Buildyourowncar.com: Where E-Business is Driving the Auto IndustryPublished: June 07, 2000 in Knowledge@Wharton
"It is April 27, 2010, and Kate has decided she wants to buy a new car. Out of many sites that her WebPad brings up, she narrows her choice to two: Ford.com and Buildyourowncar.com..."
Will we in a few years be able to buy a built-to-order car on-line, picking and choosing the components and features we want - a Honda engine here, a Ford body there, a Bose sound system - from among various firms' offerings? What other opportunities and transformations are in store -or already in the works - for the auto industry in the age of e-business? Susan Helper, a professor at Case Western University, and John Paul MacDuffie, a Wharton management professor, tackle these questions in their paper, "E-volving the Auto Industry: E-Business Effects on Consumer and Supplier Relationships."
Automotive build-to-order of the type mentioned above is one scenario that Helper and MacDuffie sketch out, although it is admittedly a radical and long-term prospect that is at least 10 to 15 years away. The authors do describe an innovative build-to-order-type system that has already been highly successful in selling customized personal computers. With the Dell Direct model - "the object of much scrutiny by the auto industry," according to the authors - consumers can choose a custom configuration at Dell's website, arrange purchase and payment details online, and if they wish, track the progress of their order through every phase of production. Orders go directly from the website into Dell's production schedule, and parts are ordered from suppliers only after the order and payment are received.
Helper and MacDuffie analyze how this model might be applied to the auto industry by working through the value chain from the customer back through retail/distribution, product design, manufacturing and procurement. They conclude that the logistical issues are far more complicated for cars than they are for computers, rendering build-to-order a daunting prospect. "A vast number of interrelated changes," the authors write, "[would be] necessary to make this production model a reality."
Looming largest would be the production of parts that could be mixed and matched with those from other companies: "A key component of making build-to-order feasible is modularization; but if modularization is combined with outsourcing (another widespread trend in the auto industry) automakers would be giving up control of key design aspects of the car." Another necessary change would be a prevalence of 'voice' strategy relationships between automakers and suppliers to ensure collaborative product development of modules. (With the 'voice' strategy - historically seen more often in Japan - an automaker works with a supplier to resolve problems. With the contrasting 'exit' strategy historically the norm in this country - automakers solve problems with suppliers by replacing them with other suppliers.)
Moreover, the role of dealers under build-to-order is quite unclear. There are no dealers in the Dell model. But Helper and MacDuffie suggest that intermediaries of some kind will continue to be part of a vehicle purchase transaction, given the importance of seeing, touching and testing driving the product and the desire of automakers to wrap many services around the product at the time of sale. And what about consumers: Are they prepared to pay a premium for broader choices and speedier fulfillment? So far, say Helper and MacDuffie, there is no evidence that they would.
Indeed, even if build-to-order and its necessary precursor, modular product architecture, never come to pass, the authors say, e-business will still offer the auto industry new economies, new capabilities and new opportunities for business development. Business-to-business procurement in particular is experiencing an upheaval: Helper and MacDuffie cite a recently-announced industry consortium, including most of the world's automakers and some powerhouse IT firms, that is backing a gigantic e-procurement website known as Covisint. "E-procurement will result in significant savings over current procurement systems, as well as transforming supplier relationships and purchasing conventions, the authors says. "Covisint is becoming almost global there are only a few automakers left who have not announced that they'll be part of it. This is the significant development to date, with the most major potential impact on the industry. It brings up all these questions: Will the Federal Trade Commission approve it? Will these big automakers be able to work together? Will the suppliers go along or will they set up a competing site? And then, how will the site actually work?"
Co-author Helper explains: "It ties a lot of the firms together, so it might be less possible for them to have different purchasing strategies. You might even see, for example, Toyota do more purchasing in exit mode, and conversely, GM do more in voice mode. It might move automakers in the direction of using a similar procurement strategy." But ultimately, note the authors, e-procurement could end up favoring either the exit or the voice strategy, because it facilitates both auctions and collaboration.
"This e-procurement website," says MacDuffie, "will make it easier if you're pursuing very free-market type relationships where you expect to be switching a lot between suppliers and taking the lowest price, the exit option. But on the other hand if you're accustomed to working very closely with your suppliers, there ought to be plenty of Internet-based tools that can facilitate that." Either way, "the consortium model established to launch Covisint will influence competitive dynamics in the industry as thorny issues around product architecture (how modular?) and standardization (open industry standards, like PCs, or competing proprietary standards?) are worked out.
The face of retailing is changing, too. "Auto dealers are already coping with the consequences of Internet-informed consumers and a host of dot.com intermediaries that are challenging the traditional retailing model." A lot of people are using the Web to research their cars, says Helper. "The figure we cite is 25%; but I've seen figures that go up to 60%. And that really does, I think, change bargaining power, if everybody - not just Consumer Reports readers - has some idea of what the margins are that the dealer's making. So even if they eventually buy from a conventional dealer, if they've checked out what's happening on the Edmunds site, or Autobytel or Greenlight.com, they're in a much better position to bargain."
Currently, because of state franchise laws, online sites must still refer interested customers to dealers to arrange the final purchase. But MacDuffie predicts that in the near future, consumers may be able to close their deals online. "Already, Ford has challenged a state law in Texas. And my guess is that, if at some point consumers believe dealers are standing in the way of them getting a crack at some neat options at purchasing a vehicle from the Internet, there'll be political support for overturning some of those laws."
Another powerful impact of the Internet on new auto industry opportunities, according to the authors, is the acceleration of efforts to bring new information technologies such as safety and entertainment systems into cars. "In the U. S., commuters spend an estimated 500 million passenger hours per week in their cars....Vying for all those hours of captive eyes and ears is a wide array of potential services" -from email and custom news and weather, to travel and restaurant reservations, to navigation services. "There are a whole lot of things on the drawing board," comments MacDuffie, "possibilities for a lot more computer power inside the car itself, so you could plug in not only your Palm Pilot, but also your MP3 player and all sorts of different electronic add-ons, as a way of customizing your environment." Further, "When the information-intensive vehicle is linked to a 'smart highway' or Intelligent Transportation System, even more services become possible, from toll collection to congestion avoidance."
Helper and MacDuffie believe that these technological innovations could become part of a build-to-order strategy. However, they predict that add-on products and services will become increasingly available whether or not there is a substantial move toward build-to-order. Right now, automakers are…forming alliances with a wide array of hardware and software specialists from the IT domain. Ford and GM have been the most aggressive, often announcing deals with separate alliance partners on the same day."
With all these dramatic developments in the offing, who will lose and who will gain? "From a national point of view," says MacDuffie, "clearly the U. S. companies have been moving much faster on all this Internet stuff. And I know, just coming back from two weeks in Japan, that the Japanese companies are a bit worried about being left behind. But they are also cautious about changing too quickly from the supplier relations mode they've had for many years. It's actually quite significant that Toyota just announced it's signing on to Covisint, because it's viewed as the leading and most successful of Japanese companies, and also as quite cautious."
But no matter how well automakers and suppliers lay their plans, customers ultimately will have the last word. The future of the auto industry "will depend as much on what consumers want and how clearly their preferences are felt as it will on the current industry structure and the capabilities of key players," the authors conclude. "The Internet's impact may be greatest, therefore, in the extent to which it amplifies and accelerates the delivery of the voice of the consumer to the ears of industry leaders."