auto industry – The OM Blog by Heizer, Render, & Munson

OM in the News: Apple, Core Competencies, and Electric Cars

In a perfect example of what happens when successful firms decide to stretch beyond their core competencies (see Chapter 2), Apple has just put an end to its decadelong push to build its own electric vehicle. Once seen as an effort having the potential to transform the auto industry, the secret group inside the iPhone giant—known internally as Project Titan—has been shut down, reports The Wall Street Journal (Feb. 28, 2024).

That EV transformation, which has been under way for years without Apple, continuously increased the level of difficulty Apple faced as it spent billions on R&D for the project trying to catch or exceed the capabilities made available during a revolution led by Tesla. The car group inside Apple was the subject of several rounds of restructuring and shifting strategies over the years as Apple struggled to figure out a path forward. Some executives pitched deep partnerships with automakers or even outright buying an automaker, but none of that materialized.

Since the mid-2010s, the specter of Apple introducing a car had rattled auto executives. Cars were becoming computers on wheels, with updateable features and large touch screens—morphing into a sort of device that seemed to play right into Apple’s strengths. “There was a view that if they ever did put out a car, that would be tough to compete with. Still, an Apple vehicle was seen as a distant threat because everybody knew how hard it was to build cars.” ” said a former GM exec.

When the effort kicked off in 2014, Apple imagined a fully autonomous vehicle. Over time, it scaled back those ambitions to where the vehicle automates only some parts of the driving. With these strategic changes, leadership was also in near constant flux.

“Apple canceling this project is a sigh of relief for us,” said an investment manager. “When you looked at Apple’s future initiatives, the car project was always the most far-fetched for Apple. This just isn’t in their wheelhouse. Instead, it is better Apple will be redeploying engineers and investments into areas like artificial intelligence that could help its consumer electronics business.”

Classroom discussion questions:

What is Apple’s core competency?
Apple also tried to enter the TV business in 2014. ( See the Time article on June 1, 2015), What happened in that venture? Compare it to the EV project.

OM in the News: Robots Are Looking Better to Detroit

United Auto Workers (UAW) members recently approved a labor contract with Ford, General Motors, and Jeep maker Stellantis that included a record 25% wage increase over 4 years and marked the sharpest labor-cost increase for the companies in recent memory. The auto makers did avoid a strike, but the longer term cost was great, reports The Wall Street Journal (Jan. 15, 2024).

Robots weld the body of a Model Y EV at a Tesla factory

The effect from the deals in Detroit quickly rippled through the industry, with Toyota, Hyundai and other nonunionized automakers increasing wages to stay competitive. The contracts were richer than Detroit had planned for, and the auto makers are strategizing ways to blunt the increased costs. Ford said the new terms would add $900 in cost per vehicle by 2028.

So the firms are looking to an old friend to help offset rising labor costs: robots. For decades, car companies increased automation inside their factories. Now, they are looking even more seriously at this approach, to address the rising labor bill and take advantage of more sophisticated technology. Competition from newcomers like Tesla, which has been more aggressive in deploying robots, is also nudging more traditional auto manufacturers in this direction.

The global auto industry is a top consumer of robots, having installed 136,000 new industrial robotic units in 2022. Often these so-called cobots work alongside workers to access hard-to-reach spots or perform tasks that are particularly physically demanding.

Dozens of new battery and EV plants in the works will also open the door to broader use of high-tech systems. It is easier and less costly to install robots in a new facility versus retrofitting an existing one. Plus, it is more streamlined to have updated systems that “speak” to each other smoothly, as opposed to popping in a new machine among older ones.

The UAW may have attained major wage increases, but the trend is making its members nervous about the prospect of machines replacing jobs. “The companies have used technology as a way to cut jobs instead of interjecting robots and technology to make our jobs easier,” says the UAW president.

There are risks to automating. Adding robots to a process for the first time can introduce quality problems. And whatever machines gain in terms of productivity can be zeroed out by the needed personnel to fix or program robots.

Classroom discussion questions:
1. Discuss the advantages and disadvantages of robotics in the auto industry.
2. What is Tesla’s edge?

OM in the News and Video Tip: A Circular Economy Hub for Automaker Stellantis

Stellantis opens its first circular economy hub.

Stellantis–the global automaker with brands including Chrysler, Fiat, Jeep, Maserati and Peugeot– has inaugurated a Circular Economy Hub at its manufacturing complex in Turin, Italy, demonstrating its commitment to a “360-degree approach” to automotive production, involving a strategy of remanufacturing, repair, reuse, and recycling (4R‘s.) Stellantis says it is adopting capabilities and facilities “to change its consumption model to reduce the environmental impact and better manage the company’s aggressive decarbonization target of reaching carbon net zero by 2038.”

“Circular economy,” a topic in Supplement 5 of your Heizer/Render/Munson text, describes an economic concept for production and consumption that preserves the value of energy, materials, and labor as products move from design through to end-of-use handling and recycling. The Hub represents a $40 million investment, covering 785,000 sq. ft. The site will employ 550 workers by 2025.

“The Circular Economy Hub brings together a powerhouse of skills and activities aimed at creating a high-performing center of excellence in Europe,” stated Stellantis in American Machinist (Nov. 28, 2023). “We are industrializing the recovery and sustainable reuse of materials, building new technologies and advanced capabilities as we grow in this area.”

The primary objectives for the Hub are to extend the life of parts and vehicles, ensuring that they last for as long as possible; or, failing that, to recycle those materials and others from end-of-life vehicle dismantling for remanufacturing as new parts and/or vehicles. The goal for the first operation, “Reman,” is to manage over 50,000 remanufactured parts annually by 2025, rising to 150,000 by 2030. For the Hub’s Sorting Center, the target is to process an estimated 2.5 million worn parts annually by 2025, increasing to 8 million by 2030.

The Vehicle Reconditioning activity will undertake aesthetic and/or mechanical repair of remanufactured or used parts and then reintroduce those to the supply chain through Stellantis’ manufacturer-certified used-vehicle program and services network. Last, the Vehicle Dismantling activity will convert end-of-life vehicles into resources for parts to be remanufactured, reused, or recycled.

Stellantis intends for the Hub to generate “efficiencies and synergies” among these activities, and through vertical integration of materials and processes. Here is a 3.5-minute video showing the 4R process in action.

Classroom discussion questions:

What is meant by “circular economy?” Give an example with an iPhone as the product.
What auto parts will be hard to repurpose?

OM in the News: Ford’s Latest Supply-Chain Problem

Ford held some shipments because of a lack of badges.

Ford Motor has delayed deliveries of certain vehicles because it didn’t have the blue oval badges that go on them, in another example of how supply-chain challenges have hit auto makers, reports The Wall Street Journal (Sept. 24-25, 2022). The company has run into supply constraints with the brand-name badges and the nameplates that specify the model. Both parts are affixed to the vehicle’s exterior and are important identifiers for the auto maker’s products.

Ford had considered some workarounds, such as 3-D printing the insignia until the permanent ones could be obtained. But they didn’t feel the printed substitutions would meet the bar on quality.

The company is retrofitting those built without a Ford logo and delivering them to dealers. It now has 40,000 to 45,000 vehicles in inventory that can’t be shipped to dealers because they were awaiting needed parts. Many of these vehicles are high-margin trucks (like the F-150 pickup) and SUVs. The shortages primarily involved parts other than semiconductors.

Tribar Technologies, which has made badges for Ford, had to limit operations last month after disclosing to Michigan regulators it had discharged industrial chemicals into a local sewer system. Ford’s trouble getting nameplates and badges illustrates that even the most basic parts can be hard to come by, resulting in constraints that can have larger repercussions on a company’s ability to fulfill vehicle orders.

The global auto industry has been wrestling with various supply-chain disruptions for more than a year, but most of the shortages have revolved around a lack of semiconductors. That has led car companies to build some vehicles without the needed semiconductors and then park them until they can be finished. This strategy has left tens of thousands of cars and trucks sitting at airport lots and other holding pens near assembly plants in the South and Midwest.

GM had nearly 100,000 incomplete vehicles that it couldn’t sell because they lacked the needed computer chips and other parts to deliver them to dealers. Similarly, EV startup Lucid has cited supply-chain constraints on parts such as glass and carpet as one reason it slashed production targets for 2022.

Classroom discussion questions:

Table 11.3 in your Heizer/Render/Munson text lists ten supply chain risks. Which did Ford face here?
As operations manager, how would you address the multitude of supply chain problems?

OM in the News: Why Tennessee Hits the Electric Vehicle Sweet Spot

Tennessee is emerging as a leader in a national scramble to develop electric-vehicle and battery production, as states compete to woo multibillion-dollar investments from auto companies pivoting away from the combustion engine. Ford and South Korean battery maker SK Innovation recently said they plan to develop a large complex to make EVs and batteries there. That follows similar investments made by GM and VW to add EV production at their Tennessee assembly plants.

Ford’s real-estate scouts began their search early this year by looking at 85 potential locations across more than a dozen states. Ford’s checklist included a large empty property, so Ford could move quickly without having to clean up or retrofit an existing facility; cheap and reliable energy derived from renewable sources; access to rail and interstates; and reasonably close proximity to Ford’s other assembly plants– all factors we discuss in Chapter 8 of your text.

Tennessee has stepped out in front in large part because of yearslong efforts by the state and the Tennessee Valley Authority, which provides power to the region, writes The Wall Street Journal (Oct. 16-17, 2021). The state promoted its extensive workforce-training programs, a right-to-work law, and proposed $500 million in incentives. The TVA offered inexpensive, reliable energy and at least $100 million in power upgrades and other incentives.

Energy costs are a big consideration for the battery factories because of the immense amount of electricity they use: 5 times more than in a typical auto assembly plant. TVA charges some of the lowest industrial energy rates in the country.

Tennessee made its mark on the auto world in 1983, when Nissan opened its first U.S. plant in Smyrna, Tenn. This was followed by large manufacturing operations for GM and VW. Hundreds of suppliers followed. Today, many thousands of Tennesseans are employed in vehicle manufacturing.

Auto makers are spending more than $300 billion globally by mid-decade to transition their lineups, including on massive battery factories and on new and revamped assembly plants. VW is nearing completion of an $800 million expansion of its decade-old assembly plant in Chattanooga, where next spring it is scheduled to start production of its new ID.4 electric SUV. GM in the past year decided to double down on Tennessee as a base of EV production, spending $2 billion to overhaul its assembly plant in Spring Hill, for electrics, starting with a plug-in Cadillac SUV.

Classroom discussion questions:

What is a “right-to-work state” and why was it a factor here?
Discuss the incentives offered to auto makers. Are they reasonable?

OM in the News: The Chip Famine Persists

The chip famine is starving the global auto industry and putting car buyers on a strict diet, writes The Wall Street Journal (Sept. 23, 2021). So far this year, 7 million cars that were supposed to be produced haven’t been. Auto companies are shutting down production lines for weeks at a time and furloughing employees as a result of the chip shortage. Toyota has slashed its production 40% this month. But the chip famine won’t be solved quickly, as supply won’t catch up with demand until late 2022 and into 2023.

The inventory of new cars in the U.S. is only about 30% of pre-pandemic levels, and buyers snap up used cars as soon as they find them. Rental companies reduced their inventories during the pandemic and now don’t have enough cars to meet demand.

Cars need more than 1,000 computer chips for functions like raising windows, adjusting AC, and cruise control. They don’t need advanced chips like those in smartphones. Instead, they use mass-produced microcontrollers. Over the past decade, fewer companies have produced these chips. But an adequate supply of chips is going to become even more important for the auto industry’s future. Electric and self-driving vehicles require both leading-edge and traditional chip technology, and an EV powertrain has 3 times as many semiconductors as a traditional engine. The average vehicle currently contains about $450 worth of semiconductors–a number expected to double by 2030.

The auto industry’s reliance on a shrinking supply base to produce semiconductors was risky. The pandemic has turned that risk into a serious shortage. Beginning in 2020, auto makers had to compete for chips against electronics manufacturers producing goods for locked-down consumers and 5G mobile networks.

Covid outbreaks also shut down factories, breaking links in the supply chain. The Vietnamese plants that fabricate chips for Asian manufacturers stopped working in August. A drought in Taiwan disrupted water-intensive chip production; a fire at a Japanese semiconductor factory restricted supply; and a winter storm hit semiconductor plants in Texas. Some auto companies are paying premiums to secure chips.

The obvious answer to the chip famine is to increase manufacturing capacity. But that is expensive and takes time. Semiconductor companies may not want to invest in traditional chip technology when future demand likely will come from higher-value chips for applications like AI. While the chip industry has announced nearly $400 billion in new investment as the chip famine unfolded, only a small portion of this investment will be used to address the chip shortage afflicting auto makers.

Classroom discussion questions:

Why can’t chip makers increase capacity quickly to handle the high demand?
Which analytic model in Supp. 11 of your Heizer/Render/Munson text can be used to address supply chain difficulties?

OM in the News: Casting Aside Gas Engines

VW ID.3 electric cars assembled in Germany,

For more than a century, auto makers continually honed their gas and diesel engines, sparring over which had greater power, better fuel efficiency, more durability or delivered a smoother ride. Now, they are sending the combustion engine to the scrap heap and are pouring billions of dollars into electric motors and battery factories. Instead of powertrain specialists, they are hiring thousands of software engineers and battery experts.

The transition is upending the automotive workplace, writes The Wall Street Journal (July 24-25, 2021), from the engineering ranks and supply chain to the factory floor. Parts makers that for generations have made the same pieces for engines and transmissions are jockeying to supply electrical components.

Unions in the U.S. and Europe fear a steep loss of jobs tied to making engines and transmissions. The UAW has warned that the move to EVs, which require fewer parts and 30% less manpower to produce, could jeopardize tens of thousands of U.S. jobs. A Morgan Stanley report estimates full transition to EVs could lead to 3 million lost automotive jobs globally. EVs are simpler mechanically than gas-powered ones. Their drivetrains employ fewer than 20 moving parts, compared with hundreds for the gas-powered version.

“It’s been a fun ride,” said an engineer with 40 years in the industry. “But I think we’re coming into the homestretch for the conventional engine.” Auto executives have concluded that they can’t meet tougher tailpipe-emissions rules globally by continuing to improve gas or diesel engines. And they don’t intend to develop any new gas engines. “I don’t know where to spend money on them anymore,” said GM’s President. Developing a new gas engine can cost $1 billion and involves 100’s of suppliers. Over the past several decades, auto makers rolled out 20-70 new engines annually. That number will fall below 10 this year, and then essentially go to zero.

The industry’s rapid shift in focus has left suppliers that have long made parts for gas engines hustling to reinvent themselves. “We don’t want to be left making the best buggy whips,” said one Michigan auto supplier.

Classroom discussion questions:

What strategy should auto parts makers take?
Will the transition to EVs be complete this decade? Why or why not?

OM in the News: Auto Makers and the Global Chip Shortage

Auto manufacturers have spent decades streamlining their supply chains, using their muscle over parts makers to reduce their own costs by carrying little inventory and relying on suppliers to deliver components “just in time.” But car makers are finding they can’t dictate terms in the same way to the chip industry with its far-broader customer base, particularly now that chip demand is booming globally among a swath of industries. Car makers blame the shortage on tier-one parts suppliers, which generally do most of the chip buying. The shortage will drive the global auto industry to produce nearly 700,000 fewer cars than planned for the first three months of 2021. Auto makers including VW, Ford and GM, have furloughed tens of thousands of workers.

Ford has slashed production of America’s top-selling vehicle, the F-150 pickup, because of chip shortages

The car-chip pain is partly a self-inflicted wound that traces to the pandemic’s early days, writes The Wall Street Journal (Feb. 13-14, 2021). When the global economy went into stasis, preparations for future car production halted. Auto-parts suppliers reduced orders for electronics, betting that large volumes wouldn’t be needed well into the future.

Chip makers chose not to stockpile parts and wait for car makers’ orders—a decision made easier by surging demand from sales of laptops, servers, smartphones, video game consoles, 5G networks, and other electronics. The harsh reality is that these other products have have a much, much higher rate of return than making chips for cars. Plus only one chipmaker, Taiwanese TSMC, produces about 70% of the units used in the world’s autos.

Still, the car industry largely operated as if electronics suppliers were at its mercy. Normally, when they are calling on their suppliers, everyone is excited about the large volumes. But it must be compared to the billions of smartphones and PCs that are being sold. Unlike with some other parts, said a chip maker exec, referring to the auto makers, “They don’t know how the sausage gets made at the bottom.”

Classroom discussion questions:
1. What is meant by the quote at the end of the blog?

2. Table 11.3 (page 450) in your Heizer/Render/Munson text lists 10 supply chain risks. Which, if any, apply in this case?

OM in the News: “The ICE Age is Coming to an End”

Yes, that’s the quote in The Wall Street Journal (Feb. 6-7, 2021). But its not what you might think. It refers to the internal combustion engine, which over 100 years has been engineered to near perfection. The innovation of the battery-powered electric vehicle, by contrast, has barely begun. Still, car experts believe battery-powered models—which are mechanically much simpler than those with gasoline engines—will prevail. Batteries recently scored a win at GM, which is phasing out gas powered vehicles by 2035.

The rise of rechargeable batteries is now a matter of national security and industrial policy. Control of the minerals and manufacturing processes needed to make lithium-ion batteries is the 21st-century version of oil security. The flow of batteries is currently dominated by Asian countries and companies. Nearly 65% of lithium-ion batteries come from China. By comparison, no single country produces more than 20% of global crude oil output.

Assembling lithium-ion batteries in Huaibei, China

To meet expected demand, global output of lithium, a metal also used to make nuclear bombs and treat bipolar disorder, has tripled in the past decade. Lithium is mostly mined in Australia and Chile. EV battery packs and motors currently cost about $4,000 more to manufacture than a comparable fossil fuel-burning engine. But by 2022, the difference will be $1,900—and will disappear by 2025. VW, Tesla, and GM are pushing battery prices down further as they race to lock up the giant capacity needed to power millions of EVs.

Last year, the U.S. established a consortium of agencies to promote a domestic battery industry, and used the Defense Production Act to speed development of mines for rare-earth elements. The U.S. Energy Secretary just stated, “We can buy electric car batteries from Asia or we can make them in America.” The E.U. is also using industrial policy to foster the development of a regional battery sector, saying it wants a “closed value chain for battery cells to be created in Europe” from processing raw materials through recycling used batteries.

Classroom discussion questions:

About 4% of car sales last year were EVs. Why was that figure so small and why might it change?
Why is the supply chain strategically important? (See Ch.11 in your Heizer/Render/Munson text)

OM in the News: Tesla Searches for a New Location

Tesla is looking for locations in the central United States to build a new factory for the company’s electric pickup truck. Cybertruck, a wedge-shaped pickup, is expected to go into production in late 2021 and start selling for a price of just under $40,000. By publicizing Tesla’s plans to construct a factory for the truck, the firm is repeating a strategy used in 2014 to score a $1.3 billion incentive package from Nevada. The state lured the company’s massive battery factory there after Tesla held a bake-off in which Arizona, California, New Mexico and Texas were the finalists that came up short.

States with right-to-work laws that prohibit unions from requiring prospective hires to join their membership are likely to be contenders for Tesla’s facility, writes Industry Week (March 11, 2020). Government incentives will also play a role in Tesla’s decision-making on a plant location, along with logistics costs, access to big, talented workforces, and quality of life.

Tesla recently completed construction of its newest plant in China and started delivering locally assembled Model 3 sedans to consumers in January. It’s also planning a factory near Berlin.

Last month, Elon Musk hinted that Tesla could build a factory in Texas. The Texas Enterprise Fund, created by the state’s legislature, has become one of the largest payers of economic-development incentives in the nation. Texas offered $2.3 million to entice SpaceX, the rocket company Musk founded and runs, to locate a launch facility in Brownsville.

Classroom discussion questions:

What are the most important location factors for Tesla’s new plant?
What kind of incentives did Amazon seek when it announced its search for a second HQ last year? (Hint: see our post on the topic).

OM in the News: GM, Capacity, and the UAW Strike

GM is pouring billions into electric cars and autonomous vehicles, and needs maximum flexibility to minimize the risk. Automobile design is headed for big changes, and a preference for shipping production out of the country threatens its ranks. Electric vehicles, which are less complex than gasoline counterparts, are expected to require 30% fewer workers—bad news for a UAW union that now only represents about 150,000 people at Big Three auto plants—a minority of American auto workers. The recent strike cost GM $3 billion and UAW members $8,700 per worker. The industry’s most profitable vehicles, meanwhile, are increasingly coming from Mexico.

Hence the factory-utilization rate. Long an indicator of a company’s underlying health, it measures the percentage of a plant’s capacity to churn out cars used during a 16-hour workday. Auto executives hate it when the lights are off on a plant. Every minute of those 16 hours that the assembly line isn’t running represents piles of wasted cash.

GM is responsible for 1/3 of the auto industry’s unused production capacity, reports The Wall Street Journal (Nov. 2-3, 2019). That’s a disproportionate burden for a company with just 17% market share. It’s also why the company announced a plan last year to close several factories, including a facility in Lordstown, Ohio, and stuck to that plan even as government and union leaders criticized the move.

GM builds the electric Chevy Bolt and small cars, for instance, at a factory in Orion Township, Mich. The sprawling facility employs about 750 people and is capable of building tens of thousands of cars a month. It currently builds 170 a day, or less than 10% of what it is capable of building during a 2-shift workday. The industry average for capacity utilization? 88%. GM is keeping Orion open because it sees the factory as a test bed for electric vehicles, which currently are money losers because of the high cost of batteries.

Classroom discussion questions:

What issues concern the UAW?
What OM issues concern auto manufacturers?

OM in the News: Disrupting the German Auto Supply Chain

Concern is rising in Europe’s automobile heartland about the economic impact of the industry’s move to electric vehicles from gasoline-powered cars, writes The Wall Street Journal (Aug. 16, 2019). Germany fears the country’s big car companies and rich ecosystem of suppliers is insufficiently prepared for the transition, and that their leadership may not be assured in an electric-car world. Assembling electric cars isn’t as complex or labor intensive as making traditional vehicles and relies partly on imported technology. And China has made rapid forays in electrification and is shaping up as a potentially formidable competitor in the field.

The trepidation is particularly acute in the city of Stuttgart, hub to one of the country’s biggest automotive clusters. The German auto industry employs 870,000 people nationwide, almost half in Stuttgart. They work at companies including Robert Bosch, piston-maker Mahle, and hundreds of smaller businesses that form the region’s auto supply chain. Trade union leaders fear that too few auto suppliers are taking steps to prepare for the huge changes that will come as the industry’s focus shifts even more toward electric vehicles.

And it isn’t just Germany. There are 309 automotive production and assembly plants across Europe, of which 72 are engine plants. The sector supports 13.8 million jobs in Europe, or 6% of total EU workforce and 11% of all manufacturing jobs.

The prediction is that fuel-powered cars will make up just 56% of new cars sold by 2030, down from 95% now. The biggest shift will be in Europe, where regulators are pushing tough restrictions on greenhouse-gas emissions.

Classroom discussion questions:

Is this an issue that will impact the U.S. auto industry heavily also?
What approaches should suppliers be taking?

OM in the News: The Future of the Auto Industry

The future of the auto industry is going to look like the history of the cell phone, writes IndustryWeek (Dec. 18, 2018). The two even share technology: the lithium-ion battery. As the world’s automakers gradually switch from combustion to charging, some of today’s dominant car companies will share the fate of a few former titans of the smartphone. Remember BlackBerry, Nokia and Palm?

This transition will play out as electric options flood showrooms. In the next 2 years, 85 more battery-powered models will be marketed, bringing the global fleet to 357. VW is near the front of the pack, promising 20 new electric models by 2020 and another 80 by 2025. VW just announced the internal combustion vehicles being designed now will be its last!

Being first, however, is no guarantee of success. Honda’s Insight promised 70 mpg as the first U.S. hybrid in 1999. Yet the Toyota Prius, which reached the market later, became the icon of greener wheels. A crowd of copycat hybrids arrived but none came close to matching the Prius.

For the next decade, old-school car executives will try to pull off a tricky financial stunt: driving returns with gasoline engines until their electric models have enough momentum to start keeping pace. They are essentially using an old technology to fund the transition to the next. Jump to the electric too soon and the whole works will grind to a halt; jump too late and lose the EV race. Startups such as Tesla don’t have to make this awkward jump. They don’t have to worry about feeding a legacy business as it slowly winds down.

Electric drivetrains and smart manufacturing systems have the potential to open up car manufacturing–and remove the stranglehold car companies have had on the business because of the high cost of capital. And as we note as one of our 10 strategic decisions of OM, Product Design (Ch.5) is critical. Products must be designed to a dynamic market meeting sometimes harsh capital and labor requirements and time constraints. VW, like other auto manufactures is “biting the bullet.”

Classroom discussion questions:

Is VW making a wise decision? (SWOT analysis)?
Where would you place EV and gasoline cars on the product life cycle curve now and in 10 years? (See Figure 2.5 in the text)

OM in the News: The Stressed Global Auto Supply Chain

The automotive supply chain is a complex, global network of interdependent businesses ranging from small, family-owned manufacturers based in the U.S. heartland to large publicly traded overseas auto parts companies—all working in unison to keep cars rolling off the assembly line. But fights are emerging across the auto industry over who should bear the costs of tariffs, leading to new stress along the supply chain, reports The Wall Street Journal (Nov. 10, 2018).

Recently, Pierburg US, a manufacturer of parts used in the Ford F-150 pickup truck and Jeep Wrangler SUV, sued one of its suppliers over new tariffs imposed. The two sides have been in business for 20+ years. Pierburg says that the supplier’s refusal to ship electric motors from China to Pierburg’s factory in South Carolina unless it paid the 25% tariff cost in full was “extortion.” A failure to deliver the parts could shut down multiple auto factories and “plunge the automotive industry into complete chaos,” Pierburg added. Sorting out the cost of tariffs is difficult because some parts cross the U.S. border multiple times before being installed in a car, blurring the lines of what is “domestic” content.

A typical vehicle is made up of roughly 30,000 individual parts, and car companies on average work with hundreds of suppliers at once for each model line, either buying components directly or contracting them out further down the chain. Thousands of individual contracts outline in detail parts orders, delivery dates and prices, and many of them are locked in place months and even years in advance.

Toyota has told suppliers they shouldn’t count on the Japanese car maker to help absorb the higher tariff-related costs. The average operating profit margin in the auto parts manufacturing business is already slim–about 7%—so extra costs can hit earnings hard.

Classroom discussion questions:

Describe the auto supply chain.
What is the impact of tariffs proposed?

OM in the News: The Beetle’s Life Cycle

All products are born, grow, mature, and eventually decline (see Figure 2.5 on product life cycle). So it should come as no shock that even the venerable Volkswagen Beetle is set to become a thing of the past. VW just announced that it will end production of the vehicle in 2019, reports The New York Times (Sept. 15, 2018). Sales of the model by the German carmaker’s U.S. unit, the only division still turning out Beetles, had declined sharply in recent years. VW is ending production of the Beetle 7 decades after the car was first designed. The original Beetle was designed for Hitler in the 1930s.

The car’s simple design and air-cooled engine eliminated the need for a more complicated water-cooled system and helped make it a postwar hit. Despite the Beetle’s connection to Hitler, it became a symbol of ’60s counterculture and the best-selling import of the era in the U.S. For the Woodstock generation, driving a Beetle or its larger cousin, the VW van, was a form of protest against materialism and the gas guzzlers churned out by the big American carmakers.

By the 1970s, though, the Beetle was showing its age. It was slow, and its heating system barely worked. Volkswagen also had trouble adapting the 1930s technology to increasingly strict pollution standards. The New Beetle, which was introduced in 1997, was meant to tap into nostalgia for its predecessor. The two cars had little in common mechanically. Beneath its Beetle-like exterior, the New Beetle was essentially a Volkswagen Golf. But the car was a hit in the U.S. Although about 1.2 million New Beetles were sold from the product’s introduction through 2010, by last year, annual sales had slipped to just 60,000.

VW was careful not to rule out reviving the model in the future. “Never say never,” said the CEO for VW-America.

Classroom discussion questions:

Name a few products that just don’t seem to ever die.
Name a product for each of the four life cycle stages.