Reinventing the Wheels

New ways to design, manufacture, and sell cars can make them ten times more fuel-efficient, and at the same time safer, sportier, more beautiful and comfortable, far more durable, and probably cheaper. Here comes the biggest change in industrial structure since the microchip
Shifting Gears in Competitive Strategy

Ultralight hybrids are not just another kind of car. They will probably be made and sold in completely new ways. In industrial and market structure they will be as different from today's cars as computers are from typewriters, fax machines from telexes, and satellite pagers from the Pony Express.

Many people and firms in several countries are starting to realize what hypercars mean; at least a dozen capable entities, including auto makers, want to sell them. This implies rapid change on an unprecedented scale. If ignored or treated as a threat rather than grasped as an opportunity, the hypercar revolution could cost the United States millions of jobs and thousands of companies. Auto making and associated businesses employ one seventh of U.S. workers (and close to two fifths of workers in some European countries). Cars represent a tenth of America's consumer spending, and use nearly 70 percent of the nation's lead, about 60 percent of its rubber, carpeting, and malleable iron, 40 percent of its machine tools, 15 percent of its aluminum, glass, and semiconductors, and 13 percent of its steel. David Morris, a cofounder of the Institute for Local Self-Reliance, observes, "The production of automobiles is the world's number-one industry. The number-two industry supplies their fuel. Six of America's ten largest industrial corporations are either oil or auto companies. . . . A recent British estimate concludes that half of the world's earnings may be auto- or truck-related." Whether the prospect of hypercars is terrifying or exhilarating thus depends on how well we grasp and exploit their implications.

The distribution of hypercars could be as revolutionary as their manufacture. On average, today's cars are marked up about 50 percent from production costs (which include profit, plant costs, and warrantied repairs). But cheap tooling might greatly reduce the optimal production scale for hypercars. Cars could be ordered directly from the local factory, made to order, and delivered to one's door in a day or two. (Toyota now takes only a few days longer than that with its steel cars in Japan.) Being radically simplified and ultra-reliable, they could be maintained by technicians who come to one's home or office (Ford does this in Britain today), aided by plug-into-the-phone remote diagnostics. If all this makes sense for a $1,500 mail-order personal computer, why not for a $15,000 car?

Such just-in-time manufacturing would eliminate inventory, its carrying and selling costs, and the discounts and rebates needed to move existing stock that is mismatched to demand. The present markup could largely vanish, so that hypercars would be profitably deliverable at or below today's prices even if they cost considerably more to make, which they probably wouldn't.

America leads—for now—both in start-up-business dynamism and in all the required technical capabilities. After all, hypercars are much more like computers with wheels than they are like cars with chips: they are more a software than a hardware problem, and competition will favor the innovative, not the big. Comparative advantage lies not with the most efficient steel-stampers but with the fastest learning systems integrators—with innovative manufacturers like Hewlett-Packard and Compaq, and strategic-element makers like Microsoft and Intel, more than with Chrysler or Matsushita. But even big and able firms may be in for a rough ride: the barriers to market entry (and exit) should be far lower for hypercars than for steel cars. Much as in existing high-tech industries, the winners might be some smart, hungry, unknown aerospace engineers tinkering in a garage right now—founders of the next Apple or Xerox.

All this is alien to the thinking of most (though not all) auto makers today. Theirs is not a composite-molding/electronics/software culture but a diemaking/steel-stamping/mechanical culture. Their fealty is to heavy metal, not light synthetics; to mass, not information. Their organizations are dedicated, extremely capable, and often socially aware, but have become prisoners of past expenditures. They treat those historical investments as unamortized assets, substituting accounting for economic principles and throwing good money after bad. They have tens of billions of dollars, and untold psychological investments, committed to stamping steel. They know steel, think steel, and have a presumption in favor of steel. They design cars as abstract art and then figure out the least unsatisfactory way to make them, rather than seeking the best ways to manufacture with strategically advantageous materials and then designing cars to exploit those manufacturing methods.

The wreckage of the mainframe-computer industry should have taught us that one has to replace one's own products with better new products before someone else does. Until recently few auto makers appreciated the starkness of the threat. Their strategy seemed to be to milk old tools and skills for decades, watch costs creep up and market share down, postpone any basic innovation until after all the executives' planned retirement dates—and hope that none of their competitors was faster. That's a bet-the-company strategy, because even one superior competitor can put a company out of business, and the company may not even know who the competitor is until too late. The PNGV is stimulating instead a winning, risk-managed strategy: leapfrogging to ultralight hybrids.

It is encouraging that some auto makers now show signs of understanding the problem. In recent months the PNGV has sparked new thinking in Detroit. The industry's more imaginative engineers are discovering that the next gains in car efficiency should be easier than the last ones were, because they will come not from sweating off fat ounce by ounce but from escaping an evolutionary trap. Although good ultralight hybrids need elegantly simple engineering, which is difficult, one can more easily boost efficiency tenfold with hypercars than threefold with today's cars.

Little of this ferment is visible from the outside, because auto makers have learned reticence the hard way. A long and unhappy history of being required to do (or exceed) whatever they admit they can do has left them understandably bashful about revealing capabilities, especially to Congress. And firms with innovative ambitions will hardly be eager to telegraph them to competitors. Corporations share a natural desire to extract any possible business and political concessions, and to hold back from extending to traditional adversaries (such as the media, politicians, and environmentalists) any trust that could prove costly if abused or not reciprocated. Thus automakers are more likely to understate than to trumpet progress. Also, the Big Three are progressing unevenly, both internally and comparatively: their opacity conceals a rapidly changing mixture of exciting advances and inertia. Only some executives appreciate that hypercars fit the compelling strategic logic in favor of changing how their companies do business, especially by radically reducing cycle times, capital costs, and financial risks. It is difficult but vital for harried managers to focus on these goals through the distracting fog of fixing flaws in their short-term operations. But signs of rapid cultural change are looming, such as General Motors' announcement, last February 3, that its corporate policy now includes the CERES (Coalition for Environmentally Responsible Economies) Principles, formerly known as the Valdez Principles—a touchstone of environmentalists.

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