The original equipment manufacturer (OEM) side of the automotive industry is on the precipice of experiencing what financial analysts call disruption. There are a number of factors at play and shop owners should be paying attention because what happens in manufacturing is going to affect repair shops.
In April, Fiat Chrysler CEO Sergio Marchionne delivered his manifesto on what ails the manufacturing part of the automotive industry. Fundamentally he said that OEMs are addicted to capital (money they can spend) and that over time they generally are good when they make back enough to break even.
He went on to say, and I paraphrase, that it only takes one bad year and they are hemorrhaging capital, which causes stockholders to lose their stock value. Why do you care? You care because if nobody wants to own auto stock, OEMs will not have money to spend to design and build vehicles. The truly scary part is that most of the players at Marchionne’s level agree with him for the most part.
The core issue according to the FCA CEO is that OEMs spend a fortune in R&D creating proprietary content and designs that the majority of vehicle owners who don’t have the “car guy gene” can even recognize. In fact, TrueCar President John Krafcik opined that most people could not identify the difference between a BMW component and a Chrysler component.
Bob Lutz, a former GM executive, agreed adding that most people could not tell a meaningful difference between an F-150, a Silverado and a Ram pickup. If you have worked the counter at an auto repair shop you know that this is true. Often customers have no idea what vehicle they drive every day.
Marchionne says that OEMs need to merge and they need to reduce their R&D budget radically by partnering long term with suppliers to share technologies. The pushback is pretty typical of the industry.
Former BorgWarner CEO Tim Mangello summed it up pretty well when he said that OEMs are all pretty happy with their profitability. The boom or bust nature of the industry over the years tends to level that playing field. Whether mergers are a good idea or not is a much larger conversation, but let’s consider the case for shared technology by taking a look at Apple and Dell.
It could be argued that more than 50 percent of their content is shared: CPUs, memory (RAM and storage) cables, materials, and video cards. How does Apple differentiate itself from Dell? They have an operating system that is unique, they have a high-definition monitor and they have a slick case. But at their core is marketing.
So if the OEMs were to take a page out of the computer hardware companies playbook what would that mean to the repair segment?
More standardization should be the first thing that comes to mind. An engine management system might show up on many different brands of vehicles allowing technicians to be more experienced earlier in the life cycle of the system. Better quality due to less parts proliferation and suppliers having more time to perfect a product. Multiple brands using the same engine causes many of us pain, but it’s already going on. A huge differentiator will be the way cars look.
If you take a look at the balance sheets of carmakers compared to the big tech companies, there is a very good business case for this. It seems to me that Marchionne may be right, but until there is some real pain he will have to be happy with his Nostradamus-like opinion. I suggest you watch connected cars and China for the pain.
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