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Promise and Peril in New Era for Automakers, Suppliers

Bill Koenig
By Bill Koenig Senior Editor, SME Media

Auto industry confronts a new era that brings the most change in more than a century

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Ford Motor Company has acquired the iconic Michigan Central Station and plans to transform it into the centerpiece of a vibrant new campus in Detroit’s Corktown neighborhood that will serve as an innovation hub for Ford’s vision for the future of transportation.

In Detroit’s Corktown neighborhood, there’s a structure that symbolizes both the promise and the peril of a new automotive era—the 105-year-old Michigan Central Station. The train station has been empty and decaying for 30 years.

It has been acquired by Ford Motor Co. (Dearborn, MI), which plans to turn part of it into a center to develop future self-driving and electrified vehicles. The automaker’s acquisition for an undisclosed price was a feel-good story in Detroit. The city had viewed the train station as an embodiment of decay. Ford is betting its future on the old structure.

However, it’s not guaranteed the train station will be a feel-good story in the long run.

“It’s time to remake this station into a place of possibility again,” company Executive Chairman Bill Ford said during a June event at the building. “This industry is going through some big changes.”

During the address, he added a caveat. “We don’t precisely know what the future will look like,” said the great-grandson of company founder Henry Ford.

The coming years may encompass the most far-reaching changes for the auto industry in more than a century. At the start of the 20th century, the U.S. auto industry was divided into the mass-produced vehicles of Henry Ford and the Dodge brothers on one side, and the hand-built, hand-crafted cars with names such as Cord, Duesenberg and Stutz. The mass market side, based in Detroit, won out. The hand-crafted side, centered hundreds of miles away, lost.

The new era of self-driving vehicles, formally known as autonomous vehicles, electrification (electric vehicles and hybrids) and ride-sharing services (expected to reduce the need for everyone to own a car or truck) are projected to shake things up massively.

All will require investment. The peril part of the equation is that not all of the investment is going to pay off.

A study by consulting firm AlixPartners (New York) says by 2025, R&D and capital expenditures on electric vehicles will total $255 billion globally. There are 207 electric models scheduled to reach the market by 2022, with many of them projected to be unprofitable and made in low volumes. AlixPartners estimates another $61 billion (what it calls “just the opening ante”) will be spent on self-driving vehicles.

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A hybrid electric/ICE drivetrain. Vehicle electrification is one of the trends reshaping the auto industry.

“It’s wasted investment if you do it the wrong way,” said Mike Wakefield, global co-head of AlixPartners’ automotive and industrial practice. “We wanted to highlight the extent of that risk. There will only be a handful who have an algorithm that will be a big success.”

For now, U.S.-based automakers are enjoying profits from large pickups and sport-utility vehicles amid plummeting demand for cars. That profit is “going to drive the investment into electrification and the powertrains,” said Carla Bailo, president and CEO of the Center for Automotive Research (CAR; Ann Arbor, MI). “If those robust sales go down, then those money sources are also going to go down.”

What’s Driving Change

The looming changes are being driven by a number of factors.

China and Europe are pushing for electric vehicles and hybrids to reduce vehicle emissions. The US and the rest of North America, not so much. The Trump administration has proposed easing fuel efficiency standards set under President Barack Obama. Regulators, in rules set in 2012, established a target for the U.S. vehicle fleet to average 54.5 mpg (23 km/l) by the 2025 model year. The Trump proposal eliminates that target. The industry already was unlikely to meet that because customers are buying more, and heavier, trucks than anticipated when the rules were set.

Regardless, with electrification, “All the automakers are heading in that direction, with a fully electrified power-train either by 2025 or 2030,” Bailo said. That’s because, she said, automakers operate globally and want to minimize regional differences in their vehicles.

The move toward more electric cars and trucks may alter vehicle design.

“We are on the brink of a car-design revolution, one that may eliminate the steering wheel entirely,” according to an article that Tata Technologies wrote for SME’s 2018 Motorized Vehicle Manufacturing Yearbook. “As manufacturers consider how vehicles will look and behave without a human at the controls, self-driving cars will inspire bold new interiors, human-machine interfaces, connected features and external aesthetics.”

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Mahle Industries Inc. uses Bad Boy, an electric off-road vehicle, to demonstrate its product offerings for electric vehicles.

With self-driving vehicles, the situation is more complex. Part of it is the appeal of lessening stress on drivers. Sensors, radar, and LIDAR (similar to radar but using laser light) can combine to help guide drivers or take over the driving. This has appeal for operators of commercial fleets, which might be able to reduce or eliminate the need for drivers for predictable truck routes. Another possibility would be ride-sharing services, which currently rely on freelance drivers.

At the same time, there’s the question of whether customers will pay for self-driving technology. AlixPartners, in its study, said surveys indicate customers are willing to pay another $2,300 for such tech. The current cost is about $22,900.

“Everyone can easily say ‘we don’t know what we don’t know,’” Bailo said. “And we don’t know what customer expectations are truly going to be. We do know customers’ expectations of mobility are changing.”

Automakers Try to Adapt

Automakers are entering into partnerships with multiple companies with different kinds of expertise.
That’s a change in and of itself. “The industry has not been great at partnering; there’s not been a great history of collaboration,” said Wakefield of AlixPartners. However, with all the issues involved, “It forces the automakers to partner out of necessity.”

CAR’s Bailo said automakers need to seek additional expertise. Makers of vehicles need to reach out to “people who understand data, who understand consumer behavior,” she said. “Most automakers have seven or eight people they’ve decided to do business with.”

At Ford, the company has outlined general goals. “The plan to reach our aspiration involves making smart choices, focusing on fitness and tracking our success against key metrics,” Mike Levine, a Ford spokesman, said in an email.

The metrics include “fully committing to new propulsion systems, including adding hybrid-electrics to high-volume, profitable vehicles,” he said. Also, Levine said Ford wants to build “a viable and profitable autonomous vehicle business offering the most trusted and human-centered ride hailing and goods delivery experience for our customers.”

Ford previously built electrified vehicles at its Michigan Assembly Plant in Wayne, MI. That output included the Focus Electric, C-Max hybrid and C-Max plug-in hybrid.

The automaker is mostly getting out of the car business to concentrate on trucks, SUVs and crossovers. It will retain the Mustang sports car and produce a new Focus crossover. How this affects the company’s self-driving vehicle plans remains to be seen. “It’s too soon to discuss the manufacturing of autonomous vehicles, which we have said will be built at our Flat Rock Assembly Plant in Michigan,” Levine said.

Ford announced in late July it was forming Ford Autonomous Vehicles LLC to oversee its self-driving vehicles effort. The automaker said the entity “is structured to take on third-party investment.” In short, other groups may invest in Ford’s autonomous vehicle operations. The company says it expects to spend $4 billion on autonomous vehicles through 2023.

It’s clear that automakers are moving ahead. For example, General Motors Co. (Detroit) said last year it plans to deploy autonomous vehicles in commercial fleets in 2019.

In May, SoftBank Vision Fund said it will invest $2.25 billion in GM Cruise Holdings LLC, the automaker’s self-driving vehicle business. The investment will give it a 19.6% stake in GM Cruise. GM also invested $1.1 billion in the self-driving vehicle unit.

Other changes are underway. Automakers are cutting investment in traditional, internal-combustion engines, Michael Robinet, a managing director of IHS Markit, said during a June presentation at EMAG LLC’s Technology Days in Farmington Hills, MI. “The number of new engine families is declining,” he added. The companies are “spending more time on electrification.”

Suppliers Adjust

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Inficon says its devices can be attached to robots to conduct inspections.

Industry shifts are “going to test OEM-supplier relationships going forward,” Robinet said. “Hard decisions are going to be made.” The analyst said a handful of suppliers may emerge as “super Tier 1 suppliers.” Such suppliers are “moving to be the integrator of electric systems,” he said.

Suppliers already are devising strategies on how to proceed. Earlier this year, Eaton Corp. formed its new eMobility business, which involved combining products and plants from its electrical and vehicle units. The company said it plans to invest more than $500 million over the next five years to develop new products for vehicle electrification.

“Eaton is a very deliberative company,” said Scott Adams, senior vice president of vehicle electrification. “This was a very big decision for us. We spent a long time looking at the long-term trends. Our view is there will be bumps in the short term. [Despite that], “we believe this is going to happen. Our decision was long-term.”

Mahle Industries Inc. (Farmington Hills, MI), a maker of engine components, says it’s trying to cover the bases across different technologies. Mahle is designing and producing components for smaller internal-combustion engines as well as parts for hybrid and fully electric powertrains. Its lineup includes motor controllers, charging systems, power converters, electric motors, generators and alternators.

“We don’t think there’s a single solution that works globally,” J.D. Kehoe, a Mahle executive, said at the annual Tech Crawl supplier presentation in Birmingham, MI, in June. “We are positioning ourselves” to go whichever direction “the OE wants to go down. Mahle is well positioned to deal with whatever curveball the industry throws at us.”

Mahle also uses Bad Boy, a Textron-produced off-road, electric-drive utility vehicle to show off its electric product line. The vehicle was built with high-strength-steel tubing and a fiberglass body. The all-wheel-drive vehicle is driven by two Mahle 72-V traction motors fitted to its front and rear transaxles. It’s powered from six 12-V conventional batteries. The Mahle motors are used by Textron for its electrified vehicles. Bad Boy was on display at the Tech Crawl event.

Also at Tech Crawl, Chassis Brakes International, a maker of automotive brakes, said it is moving toward electric brakes.

“We believe the brake will be completely electrified,” Dennis Berry, the company’s president of the Americas, said in a presentation. Chassis Brakes expects electric brakes will be on the market in five to six years. “I think we’ll see it on commercial vehicles first,” Berry said.

Inficon, a company whose products include automotive leak detectors, says battery packs and sensors will need to be inspected for leaks. Without testing, humidity can form in sensors, said Thomas Parker, North American market sales manager for Inficon. As a result, the company sees potential increased demand. At TechCrawl, the company showed how its equipment can be attached to robots to perform inspections. “It’s a very exciting time we’re in,” Parker said.

“This could be a really big game changer,” said Jody Hall, vice president-automotive market for the Steel Market Development Institute, part of the American Iron and Steel Institute. “We want to be sure we can support the [auto] industry.”

The Future

Perhaps the biggest peril facing the industry is that overall demand for cars and trucks may decline in the new era.

Automotive supplier Denso, during CAR’s 2017 Management Briefing Seminars, said vehicle demand
may decline from 2030 onwards because of self-driving vehicles and ride-sharing services. Denso said it was beginning planning in case such a scenario materializes.

Still, there’s no looking back.

“It’s going to speed up,” said AlixPartners’ Wakefield. “These are trends that are fairly new and are on top of regular vehicle development. Making today’s cars [is] different than 10 years ago.”

It’s likely to be even more different 10 years from now, Wakefield said.

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