DETROIT -- There has been a great deal of high-profile collaborations announced recently between traditional automakers, large suppliers and Silicon Valley companies. This new wave of business activity portends a swiftly changing landscape in the automotive business’s not-too-distant future.
While these collaborations are necessary business realities, it is important to consider and understand the unique challenges they pose for traditional automakers and their supplier partners. Without proper management, these collaborations have the potential to result not only in fundamental structural changes to the traditional auto industry, but further diminution of its leadership and clout, favoring instead the tech industry.
From the beginning of the automotive industry until well into the 1970s, domestic and European automakers were highly vertically integrated entities which produced wholly unique products.
In a next phase of the industry, beginning roughly in the 1980s, domestic manufacturers began a process of shared component sourcing, co-development and co-manufacturing activities. Examples include commonly sourced transmissions between Ford and General Motors and co-manufacturing by Mazda and Ford, and GM and Toyota.
At the same time, automakers were beginning to increasingly rely on their Tier 1 suppliers for basic engineering development and manufacturing of components and comprehensive vehicle systems. The Tier 1s made significant investments in these developments and accordingly required the ability to distribute their products over multiple customers for larger volumes.
While there is an intricate dance between manufacturers and Tier 1s regarding exclusivity of features and products, both groups benefit when production volumes increase and cost savings can be realized. With these collaborations, however, manufacturers struggle to maintain unique product offerings with distinctiveness generally related to styling, features, manufacturing quality and other factors.
Despite these challenges, major automakers have thrived in the recent past along with their Tier 1 partners, due in part to sharing the same industry space in an environment of high consumer demand for products.
But even so, dramatic changes are afoot in the next era of the auto industry.
Flush with investable dollars and a drive to push into new markets with entrepreneurial zeal, Silicon Valley companies such as Apple and Google and emerging car companies like Tesla and a host of other startup car companies have either announced an intention to enter into the automotive manufacturing scene or have actually done so.
Why is this different than automaker and Tier 1 alliances of the past?
The traditional advantages of existing automotive companies is diminished in light of dramatic new technologies and powertrain alternatives, such as all-electric and hybrid powertrains, assisted-driving technologies and autonomous vehicles, and a desire for the automobile to become an integrated connectivity platform.
Are car companies tech companies? On many levels, the answer is yes. But significant expertise and capabilities for many of these emerging technologies are not solely concentrated within automotive companies. Now, faced with aggressive movement by outsider companies, automakers and Tier 1 suppliers have collectively decided to enter into broad-scope collaborative projects with tech companies involving shared technology, market plans and co-development of essential, critical technologies.
While we cannot turn back the clock in this industry, these collaborative relationships, if not administered carefully at every level, can result in a loss of the competitive benefits of the traditional automotive industry.
To that point, the legacy automotive companies must preserve control over their existing and organically developed technologies in collaborative activities, preserve the flexibility in their relationships with other potential collaboration partners and make the human resource and capital expenditure investments needed to maintain strategic advantages in the areas of manufacturing, supply chain management and product features and distinctiveness.
The players who manage this process most effectively in this exciting new era of the automotive industry will thrive -- those who do not may drive themselves to extinction.
Steven L. Oberholtzer is managing shareholder of the Ann Arbor office of Brinks Gilson & Lione, one of the largest intellectual property law firms in the U.S. Oberholtzer has decades of experience representing clients in the automotive industry. A lifelong auto enthusiast, he worked as an engineer at General Motors and as a senior engineer with a domestic automaker before receiving his law degree.