Hindsight is a wonderful thing. For decades many industries have been labouring under the illusion that Moore’s Law only applied to computer chips. A quick reminder: Some time in 1965 Intel co-founder Gordon Moore predicted that the number of transistors on a chip would double approximately every two years. Less well known perhaps is a 1936 paper by aeronautical engineer Theodore Wright, which identified that cost decreases as a power law of cumulative production.
In other words, economy of scale. Put the two together, and one starts understanding the cost pressures facing all industries, including the automotive sector. At least two generations of consumers in the industrialised have grown up with the expectation that computers and other electronic gadgets would continue to get more powerful, and that their price would drop. Marketers even created or identified new categories of consumers – ranging from “early adopters,” who stand in long lines and pay top dollar to get the latest tech gadget to the “laggards” who pay bargain basement prices after the early adopters have moved on.
As consumers we have transferred this expectation into most of our other purchases. The new industrial powerhouses in the East arose because we expect to pay less for our television sets, cameras, clothing, shoes and – dare we say it – motor cars. When factories in the industrialised West and Japan could not meet the demand for quality at a lower price, the retailers sourced them elsewhere. Both laws can be seen in action – quality started off at a low level (as it did in Japan), but has improved exponentially. Wright – whose law is also known as the “Rule of Experience” – foresaw this. Investigation of 62 industries by the Santa Fe Institute discovered that Wright “experience curve” is a good predictor of improvements in sectors as diverse as aircraft production, beer manufacturing, energy production, specialty chemical manufacturing, metal production, and sugar refining.
Process improvement programs such as Six-Sigma and Lean Manufacturing are a manifestation of the impact Wright’s Law in the workplace. What the auto industry is now facing is the challenge of the confluence of both laws. As we see in this and recent editions of Automotive Industries, OEMs are relying increasingly on information technology to differentiate their vehicles in the market-place. The new generation of consumers also expects their vehicle to be as connected as their Smartphone, television set, computer or (coming soon to a home near you) their fridge. With that expectation comes the assumption that they will continue to get more for less. If not, they simply shop elsewhere, there is little brand loyalty in the market-place of the industrialized world where pretty much everything has become commoditized.
In emerging markets the majority of consumers are forced to buy on price. OEMs accept this when it comes to the annual negotiations with their supply chain – component producers are expected to reduce rather than raise prices. Service providers are coming under the same pressure. So much so that this writer knows of a case where an OEM has demanded that an hotel reduce its rates year-on-year. Consumers are benefiting. New car prices have fallen in real terms in a number of markets across the world. Growing competition from low-priced marques made in China and India will continue to put pressure on prices, particularly as the quality coming out of the two economic powerhouses continues to improve.
The burning question is how the component suppliers are to survive. Some – as we see in this edition of AI – invest heavily in R&D to ensure that they have something unique to offer. That is usually accompanied by shifting production to more cost-effective locations. Whatever the solution, the rule is that there is no easy money to be made in today’s auto industry.