Who needs car companies? - trends in retail, suppliers, and manufacturing in the automobile industry could render car companies obsolete - Industry Overview

Automotive Industries, July, 1998

Back in the early days of the industry, car companies believed they needed to make almost everything that goes into assembling a car. They bought up independent companies that made everything from headlamps to wheels to bumpers. Vertical integration was considered more than a virtue. It was considered a necessity for survival.

But in the 1980s automakers began to realize they didn't have to make everything under the sun. They recognized that certain suppliers were far better at making certain components than they were. Moreover, they found they could even outsource the design, engineering and development of parts to these suppliers, and save a ton of time and money in the process. As a result, we've seen the OEMs outsource tens of billions of dollars in business to the supply community in the 1990s.

Today, the automakers have surrendered significant chunks of car development and production to their supply chains. We've seen the emergence of mega-suppliers with tremendous capabilities and global operations. In fact, it would be virtually impossible for most large automakers to be able to design or develop, much less build an entire car, on their own anymore.

On the retail end of the business we've seen the emergence in the United States of the mega-retailers. Companies like Republic are buying up dealerships from coast to coast. For the first time in the history of the industry we're seeing the emergence of a national automotive retail brand. As I've written here before, we're likely to see these automotive mega-retailers behave like any other retail operation -- if a product doesn't sell well, it will not get any shelf space. They could soon dictate to automakers what products they want to sell.

Right now if a car dealer objects to being forced to sell a slow moving product, tough. The OEM will force it to continue providing "shelf space" for the slow selling car, if it wants to continue getting the hot selling ones. That tactic works well as long as the OEM is dealing with a bunch of individual and relatively small retailers. But will this tactic continue to work once we see the emergence of a national retail network? I doubt it.

One of the more interesting tilings to occur this decade came out of Nedcar, the independent automotive design firm from the Netherlands. It developed a car on its own to showcase its design capabilities. Called the Genesis project, Nedcar designed a car on its own, from road to roof and bumper to bumper. It contracted suppliers to build everything on the car, including the powertrain, chassis, interior and body. More recently, a group of Australian suppliers did much the same thing. To showcase their abilities, they hired an independent design firm, then they built all the parts to make it. You may have seen it at this year's SAE show.

Here's one more point to consider before I tie this all together. Earlier this year mega-supplier Magna bought the Austrian company Steyr. Among other things, this gives Magna the capability to fully assemble complete vehicles.

Here's the point. We have independent design finns, such as Nedcar and Porsche Engineering that can completely design a vehicle. We have suppliers that can make all the parts and assemble them into a vehicle. And we have a national retail chain that could conceivably lint the product on its "shelves" and market it to consumers.

I'm not predicting this is going to happen. But certainly in a very short amount of time, the capability to do it is going to be there. And the question this ultimately begs is: who needs car companies?

John McElroy is the editorial director for Automotive Industries. You can reach him via e-mail at: jmcelroy@chilton.net.