
and so if I'm at one of those companies, I'm saying to myself, well, it's not so different what he's talking about than what we do.
Speaker 5: If you're in a normal automaker and there is a discussion, let's say it was on a park pole, and you now had an electric instead of a mechanical approach, and you didn't have spec for it, and the chief engineer in any Western automaker would not be able to simply say, forget it, I'm not using the mechanical spec this is an electrical thing, doesn't apply. I'm going You would have
all sorts of other people around that making sure that.
Oh wait a second. For a Chinese automaker, you have
a chief engineer or a vehicle head that is able to choose basically what the vehicle has to do in a greater degree of that.
Speaker 4: So in that case, might some of these people that are around making that decision may be I don't know, lawyers.
Speaker 5: No, Actually, it's more the fear of.
Speaker 6: Lawyers, I would say, And to some degree it's it's unfortunately valid because the you know the you just saw you know what.
Speaker 5: Tesla was able to get away with in their aid ass versus what say, a traditional car company would have been hauled in front of Congress well before you know, these sort of things. So there's there's a degree to okay,
you get it, and then there's all these problems have happened.
But it's even the culture of when you you're in that room and there has to be a new spec and someone says, okay, who's going to write the spec?
It's one of those like volunteer things where there's a line up of people, everyone steps back and the person who doesn't step back fast enough is like, oh, it's guse, it's me. It's not a jump on the grenade type
of an affair like you honestly do get with some of the startups, more so in the Western Europe and North America. But you really don't get that so much
with outside of the chiefs that are very the great, the good ones. You don't get that sort of jump
on the grenade mentality typically, and just the institution of the component engineering, purchasing, quality, manufacturing, finance, all of these people in the mix make it difficult to politically and career wise be the person who jumps on those grenades.
Speaker 1: A couple of the other attributes in this new operating model is a higher appetite for risk amongst the Chinese and rapid decision making.
Speaker 5: Yeah. Yeah, the decision making is quite fast, particularly in
the upfront what are we going to make this car?
There isn't the endless sort of redos of the business cases, and in part because you're redoing a car so fast, it's just it's not worth it. If you spent two
years deciding what vehicle you're going to do, you might as well just make the vehicle, see if it works, try another one. So it's not it's a different game
when you're you're not doing a seven year product cycle and you're you're doing as soon as there's something ready and if different, we're going to do it type of product cycle. But yes, fast decision making. Also, this risk
tolerance gets into the good enough, It gets into using and trusting digital tools up front that allow you to to basically make some of those calls, not relying on soft tooling when you don't have the net of I'm going to have a you know, an alpha and a beta fleet out there to get exposure and experience. You know,
you hear that all the time in Western automakers. I
need exposure, you know. It means I need a gazillion
prototypes out there running around just because I don't trust you engineers and I think something's going to not work and I want to see it. That's a luxury of time,
and it's it's a result of risk tolerance as well, and risk tolerance reliance on specs, reliance on testing that if again, if you're in a knife fight like the Chinese market is today, those are luxuries that people can't really afford.
Speaker 1: A couple of others here, modular design, and I think this almost goes hand in hand early supplier involvement.
Speaker 5: Yeah, yeah, and the supplier involvement is is much earlier.
It's also with the dual sourcing that's very famous of you know, you're you never quite have the program or the award as a supplier, but it's more yours to lose on your cost and your performance, not on who brings the donuts or what happens, you know, other things, and and so the there isn't like a desire to get in the supplier shorts as much about you know, you can supply a black box or you can just white box it too, but it's going to be it's
going to be out of date in a couple of years anyway, so it's not really that valuable to reverse engineer what someone has done. It just gets So it
allows the automakers to say, come in early and let's go do this. Allows the suppliers to say, I'm not
going to have secrets because I'm working on the next thing.
My secret is the next thing when i'm coming out with, not when I'm going to put in production for you.
And so it this early involvement does really lead to speed later on. But it also goes hand at hand
with that standardized components and the ability to work on interfaces and requirements so you can swap things, you know, within a year. Actually not very rarely would have a
performance oriented component, like a high value component that would last more than two years.
Speaker 4: One of the things that's buried somewhere in that text, it was a jumped out at me and talking about suppliers, and you guys wrote that there is multiple sourcing of suppliers in China to induce competitive tension. Yeah, so I
mean talk to us about this competitive tension.
Speaker 5: Why that's going to me.
Speaker 4: We had Dave Andrea from Platinum ran on last week talking about good supplier relationships with OEMs and how that's beneficial.
This sounds like these guys are sharpening their knives to go after one another.
Speaker 5: I mean they are, but there it's a growing pie first of all. So that's a different animal, and it's
a high cost reduction environment. And when you as a
supplier say hey, I can't do that, but you know, I could take ten percent out of this. If we
did this, you get a lot more yes. Is like
ninety percent more yes in China, and you get here of oh I can't, but then we'd have to do this.
We have to revalidate this, you know. And so here
it ends up in a commercial discussion, like more of the savings end up to be commercial. Really between the
supplier and the automaker versus in China. It's significantly technical
and it's higher because of not just that tension of the dual sourcing. So you really do have a threat
you could lose at any time. And it doesn't mean
like a year from now, like they could simply like drop your orders and have somebody else so you're not stuck with the one validated thing and you can only use me. But they also it's a pretty clear hurdle.
You know, the cheapest guy that can do it properly wins, so go and there's a clarity to that. But that
element though, of being responsive to supplier ideas. That's why
you hear about this sort of China for China model.
Not a lot of successes of something going back to Detroit or back to munich for an okay on, you know, can I offer this controduction with this design change like your supply as a supplier. If you're doing that, you're
not doing China for China, and you're probably going to get out competed by the people who are honestly looking for five plus percent a year and how they can take it.
Speaker 1: Out in the product development process, you identified any areas where the Chinese are moving far, far faster as we talked about before, automakers in the West taking forty months to do a new car from clean sheet China taking twenty months. What what are some of the key areas
where the West is falling behind.
Speaker 5: It's really at each step, so if you break it into the strategic phase. There's probably four months there we
considering conceptualizing what the vehicle. You go your business case
that says, okay, these are the requirements, this is the vehicle, this is the basic packaging we're going to look at.
And that you know takes half a year in typical automakers here that takes you know a month or two in China. Of that approach, so and you don't have
these continual go backs on it. You also then getting
into the okay concept phase. Concept phase, there's some savings
you can do. The bigger ones are then into into
design validation, using tools, using speed, using when you're you're not using as much new and you're relying on validated component basis instead of trying to focus on that component and basically not doing the upfront systems engineering, then it leads to a lot more time and redoce in that design validation phase. In the production validation phase, that's the
biggest piece. That's where many many months come out and
you see the difference between not going to soft tools.
You see not doing nearly as many prototyping, the use again of that that systems approach where you know, like in a it's sad. But in an automaker, the Western automaker,
if the part is made internally, if the part's made externally, they're actually not treated the same. You know. The bar on, hey,
I can't quite make this crease in the stamping, versus I can't make this crease in the stamping gets treated quite differently.
Speaker 3: If it's they go easier if it's in the house.
Speaker 5: Yeah, and in China they're going easy on all of them because they have that time wall hitting them, and so like that's the best you can do. Ah, Okay,
let's go figure out a way to make it work, and let's go around it. Because if that supplier is
just you know, messing with them and trying not to do hard work, they're going to lose pretty quickly. So
you get a ton out there. Like the physical testing
is much much less and it leads to risk too though, where this can go badly. So it's not like this
is a recipe for one hundred percent success. But the
thing is, if players are playing this game, it's pretty much guaranteed not to win to not play it. But
I mean, is the game the same?
Speaker 4: I mean, it almost seems to me from what you're saying is that we've got we've got these two boards and they both have squares on them, and the squares are different colors, but we have different pieces on the boards.
So some people are playing high speed checkers and somebody is playing chess, and that in China, as you said that, there are multiplicity of competitors compared to what in the West, right, And the other thing being that the mindset is, Okay, we're in this game. We're going to build products that
are good enough for two years, and they're going to move on to something else. Because if that's not good enough,
that's all right, We'll just we'll Here in the West, we're building things that last for a long time, and we're really concerned about being sued and or we're really concerned about recalls. I mean, I was looking last year,
Ford had sixty two recalls cost them nine point two billion bucks. Well, Ford is probably gonna be very cautious
in terms of what it does versus saying, nah, that's good enough, we'll just move on.
Speaker 5: What was bys recalls last year? I don't know that
it's they're not bad cars, the Chinese cars, they're pretty good quality cars, pretty competitive. The better of the Chinese
automakers are the ones that are exporting. We're a long
way from the those ones that crumpled in the European tests and such. These are excellent cars with actually higher
technology that would sell today in the US at a lower price. When we've talked to some of our Chinese
clients and they're setting prices for other regions at times, they're doing it to avoid a negative reaction, not because this is the price they can do it. They're looking
at the.
Speaker 3: Market, they're charging more money, so they're charging more.
Speaker 5: Money, not to make money, but to avoid low bad When you have competitors that are at that level, that's a terrifying concept. And you've been to Johnny, you've driven them.
They're pretty good vehicles, and they're lasting pretty well, and there's a number that would sell quite well if the US market was open today. So I sort of reject
the premise that the customers are getting an inferior product there, and it's but the dynamic of the competitiveess is absolutely true.
But that's why I showed that page of the HHI where the US and Europe are getting more and more into a competitive environment. You don't have GM with fifty
percent of the market share anymore, not even close. And
you've had automaker's retrench from every person purpose into i'm good here, I'm good here, which is lay meant to fragmented more competitive environment in the US every decade as it goes along, and in Europe sort of not far behind that. So that world is becoming more and more
competitive and getting closer and closer to the competitives of China.
Are we going to have one hundred and something? No,
but it is factually, mathematically getting more competitive. And that
means that instead of looking to what sells in California, look to what sells in Shanghai, and look to how they did it, not to how the you know, how do the winter in California do it? So and again
it's not based on hey, does buid start selling cars in Detroit or not, it's does someone pick up enough of these which are really tough to change because they're not evolutionary. You've got to throw some things aside, but
pick enough of these things up where they are the competitor within the walled garden. And now instead of you know,
the sharks out in the ocean, you've got now the shark and the lake, assuming it's a slar.
Speaker 1: So the analogy is not too different from the nineteen eighties nineteen nineties where Detroit finally started to pay attention to the Japanese.
Speaker 3: Were doing things.
Speaker 1: Learn the Toyota production system started applying those lessons and really think roaring back.
Speaker 5: Yeah, I mean lean is was better, right, It was just better than what the rest of Europe and North America were doing. And now we've all embraced those and
we live those, you know, and you push in your chair, clean up your workspace at the end of the day, even if you're, you know, miles from the factory floor.
This sort of time not being the variable, rapid decision making, cost focused piece to it, supply a different supplier relationship.
Architecting for software as the key versus a hardware vehicle, and assuming a hyper competitive environment is things that we've seen get a lot of interest. We've worked very hard
and sometimes with a lot of brain damage along the way.
But what I'm trying to point out is that there is a point B here and lessons to get to point B.
Speaker 1: Even more than the lessons that you've already talked about.
You identified some tools, especially using AI that legacy automakers, let's just say American auto makers or could be European or jabaning to take at least eight months out of their product development process. Right now, go into a little
bit of what you're talking about. What these AI tools are.
Speaker 5: Sure early on using more generative AI in design and in testing and in requirements and using it also to test specification in applicability. Some of these specs were made
nineteen seventy five, right, does it really apply now that I've got different ways of approaching it? And so there
was a big push on first principles approach to design, and that's one thing. But these tools allow first principles
approach in a way that isn't intuitive to an engineer coming up with an answer that you wouldn't come up with.
You can't really come up with yourself when you're not a computer. AI doesn't think like a human thinks differently.
Some that's good, some of it's bad. But if you
use the good, you can actually speed up your generative design and come up with a more cost efficient approach coming into it.
Speaker 3: Any real world examples come to mind.
Speaker 5: The more in terms of part combination. That's been the
interesting piece where it says, hey, you just make a dual derometer part here with coinject the soft rubber on the hard plastic and all these Well, that part was branching across HVAC and interior. There's no good reason why
it has to be sourced to an HVAC supplier that's used to this or interior one that's used to fit and finish, and the look of it, it could be one part, and it forces you to say, as an engineer, why can't I is there any really good reason why I really can't other than just the risk of now teaching an HVAC supplier class a finish or teaching a supplier for interior components. You know more HVAC and temperature
and air handling, which is doable. That's not a real constraint.
So part combination, particularly in cross commodity areas, is a big release. But also when you get further into the
design into packaging and solutions to packaging, so instead of the rocker panel is hitting the door hinge or whatever you know, it's and you got okay, I got these two parts. The two engineers for those parts, you guys
go figure out how to work that clearance out. It
may not be the right answer to work the clearance out between two parts. It may be a better answer
to work the clearance out by doing something very very different with the rocker panel in entirety that the rocker panel's job is changed enough because you've accommodated the strength it's needed somewhere else, and so it gets to be a more It allows a more systems approach getting into packaging, and the speed at which it allows that is tremendously different.
Program management's an interesting one where you get, you know, in many of the different software packages now where you can basically have it as middleware where all of your data is dumped into it and you can see live program management status. You don't have to wait for the
monthly or weekly meeting and the program manager. It bounce
between the silos. You can see everything that's really going on,
and it's launchtime, how did the test go? Where part winter?
Part's going to be available? You don't have to call
five people to find out when the new part will be available. This speeds things up dramatically within program management.
Having that one source of truth. It isn't one source,
it's more of a unified data like that looks like one source because it's available to people who can then queer you on a large language model. It looks into
that and it gives you the basic answer without having to go wait for the next meeting and status meeting and the quality guide you'll tell you whether it passed or failed or whatever.
Speaker 1: So do you see legacy automakers adopting these artificial intelligence tools.
Speaker 5: To some degree? They're trying. It's just so hard at
large scale, so they're trying in pilots. I would say
we had a lot of success in validation because that's one thing you can sort of chunk out and declare and just do. So we had a really great example
of getting one hundred million dollars out of a validation cycle to launch by having it as a mandate going in that we were going to use these tools and approach it that way and not have these certain prototypes.
And so when you burn the bridge, then the engineers get more creative about, Okay, so what do I need to do digitally to prove to myself that I'm going to be comfortable and the thing will work when we start to put it together.
Speaker 3: One hundred million dollars, that's real money.
Speaker 5: It is. I mean it's off of a five six
hundred million dollar base, but yes, it's real money at aud scale. I mean, change in the couch is real money.
Fliers you're seeing doing it a bit more and getting a bit more creative with some of the AI tools, but again in that area you're still just seeing it in pieces. There hasn't been sort of like a digitally
native supplier that I would hold up and say, these guys are, you know, running their business on Palanteer Foundry and they're doing this and they have you know, look like the Shopifire was the guy that said, you know, prove to me that AI can't do this job before we hire somebody. I haven't seen that so much. So
one of the.
Speaker 4: Things that I thought was a red flag for my friends in the design community. In concept phase, you guys
have eliminate redundant loops in styling. Okay, so basically using
generative design to come up with a design. I mean,
so now we're not talking packaging, it says styling. So
are we talking here about like, sorry, designers, the machine's going to do it.
Speaker 5: You know, some of it's package. Some of that is
packaging or getting out of unmanufacturable things as a starting point inherent in the design tools in the class A surface, but also some of it is getting into what can AI do for you that allows reuse of If I set, I can ask an AI approach to say, I want to make this look like this sketch or this model
as much like this model, but I want to reuse fifty percent of my class A surface and components by value, And then it knows how much was a windshield much just the faceha, how much is that is that rear quarter panel and gives you, okay, here's your refresh and allows put scarbrails on styling. For sure, it's styling is
a good differentiator, and it's a good appear, and of course brand pieces to it. But when it gets into
vehicle architecting and costing, you don't need to have a do loop of here's what I wanted to look like, Now how close can I make it? Do that? You
can do that at the same time with the eye you know.
Speaker 1: Two anecdotes that that I think drive that point home is years ago when Jack Telnak was the head of Ford Styling, they wanted to redo the Crown Victoria and the Mercury Marquee, and so he had the body shop guys take a body in white and take markers and mark all the hard points on the car, and they literally wheeled it into the studio, this body in white with markers notations on it. And what the body shop
guys said to the designers is if you don't touch these things that are marked, and.
Speaker 3: You can do whatever you want, just don't touch those.
Speaker 1: And I thought that was a brilliant way of approaching it.
And then another anecdote, it might have been it might have been, And then I can't remember if it was Etyl Design or Penninfarina.
Speaker 3: Used to do. They didn't use clay, they used plaster.
Speaker 1: And when I asked them, why are you guys using plaster, they said, because when it's set now management can't come in and tell us to make design changes.
Speaker 3: It's done.
Speaker 2: Whereas it's clay, you're always massaging the clay.
Speaker 5: Yeah, there's a degree to that, and this degree they just hide it from the executives who come in and we'll do this, or dealers or work. So you can
bring some some super dealers through and also let's you know, the designer and the vehicle chief and the vehicle program say, okay, getting to feasible faster is a good thing. And if
it then looks more like what the style, what what design actually wanted, so much the better. So I wouldn't
say it's a it's a change for for design, but it's not replacing the designer. It's somewhat constraining them. It's
also enabling them, and it's hopefully leading to a vehicle that is truer to the division than what you what you see from sketch to reality. Now.
Speaker 4: So one of the questions that I have is that, you know, while AI sounds very sexy right now, Desso and Semens basically have a suite of digital tools that have been available for years and years and years and years that periodically the oemsub we use this and if they used that completely, would they not get maybe not
eight months out, but it's.
Speaker 5: Six probably not because you're then into the trap of the system has to do it versus the systems. Think
of it almost like middleware of connecting the dots between these and when you then also it's less so done now it's more done, still a bit siloed of the bill of process and the layout of a plant and the layout of the plant for flexibility, not for necessarily the one ideal state, which is often what's done. But
if you can combine data sources and be able to have people understand what's happening, it enables a cross functionality that's not like the up and over and down, up and over and down that happens today even with those great tools. So I haven't seen too many program managers
purchasing people of quality manufacturing, people that can spin a three D model parapracture model. I haven't seen that much.
I haven't seen them using like just think of the difficulty of reusing product catalogs in software catalogs. It's very
difficult for the system holding all of those doing everything, the thing you're doing your coding in that you're doing everything in to also be the thing that then is the PLM type system and that actively is engaging in the optimization effort and saying, you know, there are the optimal path here. Instead of someone taking a month to
go figure out should I have six connectors or sixty connectors on this vehicle, you are allowed you can go through what instead of this month of Monte Carlo simulations in two days, you've got your real answer. It's ten.
We're going to go with ten connectors on this vehicle.
And that's it. And if you look at a Tesla,
you look at some of the Chinese automakers, they don't have, you know, fifty plus electrical connectors, different types of electrical connectors.
If you look at the Western auto makers, there's tons of them. It's because you've done this silo piece. And
even with those great software tools, it's not happening because it's.
Speaker 3: Hard because of the silos.
Speaker 1: Instead of approaching it on a total systems basis, each silo is optimizing for what it works on.
Speaker 5: Yeah, and there isn't even visibility across silos. It's not
like bad actors or lazy actors or something. It's just
it's not it's not set up for success.
Speaker 4: Isn't a lot of this though, just habit. Okay, if
you look at a Chinese automaker, it hasn't been around for one hundred years. You look at Tesla, it's not
been around for one hundred years. So these guys are like,
why would we do it that way?
Speaker 5: Exactly?
Speaker 4: And if you work in one hundred year old company, we've always done it that way.
Speaker 5: And yet when Lean came in, he said, you know what, that's better, And not everyone took it at the same time.
But today no one would say it's a it was a mistake to look at a lean manter fact.
Speaker 4: But I mean, but didn't a lot of that have to do with the reason that they finally embraced it.
I mean, and I think that they were streaming and kicking more than they were like, oh, this is nirvana that you know, you suddenly had Marysville and you had Georgetown.
They were in your backyard and they're doing this stuff.
And you know, you guys have studied China and if you're here doesn't really matter.
Speaker 5: It will matter, as I said, if someone else who is able to do it, takes these lessons and does it more holistically. The clients were working with that are
taking this in pieces, are not regretting it. They're moving
at speat. Sometimes some of them get bogged down in
the initiative of the AI initiative, where the the PD thing gets unwieldy in its weight, and the tyranny of having different models going at different times and having to support old and new is difficult. But just because it's
difficult doesn't mean you shouldn't do it. And you know,
when the people were then schooled with their with their you know, sensays from Toyota about lean. There's very few
of those guys that came out of those experiences going that guy from Japan is crazy. He's a terrible guy.
You know, they're like, oh my god, this changed my world.
That's every one of them says that, right.
Speaker 1: So, Mark, what I'm worried about is how long it took the American industry, really the Western industry, to adopt the Toyota production system.
Speaker 3: I think part of it was cultural too.
Speaker 1: I think one of the things that accelerated it is when Mit did the book The Machine that Changed the World, and they created this new term called lean manuf factoring or lean production. And so it wasn't this Toyota thing,
it wasn't this Japanese thing. It wasn't you know, populated
with Japanese terms like kaisen and things like that. But
it still took a long time for it to catch on.
And that's what I'm concerned about. Now, you're creating something
of a pathway to take a lot of time out of the PD process.
Speaker 3: But my fear is it's going to take a long time.
Speaker 5: Yeah, it's a challenge because it's more revolutionary than evolutionary and the kind of architecting you have to do upfront to say this is the apertures I want this thing to be able to do, the kind of thing like on costing more cost, leave headroom for the software to develop.
These are very different things than a typical vehicles finance guy, it would allow one to do so it does need a bit of that impetus of burning the bridges and going this different way. But with as you showed in
these disruption cycles of things are these disruptions are speeding up and so everyone is getting more use to having to work at a higher clock speed and change at a higher pace. I mean, do you search with Google
or chat GPT chat Okay? How long? How long I've
been doing that? Yeah?
Speaker 3: Just since this year?
Speaker 5: Okay? And chatchapet is only two years old, and you
adopted something that you thought you could never would never live without a Google search, and you've already changed your behaviors because something's better.
Speaker 3: Actually, it depends.
Speaker 1: So if I want an answer to a question, no question, chat ept is the way to go. If I want
to look up sources of things, I still find Google very helpful.
Speaker 5: No, sure, But the interesting thing is chatchepet is not really about search. It can do so much more, and
it's a gateway into that. I'm more saying, look at
how fast that disruption of AI in large language models has disrupted the search market. And so when you think
about the data like capabilities instead of this crazy middleware implementation, being able to actually have clustering and pattern recognition and then optimization and have real time visibility that's interpretable and not you know, gobleegook or the I don't know what that acronym stands for. Even I remember a long long
time ago getting a source award from an automakeup and remain nameless. When I was working for a supplier and
they asked for a chimsel and they said C H I M S E L. It's like, you clearly have
no idea what this even thing is. And you know,
with the AI thing, you could actually purchasing person could have seen, Oh that's what that is. Oh it's a center.
I'm at a stoplay. And the information capability that allows
people to just do better is its own sort of force, and there's a lot more engineers now using this, particularly in software than I think their boss's bosses really even know about at this point. So there's a bit of
groundswell for this and readiness for this in the younger generation coming through.
Speaker 4: Good luck to then, Hey, one of the things I mean, I want to get back to the regulatory and legal issues.
Germane to a lot of this, Okay. So one of
the things that you guys point out is that there is less physical testing, especially mechanical testing for evs, and you have reliability slash quality is traded off for lower investment costs in shorter time to market, so you have durability.
Traditional manufacturers will do three hundred million kilometers versus six hundred thousand kilometers for the Chinese summer and winter testing.
Traditional OEMs do two cycles of each versus one for the Chinese. Fewer crash tests per scenario two in China
four here. So if I'm somebody who is anywhere related
to any of these things, I'm saying to myself, I'm not giving up, you know, fifty percent.
Speaker 3: Of these tests.
Speaker 4: To save some time, because it may be my ass if something goes south.
Speaker 5: And that is also why these chiefs are in powered to be able to make that decision rounder than the person in that seat. And it's also why when time
is in the variable, you then say, Okay, if that's what we're going to do, then how do I make this turn out the best as possible? What do I
need to do before I do that summer test? Because
I know I don't get to so what do I need to do? Because it's if you simply said I'm
going to do what it is today, I'm just going to test less. You know, bad things will happen if
you say I'm going to test less upfront. So what
do I need to do to make that better? Are
you going to make it as good? Probably not? But
are you going to make it good enough?
Speaker 4: Probably?
Speaker 5: But it's not just hacking out tests. That's where I
talk about it being revolutionary. Evolutionary would be I'm just
going to do a little bit less less tests. I'm
going to do one summer, not too I'm going to or I'm going to do one summer and fly down to a snowy place and do them at the same time.
The But if you know that that's all you're going to get, then you have to be pretty different about what you do upfront.
Speaker 1: Which you're saying relying more on digital tools, whether it's digital twins and stimulation.
Speaker 5: And standard components and the system's approach to looking at it, and a software that is that does have this abtraction layer between its hardware that has headroom in it, so you're not bumping into the limits there or having challenges.
You can spin the software many, many times and see what happens with your hill tests and such.
Speaker 4: So, okay, you talk about standardized parts. Okay, So John
and his colleagues in the Automotive buff book set would largely criticize certain companies for reusing parts throughout the thing.
How does this differ from going to the parts bin and pulling it out using it?
Speaker 5: Very good point. So i have a light ballast in
my LED headlamp and I've now figured out how to do that a little bit cheaper with a little bit power loss, and now I'm going to use that new ballast and it's going to go across everything. So it's
not that it's standard as in it's the same thing we've used for seven years. It's the same thing horizontally,
and as soon as the new one ready. It goes
across all things in that new standard way. So I'm
getting scale horizontally, not longitudinally in time, and I'm willing to allow that this doesn't have to be a specific balance with a specific connector and a specific It's intended to be able to near plug and play with some software changes, not real hardware ECU type changes into the new headlamp. That's six months after launch, a year after
launch maximum, And I'm taking the cost benefit that ten percent cut, and I'm doing it in every component on a near rolling basis, And so the standard it's a good point standardization. I don't mean using the same thing
we've always used.
Speaker 1: Also, it's it's what's visible to the user and what's not.
You know, I remember when the Jaguar was the X type came out. Everybody was like, wow, this is just
a mondeo. I mean it's got the same switch gear
and they hated it.
Speaker 4: So I think they have a lot of money, probably save a lot of money, right, except that they didn't sell as well, and so maybe they didn't save anything, which is which is I think? I mean, really the
point of all of this isn't it? I mean making
cars that people want to buy.
Speaker 5: Yeah, it has to be better, like the switch gear is.
Also the du ninety eight was the same way, right, it had the sort of cheaper stuff in the tier.
If you go to Chinaday, you see all those center screens that are up there, go, oh my god, these are all the same. This looks terror. Yeah, but interact
with it, like the latency is solo. It's these are
great systems. And so the fact that they're all propped
up there, and if that allows them to use the same screen and change the screen every six months for a brighter, faster, cheaper screen. People like that, like you
don't buy a car because it's here and not here, or that it kind of looks the same roughly as everybody else's car. That can be a good thing. You
don't have like it's not a brand and mostly except for a few cars, it's not a brand signature to have a steering wheel over here down here. So why
can't the screen just be better and better and better and stay in the same spot and show in the same way. And if that allows, you know, fifty automakers
to use the same actual screen underneath that, what's wrong with that? Yeah?
Speaker 1: I mean you know, one of my favorite examples is tire pressure monitoring systems. All they do is measure the
pressure in the tire in the car. Right, every automaker
uses a different design, why there's no reason to I heard a recent anecdote this week that somebody was questioning an engineer why they went to all this engineering change when they had parts been stuff that would work. And
he was told, well, we had the budget and the chief engineer wanted to do it, which doesn't sound like a good reason in my right, but I think that's actually very real world of what happens.
Speaker 5: I haven't seen as much of that. I've seen more
of the we have a requirement, it's immutable, and so we have to do it this way. We have a
weight target, so anything we can take out of this weight and I could do it a little differently here versus now, I'm going to use a standard one. But
then once I have a a you know, fifty lighter tire pressure monitor system, I'm going to put it across all of my vehicles. Within six months, they're going to
be in all my vehicles. It's all going to change,
and I'm not going to get hung up in a massive validation loop. I'm having to run these vehicles for
a million miles before I do that. That is a
difference because that horizontal versus the I will only ever use the thing that was designed twenty years ago.
Speaker 4: Okay, we have four minutes. We should we should ask
you about tariffs. I mean since so, okay, you guys
had some findings about what costs are going to accrue as a result of these.
Speaker 5: And yeah, wow, there's a lot of brain damage in getting those teams together. Luckily, before this, we had this
team that created a tool called this Global Trade Optiviser, So we had the foundation of all of the tactules and the infrastructure built. It was more built where to
assource stuff with a static teriff world, so we had to change it somewhat to be in a dynamic one.
It gets very hazy. So in our work with automakers
and some with sometimes more with automakers, we found you need to take a point of view of where will the landing zone be. You can't take a today kind
of of an approach and when you often will do this an automaker and we'll align with them on where the landing spot is and directionally, everyone's kind of the same you know, assembly, more tariff and sort of more preference for local. Then parts a realization that there's a
big difference between eight one hundred percent of something, that there's a cost tail that zooms up, and so you get these alignment on. Okay, if that's going to be true,
then this is likely where this landing zone is. And
then it gets into okay, what can I make as easy changes or not. But we've also seen the landing
zone for US ended up to be when we look through closely, just under two thousand dollars a vehicle that a consumer pays and for twenty twenty six, you know, just a bit over six billion in cost the automakers will we'll take with that's basically the stuff that's not passed through, and it's really the non USMCA automakers that we think are going to get in vehicles that are that are really going to get hurt the most by this,
as you might expect. So we put a sort of
stake in the ground where we think the landing zone will be sometime within within a year. The landing zone
of the USMCA, as well as all tariffs coming into the US routle so.
Speaker 4: The consumer can consider an average two grand on top of what they would be paying in twenty.
Speaker 5: Five seventeen fifty yeah, seventeen fifty. Yeah, so that's that
is considerably more, but it's also less than some incentives were.
So it's it's something that it's for us. It takes
about a million units collectively of the next three years out of the sales. As affordability continues to go up,
we see the bottom forty percent almost locked out of new car buying.
Speaker 1: Yeah, when you say affordability going up, you mean the prices are going up.
Speaker 3: There's less portability, right, lack.
Speaker 5: Of Yes, affordability getting worse, right, But.
Speaker 1: It takes a million units of sales out. That's you know,
because when you say it's going to.
Speaker 5: Raise prices over a three year pero it's a half year period still.
Speaker 1: But you know the real problem isn't for the OEMs.
They'll manage that. It's with the lower or two years
that need the volume.
Speaker 5: It's even worse for them because and for automaker to a degree, because you've also got a repositioning of again, like I was talking about the two factories. Instead of
now supplying the bumper for two hundred thousand units in Factory A. The contract is one hundred thousand of this
one and one hundred thousand to that one across the ocean.
And so the the average volume per platform or per program, per plant program is going to go down and down.
It's been going down, it's going to go down markedly.
And especially in evs, this is an even bigger problem because we used to think that there was going to be, you know, sometime in the twenty thirty to twenty thirty five period and a crossing over or basically getting back to the same basis of vehicles per platform. And now
with the EV volumes dramatically almost cut hours and a half twenty thirty for the US, you just don't get that same volume per platform, and so the amortization of all those fixed costs gets very ugly in the EV space for the US based consumption, and that hurts automakers.
It hurts suppliers as well, because there are vehicles in the pipeline. While there are many getting delayed, many getting pivoted,
there's still trains running down down the tracks.
Speaker 1: It hurts consumers too because now they got to pay more for a car.
Speaker 5: YEP, and it keeps the used car price up to because there isn't a ton of recently used car availability because of the COVID dip into it, So there isn't the shock absorber that there was in say two thousand and one, or there was a two thousand and eight of a used car population out there, and that also reinforces this cost piece. That's why it's like you used
to have the numbers in here. It was meaningful. It's
like ten percent. I think of the car purchases of
being the bottom forty percent of incomes, and it's going to go to virtually nothing, and they're going to be turning into used car buyers. But used car buyers at
a new car price.
Speaker 4: Yeah, if they worked in that bumper plant, their screwed.
Speaker 1: Mark Wakefield, thanks so much for coming on. This has
been a fascinating discussion. I think it's going to be
very valuable too for our audience members who work in the industry to take these lessons learned back into what they're doing.
Speaker 5: Oh thanks. I mean this is the culmination of my
team around the world that puts their heads together and saying what did you work on and how did you get it all together? So We just gave you a
snippet of some of that internal knowledge gathering we do every year. Twenty second year of it actually that actually
Offercar started it, retired this year. We've kept it going
and it allows us, yeah, that, to speak in one voice, but also raise our heads above the boat, look at the horizon a bit and come up with things like this, real good.
Speaker 3: Thank you Mark, Yeah, thank you for having me on good stuff.
Speaker 1: Hu Gary, absolutely, and of course we want to thank all of you for having tuned in today.
Speaker 5: H
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