Ford’s CEO identifies complexity as a major problem for the auto industry. Jim Anderton argues that it is the main problem with the auto industry.
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Episode Transcript:
Speaking at the recent Wolfe Research Global Auto Conference, Ford Motors CEO Jim Farley was candid about the current situation at the blue oval.
“Dysfunction,” and $2 billion left on the table during the fourth quarter were mentioned, but Farley identified the real problem as insufficient improvements to efficiency in engineering, manufacturing and the supply chain.
It was a candid admission by a corporate CEO: that troubled manufacturing companies can’t simply cut their way to profitability.
At Ford, CFO John Lawler declared that the company has a seven- or eight-billion-dollar cost disadvantage against class-leading rivals, and three to four billion dollars in material costs, one billion dollars in warranty costs and three billion in structural costs.
Fixing this will require what Farley calls, “huge transformations.” But what does that mean?
In manufacturing, there is no quantum leap in automation technology readily available which will dramatically lower the cost of assembling an automobile—as Tesla has discovered. Similarly, there is no way to significantly reduce the amount of basic inputs such as sheet metal, glass, rubber and plastics.
Pre-COVID, globalized supply chains already operated on a just-in-time basis, and outsourcing large segments of every motor vehicle was common practice. Broken supply chains have increased those costs, but it will take years for regional and domestic suppliers to become productive enough to bridge the labor cost gap that China offers.
Bureaucracy has been attacked at all the Detroit Three automakers, with waves of layoffs and retirements for over a decade now. And, as more and more players enter the U.S. market, already thin margins get even tighter, despite the short-term pricing power offered by vehicle shortages.
So, what can Ford or any other auto manufacturer do? On the margin, better quality control can reduce some costs, and all the majors are looking at a direct sales model that would claw back some dealer margins—although admittedly, dealers don’t make much money on new car sales as it stands right now.
If Farley were to ask me (and he hasn’t), I would suggest that the marketing team needs to reinvent the automobile in a fundamental way.
25 years ago, Chrysler had the right idea with the China Concept Vehicle, or CCV. It was a daring project to essentially injection mold the entire body in white in halves and assemble them like a gigantic plastic model kit. I urged them to produce it at the time, but for numerous reasons, the project was shelved. The primary reason given was that Chrysler felt consumers would not buy an automobile that couldn’t be produced with a “Class A” finish, something that the current generation of flat and semi-gloss color cars and light trucks would suggest is no longer true.
Or maybe additive manufacturing is the way forward. It would help significantly if engineers can find a way to reduce the insane proliferation of microprocessors in modern automobiles. The shift to software-defined systems has drastically increased complexity, and I do not believe that it has been a significant cost reducer, either.
Is there a market for drastically simplified, low cost, reliable transportation? In a world where people will pay literally thousands of dollars for advanced technology in their handheld device, I argue that the answer is “yes.” My smart phone can do everything I need my automobile to do except get me from place to place. But instead, I’m forced to pay tens of thousands of dollars to buy redundant capability in my car.
Is there a market opportunity here? I think so.