Current Trends

Automotive Industries, July, 2001 by Paul Hansen

What are the roadblocks facing mass market, high-tech electronic content?

Automotive electronics is a hot spot in the market today. Yet, automakers are not realizing the margins they expected from this market because several hurdles remain in the path of profit. First, and most notable, is the lack of standards for the automotive electronics market. Without standards, markets for advanced products and tools stay fragmented and small, and less interesting to suppliers. And the industry is a long way from an optimal level of standardization. But at least the global auto electronics industry seems to agree it is a good idea to adopt from other industries standards that already have wide support (see AI June 2001, pg. 30).

The second hurdle is the issue of small, slowly increasing profits in the auto electronics industry Unless the amount of new electronics brought to cars grows quickly on its own, growth in automotive electronics sales is limited by the year-to-year increases in vehicle production, which for the last six years has grown by just 2.5 percent per year, on average, worldwide.

Furthermore, automakers always seem to have more clout than suppliers. They demand and get price reductions of three, four or five percent every year on existing products. If suppliers say "no," they take their business elsewhere. And the competition for automotive electronics sales has been more than intense; but, because profits and expectations are low, companies have been getting out of the business, leaving fewer companies behind to compete.

Over the last five years, a number of very large companies have said, "no" to the automotive electronics industry. Of course, Ford Motor Co. and General Motors Corp. got out of the business when they spun off Delphi and Visteon. DaimlerChrysler just sold its German auto-electronics maker Temic to Continental. DaimlerChrysler, or Chrysler before, would have spun-off their in-house operation, Huntsville Electronics, long ago if it weren't for Chrysler's inability to get the UAW to agree.

More recently, ITT sold ITT Automotive, part of which went to Continental -- the rest went to Valeo. Lucas sold out to TRW; Mannesman sold VDO to Siemens, and United Technologies sold UTA to Lear. Even in Japan the number of top-tier auto electronics suppliers is shirking

As consolidation continues though, competition among the remaining suppliers will become less intense; suppliers will begin to say "no" to automakers' incessant demands for price reductions.

Another way to get a grip on profits and more clout with automakers is by taking advantage of outsourcing. Instead of manufacturing electronics in-house, several top-tier automotive suppliers are using contract manufacturers to assemble electronic control units on their behalf. This is already widespread in other faster-moving electronics industries. For example Hewlett Packard, Cisco Systems, Ericsson, Motorola's cell-phone business and Deli Computer are all quite committed to the practice. Among automotive suppliers, Johnson Controls seems most devoted to outside electronics manufacturing, and TRW, Visteon, Delphi and Motoro1a AIEG and TCG intend to use contract manufacturers to some extent

Because they are specialists, contract manufacturers can often make electronics assemblies in high volume better than most top-tier suppliers can for themselves. They have more clout with component suppliers, more experience with advanced manufacturing processes and, best of all, they own the manufacturing facilities and equipment. So when sales cycle down, which they periodically do, or if some business is lost because a supplier refuses to swallow a price reduction, then some of the costs can cycle down too.

Yet another hurdle for the automotive electronics market is electrical and electronics quality. Every May The Hansen Report ranks each automaker with major sales in the U.S. according to electrical and electronics quality (or E/E quality). And while the quality of the electrical and electronics in vehicles keeps improving, electrical quality still suffers -- along with the two other most-problematic categories: body integrity and squeaks and rattles.

In 2000, roughly 12 percent of drivers with three-year-old vehicles said they had experienced major E/E problems. Twenty years ago 19 percent of survey respondents reported major E/E troubles over a three-year period.

In April, Consumer Reports published its survey results: Of the owners with 2000 model-year vehicles surveyed, Toyota was the best with just 1.59 percent of its 2000 vehicles having major E/E troubles spots. Toyota Motor Corp. was followed by Nissan Motor Co. Ltd., Honda Motor Co. Ltd., Mazda Motor Corp., GM, Ford, DaimlerChrysler and BMW AG. Volkswagen AG was the worst with 6.28 percent of their 2000 model-year vehicles having major electrical problems. When Chrysler and Mercedes are ranked separately, only 3 percent of Chrysler vehicles had major E/E troubles compared with 7.2 percent for Mercedes.

That is the opposite of what you might expect from German engineering. But it makes sense when you consider that many of the German vehicles sold in the U.S. are high-luxury types. These vehicles are loaded with electronics features and they are more complex. And the Germans tend to push the technology envelope.